STOPANSKA BANKA AD - SKOPJE. Financial Statements and Independent Auditors Report for the year ended December 31, 2007

Transcription

1 STOPANSKA BANKA AD - SKOPJE Financial Statements and Independent Auditors Report for the year ended December 31, 2007

2 CONTENTS Page Independent Auditors Report 1-2 Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 Statement of Cash Flows 6-7 Notes to the Financial Statements 8 60

3 INDEPENDENT AUDITORS REPORT TO THE MANAGEMENT AND SHAREHOLDERS OF STOPANSKA BANKA AD - SKOPJE We have audited the accompanying financial statements (page 3 to 60) of Stopanska Banka AD - Skopje (hereinafter referred to as the Bank ), which comprise the balance sheet as of December 31, 2007 and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting standards applied in the Republic of Macedonia. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Audit Law of the Republic of Macedonia and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the financial statements of the Bank in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements of the Bank present fairly, in all material respects the financial position of Stopanska banka AD - Skopje as of December 31, 2007, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with accounting standards applied in the Republic of Macedonia and accounting policies presented in Notes 2 and 3 to the financial statements. Deloitte DOOEL Lidija Nanush Chartered Accountant Manager Biljana Nasteska Chartered Accountant Skopje January 25,

4 INCOME STATEMENT Year ended December 31, 2007 (Expressed in thousands of Denars) Note Interest income 3.1, 5 3,362,413 2,565,016 Interest expense 3.1, 5 (1,194,464) (756,341) Net interest income 2,167,949 1,808,675 Fee and commission income 3.1, 6 969, ,590 Fee and commission expense 3.1, 6 (50,886) (43,541) Net fee and commission income 918, ,049 Dividend income 7,892 1,977 Foreign exchange gains, net ,976 94,810 Net trading income Impairment losses, net 8 (495,388) (477,455) Other operating income 9 121, ,330 Other operating expenses 10 (1,713,792) (1,559,463) PROFIT BEFORE TAXATION 1,118, ,765 Income tax 11 (11,587) (8,638) NET PROFIT 1,107, ,127 The accompanying notes are an integral part of these financial statements. The financial statements were approved by the management of the Bank on January 24, 2008 and shall be proposed on approval by the Bank s Board of Directors. Signed on behalf of Stopanska banka AD - Skopje: Mr. Gligor Bishev First General Manager Mr. Georgios Papanastasiou Second General Manager 3

5 BALANCE SHEET At December 31, 2007 (Expressed in thousands of Denars) Note ASSETS Cash and cash equivalents 12 4,722,680 4,664,562 Treasury and other eligible bills 13 5,232,175 2,426,260 Financial instruments held for trading , ,765 Financial instruments available for sale , ,354 Financial instruments held to maturity 14 3,838,602 4,391,916 Placement with, and loans to, banks 15 5,443,514 6,001,414 Loans to customers 16 32,917,403 21,659,311 Other receivables 17 1,021,369 1,023,626 Investment property , ,987 Leasehold improvements 19 20,268 20,754 Intangible assets 20 89, ,853 Property and equipment 21 1,134,954 1,162,151 Deferred tax assets 11 1,789 2,102 Total assets 54,909,101 41,911,055 LIABILITIES AND EQUITY LIABILITIES Deposits from banks and financial institutions 22 3,750,252 2,232,155 Deposits from customers 23 43,280,888 32,962,368 Loans payable , ,980 Subordinated debt 25 1,224,032 1,223,482 Preferred shares obligations 26 90,978 90,978 Other liabilities , ,426 Income tax payable 11 2,747 8,929 Deferred tax liabilities 11 1,307 - Obligations toward employees 14,908 - Total liabilities 49,425,460 37,474,318 EQUITY 28 Share capital 3,511,242 3,511,242 Reserves 252, ,555 Retained earnings 612,295 2,813 Net profit for the year 1,107, ,127 Total equity 5,483,641 4,436,737 Total liabilities and equity 54,909,101 41,911,055 Commitment and contingencies 31 10,639,454 6,938,483 The accompanying notes are an integral part of these financial statements. 4

6 STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2007 (Expressed in thousands of Denars) Share Capital Revalued Reserve Statutory Reserve Special Fund Retained Earnings Total Balance, January 1, ,511,242 22,610 1,911 1, ,764 3,661,610 Transfer to statutory reserve ,951 - (121,951) - Profit for the year , ,127 Balance, December 31, ,511,242 22, ,862 1, ,940 4,436,737 Balance, January 1, ,511,242 22, ,862 1, ,940 4,436,737 Transfer to statutory reserve ,269 - (116,269) - Paid dividends (71,986) (71,986) Transfer of revalued reserve to retained earnings - (22,610) ,610 - Revalued reserve from reassessment of equity securities - 11, ,763 Profit for the year ,107,127 1,107,127 Balance, December 31, ,511,242 11, ,131 1,083 1,719,422 5,483,641 The accompanying notes are an integral part of these financial statements. 5

