PIRAEUS BANK A.D. BEOGRAD FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 AND INDEPENDENT AUDITOR'S REPORT

Transcription

1 PIRAEUS BANK A.D. BEOGRAD FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 AND INDEPENDENT AUDITOR'S REPORT

2 PIRAEUS BANK A.D. BEOGRAD Financial statements for the year ended 31 December 2016 Content Page Independent Auditor s report 1 Income Statement Statement of other comprehensive income Balance sheet Statement of changes in equity Cash flow statement Notes to the Financial Statements TRANSLATION OF THE REPORT ORIGINALLY ISSUED IN SERBIAN

3 INDEPENDENT AUDITOR S REPORT To the Shareholders of Piraeus Bank a.d. Beograd We have audited the accompanying financial statements of Piraeus Bank a.d. Beograd (the Bank ) which comprise the balance sheet as of 31 December 2016 and the income statement, statement of other comprehensive income, 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. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Law on Auditing and auditing regulation effective in the Republic of Serbia. This regulation requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about 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 entity s preparation and fair presentation of the financial statements 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 entity 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 accompanying financial statements present fairly, in all material respects, the financial position of Piraeus Bank a.d. Beograd as of 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Refer to the original signed Refer to the original signed Serbian version Serbian version Saša Todorović PricewaterhouseCoopers d.o.o., Beograd Licensed Auditor Belgrade, 21 April 2017 PricewaterhouseCoopers d.o.o., Omladinskih brigada 88a, Belgrade, Republic of Serbia T: , F: , This version of our report/ the accompanying documents is a translation from the original, which was prepared in Serbian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

4 PIRAEUS BANK AD BELGRADE INCOME STATEMENT for the period from 01 January to 31 December 2016 (in RSD thousand) Note Interest income Interest expense Net interest income 4 1,967,660 2,812,324 4 (591,192) (847,395) 4 1,376,468 1,964,929 Fee and commission income Fee and commission expense Net fee and commission income 5 470, ,918 5 (42,166) (45,652) 5 428, ,266 Net profit on financial assets initially carried at fair value through profit and loss Net profit on financial assets available for sale Net profit on foreign exchange differences and foreign currency clause Other operating income Impairment losses from financial assets and credit risk off-balance sheet items NET OPERATING INCOME/(LOSS) Salaries, wages and other personal expenses Depreciation costs Other expenses PROFIT/(LOSS) BEFORE INCOME TAX Deferred tax profit/(loss) PROFIT/(LOSS) AFTER TAXES Result for period - PROFIT/(LOSS) Profit/(Loss) attributable to the parent entity Belgrade, 21 March , , , , ,513 65, (445,448) (4,973,513) 2,282,388 (1,329,658) 11 (848,731) (884,148) 12 (118,783) (119,500) 13 (1,292,952) (1,619,722) 21,922 (3,953,028) 14 3,988 (1,253) 25,910 (3,954,281) 25,910 (3,954,281) 25,910 (3,954,281) Signed by the management of Piraeus bank a.d. Belgrade This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

5 PIRAEUS BANK AD BELGRADE STATEMENT OF OTHER COMPREHENSIVE INCOME for the period from 01 January to 31 December 2016 (in RSD thousand) Note Profit/(loss) for the period 25,910 (3,954,281) Other comprehensive income Components of other comprehensive income that may be reclassified to profit or loss Unrealized losses on securities available for sale Positive effects from changes of fair value of securities available for sale Income/(expense) from taxes relating to other income tax for the period Total positive/(negative) other comprehensive income - (206) 15,095 (2,264) 31 12,831 (175) TOTAL POSITIVE/(NEGATIVE) COMPREHENSIVE INCOME The total positive/(negative) result for the period belonging to the parent entity Belgrade, 21 March ,741 (3,954,456) 38,741 (3,954,456) Signed by the management of Piraeus bank a.d. Belgrade This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

