Letter from the CEO. Dear Shareholders, Dear Clients, Dear Partners, Dear Employees,

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2 Contents Letter from the CEO 3 Key Figures Corporate Profile 6 The Executive Committee 9 Macroeconomic Outlook Business Overview 14 Corporate Banking Retail Banking 22 SME Sector 25 Branch Network 27 Treasury Operations 28 Human Resources 31 Outlook for the future 36 Group Subsidiaries 39 Piraeus Bank Romania Annual Report

3 Letter from the CEO Dear Shareholders, Dear Clients, Dear Partners, Dear Employees, While we all agree that we are living difficult times, a second glance shows a more appealing perspective to the ones who take one step ahead in designing the banking business strategies for the future. Yes, it is true that the banking business has been changing during the last two years in a sense where Business as usual was replaced by a sustained effort to maintain our sector s credibility and soundness. In a frail, image damaged banking context all the players were forced to change the paradigm. And Romania made no exception. From the loan frenzy we suddenly passed to loan freeze. The client s enthusiasm transformed into cautiousness. A two way lack of trust started to emerge in the relationships between clients and banks. The banking sector adjusted its way of operating by becoming more selective when offering loans. At the same time the service area became the new mainstream in doing banking business, a trend sustained by the economical constraints experienced by the clients. The economic environment discouraged consuming and the international turmoil in the banking sector added another layer to the client s prudent attitude when it came to banking. Accompanying the downward economical trend came the NPL increase which stands as one of the more ardent issues that the banking sector has to deal with. The focus on the Romanian banking market changed from granting new loans to conserving the already existing good ones, to create portfolio loyalty. Nevertheless it becomes more and more clear that the crisis redefined the banking business up to the point where the relationship with the customer becomes more important than the product. It is obvious that in the last period banking has not been mainly about offering cheap loans and good deposit interests but more about offering good services, having emphatic, well trained employees, about creating partnerships with our clients. And this is the good news for the flexible, friendly, client oriented banks. Through all the economic impediments the opportunity comes for those banks which build their business based on their client s needs, who understand the power of dialogue. During these crisis years due to its structural pattern based on flexibility and capacity to understand the customer s needs Piraeus Bank Romania managed to adapt to the new economic environment mainly. As a result, at the end of 2009 the bank managed to maintain a solid business, to preserve its strong position on the competitive Romanian market as well as to realize a 23% increase of its deposits compared to the same period of 2008 while moderately expanding its network to 186 branches. Furthermore we continuously enhanced our product portfolio trying to anticipate the needs of our clients. We are aware that the years to come will bring further more challenges for the banking system but at the same time we are confident that a strategy combing wise risk decisions, cost reducing policies, good products and loyalty programs for our clients will pay of. On behalf of Piraeus Bank Romania I thank you all for your trust and commitment! Catalin Parvu Executive General Manager Piraeus Bank Romania Annual Report

4 Key Figures 2009

5 Key Figures 2009 INCOME STATEMENT ( MN) 2008 ( MN) Net interest income Net fee and commission income Net trading income Other net operating income Operating income Loan loss provisions Operating Expenses Profit before tax Income tax Net profit for the year BALANCE SHEET ( MN) 2008 ( MN) Total assets 2, , Total assets, including the assigned loans 3 4, , Total loans 1, , Assigned loans 1, , Total loans, including the assigned loans 3 3, , Due to customers 1, , Shareholders Equity RATIOS 2009 % 2008 % Cost-income ratio % 51.48% Loan provision ratio % 3.21% Return on average equity 6.46% 15.67% Return on average assets 0.89% 2.06% Capital adequacy ratio, Tier II % 12.10% STAFF & NETWORK Employees 7 1,792 1,946 Branch Offices ) The equivalent of income statement figures has been calculated using the RON/ average exchange rates published by the National Bank of Romania for 2008 and 2009 (i.e. 2008: RON/1 ; 2009: RON/1 ). 2) The equivalent of balance sheet figures has been calculated using the RON/ year end exchange rates published by the National Bank of Romania (i.e. Dec.31, 2008: RON/1 ; Dec.31, 2008: RON/1 ). 3) Assigned loans are loans originated in Piraeus Bank Romania and assigned to Piraeus Bank- London Branch; Piraeus Bank Romania continues to administrate those loans, being remunerated for the services provided. 4) Cost-income ratio as a percentage of operating expenses (staff, administrative and depreciation expenses); there were no exceptional expenses which might influence the level of this efficiency ratio. 5) Loan loss ratio as a percentage of the loan provisions in total loans (excluding the assigned loans); for the assigned loans also the risk has been transferred. 6) Statutory figures. 7) Full-time employees Piraeus Bank Romania Annual Report

6 Corporate Profile

7 Corporate Profile Piraeus Bank Group is one of the most dynamic and active financial organisations in Greece today. Founded in 1916, Piraeus Bank went through a period of state-ownership and management ( ) before it was privatised in December Since then, it has continuously grown in size and activities. Along with its organic growth, Piraeus Bank made a series of strategic moves with the goal of establishing a strong presence in the domestic market. Thus, in 1998, the Bank absorbed the activities of Chase Manhattan in Greece, took over controlling interest in Macedonia-Thrace Bank and acquired the specialised bank Credit Lyonnais Hellas. At the beginning of 1999, the Bank acquired Xiosbank and absorbed the activities of National Westminster Bank Plc in Greece. In June 2000, the Bank unified its three commercial banks in Greece (Piraeus Bank, Macedonia- Thrace Bank and Xiosbank), creating one of the three largest private sector banks in Greece. In early 2002, Piraeus Bank acquired the Hellenic Industrial Development Bank (ETBAbank). ETBAbank was absorbed by Piraeus Bank in December Also, at the beginning of 2002, a strategic alliance agreement for the Greek market was signed between Piraeus Bank Group and ING Group, focused in the field of bancassurance, which was renewed for 10 more years in October At the beginning of July 2009, Piraeus Bank and BNP Wealth Management agreed to a strategic partnership in Wealth Management. Finally, at the beginning of October 2009, Piraeus Bank and Victoria General Insurance Company S.A. subsidiary of Ergo International in Greece and member of the German insurance Group Munich Re commenced a 10-year exclusive cooperation in the general insurance field. In early 2005, Piraeus Bank Group, implementing its strategy for expansion in Southeastern Europe and Eastern Mediterranean markets, acquired the Bulgarian Eurobank (renamed into Piraeus Bank Bulgaria), strengthening its presence in Bulgaria, while the merger of Piraeus Bank branches in Bulgaria with Eurobank was completed in March Furthermore, in 2005, it entered into the Serbian market by acquiring Atlas Bank (renamed into Piraeus Bank Beograd), and into Egyptian market by acquiring Egyptian Commercial Bank (renamed into Piraeus Bank Egypt). Finally, in 2007, Piraeus Group expanded its international presence in Ukraine by acquiring the International Commerce Bank (renamed into Piraeus Bank ICB) and in Cyprus (Piraeus Bank Cyprus) by getting the approval to operate a banking institution and by the acquisition of the Arab Bank Cypriot network. Today, Piraeus Bank leads a group of companies covering all financial and banking activities in the Greek market (universal bank). Piraeus Bank possesses particular knowhow in the areas of retail banking, small and mediumsized enterprises (SMEs), capital markets and investment banking, leasing. These services are offered through the Bank s nation-wide network and also through the electronic banking network of winbank. The latter was launched in the beginning of 2000, as the first complete electronic banking service in Greece, offering a full set of services through four different channels of distribution (Internet, mobile phone, call centre and ATMs). At the same time, the bank has built significant presence in the field of green banking with specially designed green banking products and 640 mn approved credit limits at December Piraeus Bank Romania Annual Report

8 Piraeus Bank Group has a growing international presence, focused in Southeastern Europe and Eastern Mediterranean, but also in the financial centres of London and New York. In particular, the Group is present in the USA through Marathon Bank, based in New York with 13 branches, in London with a branch of Piraeus Bank, in Albania through Tirana Bank with 47 branches, in Romania through Piraeus Bank Romania with 186 branches, in Bulgaria with 101 branches of Piraeus Bank Bulgaria, in Serbia with 47 branches of Piraeus Bank Beograd, in Ukraine with 54 branches of Piraeus Bank ICB, in Cyprus with 15 branches of Piraeus Bank Cyprus and in Egypt with 49 branches of Piraeus Bank Egypt. The main medium term goals of Piraeus Bank Group are to maintain a balanced growth in terms of loans and deposits, achieve high efficiency and sustain superior asset quality and satisfactory capital adequacy. Piraeus will continue to focus on SMEs and retail banking segments, where it holds strong expertise, while capitalizing on its young branch network, both in Greece and abroad. The Group s fundamental policy direction for human resources development is based on the efficient management of human resources, leading to the creation of skilful and dedicated personnel able to function within the framework of the competitive EU banking market. At the end of December 2009, the Group employed 13,417 people. At the end of December 2009, Piraeus Bank Group had a network of 872 branches (359 in Greece and 513 abroad) and its equity capital amounted to 3,614 mn. The clients deposits, repos and retail bonds issued amounted to 30,755 mn, net loans reached 37,688 mn and total assets were 54,280 mn. Piraeus Bank Romania Annual Report