7 STATEMENT OF CASH FLOWS Year ended December 31, 2007 (Expressed in thousands of Denars) Profit before taxation 1,118, ,765 Adjustments for: Depreciation and amortization of: - Property and equipment 149, ,014 - Intangible assets 68,948 69,055 - Investment property 3,919 4,608 - Leasehold improvements 4,819 1,230 Capital gain: - Sale of property and equipment (41,513) (67,939) Interest income (3,362,413) (2,565,016) Interest expense 1,194, ,341 Net trading income (614) (842) Write-offs - 6,933 Impairment losses 879, ,293 Impairment losses for: - Investment property 7,117 11,741 - Assets acquired through foreclosure procedure 39,294 - Release of impairment for balance sheet items (383,993) (428,279) Impairment/(release) of impairment for off-balance sheet items - (87,559) Interest receipts 3,309,409 2,553,276 Interest paid (1,134,860) (737,045) Operating profit before changes in operating assets: 1,852,372 1,463,576 (Increase)/decrease of operating assets: Purchase of bonds held-for-trading (102,325) (73,535) Placements with, and loans to, banks 10,134 7,835 Loans to customers (11,732,446) (6,050,935) Increase/(decrease) in other assets 55, ,100 Increase/(decrease) in other liabilities: Deposits from banks and financial institutions 1,517, ,012 Deposits from customers 10,242,646 5,746,738 Other liabilities 159, ,780 Net cash flows from operating activities before income tax 2,002,526 1,524,571 Income tax paid (8,527) (1,811) Net cash flows from operating activities 1,993,999 1,522,760 6

8 STATEMENT OF CASH FLOWS (Continued) Year ended December 31, 2007 (Expressed in thousands of Denars) Cash flows from investing activities Acquisition of property and equipment (202,969) (215,983) Acquisition of intangible assets (8,714) (16,998) Acquisition of investment property - (1,007) Net proceeds from investments 575, ,922 Proceeds from sale of property and equipment 55, ,612 Proceeds from sale of investment property 39,446 37,204 Investments in leasehold improvements (9,540) (16,851) Net cash flows from investing activities 449, ,899 Cash flows from financing activities Net decries/increase of borrowings (65,011) 531,253 Payment of dividend (71,986) - Subordinated debt - 1,223,482 Net cash flows from financing activities (136,997) 1,754,735 Net increase of cash and cash equivalents 2,306,133 3,398,394 Cash and cash equivalents, beginning of year 13,092,236 9,693,842 Cash and cash equivalents, end of year 15,398,369 13,092,236 Cash and cash equivalents, end of year: Cash and cash equivalents, end of year (Note 12) 4,722,680 4,664,562 Treasury bills and other eligible bills (Note 13) 5,232,175 2,426,260 Deposits with banks placed for up to 30 days (Note 15) 5,443,514 6,001,414 15,398,369 13,092,236 The accompanying notes are an integral part of these financial statements. 7

9 STOPANSKA BANKA AD SKOPJE 1. PRINCIPAL ACTIVITIES Stopanska banka AD - Skopje (further referred as the Bank ) was established as a shareholding bank on December 29, The Bank is registered as universal type of commercial bank in accordance with Macedonian laws. The principal activities of the Bank are as follows: - Collecting deposits and other recurrent sources of funds; - Financing in the country and abroad, including factoring and financing commercial transactions; - Issuance and administration of payment instruments (cards, checks, bills of exchange); - Domestic and international payment operations, including purchase/sale of foreign currency funds; - Fast money transfer - Trading in instruments at the money market (bills of exchange, deposit certificates); - Trading in foreign currency funds, securities and financial derivatives; - Financial leasing; - Foreign exchange operations; - Purchase/sale, guaranteeing and placement of securities issue; - Economic and financial consulting; - Providing services in collection of invoices, keeping records; - Issuing payment guarantees, backing guarantees and other forms of security; - Managing assets and securities portfolio at order and for account of clients; - Rendering services to custody bank; - Intermediating in concluding agreements for loans and borrowings and in selling insurance policies; - Providing services of renting safe deposit boxes, depositories and depot; - Other financial services defined by law which can be performed only by a bank. On December 21, 1999, Share Purchase Agreement ( the Agreement ) was signed between the Bank, National Bank of Greece, International Finance Corporation ( IFC ), and the European Bank for Reconstruction and Development ( EBRD ) ( the Investors ) from one side and the Bank Rehabilitation Agency of the Republic of Macedonia and the Ministry of Finance of the Republic of Macedonia on the other side. Pursuant to the Agreement, the investors acquired ordinary shares in the Bank in a total amount equal to 85% of the Bank s issued and outstanding shareholders capital in the following proportion: National Bank of Greece 65%, IFC 10% and EBRD 10%. The total number of Bank s employees as of December 31, 2007 is 1, BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARISON DATA The Bank maintains its accounting records and prepares its financial statements in compliance with the Banking Law and by-laws prescribed by the National Bank of the Republic of Macedonia ( NBRM ), Company Law (Official Gazette of the Republic of Macedonia no. 28/2004 and no. 84/2005) and the Rules on Accounting Management (Official Gazette of the Republic of Macedonia nos. 94/2004, 11/2005 and 116/2005). According to these Rules, the accounting standards applied in the Republic of Macedonia are the International Accounting Standards (IAS) dated 2003 as prescribed by the International Accounting Standards Board (IASB). The supplement to these Rules dated February 10, 2005, refers to the application of the International Financial Reporting Standard (IFRS) 1, as well as the supplement dated December 29, 2005, for application of IFRS 2, 3, 4, 5, 6, and BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARISON DATA (Continued) 8