6 PIRAEUS BANK AD BELGRADE BALANCE SHEET as of 31 December 2016 (in RSD thousand) Note ASSETS Cash and balances with Central Bank Pledged financial assets Financial assets initially carried at fair value through profit and loss held for trading Financial assets available for sale Loans and receivables from banks and other financial institutions Loans and advances to customers Investments in associates Intangible assets Property, plant and equipment Deferred tax assets Non-current assets held for sale and discontinued operations Other assets TOTAL ASSETS LIABILITIES Financial liabilities at fair value through profit and loss held for trading Deposits and other liabilities due to banks, other financial institutions and the Central Bank Deposits and other liabilities due to customers Subordinated liabilities Provisions Other liabilities TOTAL LIABILITIES EQUITY Share capital Profit Loss Reserves TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 16 7,607,792 11,293, ,471, , ,157,431 2,792, ,051, ,669,806 4,769, ,598,434 31,181, , , , , , , ,982 54, , , , ,491 52,243,239 52,546, ,817 11, ,369,283 5,489, ,960,037 30,344, ,147,633 4,085, , , , ,609 39,911,899 40,254, ,570,230 17,570,230 25,910 - (5,313,597) (5,313,597) 33 48,797 35,966 12,331,340 12,292,599 52,243,239 52,546,969 Belgrade, 21 March 2017 Signed by the management of Piraeus bank a.d. Belgrade This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

7 PIRAEUS BANK AD BELGRADE STATEMENT OF CHANGES IN EQUITY for the period from 01 January to 31 December 2016 (in RSD thousand) Share capital and other capital Share premium Reserves from profit and other reserves Revaluati on reserves credit Revalua tion reserve Profit Loss Total s debit Balance as at 01 January of the previous year Correction of significant accounting estimates and errors and changes in accounting policies from prior years - decrease Restated opening balance as at 01 January of the previous year Negative effects of changes in other comprehensive income - total 16,975,755 16,975, , ,475-35, , (169) (6) - (1,359,316) 16,247, (1,359,316) 16,247, (175) Current year loss (3,954,281) (3,954,281) Transactions with owners recorded directly to equity-increase Distribution of profit or loss coverage -decrease Other increases Other decreases Balance as at 31 December of the previous year 16,975, ,475 35,972 - (6 ) - (5,313,597) 12,292,599 Balance as at 01 January of the current year Restated opening balance as at 1 January of the current year 16,975,755 16,975, , ,475 35,972 - (6) - 35, (5,313,597) 12,292,599 - (5,313,597) 12,292,599 Total positive comprehensive income for the period , ,831 Current year loss/profit ,910 25,910 Balance as of 31 December of the current year Belgrade, 21 March ,975, ,475 35,972 12,825-25,910 (5,313,597) 12,331,340 Signed by the management of Piraeus bank a.d. Belgrade This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

8 PIRAEUS BANK AD BELGRADE CASH FLOW STATEMENT for the period from 01 January to 31 December 2016 (in RSD thousand) CASH FLOWS FROM OPERATING ACTIVITIES Inflows Interest receipts Fee receipts Receipts from other operating income Receipts from dividends and equity investments 2,616,921 3,115,888 1,912,850 2,549, , , ,364 93, Outflows Interest payments Fee payments Payments to and on behalf of employees Cash for other taxes and contributions Outflow to other operating expenses Net operating cash inflows before changes in placements and deposits Net operating cash outflows before changes in placements and deposits Decrease in placements and increase in deposits and other liabilities Decrease in loans and receivables due from banks, other financial institutions, central bank and customers Decrease in financial assets initially carried at fair value through profit and loss, financial assets held for trading and other securities not held with investment purposes Increase in deposits to banks, other financial institutions, central bank and customers Increase in loans and decrease in deposits and other liabilities Increase in loans and receivables due from banks, other financial institutions, the central bank and customers Increase in financial assets initially carried at fair value through profit and loss, financial assets held for trading and other securities not held with investment purposes Decrease in deposits to banks, other financial institutions, central bank and customers Net cash inflows/(outflows) from operating activities before income tax Income tax paid Dividends paid Net cash generated from operating activities (2,847,633) (3,462,689) (669,499) (952,186) (42,166) (45,652) (967,910) (997,017) (48,208) (52,401) (1,119,850) (1,415,433) (230,712) (346,801) 5,428,231 13,937,891 3,876,039 13,937, ,552,192 - (8,598,147) (10,164,940) (3,597,487) (6,814,554) (2,294,026) (1,013,248) (2,706,634) (2,337,138) (3,400,628) 3,426, (3,400,628) 3,426,150 This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