9 The Executive Committee Mr. Catalin Parvu, Executive General Manager Michail Lachanas, Deputy General Manager Nikolaos Cheinoporos, Deputy General Manager Emanuel Odobescu, Deputy General Manager Board of Directors: Mr. Stavros Lekkakos, Chairman of the Board of Directors Mr. Ilias Milis, Member Mr. George Papaioannou, Member Mr. Spyridon Papaspyrou, Member Mr. Alexandros Manos, Member Mr. Catalin Parvu, Member Mr. Emanuel Odobescu, Member Mr. Michail Lachanas, Member Piraeus Bank Romania Annual Report

10 Macroeconomic Outlook

11 Macroeconomic Outlook The international financial crisis proved to be a watershed not only for the developed economies but also for emerging countries in Europe. Against a backdrop of increased risk aversion and restrictive funding, these economies strove to survive, witnessing almost with their hands tied how growth is turning into contraction, employees are fired, and their currency is depreciating. After several years of strong growth as the country was catching up, Romania did not manage to buck the trend experiencing significant hardships in 2009 that took by surprise authorities as well as private companies. The economic difficulties triggered by the conjunction of international circumstances and Romania s built in vulnerabilities were exacerbated by a rather unstable political environment, mainly towards the end of the year, when presidential election took place and a new cabinet was mended in a hurry. Recognizing the risks of a possible melt down in the emerging Europe, international financial institutions were rather willing to provide funds in order to prevent a disorderly adjustment of these economies. The financial support extended by International Monetary Fund (IMF) and European Commission as well as tough conditions required to be met in order to receive the funding, managed to reinforce investors confidence in the battered economies obtaining such an aid. This was also the case of Romania that concluded in March a 2-year IMF-led financial agreement with international institutions, succeeding to benefit due to this safety net also from the retreat in the global risk aversion towards the end of the spring. According to the arrangement, Romania is to receive a EUR 20 billion aid package out of which EUR 13 billion from IMF, EUR 5 billion from the EU, EUR 1 billion from World Bank and the rest from other sources. The widely expected external financing agreement was saluted by markets, with the country risk premium diminishing and local currency appreciating, developments supported also by the change in sentiment at the international level. From economic activity s point of view, the year 2009 proved to be for Romania the most difficult one from the last decade. Taking by surprise authorities, the GDP collapsed by 7.1% as investors as well as consumers sentiment went deeply sour, their funds dwindled together with the possibilities of accessing new ones. Gross fixed capital formation suffered the heaviest drop of 25.3% YoY having a negative contribution of 8.1 percentage points to GDP. As Romanians felt is time again to tighten their belt after several years of unconstrained consumption, households expenditures fell by 10.8% and had a negative contribution of 6.9 percentage points to the GDP rate. As imports lost momentum due to weakened demand, foreign trade gap narrowed, having this time a positive contribution of 7.3 percentage points to the GDP growth rate. As regards the supply side, all the sectors recorded a negative development. The sharpest decreases were recorded in the gross value added in construction (-13.6%) and services (-7.9%) erasing from the GDP growth rate 1.4 and respectively 3.3 percentage points. Agriculture and industry proved to be more resilient, falling only with 0.4% and respectively 4.3%. As private owned companies cut down production, closed their gates or restructured their activities to meet a dwindling demand, Romania ended 2009 with a total of 709,383 unemployed, with 75.8% more than in the previous year. Consequently the unemployment rate jumped to 7.7% from 4.4% in 2008, underlining together with IMF s requirements for the government to resize the overstaffed public sector, the significant social problems Romania must confront in the years to come. Piraeus Bank Romania Annual Report

12 The current account gap narrowed by 68.7% YoY to EUR 5.1 billions in 2009 driven by the evolution of the trade deficit that shrunk by 64.7% YoY to EUR 6.8 billions. The steep decline of the trade gap was triggered in the first quarter also by RON s depreciation that improved the competitiveness of Romanian goods and hurt imports already dragged down by the plunge in the aggregate domestic demand. In the second half of 2009 the main drivers of exports growth were the recovery of the West European economies and the ability of some local producers (such as Dacia Renault) to expand their presence in external markets. Total exports declined by 13.9% YoY while imports plunged by 32.3%. Services posted a EUR 267 millions deficit, with the modest surplus from transportation being offset by the negative contribution of tourism and other services. Foreign direct investments almost halved to EUR 4.9 billions from EUR 9.5 billions in 2008; however they covered 96.9% of the current account deficit. The year 2009 ended with a 4.7% annual inflation definitely lower than the 6.9% peak recorded in February but exceeding again the upper limit of the fluctuation band set around the central bank s inflation target of 3.5%. After a significant surge at the beginning of the year fuelled mainly by leu s depreciation against the euro, inflation embarked on a downward path against the backdrop of an agonizing domestic demand. Starting the year with a rather high key interest rate of 10.25%, the central bank entered a rather alert easing cycle and managed to cut 225 bps until the end of Nonetheless rates in the market remained at rather high levels mainly in the first half of the year, discouraging also clients appetite for extra funding in local currency. According to the data released by the European Commission and national statistical office, consolidated budget deficit computed according to ESA 95 methodology (accrual based) stood at 8.3% of GDP at the end of 2009, up from 5.4% of GDP in According to IMF methodology (cash based), consolidated budget deficit was 7.3% of GDP at the end of Nonetheless, the figure was rather high and the Ministry of Finance found itself in the situation of looking for funding sources, situation even more difficult given the pro-cyclical fiscal policy from the previous years and the outstanding public debt. Most of the funds came from the banking system that became rather reluctant towards financing the private sector, switch that brought in focus the dangers of a possible crowding-out effect. National Bank of Romania (NBR) s foreign reserves totalized EUR 30.9 billions at the end of 2009, covering almost ten months of imports. The hard currency reserve climbed due to funds received from IMF under the financing agreement reaching EUR 28.3 billions at the end of 2009 and offering the central bank enough power in order to assure a smooth evolution of the exchange rate. Country Rating Profile Moody s: Baa3 Standard & Poor s: BB+ Fitch: BB+ Banking System Despite the international financial crisis, the Romanian banking system proved to be very sound and withstand the sudden gusts of wind blowing from the developed countries. Consequently, there was no need for the Romanian authorities to find ways to land a hand to the system from public money, as it happened in other countries. The rather high minimum reserves that banks were obliged to keep with the central bank at the beginning of the year 40% for foreign denominated liabilities and 18% for local ones, proved to be an advantageous liquidity buffer. After the agreement between the IMF, NBR and foreign mother banks for maintaining their exposure on Romania, the central bank released liquidity in the system by gradually cutting the rate for the mandatory reserves to 25% for foreign denominated liabilities and 15% in the case of local ones at the end of Not only from liquidity point of view had the system proved safe; despite the erosion of banks capital because of provisions, the system recorded a 8.1% YoY increase in capitalization and managed to bring the solvability indicator to 14.7% at the end of 2009 from 13.8% in Besides this on average achievement, it is worse mentioning that all the banks in the system recorded a solvability level Piraeus Bank Romania Annual Report

13 above 10.0%, level established as minimal in the 2-year IMF-led financial agreement concluded with international institutions. The new international conditions and also the less bright perspectives for the local environment determined banks to change their focus and rethink their activities. After a rapid expansion of credit of 40% on average per year in the period, both banks and clients lost appetite for such transactions in 2009, when non-governmental credit inched up with only 0.9% YoY. The non-performing loans also started to be a hot spot, taking a share of 7.9% out of the total portfolio at the end of The liquidity conditions and also the uncertainty planning over future financing, determined banks to put more attention on enhancing the liabilities side of the balance sheet and increase their deposit portfolio. Consequently, the loanto-depo ratio went down in 2009 to 112.8% at the end of 2009 from 122.0% in The financing conditions from both abroad and locally, the aggressive contraction of the economic activity, the deterioration of the loan portfolios translated in higher provisions expenses all negatively weighted on the profitability of the system. The profit for 2009 was five times lower that the one in 2008, totalizing only RON 680 millions, ROA stood at 0.25% from 1.56% in the previous year and ROE plunged to 2.9% from 17.0% in Piraeus Bank Romania Annual Report

14 2009 Business Overview

15 2009 Business Overview The economy of Romania continues to display characteristics of an emerging market. These characteristics include the existence of a currency not freely convertible outside of the country, a low level of liquidity in the public and private debt and equity markets and relatively high inflation. Additionally, the banking sector in Romania is particularly impacted by adverse currency fluctuations and economic conditions. Furthermore, the need for developments in the bankruptcy laws, in formalised procedures for the registration and enforcement of collateral and other legal, fiscal impediments contribute to the difficulties experienced by banks currently operating in Romania. The borrowers of the Bank may also be negatively affected by the financial and economic environment which could inturn impact their ability to repay their outstanding loans. Balance Sheet Developments Assets In terms of assets volumes Piraeus Bank Romania finished the year 2009 with total assets under direct administration amounting of 2,299.2 million against 2,372.7 million by 31 December Assets under PBR's Administration (EUR million) Management closely monitors the evolution of the loan portfolio and the cash flows in the impairment assessments. In 2009, the Bank recorded a gross profit of 25.1 million (decrease of 53.5% compared with previous year), total assets volume of 2,299.2 million (decrease of 3.1%) and extension of the Branch Offices network till 186 units (increase with 6 new offices). The following comments should be read in conjunction with the IFRS financial statements and the related notes. The financial statements of the Bank for the years 2009 and 2008 have been audited by PricewaterhouseCoopers Audit SRL Dec Dec Assigned Loans, under PBR's administration PBR Assets In addition to the above, assets in amount of 1,905.1 million have been committed on behalf of Piraeus Bank London Branch following the policy of active cost management and distribution of assets. During the whole year Piraeus Bank Romania acted as an agent, managing the external portfolio while the risk and related income laying with London Branch. Piraeus Bank Romania Annual Report