10 STOPANSKA BANKA AD SKOPJE In the beginning of October 2007, several enactments from the scope of work of the National Bank of the Republic of Macedonia (NBRM) were published as follows: 1. Decision on the chart of accounts of banks; 2. Decision on the Methodology of Recording and Evaluating accounting entries and on the preparation of financial statements; and 3. Instructions on the types and contents of financial statements of the banks. Pursuant to the provisions of these enactments, the Bank is obliged to: 1.1. Perform a reposting of the balance on 31st December 2008 from the accounts determined by the Regulation and Decision for analytical accounts in the chart of accounts of banks, savings banks and other financial organizations to the accounts prescribed with the decision on the chart of accounts of banks; 2.1. Submit to the NBRM a detailed Methodology Implementation Plan, not later than 10 th January 2008; 2.2. Harmonize the internal enactments with the requirements in the Methodology and the Chart of accounts of banks not later than 31st August 2008 and to accordingly notify NBRM until 10 th September 2008; 2.3. Harmonize the IT systems with the Methodology requirements not later than 31st October 2008 and to accordingly notify NBRM until 10th November 2008; 3.1. Prepare initial Balance sheet and fill in the relevant notes related to the items in the Balance sheet, as at 1 st January 2008 and submit them to NBRM not later than 20th November 2008, along with the opinion on the initial financial statements prepared by the audit company. For the purpose of more efficient performance of assignments and proper implementation of obligations, the Bank established a Committee for management with the project for implementing chart of accounts and methodology for recording and assessment of accounting items and for preparing financial statements, as well as a Committee to supervise this project. In accordance with item 2 and sub-items 2.1., 2.2. and 2.3., the Committee for project management prepared and submitted to NBRM a plan that contains the following: Organization of the process of harmonization with the requirements in the Methodology for Recording and Evaluating the accounting entries and on the preparation of financial statements; Allocation of human resources that will work on implementing the Methodology; Time schedule for harmonization of the Bank s internal enactments with the requirements of the Methodology and the Chart of accounts of banks; Time schedule for harmonization of the Bank IT systems with the Methodology requirements, with a special attention to the application systems, including the defined period for their testing. On December 31, 2006, the Bank has a 100% ownership in Stoba Trejd Skopje ( the Entity ). In the course of 2007 (November 21, 2007), in compliance with the modifications to the Banking Law, the Bank passed a Decision on closing of and initiation of liquidation of the Entity. The financial statements of the Bank are prepared in accordance with the accounting policies disclosed in Note 3 to the financial statements. The presented financial statements are expressed in thousands of Macedonian Denars. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 9

11 STOPANSKA BANKA AD SKOPJE 3.1. Income and Expenses Recognition Interest income and expense is recognized in the income statement for all interest-bearing instruments on a calculation basis, hence taking into account the unrepaid principal and using the method of effective interest rate based on amortized cost. Interest income involve as well coupons acquired on the basis of trading securities and securities held to maturity and calculated discount and premium on treasury bills and other discount bearing instruments. Fee and commission, except fee on approval of loans, is generally recognized on a calculation basis in the period of service rendering. Fees relating to loan origination are deferred and amortized to over the life of the loan using the effective interest rate method Foreign Exchange Translation Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia (NBRM), which is the Central Bank of the Republic of Macedonia, at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into Denars at the balance sheet date using official rates of exchange ruling on that date. Net foreign exchange gains or losses resulting from foreign currency translation are included in the income statement in the period in which they arose Loans originated by the Bank and allowances for Losses on Impairment and Uncollectability Loans originated by the Bank are initially recognized at cost, when cash is advanced to customers. They are subsequently measured at amortized cost using the effective interest rate. Loans to customers and financial institutions are stated as net amount reduced by loss on impairment and uncollectability. Allowances for losses on impairment and uncollectability are determined if there are objective proofs that the Bank cannot collect all mature amounts upon receivables as per original agreed conditions. Allowance for losses on impairment and uncollectability is presented as reduction of carrying value of the claim in the balance sheet, while, regarding off-balance sheet items, such as financial liabilities, the allowance is presented within the other liabilities. Concurrently, allowances for losses on impairment and uncollectability are presented as well in the income statement as losses on impairment and uncollectability. The allowances for losses on impairment and uncollectability are determined on the basis of the degree (size) of the risk of uncollectability or specific country risk on the basis of the following principles: 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Loans originated by the Bank and allowances for Losses on Impairment and Uncollectability (continued) 10