9 PIRAEUS BANK AD BELGRADE CASH FLOW STATEMENT - continued for the period from 01 January to 31 December 2016 (in RSD thousand) CASH FLOWS FROM INVESTING ACTIVITIES Inflows Seles of intangible and property, plant and equipment Outflows Purchase of intangible and property, plant and equipment Net cash inflow from investing activities 1,991 30,520 1,991 30,520 (90,090) (11,116) (90,090) (11,116) (88,099) 19,404 CASH FLOWS FROM FINANCING ACTIVITIES Inflows Proceeds from issuance of capital Other proceeds from financing activities Inflows from borrowings 319, ,994 - Outflows Outflows from borrowings Outflows from subordinated liabilities - (609,166) - (609,166) - - Net cash inflow from financing activities Net cash outflow from financing activities 319, (609,166) Total net received cash Total net cash payments NET INCREASE/DECREASE IN CASH CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR GAINS ON EXCHANGE LOSS ON EXCHANGE CASH AND CASH EQUIVALENTS, END OF YEAR Belgrade, 21 March ,367,137 17,084,299 (11,535,870) (14,247,911) (3,168,733) 2,836,388 7,690,595 5,246,581 1,068, (392,374) 5,590,571 7,690,595 Signed by the management of Piraeus bank a.d. Belgrade This is a translation of the original Independent Auditors Report issued in the Serbian language. All due care has been taken to produce a translation that is as faithful as possible to the original. However, if any suggestion arise related to interpretation of the information contained in the translation, the Serbian version of the document shall prevail.

10 Company ID No.: Code of activity 6419 Tax ID No.: NOTES TO THE FINANCIAL STATEMENTS FOR 2016 PIRAEUS BANKA AD BEOGRAD, BEOGRAD April 2017

11 For the year ended 31 December GENERAL INFORMATION Piraeus Banka ad, Beograd (the Bank) is established as a shareholding entity under the regulations of the Republic of Serbia. As of 14 July 2006, Piraeus Banka S.A. is the Bank's only shareholder with a 100% share capital. As at 31 December 2015, Piraeus Banka S.A. from Athens had a 100% share capital of the Bank. The Bank was originally established as Trust Banka ad, Beograd on 12 September 1995, based on Company Foundation Contract dated 08 May 1995, and registered with the Commercial Court in Belgrade. At its Shareholders Assembly, the Trust bank a.d., Beograd passed a Decision to change the Bank s name into Atlas banka a.d., Beograd, having obtained the consent of the then National Bank of Yugoslavia at that time, and in accordance with the with the Decision of Commercial Court of Belgrade No. I. Fi /95 dated 15 November On 30 May 2005, Piraeus Bank S.A. from Athens became the majority owner of the Bank, having purchased 80% of shares. Based on Business Registers Agency Decision No /2005 dated 03 October 2005, the Bank changed its name into Atlas Bank A.D., and its old shareholders have been deleted from the register. Based on the Business Registers Agency Decision No. BD /2006 dated 30/06/2006, the Bank changed its name and as of that date it has been operating under the name of Piraeus Bank A.D. Beograd. The Bank is licensed in Republic of Serbia to perform payment operations, domestic and foreign credit and deposit operations, and under the Law on Banks, the Bank is obliged to operate in accordance with the principles of liquidity, solvency and profitability. As of 05 November 2009, the Bank's registered office is in Belgrade, at 5b Milentija Popovića Street, New Belgrade. The Bank operates through 26 branch offices in the Republic of Serbia. As at 31 December 2016, the Bank had 445 employees (as at 31 December employees). The Bank s tax identification number is