16 It should be emphasized that the managed loans are associated with Piraeus Bank Romania s efforts in terms of customer relationships, portfolio build-up, and initial risk assessment. Furthermore, in 2009 reliable credit risk measurement is of top priority within the Bank s risk management framework. The continuous development of infrastructure, systems, and methodologies aimed at quantifying and evaluating credit risk is an essential condition in order to timely and efficiently supports management and business units in relation to decision making, policy formulation and the fulfilment of supervisory requirements. Loans In 2009 the bank focused its strategy on limiting the volume of loans under its direct administration in order to manage and control its credit risk exposure and concentration Structure of Loans in Administration (EUR million) Assets - Currency Structure (EUR million) Dec Dec Individuals SMEs Corporate Dec Dec FCY Assets LCY Assets Thus, at year-end 2009 Piraeus Bank Romania had under its administration assets amounting 4,204.4 million (-3.3% decrease), by combining its own loans with those belonging to Piraeus Bank London Branch. The currency structure of the assets shows a raise in local currency +15.3% ( million in 2009 against million in 2008) compared with a slight decrease of -12.0% ( 1,410.3 millions in 2009 against 1,601.9 millions in 2008) of foreign currency portfolio. Aligned on present market conditions, the total loan portfolio of the Bank, reached 3,521.6 million (2008, 3,647.8 million) considering also the loans assigned to London Branch. The Bank continues to be focused on strong actions towards maintaining the non-performing portfolio within manageable and reasonable limits, mainly through restructuring process. In the light of a steep decrease in loans demand, either for retails either for companies, but more intensive for individuals, the Bank continues to have a stable structure of loan portfolio with a 63.7% loans for Companies (62.8% in 2008) and 36.3% (37.2% in 2008) for Individuals. Beyond the IFRS figures, the lending evolution for the whole year 2009 should be completely understood by taking into consideration as well the amounts of the loans committed by Piraeus Bank London Branch which decreased with more than 3.6% until 1, millions compared with 1, millions in Piraeus Bank Romania Annual Report

17 Loan loss provisions ratio increased from 3.21% as of 2008 to 8.64% of total loans as reported in IFRS figures as a result of deterioration of general macroeconomic environment. The opportunity offered by the cross-selling products strategy and smart marketing actions gives Bank the chance to be a real choice for more than clients Loans under PBR's Administration (EUR million) PBR's own loans Currency analysis as of Dec. 31, LCY loans 31% In the Retails Loan structure, the mortgage loan product keep the balance in face of the decreasing trend generated by the market and record an increase of 11.2% comparing the previews year level. In the same line the loans disbursements were tightly monitored Dec Dec Assigned Loans, under PBR's administration PBR Loans Individual Loans Structure (EUR million) FCY loans 69% 2009 brings more focus on the Public Sector business and these actions have as result the participation of 75 millions in a state club loan reflected in the corporate loan portfolio. The currency structure of loan portfolio shifted between foreign currency (66.7% as of 2008 to 69.5% as of 2009) and local currency (33.3% as of 2008 to 30.5% as of 2009). PBR's own loans Analysis by sector as of Dec.31, Hotels & Transport & Logistics 1% Manufactoring & Trade 9% Manufacturing 8% Construction 2% Public sector - Corporate loans 5% Mortgage 7% Other 3% Dec Dec Other (Personal & Consumer) Mortgage Consumer 70% Piraeus Bank Romania Annual Report

18 Liquid assets Consistent with its liquidity policy and compliant with the Central Bank requirements during 2009 the Bank continued to secure an adequate management of its liquidity. The Cash and balances with Central Bank position decrease from millions as of December 2008 to millions as of December 2009 (-35.6%). Significant decrease of the Balances with Central Bank was generated by the relaxation of minimum reserves regime. Having the constraints derived from the agreement with IMF regarding the Group exposure towards Romania, the excess liquidity generated problematic challenges in finding the optimum placement solutions. During 2009 the Bank aligned its deposits interest policy with the market trends, by positioning itself within the medium to top range and within reasonable limits. In addition to the attractive interest rates and tailored saving products, the boost in customers deposits was stimulated also by the steep deterioration of the economic perspectives. The new market demands of the 2009 raised the competitions in retaining and increasing the volume of deposits on the local market Liabilities Structures (EUR million) The excess liquidity derived from the relaxation of the NBR s 2500 minimum reserves requirements was absorbed in the increased volumes placed in T-bills and Government Bonds Tangible and Intangible Assets By the end of 2009 the properties and the equipments of the Bank reached million from million mainly due to the impact of local currency depreciation During 2009 the intangible assets followed a steep increase amounting 5.03 million (showing a growth of 59.94% vs. previous year). Despite the rough economical environment the bank understood the importance of healthy investments in its infrastructure, in order to offer height quality products and services to the clients and to be in line with the market requirements. As so the bank invested only in million in upgrading the core system (39% from total intangible assets). The implementation of the new software, represent milestone in improving the efficiency of the internal activities and, especially, in facilitating the improvement services to the clients. Liabilities & Equity The overall evolution of liabilities reflects the efforts of the Bank to diversify its financing resources in order to sustain the business development needs and also to be in line with the strategically objective that target a low dependency of the abroad funding offered in favourable conditions by the mother company Dec Dec Due to banks Due to Customers Equity Other Liabilities Subordinated Loans Based on a proficient incentive scheme, Piraeus Bank lunched a new investment product: Your Gold. For the first time on Romanian market the customers have the opportunity to invest in a unique product that offers safety and value. The customer deposits as of December 2009 reached the level of millions pointing a significant increase of 22,85% versus million as of December The decline of economical perspectives imposes a new strategic approach in term of liquidity both for customers and for banks. The retails customers become more oriented for saving products and banks intent to increase the liquidity indicators. Deposits from banks decrease in 2009 by 30.45%, from 1,017.8 million in December 2008 to million by the end of Piraeus Bank Romania Annual Report

19 Consistent to its business philosophy according to which the Bank leads its operations within a prudential framework, focusing the optimum convergence of profitability criteria with banking processes associated risks, the Bank constantly acted for maintaining an adequate capital base. The total equity figure increased with 7.34% from 290 millions (December 2008) to millions (December 2009). New capital inflows are planned for actions have impact over the net interest income line, (i.e. 62.7million) lower by 46.6 million from the previous year (i.e millions, a decrease of 42.6%), holding a share of only 29% in the 2009 operating income Operating Expenses (EUR million) 10 Income Statement At the end of December 2009, the bank s operating profit (i.e. profit before provisions and tax) increased with 30.21%, reaching million from million in the previous year. In the same time, following the steep increase in loan loss provision line, the profit after tax decreased to 19.0 million in 2009 from 46.2 million in Adopting a tight cost control policy, the bank successfully reached a small increase of 3.2% in operating expense line ( 98.3 millions) compared with 2008 s expense ( 95.3 millions) Dec Dec Depreciation Administrative Exp. Staff Expenses The accelerated declines in both loans demands and offer led the Bank to attentively manage the interest rates, matching both its profitability requirements as well as the clients needs. 250 Operating Income (EUR million) The bank s trading activity generate an increase in the net trading income of 122.6%, with 49.1 millions more than previews year s balance (i.e millions). The net trading income consists in the revenues of the Bank from foreign currency exchange operations with customers, currency swaps, as well as from the inter-bank transactions. 200 In line with the funds structural changes (i.e. a shift from inter-bank funds to customers deposits resources) in 2009 the share of customers deposits in total interest expenses grew up to 67% from 41.7% in Dec Dec Net Trading Income Net Interest Income Net Fee and Commission Income Subsequent to the business consolidation measures, the net fee and commission income grew to 62.9 million from 34.8 million in 2008 (i.e. an increase of 80.7%). The increase in fee and commission income was mainly driven by the management fees charged for the administration of the loans belonging to Piraeus Bank-London Branch, which reach to 56.2 million comparing with 24.7 million at the end of In the same time the liquidity concerns in the market push all the players from banking sector to adopt continuous measures to adjust the interest rate margins. These Due to the continuous effort of the Bank to enhance the efficiency, the cost to income ratio improved from 51.5% in 2008 to 45.7% in Piraeus Bank Romania Annual Report