12 STOPANSKA BANKA AD SKOPJE - Separate loan exposures (risks) are assessed on the basis of the type of loan applicant, his/her/its overall financial position, resources and payment records and recoverable value of collaterals. Allowances for losses on impairment and uncollectability are measured and determined for the difference between the carrying value of the loan and its estimated recoverable amount, which is, in fact, the present value of expected cash flows, including as well recoverable amounts from guarantees and collateral, discounted by effective loan interest rate. - If there are objective proofs on uncollectability of loans in the loan portfolio that may not be identified on a specific basis, the allowances for losses on impairment and uncollectability are determined at level of risk for overall loan portfolio. These losses are determined on the basis of historical data on loan classification of borrowers and express the current economic environment of the borrowers. - Losses on impairment and uncollectability is termination of the calculation of interest income as per agreed terms and conditions, while the loan is classified as non-performing since the contractual liabilities for payment of the principal and/or interest are on default, i.e. uncollected for a period longer than 90 days. All allowances for losses on impairment and uncollectability are reviewed and tested at least once a year, and any further changes in amounts and time of expected future cash inflows in comparison to previous assessments result in changes in allowances for losses on impairment and uncollectability recorded as debit/credit of losses on impairment and uncollectability recorded in the income statement. - The loan which is believed that is impossible to be collected is written off against relevant allowance for losses on impairment and uncollectability. Further collections are recorded as reduction of losses on impairment and uncollectability in the income statement. - In case of granted loan to borrowers in countries with increased risk of difficulties for servicing external debt, the political and economic circumstances are assessed and additional allowances for country risk are allocated. In compliance with the Decision on modifying the Decision on classification of balance sheet and offbalance sheet asset positions of banks as per their risk degree risk published on June 29, 2006 (Official Gazette of the Republic of Macedonia no. 80/2006), starting as of March 31, 2007, the Bank allocates special reserve for potential losses at 1% of total loan exposure classified into risk category A. 11

13 STOPANSKA BANKA AD SKOPJE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Securities held for trading Securities held for trading which comprise securities issued in local currency by the Ministry of Finance are securities included in the portfolio which is intended for realization of short-term profit. Securities held for trading are initially recognized at cost and are subsequently recognized as per their fair value on the basis of their market price. All of the respective realized and unrealized gains and losses are included under net trading income. Interest, if realized during management of securities held for trading, is recorded as interest income. The sale of securities held for trading is recognized on trading date, which is the date when the Bank obliges to buy/sell the asset Securities available for sale Available for sale securities are those financial assets that are not classified as financial assets held for trading or held-to-maturity investments. This portfolio comprises quoted and unquoted equity investments in shares of banks and other financial institutions and enterprises, where the Bank does not exercise control. Available for sale financial assets are subsequently re-measured at fair value based on quoted prices or amounts derived from cash flow models. Unrealized gains and losses arising from changes in fair value are recognized directly in equity, until the share is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in net profit or loss for the period Investments in associates An associate is an enterprise over which the Bank is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. Investments in associates comprise unquoted equity investments in shares that are stated at equity method. The Bank s management believes that the carrying amount of this investment is a reasonable estimate of their market value Held-to-maturity securities Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. This portfolio comprises government bonds from old savings deposits, denationalization, government securities received in exchange for the Bank s non-performing receivables as well as bonds issued by the Government of the Republic of Macedonia. These securities are measured at amortized cost using the effective interest rate method. 12