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated Bases of preparation The Bank prepares its financial statements in accordance with the accounting regulations prevailing in the Republic of Serbia, and with the National Bank of Serbia Regulations. Pursuant to the Law on Accounting (Official Gazette of the Republic of Serbia no. 62/2013), banks are required to maintain their books of account and to prepare financial statements in accordance with International Financial Reporting Standards (IFRS). The accompanying financial statements are presented in the format prescribed by the Decision on the form and content of the financial statements of Banks (Official Gazette of the Republic of Serbia no. 71/2014 and 135/2014). The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities at fair value through profit or loss. The aforesaid law and the NBS regulations prescribe the first-time adoption of IFRS for the period commencing 1 January Going concern The financial statements are prepared in accordance with the going concern concept, which assumes that the Bank will continue its operations for the foreseeable future a) Position of the Piraeus Bank S.A. Greece (Parent) Macroeconomic environment Regarding the developments in the international environment and economic developments, major events in 2016 and 2017, until the time of publication of the financial statements are as follows: The year 2016 is characterized by agitated political events and change in conditions, while the economic and monetary stability is held in check mainly by the intervention of Central Banks. The Global growth rate of GDP in 2016 was 3.1%, in relation to 3,2% in 2015, with a marginal slow-down which is attributed to the Developed economies (GDP grew at 1,7% in relation to 2.1% respectively), while the economic growth in the developing countries remained unchanged at 4.1%. For 2017, a global growth of 3,4% is projected. During 2016, the growth rate of GDP for the economies in the Eurozone decreased to 1,7% from 2,0% in 2015, while the inflation remained at a very low level for the third consecutive year. European Central Bank (ECB) decided, during 2016, to increase the monthly purchase of assets from EUR 60 billion to EUR 80 billion with the goal to combat the low inflation rate. For 2017, it is expected that the growth rate of GDP will decrease to 1,6% while inflation will reach 1,6%. The year 2017 will characterized by the differing policies of the main Central Banks of the EU. 3

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) a) Position of the Piraeus Bank S.A. Greece (Parent) (continued) Macroeconomic environment (continued) The year 2016 has been marked by several positive factors for the Greek Economy, such as the successful conclusion of the first audit for the third program of Economic Policy, further relaxations in terms of capital control, abolition of the lower limit of rating for accepting Greek Treasury Bills as collateral for refinancing ECB, as well as the decision for short-term means for reduction of Greek public debt. Even after such a positive sequence of events, it didn t lead to a complete recovery of the economy. During 2016, the Greek economy has recorded a decrease in the amount of -0.1% in relation to -0.3% in In the second and third quarters of 2016, GDP rose, however in the fourth quarter in recorded a decrease of - 1.2%. Overall, in 2016, the domestic demand had a positive impact, mainly due to the increase in private spending, while the contribution of the international trade was negative. In the meantime, in 2016 inflation, has continued its negative trend, albeit slowing down a little bit (-0.8%, in 2015: -1.7% deflation). However, in December, for the first time in 45 months of falling, the inflation rate was at 0% at the annual level, and in the first 2 months of 2017 it even recorded a positive rate. The unemployment rate was 23.5% in 2016 in relation to 24.9% in Employment rose for 1.7% while unemployment fell for -5.5%. In 2016, the current account balance is at the level of the deficit - EUR 1.1 billion (-0.6% GDP), in relation to a surplus of about EUR 0.2 billion (0.1% GDP) in 2015 From the fiscal point of view, during the 2016, it was estimated that the public budget will have a surplus of EUR 4, 4 billion. According to first estimates of the preliminary report for the budget for 2017, it is expected that the public surplus will pass the goal of 0.5% of GDP, and that it will reach the 1.1%, also it is expected that in 2017 the threshold of 2,0% will be reached in relation to the initially set goal at 1.75%. Due to that, it is of critical importance that the process of economic recovery in 2017, on both the macroeconomic and fiscal level, remains the closure of the Second program, timely payment of rate for repayment of debt and the compensation of the expenses from the budget towards the suppliers from the private sector and the implementation of the measure to help repay the debt. The Greek banking system, after finalizing the process of recapitalization at the end of 2015, formed significant amortizes of additional capital for further strengthening the financial position of Greek banks, despite the existing conditions in the domestic economy. The ratio of loans to deposits on the Greek banking market has improved 120% in December 2016 from 128% in December of The deposits on the domestic market increased by 4% and amounted 139 billion. Regarding the realization of the program of economic adjustment, and, the gradual reduction of capital controls from July 2016, and keeping in mind the conclusion of the second audit, it is estimated that the Greek Banks are in a position to gradual upgrade the profile of financing and strengthen their base of deposits, while the negotiations of the Second program are being finalized. Greek banks participated in the long-term TLTRO program (target long-term refinancing operations) of ECB, which was published on 10 th of March, which is a condition for the existence of qualified collateral. Due to the fact that the high level of uncollectable loans represents the toughest challenge for the Greek banking system, in November 2016, Central Bank of Greece in collaboration with SSM (Single Supervisory Mechanism) of the European Central Bank has set out the operative goals for reducing the amount of problematic loans of Greek banks, which are followed by key performance indicators. Quarterly operative goals are set at the beginning of June 2016 until the end of 2017 as are yearly goals for 2018 and The aforementioned operative goals are include in the respective business plans of the Bank. 4