20 Corporate Banking 2009

21 Corporate Banking 2009 Conducts Romanian wholesale banking activities addressed to local companies as well as to Greek owned businesses present on local market. Corporate Banking Division provides comprehensive financial solutions to large sized companies, multinational corporations, financial sponsors and institutional investors. resources, including a streamline team of highly experienced bankers. Thus, the Corporate Division with its 4 teams being focused on the growing the existing portfolio as well as toward achieving new businesses and strengthening the follow-up process on existing customers, country wide. The primary focus is to prudently develop profitable relationships across stable businesses in which the Bank has developed industry expertise over the years. 0.43% 1.85% 0.59% PBR's own loans Analysis by sector as of Dec.31, % 0.91% 0.05% 1.68% 2.28% 2.54% 0.27% 6.29% 4.45% 44.11% Agriculture Car Dealer Construction Construction Materials Food Furniture Hotels Industry IT Leasing 4.01% 3.54% 0.91% 0.08% Other Petrochemical Pharma Press Real Estate 0.73% 4.56% 18.36% Recycling Retail Textiles Trade Transport Corporate banking achieved very good results in 2009 with value added businesses delivering profitable growth. Intensifying client relationship was further improved and simplified after a number of top corporate companies were identified as priority clients and allocated additional PBR Corporate Banking adapted its policy to a continuously changing environment, capitalizing on changes in the regulatory practice, to help ensure that it applies the highest standards across all our businesses and are up to the excellent reputation. Thus the department focused a large part of its personnel on coming in the aide of the customers which have been affected by the existing financial crisis by restructuring the existing loans. This was done with a constant focus on the bank s profitability. Also part of the department was diverted from the daily activity and interactions with the customers with the purpose of creating new value added products which would increase the profitability of the department and of the bank. At this moment several new products are under development such as factoring (granting loans based solely on discounted receivables), cash sweep (concentrating the customer s sources into single remunerated accounts), treasury direct (a direct link between the customer s accounts at the State Treasury and Piraeus Online Banking) These products would allow better cash management for the bank s customers and at the same time would maximize the return on the relationships with the respective customers. Piraeus Bank Romania Annual Report

22 Retail Banking

23 Retail Banking Individuals sector Piraeus Bank adapted the retail products offer to the new market conditions and customers preferences, following the increased interest of the clients for savings opportunities and the downwards demand for consumer loans. Thus, Piraeus Bank focussed on offering to individuals compelling savings products and solutions for financing the acquisition of a property. The involvement of the bank in the First Home governmental program aiming to sustain the Romanian real estate market helped the bank overgrow the mortgage loans market (11.4% for Piraeus Bank loans vs. 9.2% for the market) and to increase the market share by 2%. In the same time the focus on creating valuable solutions for the customers searching for their dream home triggered also an increase with 18% of mortgage loans weight in total individuals loans portfolio. This evolution was also inline with the aim of the bank to further increase the collateralized loans portfolio. Individuals' savings evolution 400, ,000 The good performance in the secured loans was overachieved by the results in individuals deposits portfolio. In a highly dynamic and price-driven market, the competitive offers combined with the search for niche segments to be explored, empowered by the always constantly increasing efforts of the sales forces to expand the customer base, Piraeus Bank managed to increase its market share on the individuals deposits segment. While the individuals savings market increased in 2009 with 11%, Piraeus Bank grew with more than 28%, the main contribution coming from the term deposits balances, which were at the end of the year higher with 65% (and respectively million EUR) that the balances registered on December 31 st The good results were helped by the creation of tailored made offers for newly identified segments like pensioners, students, home owners associations. The pensioners segment was further valued as a source of cheap funding, the bank creating a special package of products for customers choosing to cash-in their pension in a Piraeus Bank current account. Responding to the needs of the customers looking for instant value for their money, Piraeus Bank launched a term deposit with interest paid upfront. 200,000 Card products offer was enriched by the launch of a product addressed to premium customers Visa Exclusive Gold credit card. 100, Total Individuals' savings balances Individuals Term & Collateral deposits balances The main focus in credit cards business was represented by usage campaigns that encouraged POS spending in order to participate in a lottery and have a chance to win a prize. Anti-attrition campaign was initiated for credit cards in order to prevent loss of credit card holders and decrease of portfolio. Piraeus Bank Romania Annual Report

24 Debit card sales registered an increase of 80% in 2009 compared to 2008, from to units. The growth was achieved due to the increased focus on payroll conventions and other target segments like pensioners and recipients of social benefits. Merchant acquiring activity tripled the number of merchants in 2009 from 337 to 1157 POS machines, by adding to the network valuable and meaningful merchants for the issuing activity. The strategy for enlarging the acceptance network has been to create synergy between issuing and acquiring. The ATM network increased by more than 100% compared to 2008, from 107 to 249 ATMs, mainly because of the branch expansion was the year that PBR ATM services were enriched by launching Bill payment service and Pro Sales marketing tool. In this way, ATMs are transforming from cash dispensing machines to service providers and cheap promotional channels, by enhancing the satisfaction level of customers. The EMV compliance project for the acquiring network was completed in the first quarter of 2009, so that all POSs and ATMs of Piraeus Bank may process CHIP cards. Internet Banking / Fast Money Transfer Services During 2009, the bank continued its efforts for enhancing the Piraeus Online Banking service by offering to its customers the possibility to pay free of charge the invoices issued by utilities providers such as Romtelecom, Dolce, Boom TV and Vodafone. Other facilities include the possibility for the clients to view the account balance of the newly implemented deposit products and the Gold accounts. page was modified as to include a link to all the fees and commissions as well as the maximum execution time for all types of payments. During 2009, the number of internet banking customers increased reaching around individual clients and corporate clients. The total payment transactions performed by the Piraeus Online Banking customers continued also this year to represent a high percentage of the total payment transactions of the Bank, being of around 44%. The Bank provides the international Western Union fast money transfer service. Western Union enables the public to receive or remit money without opening an account with the Bank, to any Western Union facility located in more than 200 countries. Bancassurance Bancassurance Department was set up in September 2009 in order to enlarge and diversify the bank s offer of products and services. Its main tasks are to contribute to the development of innovative banking products by adding insurance features (bundled products), to meet the insurance requirements of existing products and to promote the sales of stand alone insurance products via the bank network and alternative channels. All these activities are meant to increase the attractivity and profitability of the banking products due to the incorporated insurances, to increase the revenues of the bank through commissions received from insurance companies and to transform the bank branches in one stop shops for financial services. First projects started to be developed with first results expected in In order for the clients to be fully aware of all the conditions related to their payments to be processed, each payment Piraeus Bank Romania Annual Report

25 SME Sector

26 SME Sector From performed analysis by Bucharest Academy of Economic Studies resulted that while conceiving coordinates of SME development in Romania some essential elements must be taken into account: Romania is still in a period of economic crisis with a big budget deficit and rather significant external debts balance that led to the necessity of signing a financial assistance agreement with European Union, World Bank and International Monetary Fund. The Small and Medium Sized Enterprises sector in Romania has been severely affected by the crisis in In three ways, an important number of companies ceased their activity (almost 196,000) through: suspension, dissolution or voluntary liquidation. In the same time, only a little over 75,000 companies were set up, leading to a net decrease of SMEs number of more than 120,000. Most SMEs face big problems with Romania s business environment. Thus, according to the survey performed in spring of 2009, a big part of the companies almost 83% consider business environment to be negative or, at its best, neutral. Piraeus Bank carried on in 2009 the actions initiated in 2008 related to the SME segment: increasing the exposures on the existing clients and widening the products offered in order to optimize the resources used both by the bank and the clients (i.e. internet banking, POS payments, etc) attracting new business that prior to the changes in the market have been self-financed or not very exposed towards external financing and decided to continue the expansion of the activity through bank lending updating the product range to better fit the changing market demands and alignment with the credit policy of the bank early and proactive restructuring of the portfolio in order to prevent the customers from becoming distressed and starting to have difficulties in complying with the debt service towards the bank, their suppliers and the state. The bank will keep developing products and solutions, especially in providing support for the SME s to improve their activity and overcome the difficulties of the current financial crisis in the market. The SME segment continues to represent a strategic focus for Piraeus Bank Romania, due to high dispersion of credit risk, increased margins and revenues. Piraeus Bank Romania Annual Report

27 Branch Network Consistent with the promise made to its existing and potential clients, during 2009 the bank had opened 6 more branches, reaching a total of 186 operational branches and accomplishing thus the network development plan, despite the difficult economic environment. for the bank. Increasing efficiency of operations and optimizing processes have become the main objectives of the bank and of the branch network respectively, besides a close relationship with the customers affected by the worsening of the local economic environment. At the end of the year the bank has a consolidated presence in all the counties in Romania, besides a strong coverage of Bucharest (59 branches in Bucharest 32% of the total branches and 127 branches outside of Bucharest 68% of the total branches). The global economic downturn, which consistently affected the local economy, had created new challenges In order to diminish the impact faced by the clients, the bank has proven to be a reliable and long term partner for all its clients by having a proactive, flexible and customized approach. The branch network has rapidly adapted to the new challenges and succeeded to run a profitable business and to have a strong contribution in the overall bank s business. Piraeus Bank Romania Annual Report