14 STOPANSKA BANKA AD SKOPJE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8. Property, equipment and intangible assets Property and equipment and intangible assets are recognized at cost or revalued amount reduced by accumulated depreciation. Before January 1, 2006, property and equipment and intangible assets were revalued in past years at end of year by application of ratios of growth of prices of industrial products of cost or revalued amount, as well as value adjustment. The revaluation effect was recorded into revaluation reserve. As per Paragraph 44 (b) of the announced IAS 8 Net gain or loss for the period, basic omissions and changes in accounting policies (Official Gazette of the Republic of Macedonia no. 94/2004), revalued amounts of intangible and tangible assets are treated as revaluation in compliance with IAS 16 or IAS 38, but not as change in accounting policy. As at December 31, 2007, in compliance with letter from NBRM no. 91 dated January 8, 2008, this revalued reserve was transferred to retained earnings. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditures are recognized in the income statements as an expense. Depreciation of property and equipment and intangible assets is computed on the straight-line basis so that to write off the cost or revalued amount of assets in the course of their estimated useful life. No depreciation is provided on construction in progress until the constructed assets are put into use. The annual depreciation rates are as follows: Applied annual rates Buildings 2.5% -5% Furniture and equipment 10% - 25% Intangible assets 20% When assets subject to depreciation are put out of use, or, in any other way, are sold, the relevant revalued cost amount and adjustment of value are off-posted from relevant accounts. Capital gain or loss realized at sale is recorded as other income, i.e. other expense Investment property Investment property includes buildings owned by the Bank with the intention of earning rentals or for the capital appreciation or both, and is initially recorded at cost, which includes transaction costs. The classification of the investment property is based on the criteria that the property is mostly held to earn rentals when compared to the property used by the Bank for own needs. Subsequent to the initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment losses. Such value represent the fair value of investment property at the date of balance sheet. The depreciation of investment property is calculated on straight-line basis in a way to write off the cost value of assets over the estimated useful lives, which approximates the useful life of similar assets included in property, plant and equipment. The estimated annual depreciation rate is 2.5%. Rental income from investment property is recognized in the income statements on a straight-line bases over the term of the lease. 13

15 STOPANSKA BANKA AD SKOPJE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Assets acquired through foreclosure procedures In compliance with the Decision on the accounting and regulatory treatment of foreclosed assets (land, buildings, equipment and the like) published in the Official Gazette of the Republic of Macedonia no. 79/2007 dated June 26, 2007, the Bank is obligated to allocate special reserve for foreclosed assets, including as well the current foreclosed assets. On the foreclosure date, the foreclosed asset is recognized in the Bank s financial statements at initial carrying value. The initial carrying value is the lower amount than the appraised value reduced by the expected sales costs to the debit of the Bank and the cost value of the foreclosed asset. The appraised value is determined by an authorized appraiser on the date of asset foreclosure, while the cost value is the value stated in an enactment passed by a competent body from where the legal grounds for acquiring ownership arises. If the appraised value is lower than the cost value, the Bank shall be obligated to present impairment loss (IAS 36) in the income statement in an amount of determined difference between both values. At least once a year in a period of 12 months, the Bank is obligated to provide appraisal of the value of foreclosed asset by three authorized appraisers, at least two of which are external appraisers not working for the Bank. Hence, the amount of the lowest appraisal out of the three ones is considered to be appraised value. Upon exception, the Bank may provide appraisal of the value of foreclosed assets by only one authorized appraiser if the initial carrying value of the foreclosed asset reduced by the total amount of impairment loss does not exceed MKD 2,000,000. If, as per the conducted appraisal, the appraised value reduced by the sales costs is lower than the amount of initial carrying value reduced by the total amount of impairment loss, the Bank is obligated to recognize in the income statement the additional impairment loss up to the amount of appraised value. When the appraised value is higher than the amount of initial carrying value reduced by the total amount of impairment loss, the Bank must not recognize this difference in the income statement. If the Bank fails to sell the foreclosed asset within 5 years following the foreclosure date, it is obligated to conduct full write-off of such asset, i.e. to bring its value down to zero. The Bank, within 3 months following the date of this decision s enactment ( ), is obligated to provide appraisal of the value of current foreclosed assets. Hence, the date of this Decision s enactment is considered the date of foreclosure of the current assets. If the appraised value is lower than the value upon which the foreclosed asset has been recorded until the date of this Decision s enactment, the Bank is obliged to recognize in the income statement the impairment loss up to the amount of appraised value Cash and Cash Equivalents Cash and cash equivalents include cash and nostro accounts, which represent unrestricted demand deposits and placements with other banks and financial institutions, with maturity up to three months, as well as unrestricted account balances with the NBRM. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 14