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) a) Position of the Piraeus Bank S.A. Greece (Parent) (continued) Macroeconomic environment (continued) In this context, the banking sector is estimated to reduce problematic debts with around EUR 107 billion in September 2016 to around EUR 67 billion at the end of 2019, a decrease of approximately 38%. It should be noted that the downward trend of problem receivables (NPEs) recorded in the first two quarters of implementing operational goals (3rd and 4th quarter 2016). This decrease was mainly due to the effective implementation of the restructuring package, which the original exposure in default returns to the status of regular debt servicing, as well as write-offs of bad debts. Finally, at the beginning of January 1, 2016, the Single Resolution Mechanism (SRM) for Eurozone banks, under whose jurisdiction falls Piraeus Bank, has become fully operational. SRM provides that, in spite of strict control, if the bank has serious problems, the resolution can be implemented efficiently and with minimal costs to taxpayers and the real economy. Year 2016 was a key year for Piraeus bank. In financial terms, the year was marked by the stabilization of the bank's performance, especially in the second half of the year when market conditions allowed it. Liquidity and asset quality improved, and this is evident through the many aspects of financial performance, with net performance results. In this context, the strategic basis were set: a) best practices in corporate governance; b) sustained profitability of key operations; c) a fast implementation of the objectives of the restructuring; g) exit from non-core activities to free up resources to strengthen key banking platform and e) initiatives related to digitization and innovation, which will reduce costs and further improve the efficiency of the work and experience of working with clients. Piraeus Bank is continuing with the implementation of the restructuring plan, in order to support economic recovery in Greece as the biggest bank in the country, and to maximize the value of the shares. As far as the financial situation of Piraeus Group in 2016, the total assets at the end of 2016 amounted to EUR 81.5 billion compared with EUR 87.9 billion at the end of Customer deposits of the Group, after a significant decline in 2015 due to the uncertainty which prevailed in Greece, have stabilized mainly in the second half of 2016 and amounted to EUR 42.4 billion in December 2016, up 8% compared to December Customer deposits of the Group outside Greece amounted to EUR 3.0 billion, showing a stable trend in comparison to the amount of EUR 2.8 billion a year earlier. Use of Code Eurosystem funding is significantly reduced in 2016, to EUR 20.9 billion in December 2016 from a level of EUR 32.7 billion at the end of ELA funding (Emergency liquidity assistance) is reduced to EUR 11.9 billion at the end of 2016 to EUR 16.7 billion at the end of Gross loans Piraeus Group at the end of December 2016 amounted to EUR 66.6 billion. By business lines, business loans amounted to EUR 44.2 billion, representing 66% of the total loan portfolio, while loans to households amounted to EUR 22.4 billion, or 34% of the total portfolio. Net loans amounted to EUR 49.7 billion. The ratio of net loans to deposits was 113%, an improvement compared to the end of 2015 (126%). NPL ratio of the Group (the share of loans overdue more than 90 days to total loans) was 37.5% at the end of 2016, while a year earlier was 40.1%. The ratio of coverage of NPLs Total provisions amounted to 69.5%. Problematic receivables (including off-balance sheet exposure), had a share of total exposures for Piraeus Group 50.8% at the end of 2016, which remained stable on an annual basis 5