28 Treasury Operations

29 Treasury Operations 2009 was a challenging year for the Romanian Banking Sector, as significant depreciating pressure was threatening RON, nonperforming loans were increasing, and the global financial crisis continuing to make its presence felt in Romania. The Treasury Sales Desk continued to offer support to all bank s business units through high quality services and competitive pricing for a variety of products (in FX, MM and FI worlds), with increased emphasis on clients liabilities management. However, 2009 was for the Treasury of Piraeus Bank Romania a very successful one, as we managed to sustain the profitability of the Bank by transactions in the interbank market. The high RON interest rates in the market before signing the IMF agreement found the Bank with a very good liquidity position that allowed over passing the difficult market conditions and contributed to increased profitability and improved image in the interbank market. The assets of the Bank were maintained mostly constant during the year, the extra liquidity released from decreasing the mandatory reserves with NBR being invested in Romanian Bonds and Treasury Bills, while the liabilities increased significantly due to an aggressive pricing policy. Most of the Treasury s activities in 2009 were focused on placing the liquidity and taking advantage in the most efficient manner of the market opportunities. The Treasury strategy was oriented in increasing the customer deposits base, while benefiting of the opportunities in creating high yield assets. During this demanding period, the Treasury Sales Desk consolidated its product base and introduced crisis proof products, such as the successful Gold. This project was triggered by the experience of Piraeus Greece and by the constant interest of Romanian market in tangible assets, while currencies began to lose their value. Started with October 10th, physical Gold in the form of bars (from 5 grams to 1000 grams) and coins (the Gold British Pound) reached for the first time the Romanian Retail market with 30 kilograms of bars and 350 coins being delivered to new and existing clients. To support its current activity, but also to prepare for 2010, the Sales Desk continued to perfect its infrastructure for both Corporate & Retail Sales Desk and Institutional Sales Desk, producing timely reporting and monitoring systems. The new established Institutional Sales desk continued to expand its customers portfolio during the year, covering all types of financial institutions: investment funds, insurance companies, pension funds. The desk enhanced its coverage of the institutional market both in terms of new clients and of activity with existing clients. The result was an increase in their placements within PBR both in term deposits and alternative instruments as repos and sell/buy back transactions. Increased market volatility, especially in the first quarter of 2009, helped PBR s FX Trading Desk to exceed its budgeted targets and contribute to the bank s profitability while constantly expanding the market presence by increasing the traded volumes and the intraday open position. New hedging solutions for customer with significant FX exposures were developed together with the Sales Desk. For interested counterparties, sound technical analysis and foreign exchange forecasts were available on request. The Money Market Desk had an important role in Bank s Assets & Liabilities Management, identifying the best funding structures for the Bank and supporting its business initiatives. Piraeus Bank Romania Annual Report

30 Piraeus Bank Romania maintained its presence as an active player both in the deposit market as well as in the currency swap market up to 1 year, providing tight spreads and liquidity. Piraeus Bank continued the development of solid relations with the local banks, working for increasing the counterparty limits in an environment where credit risk remained high and banks were reluctant in working with each other. NBR and the gradual decrease in the minimum reserve requirement levels caused RON yields to decrease by year end and made it possible for the Ministry of Finance to successfully issue domestic EUR denominated debt with maturities of up to 4 years, with satisfactory returns for the local market players, whose mother banks agreed to maintain the exposure to local subsidiaries at the march 2009 level, as convened with the IMF. During the first part of 2009 RON bond yields stood at high levels, demanded by market players amid significant uncertainty caused by the global financial crisis and RON liquidity crisis that hit the markets in The month of January offered profit making opportunities, which Piraeus Bank seized, since the Ministry of Finance issued RON debt at the highest level of 14.25%. Most of the RON issuance was 90 % concentrated in short term papers T-bills with maturities of up to 1 year. The gradual improvement in overall sentiment and liquidity conditions, the accommodative monetary policy conducted by Piraeus Bank continued to sustain the secondary fixed income market by being one of the most active players, maintaining a constant presence and a very good relationship with other banks in the market and institutional players and providing tight spreads and forward looking prices. Piraeus Bank had an active and constant participation in the efforts to develop the RON repo market. The main initiative of the Bank was to put together a repo contract, in collaboration with ACI Romania and other market participants. Piraeus Bank Romania Annual Report

31 Human Resources

32 Human Resources Aiming to consolidate the image of the Bank in the Romanian Banking System as a flexible organization, representing its customers and its employees, Piraeus Bank management 2500 Staff Number kept the focus on a healthy organizational growth. Our main objective is to bring out the potential of people and ensure their commitment to achieve excellent results and to be able to overcome challenges within a fast changing environment In 2009 the main challenge of the Human Resources Development was to maintain a strong team of professionals capable to operate effectively within the competitive environment of the banking market, being, in the same time, an attractive employer This is achieved by modernizing organizational structures, training systems and rational management of human resources, focused on building a culture among staff members, with the following main features: passion for the customer, team spirit, professionalism, effectiveness, entrepreneurial vision, and emphasis on learning change. Number of people employed to implement business goals At the end of 2009, Piraeus Bank Romania employed 1900 people compared to 1946 in 2008, recording a decrease of 1.02%. Decreased number of personnel during the year was due to centralization of processes Human resources distribution by Gender, Age and Area 75% of total Bank employees are female while 25% are male; at the management level there are 60% female representatives and 40% male representatives, Piraeus Bank Romania being committed to offer equal opportunities to its employees. Age Distribution Recruitment process is based on adequate recruitment procedures free of discrimination, utilizing specific candidate selection systems, by using modern appraisal and selection tools. These tools may vary according to the candidate s educational and experience level and include both competencies and professional tests. >= Female <= Piraeus Bank Romania Annual Report

33 The age distribution of employees represents a major advantage of Piraeus Bank Romania. The age composition is such that favors the introduction and implementations of new technologies, methods and targets, as the average of our people is 31 years old. At the same time, it takes advantage of the high rate of graduate and post-graduate degree holders (80%). The Bank managed to employ high quality and education employee, who contribute essentially to the achievement of its business objectives. People continuous development Following Group s policy we consistently invest in development of the employees with the main focus to exploit the full potential of them. Learning programs developed are focusing both on internal seminars held by dedicated internal trainers and external seminars as well, developed to enrich employee s abilities. Main objective for the Training & Development area is to have motivated, committed and proficient employees within the Bank. 55 % of total workforce (both Headquarter and branches employees) is located in Bucharest while 45% is distributed in branches outside Bucharest. 67% of total workforce is represented by branches employees while the rest is on the Headquarter. Workforce Distribution Total number of training men / hours in 2009 was 28785, with a total number of participants in any training event of 2858, meaning an average of 10 training-men/ hour/people. 27% of total man-hours was accomplished by male while 63% by female. Distribution by hierarchical level showed that 8% of participants were at managerial level while 92% were female. Brasov 6% Cluj 7% Craiova 5% Constanta 7% Iasi 7% Ploiesti 7% Out of the total man-hours, 60% was dedicated to development of financial and banking knowledge, 35% focused on developing selling skills, service level or to enhance product knowledge, but also for quality customer service or managerial & leadership skills development. The remaining 3% was dedicated to the development of Timisoara 7% specialized technical training (courses aiming to provide specialized technical knowledge not directly connected to the core activities of the Bank). Bucuresti 55% Allocation of manhours Business Development 2132 Quality Customer Service 2080 Managerial & Leadership 2352 Technical Training 905 Banking Information Systems 4072 Banking & Financial Piraeus Bank Romania Annual Report

34 During year 2009 it was introduced an e-learning platform in order to provide online training sessions for its employees. Through this platform we aimed to increase employee s knowledge in Products, Operations, Loans Individuals, SME Loans, Compliance, Anti Money Laundering, Significant Risks. Another alternative for professional skills development are the online Skillsoft courses developed by professionals internationally recognized. A total of 6408 man/hours were allocated in 2009 for e-learning courses. For a better understanding of Bank s Products, Individuals & SME Loans, internal trainers provided On the Job Training to approximately 100 employees from the branches and agencies in Bucharest, summing a total of 776 man/hours training. Employees accessed as well in class training sessions offered by external providers. In line with this a Management Academy program took place in order to develop leadership and managerial skills of middle managers of the Bank; 260 employees participated at Customer Care training session, more than 150 employees learned about Change Management and Negotiation Skills, summing in total man/hours. In order to offer a better informational support for new comers, in 2009, the induction program were extended to all hierarchical levels, being presented as an interactive tool as well on the e-learning platform. Allocation of man/hours by form of training Rewarding employees Piraeus Bank Romania acknowledges that has to attract and retain the appropriate people with the required knowledge and skills in order to achieve its strategic goals. Bank participates every year in salary and compensation & benefits survey in order to have access to benchmarking indicators. On the basis on the equal opportunities policy, there is established a minimum pay level salary for entry level position, with no distinguish between men and women. It is noted that in all aspects of human resources the Bank 100% respects and follow legal procedures in place. Human Rights in PBR In 2009, the Piraeus Bank Romania employees acknowledged the Human Rights Policy and an Employee Survey has been conducted on Human Rights. The survey s results revealed positive approach of all the 5 principles: Forced Labor, Child Labor, Equal Opportunities, Health and Safety in the Workplace and Working Conditions. The detailed analysis involving the age, gender, work experience and organizational unit didn t reveal significant correlations. Performance Appraisal in PBR In 2009 was developed the Performance Appraisal Process, a major organizational step for Piraeus Bank Romania to move from informal annual assessment to a formal one, taking into consideration the complexity level of the process. E-learning 6408 Training on job 776 Starting with Performance Appraisal Policy, continuing with Performance Appraisal Forms and additional materials, and finalizing with transforming this into online appraisal systems, this HR process was the most demanding one for Participation rate was almost 100% of the eligible employees (both managerial and non-managerial positions) that took part of the process. Classroom Piraeus Bank Romania Annual Report

35 Employee Evaluations per Status 0.2% 0.4% 0.2% 0.5% 0.1% from 1 to 5) and average of 3.36 for competencies. According to performance scale this result shows that level of performance and efficiency is situated at a good level. Distribution by scale of performance Completed Evaluation by 2 nd Supervisor Evaluation by Direct Supervisor 98.6% Not Started Review of Evaluation (Employee) Self Evaluation Two dimensions were evaluated, overall performance and competencies, main purpose of the process being the continuous development of employees by identifying the strong areas and the aspects that need improvement. General average performance rate was 3.34 (for a scale Piraeus Bank Romania Annual Report