16 STOPANSKA BANKA AD SKOPJE 3.11 Managed Funds Assets managed on a fee basis on behalf of legal entities and citizens are included in the balance sheets on a net basis. Net asset or liability position as reported in the balance sheet reflects timing difference in collection of receivables or settlement of liabilities on behalf of the clients Employment Benefits In accordance with local regulations, the Bank is obligated to pay pension and social security contributions for its employees to the Pension & Social Security Fund calculated by applying the specific percentages stipulated under the relevant regulations. These contributions are recognized as expenses in the income statement at the moment of their generation. In accordance with the local regulations the employee is entitled to receive benefits upon retirement of at least two average monthly salaries paid to the employee in the Republic of Macedonia within the period of three preceding months. In addition, according to the collective agreement with the Bank s employees, the employees are entitled to receive benefits of two average salaries paid to the employee in the Republic of Macedonia within the period of three preceding months. These benefits are considered defined pension benefit plans. The retirement benefit obligations is recognized in the balance sheet on the basis of actuary assessment and represents the present value of the defined benefit obligation to employees as adjusted for all unrecognized actuarial gains and losses less unrecognized past service cost Income Tax Income tax is calculated in accordance with the provisions of the relevant legislation of the Republic of Macedonia based on the profit or loss recognized in the income statement prepared pursuant to Macedonian fiscal regulations. The estimated tax on monthly profit is paid in advance as determined by the tax authorities. Final taxes on profit of 12% are payable based on the annual profit shown in the statutory profit and loss account. Deferred income taxes if any are provided using the balance sheet liability method for temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. A deferred tax liability is recognized for all taxable temporary differences unless it arises from the initial recognition of an asset or liability in a transaction, which at the time of the transaction affects neither accounting profit nor taxable profit (tax loss). Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred asset arises from the initial recognition of an asset or liability in a transaction, which at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss) Fair Value The accompanying financial statements are prepared on a cost basis and subsequently reduced in order to obtain their estimated recoverable amounts. 4. FINANCIAL INSTRUMENTS 4.1. Financial risk management 15

17 STOPANSKA BANKA AD SKOPJE The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The Bank s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. The Bank s risk management organization structure ensures existence of clear lines of responsibility, efficient segregation of duties and prevention of conflicts of interest at all levels, including the Board of Directors, Executive and Senior Management, as well as between SB and the NBG Group, its customers and any other stakeholders. Within the Bank, risk management activities broadly take place at the following levels: Strategic level encompasses risk management functions performed by the Supervisory Board. These include the approval of risk and capital strategy, ascertaining the Bank s risk definitions, profile and appetite, as well as, the risk reward profile and other high-level risk related policies and internal guidelines. Tactical level encompasses risk management functions performed by the Board of Directors, Executive and Senior Management. These include the approval of risk policies and procedure manuals for managing specific risks and establishing adequate systems and controls to ensure that the overall risk and reward relation remains within acceptable levels. Generally, the risk management activities performed by the Risk Management department of SB, as well as, other critical support functions fall into this category. Operational (business line) level It involves management of risks at the point where they are actually created. The relevant activities are performed by individuals who undertake risk on the organization s behalf. Risk management at this level is implemented by means of appropriate controls incorporated into the relevant operational procedures and guidelines set by the management. The most important types of risk are credit risk, liquidity risk, market risk and operational risk Credit risk The Bank takes on exposure to credit risk, which is the risk to earnings arising from an obligor s failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed. Credit risk is the most important risk for the Bank s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances. There is also credit risk in off-balance sheet financial instruments, such as loan commitments, letters of guarantees and credits. 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 16

18 STOPANSKA BANKA AD SKOPJE Credit risk measurement, limits and mitigation policies Initially, when approving loans and loan commitments, different Credit Committees assess creditworthiness of the clients depending on the type and size of the exposure. The credit risk management, which encompasses measurement, monitoring and control of credit risk, is performed by Risk Management Committee and Committee for classification of assets and provisioning for potential losses, commitments and contingencies and it is mainly based on reports and analyses prepared by Research, Statistics and Risk Management Division. The Board of Directors is regularly informed concerning the credit risk that Bank is exposed to. The Bank monitors compliance with the legally and internally established limits and controls concentrations of credit risk. Credit risk limits regarding an individual borrower, internal persons, shareholders with over 5% of the voting shares, firms in which SB owns capital share as well as large exposures are set in the SB Risk Strategy which is approved and revised by the Board of Directors, and are in line with the regulatory requirements. The Bank structures the levels of credit risk that undertakes towards domestic and foreign banks by placing limits on the amount of risk accepted subject to an annual or more frequent review, when considered necessary. The concentration risk is monitored regularly for product, geographical and industry segments. The Bank employs a range of practices to mitigate credit risk. Common practice is accepting suitable collateral for approved loans. The main collateral types for loans and other credit exposures are: Mortgages over residential properties; Charges over business assets such as premises, inventory and accounts receivable; Charges over financial instruments such as debt securities and equities Impairment and provisioning policies The internal rating systems focus more on credit-quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment. The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. However, the majority of the impairment provision comes from the bottom two gradings. The table below shows the Bank s credit rating categories: 17