15 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) a) Position of the Piraeus Bank S.A. Greece (Parent) (continued) Macroeconomic environment (continued) The result in 2016 was burdened by provisions for loans amounting to EUR 1.0 billion, which represents a significant reduction compared with EUR 3.5 billion in 2015, in line with the reduction of problem loans, which further protects the Group's financial position by bringing the cumulative provisions at the end of 2016 to EUR 16.9 billion. Stately level of cumulative provision enables the Bank to effectively deal with solving the problem of non-performing loans. In addition, other receivables and assets are impaired for EUR 0.2 billion compared to EUR 0.4 billion in Piraeus Group in 2016 as a result of pre-tax realized loss in the amount of EUR 168 million, while in 2015 amounted to 2,930 million. Net loss from continuing operations attributable to shareholders amounted to EUR 4 million in 2016 compared to losses of EUR 1,858 million in 2015, with a positive impact due to the recognition of deferred taxes in previous years, the funds for which there is a willingness to sell or liquidated in the near future. On 31 December 2016, the total equity of the Group amounted to EUR 9.8 billion, while at 31 December 2015 amounted to EUR 10.0 billion, representing a decrease mainly due to interest payments of about EUR 166 million for convertible bonds. The total capital adequacy ratio of the Group after the Basel III stood at 17.0% at the end of Piraeus Group at the end of 2016 had a network of 921 organizational units, out of which 660 in Greece and 261 in seven other countries. Branch Network in Greece decreased by 49 units and abroad for 19 units during 2016 as a result of the rationalization plan. At the same time, the number of employees of the Group amounted to 18,075, of whom 14,492 were employed in Greece (2015: 19,279 and 15,559 respectively). The share of regular operations outside Greece in Piraeus Group at 31 December 2016 accounted for 7% of total assets, 28% of the branch network and 20% of employees. Piraeus Bank submitted in November The revised plan, which was approved by the Fund for financial stability as well as by the European Commission on 29 November Commitments from the revised plan does not deviate from the basic obligation of the restructuring plan approved in 2014 and include inter alia, the following: reduction of the network in Greece, further reducing the number of employees in Greece, reducing total operating costs in Greece, reducing the cost of financing sources by reducing the cost of deposits collected in Greece in order to restore pre-provision profitability of the Bank, reducing the ratio of net loans to deposits the Greek banking activities, limit the growth of the gross loan portfolio sale of unlisted securities, the limit of compensation of employees and managers of the Bank b )Position of the Bank In the current environment the focus of the Bank has been on liquidity and capital adequacy. As disclosed in Notes 28 and 29, the Bank s main source of funding is locally collected deposits from corporate and retail customers. As at 31 December 2016 these sources of funding represented 80% (2015: 75,38%) of total liabilities. The Bank did not perform a capital increase in

16 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Position of the Bank (continued) The bank s capital adequacy ratio (as prescribed by NBS) as at 31 December 2016 amounts to 28.80%% (Note 34) and is higher than regulatory minimum of 12%. Additionally, according to Article 34 of Decision on Risk Management prescribed by the NBS, the Bank s liquidity ratio as of 31 December 2016 was 2.08 (2015:2,37), compared to the minimum required 1. Article 33 of the Law on Banks prescribes that a bank s exposure to a person related to the Bank must not exceed 5% of the bank s capital and 20% to a group of persons related to the Bank. As of 31 December 2016, the Bank s total exposures toward the person related to the Bank represented 13.26% (2015: 22.30%) and toward the Piraeus group s entities represented 5.73% (2015: 20.31%) of the Bank s capital. Taking into consideration the above factors, the Bank s Management estimates that the Bank will continue in operational existence for the foreseeable future. Accordingly, these financial statements have been prepared on a going concern basis. 7