36 Outlook for the future

37 Outlook for the future The 2010 outlook for the Romania s economy, especially for consumption and investments drivers, remains poor. On the one hand, it is expected a moderate increase in lending activity and lower inflows of foreign capital in 2010 which will not offer much support for consumption and investment. On the other hand, household confidence will remain at lower level due to the fall in the real net disposable income (pensions and wages in public sector will be almost frozen in 2010, while wages in the private sector may advance only marginally), and unemployment will increase until the second half of However, the positive aspects for the next years that will have a significant impact over the Romanian economy s performance are the Stand-By Agreement with the IMF and the capacity of the Romanian authorities to increase the absorption rate of structural funds from the European Union. Regarding the IMF Agreement, if Romania fulfils the conditions of the IMF and European Commissions and receives all the scheduled disbursements on time, this will boost the investors and consumers confidence and the forecasted economic growth will be higher than expected. In case Romania fails to comply with the conditions of the Stand-By programme, then the recession might be longer and this aspect will trigger an increase in taxation policy which will also negatively impact the consumption and investments. In terms of absorption rate of structural funds, Romania is eligible for receiving EUR 30 billions from European Union between 2007 and 2013, but till the end of 2009 this rate remains at low levels. in order to strengthen the business relationships with its existing clients, to explore other business, to seize more growth opportunities. In 2009, a financial year marked by the after crisis efforts, the bank will continue to embrace a cautious approach, more risk oriented in granting loans and financing good clients, healthy and well collateralized businesses, with good profitability and positive prospects. The management of the Bank is closely monitoring the recently volatile macroeconomic situation in Greece, where its parent company is domiciled. Management believes that there is no impact of those events on the financial position and financial performance of the Bank. Activating in one of the emerging markets in the SE of Europe, with high foreign exchange risk (FX intervention and FX swaps), the bank is prepared to find efficient solutions to cover this potential risk. In the context of a constant changing macroeconomic climate rising unemployment and bankruptcies the bank is expecting an increase of the nonperforming loans. Consequently the bank will continue with an assemblage of measures in order to maintain the NPLs at a reasonable level by concentrating on a more cautious analysis of the repayment capacity for new customers and a proactive approach regarding the renegotiation of loans for clients with temporary difficulties. In addition, the bank will continue for further improvements in risk management framework, assuring a good quality of the assets portfolio. Regarding the banking sector, Romania s market stands out as one of the most competitive segments of the local economical landscape, even in the context of the global financial changes. The top 10 banks accounted at the end of December 2009 slightly under 80% of the total banking assets. The Bank is confident that it is well positioned to become a more important player in the Romanian market After an aggressive branch expansion in (bank network reached 186 units by the end of the year), the Bank will focus on the efficiency process of its network structure and on the cost effective measure for its network activity. Piraeus Bank Romania Annual Report

38 The bank s interest for lending will decrease compared with previous years, targeting industries less affected by crisis (i.e. food industries, healthcare, eco energy, and infrastructure and service providers). The Bank will continue to consider for the next years participation in granting state loans actions and also will continue to increase it s trading activity on derivatives products on foreign and local market. Constant product innovation for bank future development and success is even more important for the next year s context. Therefore the bank will seek new opportunities for banking products adapted to the existing financial situation. The bank will develop special products for certain categories of investors, public sector employees (for payroll agreements portfolio) and will launch dedicated customer service bundles which will include current account, savings account and various operational facilities. Taking into consideration the customers needs and their continuously necessity to diversify their savings, Piraeus Bank launched a product that offers safety and value of the money gold product; the precious metal will continue to be accessible in the Bank branches in the form of gold bars and gold coins. The appetite for internet-banking usage has constantly increased during last years, and the same trend is expected to continue also during According to market evolution the bank registered a significant increase in number of users and is planning to design products such as bill payments for utilities (Direct Debit and others). Despite the risks, the future financial environment can also be seen as an opportunity for the Bank to redirect its attention towards innovative products and services and concentrate on risk approach in order to transform 2010 in the year of optimization and performance. Piraeus Bank Romania Annual Report

39 Subsidiaries of Piraeus Bank Group

40 Subsidiaries of Piraeus Bank Group Piraeus Leasing Romania Piraeus Leasing was established in December 2002, first to meet the needs of the existing Group s clientele and second to capture a market share based on the credit culture of Piraeus Group was one of the most challenging year for PLR due to the contraction of the market with 75% mixed with a very harsh economical environment. The main challenge was to maintain a healthy portfolio while new deals and clients will not be neglected and the same quality of services will be provided to them as in the pervious years. With a very united and motivated team and with the shareholders support PLR managed to overpass 2009 having several achievements as follows: Default levels were one of the lowest from the industry, for a company of this size; Reselling policy lead to very good coverage of capital; A large portion of the clients were supported in their activity with a proactive approach; A good level of new business was generated. So in 2009 the main focus of the company was to redesign and restructure it s operations in accordance with the market conditions. 70% of the PLR team was redirected mainly in supporting the existing client s needs and maintaining in good conditions the existing portfolio, while the rest had as target to bring new business. Piraeus Insurance Reinsurance Broker Romania SRL Since the beginning of the year 2009, PIRAEUS Insurance Broker has had a complex activity for optimizing company processes and procedures. The broker activity during the year 2009 is directed to the intensive extension of its territorial network 173 new branches have been authorized during the year After, in a first phase, 185 collaborators were authorized to represent the interests of PIRAEUS Broker, the company has doubled, the number of assistants, until the end of the year 2009, anticipating the sales force needed for the next period, so that it currently has around 370 assistants. To increase professionalism among them, the brokerage company organized in the year 2009 stages of training, considering that a well trained sales force that can respond to consumer, demand a high professional level. During the period January-December 2009 the company has obtained revenues from fees of EUR 1,943 thousands EUR, and the net profit was EUR 1,410 thousands EUR. The number of the Piraeus Insurance clients has increased from 9,294 in January 2009 to 14,350 in December 2009, of which 9,525 individuals, and 4,825 legal entities. The number of policies we handled as brokers has increased from 29,328 in January 2009 to 45,688 in December A couple of the business principles were changed, the company becoming more prudent in selecting the customers and their projects as well as the level and quality of the collateral. The portfolio of premiums we handled as brokers covers most of the insurance policy types, the largest portion being represented by policies of the CASCO, RCA types, but also by policies for fire and acts of God. All this measures and actions lead PLR to remained in the top of the leasing companies from Romania, even if some of them stopped new business Piraeus Bank Romania Annual Report

41 Other types of policies PIRAEUS INSURANCE has handled as broker are: Accident and illness (including work accidents and professional illness) insurances Insurances for railway transport means Insurances for naval transport means (maritime, river, lake, navigable channels) Insurances for goods in transit, including cargo, luggage, and any other goods General third party liability insurances Insurances for supporting persons in distress A large portion of the structure of the portfolio of premiums we have handled as brokers, by the insurance companies having subscribed the risks, respectively 69%, is covered by the companies: Allianz, Omniasig, and Unita. For the year 2010, the main intended purposes are to increase the weight of the portfolio on the retail segment of the clients common to both PIRAEUS Bank and PIRAEUS Insurance, to extend the presence in all cities of the country for the enforcing of the Mandatory Household Insurance Law, and to combat the effects of the auto market decrease, clearly visible throughout the entire market. Piraeus Real Estate Consultants Piraeus Real Estate Consultants, a subsidiary of Piraeus Real Estate Greece, was established in June 2006, aiming to impose itself in the Romanian market as a Real Estate Integrator and guided by consistency, responsibility and transparency to provide its clients with integrated and innovative solutions through the following services: Real Estate Development Project Management Project Monitoring Consultancy Services for Real Estate Utilization and Management Property and Facilities Management Consultancy Services for Real Estate Investments Appraisals Reports Using the capabilities and expertise of Mother Company and based on a young and dynamic local team, Piraeus Real Estate Consultants managed to build up the business with highly promising results: Project management for the construction and the equipment and furniture installation of 143 branches throughout the country Project Management for Piraeus Bank Romania Headquarters construction in Bucharest Management contract of Office building in Bucharest Project Management for Residential Development in Crevedia Provision of Property Valuations appraisals services to Piraeus Bank Romania, Piraeus Leasing and private companies or individuals. Facility management of buildings within the Bank s Group Evaluation of any anticipated Risks associated with the Investment (environmental issues, archaeological issues, utilities connections etc.) Progress Monitoring Construction Budget Monitoring Sample Checking of Construction Subjects Sample Checking of Quality of Materials and Installations Macroscopic Checking of Executed Construction Categories (Structural Works, Architectural Works, E/M Works etc.) The perspective involvement of PREC as independent Technical Consultant aims at securing the interests of the Project s Development via the tight control and minimization of the inherent and rising risks. The strategic objectives of the company are to be the leader in the field of Real Estate with reliability and stability by providing high standard project development services, to expand its activities and to actively contribute to the implementation of client business plans. Piraeus Bank Romania Annual Report