19 STOPANSKA BANKA AD SKOPJE 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) Impairment and provisioning policies (continued) Credit rating Criteria Mapping Risk category A Debtor not likely to default and who repays on time, or with delay of Satisfactory risk 15 days. Credit exposure secured by first-class collateral. Risk category B Debtor who repays its obligation with a delay of 30 days, Watch list occasionally days. Regardless the temporary weak financial position, no signs of further deterioration. Risk category C Debtor who repays its obligation with a delay of days, Watch list occasionally days. Debtor is assessed to have inadequate cash flows to fulfilled its obligations. Risk category D Debtor who repays its obligation with a delay of days, Substandard occasionally days. Debtor is illiquid and insolvent, and have acceptable collateral. Risk category E Debtor who repays its obligation with a delay of more than 365 days or do not repay its obligation at all. Usually credit exposure to debtor under bankruptcy or liquidation procedure. Without or with bad collateral. Substandard The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the Bank: Delinquency in contractual payments of principal or interest: Cash flow difficulties experienced by the borrower (e.g. equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; and Deterioration in the value of collateral The Bank s policy requires the review of individual financial assets that are above materiality thresholds at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account. Collectively assessed impairment allowances are provided for portfolios of homogenous assets that are individually below materiality thresholds. 4. FINANCIAL INSTRUMENTS (continued) 18

20 STOPANSKA BANKA AD SKOPJE 4.2. Credit risk (continued) Maximum exposure to credit risk before collateral held or other credit enhancements Maximum exposure in thousands denars 31 December 31 December Credit risk exposure relating to on balance sheet Treasury bills 5,232,175 2,426,260 Loans and advances to banks 5,443,514 6,001,414 Trading securities 253, ,765 Loans and advances to customers 32,917,403 21,659,311 Investment securities- available for sale 123, ,354 Investment securities- held to maturity 3,838,602 4,391,916 Other assets 329, ,681 Credit risk exposure relating to off -balance sheet Financial guarantees 2,019,165 1,619,601 Standby letters of credits 1,001, ,623 Commitments to extend credits 7,332,304 4,303,044 Total credit risk exposure 58,490,860 41,583,969 Deposit, property, cars, government bonds, pledge over machines and other movables are accepted as collateral in order to secure the credit exposures. Mortgages and consumer loans in the amounts over EUR are fully secured by property (residential and business premises) with LTV up to 75%. Also, deposits and government bonds are accepted as valid collateral. Auto loans (included in category-consumer loans) are secured by cars. The corporate loans and small business lines are secured with different types of collaterals: residential mortgage, commercial premises, cars, pledge over machines and other movables, L/Gs from first-class banks, corporate L/Gs and personal bills of exchange taking into consideration the quality of the collateral and the LTV ratio. 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 19

21 STOPANSKA BANKA AD SKOPJE Loans and advances Loans and advances are summarised below: Neither past due nor impaired Past due but not individuall y impaired Individuall y impaired Total Gross Allowance for individually impaired loans Allowance for collectively impaired loans TOTAL Allowance for impairment Total net 31 December 2007 Cards 1,519, ,184-1,925,279 - (61,504) (61,504) 1,863,775 Consumer 10,455,370 2,515,643-12,971,013 - (490,334) (490,334) 12,480,679 Mortgage 2,500, ,733-3,322,044 - (62,018) (62,018) 3,260,026 Small Business Loans 3,909,233 2,215,964 1,941,339 8,066,536 (1,517,340) - (1,517,340) 6,549,196 Corporate Loans 5,555,020 3,024,479 4,138,081 12,717,580 (3,953,853) - (3,953,853) 8,763,727 Total 23,939,029 8,984,003 6,079,420 39,002,452 (5,471,193) (613,856) (6,085,049) 32,917,403 Due from banks 5,392,146 77,435-5,469,581 - (26,067) (26,067) 5,443,514 29,331,175 9,061,438 6,079,420 44,472,033 (5,471,193) (639,923) (6,111,116) 38,360,917 Neither past due nor impaired Past due but not individualy impaired Individuall y impaired Total Gross Allowance for individually impaired loans Allowance for collectively impaired loans TOTAL Allowance for impairment Total net 31 December 2006 Cards 1,001, ,272-1,278,902 - (31,772) (31,772) 1,247,130 Consumer 5,168, ,803-7,985,190 - (381,404) (381,404) 7,603,786 Mortgage 1,576, ,773-2,457,189 - (15,819) (15,819) 2,441,370 Small Business Loans 2,061,894 2,839,958 2,030,337 6, (1,583,395) - (1,583,395) 5,348,794 Corporate Loans 3,867, ,364 4,826,604 9,332,899 (4,314,668) - (4,314,668) 5,018,231 Total 13,676,258 7,453,170 6,856,941 27,986,369 (5,898,063) (428,995) (6,327,058) 21,659,311 Due from banks 5,949,205 89,010-6,038,215 - (36,801) (36,801) 6,001,414 19,625,463 7,542,180 6,856,941 34,024,584 (5,898,063) (465,796) (6,363,859) 27,660, FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) Loans and advances (continued) 20