17 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS Basis of preparation and presentation of financial statements The Bank prepares its financial statements in accordance with the accounting regulations prevailing in the Republic of Serbia, and with the National Bank of Serbia Regulations. Pursuant to the Law on Accounting, banks are required to maintain their books of account and to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities at fair value through profit or loss ) New and amended Standards and Interpretations The following amended standards became effective for the Bank from 1 January 2016, but did not have any material impact on the Bank. IFRS 14, Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). Accounting for Acquisitions of Interests in Joint Operations - Amendments to IFRS 11 (issued in May 2014 and effective for the periods beginning on or after 1 January 2016). Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 (issued in May 2014 and effective for the periods beginning on or after 1 January 2016). Agriculture: Bearer plants - Amendments to IAS 16 and IAS 41 (issued in June 2014 and effective for annual periods beginning 1 January 2016). Equity Method in Separate Financial Statements - Amendments to IAS 27 (issued in August 2014 and effective for annual periods beginning 1 January 2016). Annual Improvements to IFRSs 2014 (issued in September 2014 and effective for annual periods beginning on or after 1 January 2016). Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective for annual periods on or after 1 January 2016). Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS 12 and IAS 28 (issued in December 2014 and effective for annual periods on or after 1 January 2016). 8

18 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2. b) Standards that have been issued but are not yet effective IFRS 9 Financial Instruments (issued in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are: o Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortized cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). o Classification for debt instruments is driven by the entity s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortized cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfolio where an entity both holds to collect assets cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. o Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. o Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. o IFRS 9 introduces a new model for the recognition of impairment losses - the expected credit losses (ECL) model. There is a three stage approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. o Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The Bank is currently assessing the impact of the new standard on its financial statements. 9

19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2. b) Standards that have been issued but are not yet effective (continued) IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognized when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognized, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognized if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalized and amortized over the period when the benefits of the contract are consumed. The Bank is currently assessing the impact of the new standard on its financial statements. IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Bank is currently assessing the impact of the new standard on its financial statements. Disclosure Initiative - Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities. The Bank will present this disclosure in its 2017 financial statements. The following other new pronouncements are not expected to have any material impact on the Group when adopted: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB). Recognition of Deferred Tax Assets for Unrealized Losses - Amendments to IAS 12 (issued on 19 January 2016 and effective for annual periods beginning on or after 1 January 2017). Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018). Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018). Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS 4 (issued on 12 September 2016 and effective, depending on the approach, for annual periods beginning on or after 1 January 2018 for entities that choose to apply temporary exemption option, or when the entity first applies IFRS 9 for entities that choose to apply the overlay approach). Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Bank s Financial Statements. 10

20 2.2 c) Comparative data Comparative financial information and initial states are the financial statements of the Bank as at 31 December 2015, which include adjustments and reclassifications as discussed below: Adjustments of financial statements for 2015: In RSD thousand Official IS 2015 Correction Corrected IS 2015 Interest income 3,036,838 (224,514) 2,812,324 Interest expense 847, ,395 Net income from interest 2,189,443 (224,514) 1,964,929 Income from fees and commissions 502, ,918 Fee and commission income 45,652-45,652 Net income from fees and commissions 457, ,266 Net gains from financial assets held for trading 186, ,916 Net income from foreign exchange differences and the effects of foreign currency clause 968, ,882 Other operating income 65,862-65,862 Net losses on impairment of financial assets 5,198, ,514 4,973,513 Total net operating expenses (1,329,658) - (1,329,658) Wages, salaries and other personnel expenses (884,148) - (884,148) Depreciation costs (119,500) - (119,500) Other expenses (1,619,722) - (1,619,722) Loss before tax (3,953,028) - (3,953,028) The correction above is the result of calculation of interest on net exposure, without affecting the final result (Note 2.3). The adjustments do not have any impact on the balance sheet or equity. 11