42 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS

43 FINANCIAL STATEMENTS 31 DECEMBER 2009 CONTENTS PAGE Independent auditor s report to the shareholders - Balance sheet 1 Statement of income 2 Statement of cash-flows 3 Statement of changes in equity 4 Notes to the financial statements 5 NOTES TO FINANCIAL STATEMENTS 1. THE BANK AND ITS OPERATIONS 5 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 6 3. FINANCIAL RISK MANAGEMENT CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES NET INTEREST INCOME NET FEE AND COMMISSION INCOME NET TRADING INCOME OTHER INCOME IMPAIRMENT CHARGE FOR CREDIT LOSSES OTHER OPERATING EXPENSE INCOME TAX EXPENSE CASH AND BALANCES WITH CENTRAL BANK LOANS AND ADVANCES TO BANKS LOANS AND ADVANCES TO CUSTOMERS DERIVATIVE FINANCIAL ASSETS AND DERIVATIVE LIABILITIES SECURITIES INTANGIBLE ASSETS PROPERTY AND EQUIPMENT OTHER ASSETS DEPOSITS FROM BANKS DUE TO CUSTOMERS OTHER BORROWED FUNDS OTHER LIABILITIES SHARE CAPITAL OTHER RESERVES CASH AND CASH EQUIVALENTS RELATED PARTY TRANSACTIONS COMMITMENTS AND CONTINGENCIES SUBSEQUENT EVENTS OPERATING ENVIRONMENT OF THE BANK THE FINANCIAL CRISIS 82

44 STATEMENT OF FINANCIAL POSITION (all amounts in RON thousand unless otherwise stated) Note 31 December December 2008 Cash and balances with Central Bank 12 1,686,539 2,468,374 Loans and advances to banks 13 51,759 81,618 Loans and advances to customers 14 6,244,348 6,446,935 Derivative financial assets 15 47,732 7,549 Trading securities , ,597 Investments securities available for sale ,506 6,342 Intangible assets 17 21,283 12,542 Property and equipment , ,482 Current tax receivables 19-1,855 Other assets ,385 86,405 Total assets 9,721,559 9,455,699 Deposits from banks 20 2,993,036 4,056,221 Due to customers 21 5,199,473 3,989,080 Derivative financial liabilities 15 18,031 68,082 Subordinated loan 22 63,521 60,152 Current tax liabilities 16,134 - Other liabilities 23 67,465 83,254 Deferred tax liability 11 47,656 43,198 Total liabilities 8,405,316 8,299,987 Shareholder's equity Share capital 24 1,001, ,587 Other reserves 25 31,341 26,533 Retained earnings 283, ,593 Total shareholders equity 1,316,243 1,155,713 Total liabilities and shareholders equity 9,721,559 9,455,699 The financial statements on pages 1 to 82 were signed and approved on behalf of the Board of Directors on 30 June 2010 by: Cătălin Pârvu General Manager Viorel Mischie Chief Financial Officer The accompanying notes set out on pages 5 to 82 form an integral part of these financial statements.

45

46

47 STATEMENT OF COMPREHENSIVE INCOME (all amounts in RON thousand unless otherwise stated) Year ended Year ended Note 31 December December 2008 Interest and similar income 5 935, ,541 Interest expense and similar charges 5 (670,105) (469,174) Net interest income 265, ,367 Fee and commission income 6 273, ,677 Fee and commission expense 6 (7,175) (7,522) Net fee and commission income 266, ,155 Net trading income 7 370, ,767 Gains less losses from securities 7,900 (17,170) Other operating income 8 2,084 3,708 Impairment charge for credit losses 9 (389,186) (131,739) Other operating expenses 10 (416,659) (350,984) Profit before income tax 106, ,104 Income tax expense 11 (25,832) (28,824) Profit for the year 80, ,280 Other comprehensive income Net gains / (losses) on available-for-sale financial assets 154 (110) - Unrealized gains / (losses) arising during the period, before tax 183 (130) - Income tax related to unrealized gains / (losses) (29) 20 Total comprehensive income for the period 80, ,170 The financial statements on pages 1 to 82 were signed and approved on behalf of the Board of Directors on 30 June 2010 by: Cătălin Pârvu General Manager Viorel Mischie Chief Financial Officer The accompanying notes set out on pages 5 to 82 form an integral part of these financial statements. (2)

48 STATEMENT OF CASH FLOWS (all amounts in RON thousand unless otherwise stated) Year ended Year ended Note 31 December December 2008 Net cash flows from operating activities Interest receipts 841, ,161 Interest paid (650,814) (443,727) Fee and commission receipts 273, ,602 Fee and commission paid (7,175) (7,522) Net trading and other income 379, ,424 Recoveries on loans previously written off Cash payments to employees and suppliers (397,870) (332,176) Income tax paid (7,124) (6,647) Net cash flows from operating profits before changes in operating assets and liabilities 431, ,802 Change in operating assets Increase in loans and advances to customers (92,372) (2,468,271) Increase in trading securities (1,940,625) (157,794) Disposal of trading securities 1,502, ,375 Increase in other assets (81,454) (37,405) Total changes in operating assets (611,815) (2,563,095) Change in operating liabilities Decrease/(increase) in deposits from banks (1,064,845) 1,155,768 Increase in amounts due to customers 1,192,488 1,967,623 Increase in subordinated loan 3,644 5,625 Decrease/(increase) in other liabilities (42,356) 24,811 Total changes in operating liabilities 88,931 3,153,827 Cash flows from operating activities (91,425) 952,534 Cash flows from investing activities Sale or redemption of investment securities 21,410 15,442 Purchase of investment securities (779,408) - Purchase of property, equipment and intangible assets (38,456) (72,577) Net cash from/(used in) investing activities (796,454) (57,135) Cash flow from financing activities Issue of ordinary shares 76,185 - Net cash from financing activities 76,185 - Increase/Decrease in cash and cash equivalents (811,694) 895,399 Cash and cash equivalents at 1 January 2,549,992 1,654,595 Cash and cash equivalents at 31 December 26 1,738,298 2,549,992 The accompanying notes set out on pages 5 to 82 form an integral part of these financial statements. (3)

49 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2008 (all amounts in RON thousand unless otherwise stated) Accumulated Note Share capital Reserves Gains (losses) Total Balance as at 01 January ,587 26, ,593 1,155,713 Total comprehensive income ,658 80,812 Share Capital increase 85,053 - (8,868) 76,185 Transfer to reserves - 4,654 (4,654) - Adjustments through reserves - - 3,532 3,532 Balance as at 31 December ,001,640 31, ,261 1,316,242 Balance as at 1 January ,587 24,103 44, ,543 Total comprehensive income - (110) 170, ,170 Transfer to reserves 25-2,540 (2,540) - Balance as at 31 December ,587 26, ,593 1,155,713 The accompanying notes set out on pages 5 to 82 form an integral part of these financial statements. (4)

50 1. THE BANK AND ITS OPERATIONS Piraeus Bank Romania SA ("Piraeus Bank" or the "Bank") has been incorporated in Romania since 1995 as a joint stock Company and is licensed by the National Bank of Romania to conduct banking activities. The Bank is principally engaged in wholesale and retail banking operations in Romania and employed 1886 members of staff at 31 December 2009 (31 December 2008: 1952). The Bank operates through its head office located in Bucharest and 186 branches and offices (31 December 2008: 180) located in Romania. The registered office of the Bank is: Piraeus Bank Romania SA Sos. Nicolae Titulescu nr Bucharest, Sector 1 ROMANIA The Board of Directors composition as at 31 December 2009 was: Mr. Stavros Lekkakos - Chairman Members: Mr. Ilias Milis Member Mr. George Papaioannou Member Mr. Spyridon Papaspyrou Member Mr. Alexandros Manos Member Mr. Catalin Parvu Member Mr. Emanuel Odobescu Member Mr. Michail Lachanas Member The parent company of the Bank is Piraeus Bank SA (Athens), which is listed on the Athens Stock Exchange. The address of its registered office is 4, Amerikis Str, Athens, Greece. (5)

51 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union, IFRIC interpretation, under the historical cost convention as modified by the revaluation of available-for-sale investments (through other comprehensive income), trading securities and derivative transactions at fair value through profit and loss account. 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 periods presented. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. The significant accounting methods and policies set out below have been applied consistently to all periods presented in these financial statements. i) Standards, amendments and interpretations effective on or after 1 January 2009 IFRS 8, Operating Segments The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. Adoption of the standard did not have any significant impact on the Bank s financial statements. Puttable Financial Instruments and Obligations Arising on Liquidation IAS 32 and IAS 1 Amendment The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities. Adoption of the amendment did not have any significant impact on the Bank s financial statements. IAS 23, Borrowing Costs The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January Adoption of the amendment did not have any significant impact on the Bank s financial statements. (6)

52 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IAS 1, Presentation of Financial Statements The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. Adoption of the amendment did not have any significant impact on the Bank s financial statements. Vesting Conditions and Cancellations Amendment to IFRS 2, Share-based Payment The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. Adoption of the amendment did not have any significant impact on the Bank s financial statements. IFRIC 13, Customer Loyalty Programmes IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. Adoption of the interpretation did not have any significant impact on the Bank s financial statements. Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 1 and IAS 27 Amendment. The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. Adoption of the amendment did not have any significant impact on the Bank s financial statements. Improving Disclosures about Financial Instruments - Amendment to IFRS 7, Financial Instruments: Disclosures. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the (7)

53 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) nature and extent of liquidity risk. Adoption of the amendment did not have any significant impact on the Bank s financial statements. ii) Standards, amendments and interpretations issued but not yet effective IAS 27, Consolidated and Separate Financial Statements The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously minority interests ) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Bank does not expect the amended standard to have a material effect on its financial statements. IFRS 3, Business Combinations The revised IFRS 3 will allow entities to choose to measure noncontrolling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. IFRS 3 is not relevant to the Bank as it does not expect a business combination to occur. IFRIC 16, Hedges of a Net Investment in a Foreign Operation The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge (8)