22 STOPANSKA BANKA AD SKOPJE (a) Loans and advances neither past due or impaired Satisfactory risk Watch list Substandard Total 31 December 2007 Cards 1,519, ,519,095 Consumer 10,455, ,455,370 Mortgage 2,500, ,500,311 Small Business Loans 3,909, ,909,233 Corporate Loans 5,555, ,555,020 Total 23,939, ,939,029 Due from banks 5,392, ,392,146 29,331, ,331,175 Satisfactory risk Watch list Substandard Total 31 December 2006 Cards 1, ,001,630 Consumer 5,168, ,168,387 Mortgage 1,576, ,576,416 Small Business Loans 2,061, ,061,894 Corporate Loans 3,867, ,867,931 Total 13,676, ,676,258 Due from banks 5,949, ,949,205 19,625, ,625,463 (b) Loans and advances past due but not individually impaired Loans and advances which are past due 90 days doesn t have a impaired treatment, except when exist nformation which is opposite. Gross amount of the loans are summarised bellow. 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) Loans and advances (continued) (b) Loans and advances past due but not individually impaired (continued) 21

23 STOPANSKA BANKA AD SKOPJE Past due up to 30 days Past due days Past due days Past due days Past due days Past due 1-2 years Past due over 2 years Total 31 December 2007 Cards 295,992 46,674 10,743 52, ,184 Consumer 1,413, , , , ,307 99,657-2,515,643 Mortgage 545, ,659 35,316 70,824 1,957-20, ,733 Small Business Loans 1,510, , , ,215,964 Corporate Loans 2,332, , , ,024,479 Total 6,098,097 1,303, , , ,264 99,657 20,560 8,984,003 Due from banks ,435 77,435 6,098,097 1,303, , , ,264 99,657 97,995 9,061,438 Past due up to 30 days Past due days Past due days Past due days Past due days Past due 1-2 years Past due over 2 years Total 31 December 2006 Cards 179,330 35,105 8,572 54, ,272 Consumer 1,915, , , , , ,459-2,816,803 Mortgage 654, ,029 81,581 26,002 18, ,773 Small Business Loans 2,369, , , ,839,958 Corporate Loans , ,364 Total 5,119, ,943 1,028, , , ,459-7,453,170 Due from banks ,010 89,010 5,119, ,943 1,028, , , ,459 89,010 7,542, FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) Loans and advances (continued) (b) Loans and advances past due but not individually impaired (continued) 22

24 STOPANSKA BANKA AD SKOPJE The fair value of collateral is based on valuation techniques which are used for similar assets. Total fair value of collateral for consumer loans is: thousands denars ( thousands denars), while for mortgage s thousands denars ( thousands denars) The fair value of collateral for corporate portfolio is summarised bellow: Cash and balances with central banks 297, ,619 Financial guarantees 2,719,217 2,850,350 Movable property 8,573,319 6,261,905 Real estate 28,621,092 22,000,474 Total 40,211,261 31,330, Foreclosed assets during the year During 2007, the Bank engaged two external appraisal companies in order to determine the fair value of the foreclosed assets. In this period, the Bank sold 30 assets at total value of MKD 121,124 thousand, whereas it foreclosed 10 facilities at total value of MKD 18,987 thousand. Activities have been undertaken for preparing the assets foreclosed during 2007 for sale because the general policy of the Bank is these facilities to be sold within a period of 3 years. The Bank utilizes such facilities for its own activities very rarely. 23

25 STOPANSKA BANKA AD SKOPJE 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) Concentration of risks of financial assets with credit risk exposure (a) Geographical sectors The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorized by geographical region as of 31 December For this table, the Bank has allocated exposures to regions based on the country of domicile of the counterparties. Greece Macedonia West European countries United States and Canada SE Europe Australia and Japan Total Treasury bills - 5,232, ,232,175 Loans and advances to banks 5, ,028, , , ,572 5,443,514 Trading securities - 226, , ,301 Loans and advances to customers - 32,917, ,917,403 Investment securities- available for sale - 92,066 31, ,123 Investment securities- held to maturity - 3,838, ,838,602 Other assets - 329, , December ,075 42,636,543 4,059, , , ,572 48,137, December ,687 30,968,667 2,948, , , ,020 34,964,701 24