21 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.3. Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the income statement using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Correction of interest calculation with gross exposure to net exposure: The calculation of interest on a net basis is made for individually assessed loans that are impaired based on individual assessment and which are not in the status of doubtful receivables. The calculation of interest on a net basis applies to customers in regular status in which bank balance sheet records accrued interest on gross exposures, primarily with the aim of harmonizing debtor-creditor relationship with clients. After calculating and posting regular and default interest on the gross exposure, adjustment is done to the income statement reconciling the income from interest on interest income accrued on the net exposure. The reclassification of the income statement structure between interest income and income from the reversal of impairment is performed. Interest income is being reversed (regular and default) and the difference between the interest on the gross and net exposure to interest rate is credited to income from reversal of impairment. Income from interest income is calculated on the net exposure for individually assessed loans that are impaired based on individual assessment. The basis for the calculation of the net exposure on a daily basis (caught daily net exposure). The first calculation is applied to 2016, a posting implemented retroactively with accompanying currencies, for every balance sheet day as of January 31, 2016 and with the actual date of processing. The principle of calculating interest on the net exposure is based on the same rules of calculation of interest applicable to the calculation of the gross exposure whereby the net current exposure is current caught exposure. Accrued interest on the net exposure is performed using the effective interest rate that was used for discounting of future cash flows Fee and commission income and expense Fees and commissions, except for those, which form part of the effective interest rate of the instruments, are generally recognized on an accrual basis when the service has been provided. Fees and commissions mostly comprise of fees for payment operations services, issued guarantees and other services. 12

22 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5. Foreign currency translations Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates (the 'functional currency'). The financial statements are presented RSD thousand which is the functional currency of the Bank. Foreign currency assets and liabilities as at the balance sheet date are translated in RSD using the NBS middle exchange rate as at the balance sheet date prevailing at that balance sheet date. Foreign currency transactions are translated into RSD using the interbank middle exchange rate prevailing at the date of transaction. Exchange differences arising from translations of foreign currency items and foreign currency transactions are credited or charged to the Income statement. Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analyzed between translation differences resulting from changes in the amortized cost of the security, and other changes in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in profit or loss, and other changes in carrying amount are recognized in equity. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss. Translation differences on nonmonetary financial assets such as equities classified as available for sale are included in the appropriate reserve within revaluation reserve in equity Current income tax The current income tax charge is calculated and paid in accordance with the provisions of the Serbian Law on Corporate Income Tax. During the year, the Bank pays the income tax charge in instalments defined based on the profit disclosed in previous year tax return. The final tax base to which a 15% tax rate is applied is established based on the Bank s tax return. The tax base comprises profit as stated in the Income statement adjusted for certain income and expenses in accordance with tax regulations. Tax regulations in the Republic of Serbia do not allow for a current period tax loss to be used as a basis to recover the tax paid in previous period. However, current period losses may be used to reduce the future tax base for up to 5 years Deferred income tax Deferred income tax is calculated on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. For deferred tax calculation purposes, current tax rates have been used at the balance sheet date. Deferred tax liabilities are recognized for all taxable temporary differences arising between the tax base of assets and liabilities as at the balance sheet date and the amounts presented for reporting purposes, which will result in future period taxable amounts. Deferred tax assets are recognized for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Current and deferred taxes are recognized as income and expense and are included in the net profit/loss for the period. 13

23 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8. Employee benefits a) Employee s benefits Short term benefits to employees include salaries and social contributions. They are recognized as an expense in the period when they are incurred. The Bank and its employees are obliged to make payments to the pension fund of Republic of Serbia in accordance with the defined contribution plan. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are due. b) Other employee s benefits The Bank provides other benefits for the retirement. An employee is usually entitled to these benefits if they were employees of the Bank until reaching the prescribed age for retirement and the minimum required years of employment. The above mentioned benefits are accumulated during the service. The defined retirement obligations are estimated annually by an independent certified actuary through the projected credit unit valuation method. The present value of benefit obligations is determined by discounting the expected future cash payments by reference to the interest rates of the high quality bonds expressed in the same currency, which mature approximately at the same period when retirement obligations are due Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with Central Bank, treasury bills and other eligible bills, loans and advances to banks, amounts due from other banks and shortterm government securities Sale and repurchase agreements Securities sold subject to repurchase agreements ( repos ) are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the securities; the corresponding liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to purchase and sell ( reverse repos ) are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between purchase and sale price is treated as interest and accrued over the life of the agreements using the effective interest rate method Investments in associates Associates are entities over which the Bank has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognized at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of the investment in associates. Other postacquisition changes in Bank s share of net assets of an associate are recognized as follows: (i) the Bank s share of profits or losses of associates is recorded in the profit or loss for the year as share of result of associates, (ii) the Bank s share of other comprehensive income is recognized in other comprehensive income and presented separately. However, when the Bank s share of losses in an associate equals or exceeds its interest in the 14