54 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accounting in IFRIC 16. IFRIC 16 does not have any impact on these financial statements as the Bank does not apply hedge accounting. Eligible Hedged Items Amendment to IAS 39, Financial Instruments: Recognition and Measurement The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have any impact on the Bank's financial statements as the Bank does not apply hedge accounting. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Bank does not expect the amendments to have any material effect on its financial statements. IFRIC 17, Distribution of Non-Cash Assets to Owners The interpretation clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Bank s operations because it does not distribute non-cash assets to owners. (9)

55 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IFRS 1, First-time Adoption of International Financial Reporting Standards restructured IFRS 1 as adopted by the EU is effective for annual periods beginning after 31 December 2009, with early adoption permitted). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Bank concluded that the revised standard does not have any effect on its financial statements. IFRIC 18, Transfers of Assets from Customers The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Bank s financial statements. Embedded Derivatives - Amendments to IFRIC 9 and IAS 39 The amendments clarify that on reclassification of a financial asset out of the at fair value through profit or loss category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. Improvements to International Financial Reporting Standards The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. The Bank does not expect the amendments to have any material effect on its financial statements. (10)

56 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Group Cash-settled Share-based Payment Transactions - Amendments to IFRS 2, Sharebased Payment (effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The Bank does not expect the amendments to have any material effect on its financial statements. Classification of Rights Issues Amendment to IAS 32, Financial Instruments: Presentation (effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. The Bank does not expect the amendments to have any material effect on its financial statements. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Bank s financial statements Foreign currency translation (a) Functional and presentation currency Functional currency of the Bank is the currency of the primary economic environment in which it operates. The financial statements are presented in RON which is the Bank s functional and presentation currency. (b) Transaction and balances Transactions denominated in foreign currency are translated into the functional currency at the official exchange rate ruling at the transaction date. Exchange differences resulting from the settlement of transactions denominated in foreign currency are included in the statement of income at the time of settlement using the exchange rate ruling on that date. Monetary assets and liabilities denominated in foreign currency are expressed in RON as at the balance sheet date. At 31 December 2009 the exchange rate used for translating foreign currency balances was USD 1 = RON (2008: USD 1 = RON ) and EUR 1 = RON (2008: EUR 1 = RON ). Foreign currency gains and losses arising from the translation of monetary assets and liabilities are reflected in the statement of income for the year. Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes (11)

57 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) in the carrying amount of the security. Translation differences on non-monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in other comprehensive income Accounting for the effect of hyperinflation Prior to 1 January 2004 the adjustments and reclassifications made to the statutory records for the purpose of IFRS presentation included the restatement of balances and transactions for the changes in the general purchasing power of the RON in accordance with IAS 29 ( Financial Reporting in Hyperinflationary Economies ). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. As the characteristics of the economic environment in Romania indicate that hyperinflation has ceased, effective from 1 January 2004 the Bank no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 2003 are treated as the basis for the carrying amounts in these financial statements. The restatement was calculated using the conversion factors derived from the Romanian Consumer Price Index ( CPI ), published by the Comisia Nationala de Statistica. The main guidelines followed in restating the corresponding figures were: All corresponding amounts were stated in terms of the measuring unit current at 31 December Monetary assets and liabilities held at 31 December 2003 were not restated because they were already expressed in terms of the monetary unit current at 31 December Non-monetary assets and liabilities (those balance sheet items that were not expressed in terms of the monetary unit current at 31 December 2003) and components of shareholders equity were restated from their historical cost by applying the change in the general price index from the date the non-monetary item originated to 31 December All items in the statement of income and cash flows were restated by applying the change in the general price index from the dates when the items were initially transacted to 31 December Gain or losses that arose as a result of holding monetary assets and liabilities for the reporting period ended 31 December 2003 were included in the statement of income as a monetary gain or loss. (12)

58 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.4. Financial assets and liabilities Financial assets (a) Classification The Bank classifies its financial assets into the following categories: financial assets held at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. (i) Financial assets at fair value through profit or loss ( FVTPL ) This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. The Bank currently does not have any financial assets designated at fair value through profit or loss at inception. Derivatives are also categorised as held for trading unless they are designated as hedges. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (a) those that the entity intends to sell immediately or in the short term, which are classified as held for trading, and those that the entity upon initial recognition designates as at fair value through profit or loss; (b) those that the entity upon initial recognition designates as available for sale; or (c) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. (iii) Held-to-maturity ( HTM ) HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Were the Bank intends to sell other than an insignificant amount of HTM assets the entire category would be tainted and reclassified as available for sale. During 2008 and 2009 the Bank did not hold any HTM securities in its portfolio. (iv) Available-for-sale ( AFS ) AFS investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. (13)

59 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Recognition, de-recognition and initial measurement Purchases and sales of financial assets FVTPL, HTM and AFS are recognised on tradedate the date on which the Bank commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit and loss. Financial assets carried at fair value through profit and loss are initially recognised at fair value, and transactions costs are expensed in the profit and loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. (c) Subsequent measurement AFS financial assets and financial assets FVTPL are subsequently carried at fair value. Loans and receivables and HTM investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the FVTPL category are included in the profit and loss in the period in which they arise. Gains and losses arising from changes in the fair value of AFS financial assets are recognised directly in the other comprehensive income, until the financial asset is derecognised or impaired at which time the cumulative gain or loss previously recognised in the other comprehensive income should be recognised in profit or loss. However, interest calculated using the effective interest method is recognised in the profit and loss. Dividends on AFS equity instruments are recognised in the profit and loss when the entity s right to receive payment is established Financial liabilities The Bank s holding in financial liabilities is in financial liabilities at fair value through profit or loss (including financial liabilities held for trading and those designated at fair value through profit or loss at inception) and financial liabilities at amortised costs. Financial liabilities are derecognised when they are extinguished that is, when the obligation is discharged, cancelled or expires. (a) Financial liabilities at fair value through profit or loss ( FVTPL ) This category has two sub-categories: financial liabilities held for trading and those designated at fair value through profit or loss at inception. A financial liability is classified in this category if acquired or incurred principally for the purpose of selling in the short term or if so designated by management. The Bank currently does not have any financial liabilities designated at fair value through profit or loss at inception. Derivatives are also categorised as held for trading unless they are designated as hedges. (14)

60 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Other liabilities measured at amortised cost Financial liabilities that are not classified as at fair value through profit and loss account or fall into this category are measured at amortised cost. Financial liabilities measured at amortised cost are deposits from banks or customers, debt securities in issue for which the fair value option is not applied and subordinated debt Fair value measurement principles The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm s length transactions and discounted cash flow analysis Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously Derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the profit and loss. The bank held no embedded derivatives as at the reporting date. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Bank did not designate any derivative transaction as a hedging instrument during the years 2009 and 2008 and did not use hedge accounting. The fair value gain or loss has been recognised by the Bank through profit or loss in the line Net trading income. (15)

61 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8. Interest income and expense Interest income and expense are recognised in the statement of income for all instruments measured at amortised cost using the effective interest method. Interest income includes coupons earned on fixed income investment securities and accrued discount and premium on treasury securities. The effective interest method is a method of calculating the amortised 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 financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan origination fees for loans which are probable of being drawn down, are deferred and recognised as adjustments to the effective yield on the loan. Fee and commission income consists mainly of fees and commissions received for the transfers of money for customers, trading of securities and foreign exchange, and issuance of guarantees and letters of credit and fees charged for current accounts administration. Certain loan agreements concluded by the bank are transferred by cession to Piraeus Bank London, shortly after concluding the loan agreement, at nominal value. All risks and benefits related to these loans are transferred and the loans are derecognised in the balance sheet. After the transfer, the Bank acts as an agent of Piraeus Bank London and is paid for these services (recognised as income on commissions). This income is computed as a percentage of the interest income generated by Piraeus Bank London. The income is recognized as the serviced are rendered. (16)

62 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Dividends Dividends on ordinary shares are recognised in the other comprehensive income in the period in which they are approved by the Annual General Meeting of shareholders. The statutory financial statements of the Bank prepared in accordance with Romanian Accounting Regulations are the basis for profit distribution and other appropriations Sale and repurchase agreements Securities sold subject to linked repurchase agreements ( repos ) are classified in the financial statements as securities available for sale or trading and the counter party liability is included in amounts due to customers. The difference between sale and repurchase price is treated as interest and accrued over the life of repo agreements using the effective yield method Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: - delinquency in contractual payments of principal or interest; - cash flow and financial difficulties experienced by the borrower; - breach of loan covenants or conditions; - initiation of bankruptcy proceedings; - deterioration of the borrower s competitive position; - deterioration in the value of collateral; and - downgrading below investment grade level. The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three months and 12 months; in exceptional cases, longer periods are warranted. (17)

63 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (e.g. on the basis of the industry and product types). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. (18)

64 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the profit and loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the profit and loss. (b) Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for- sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from the other comprehensive income and recognised in the profit and loss. Impairment losses recognised in the profit and loss on equity instruments are not reversed through the profit and loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the profit and loss Intangible assets Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives which is typically three years. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Bank, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software development employee costs and an appropriate portion of relevant overheads. (19)

65 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Computer software development costs recognised as assets are amortised using the straight-line method over their useful lives which is typically three years Property and equipment Cost Property and equipment are stated at cost, restated to the equivalent purchasing power of the Romanian Leu at 31 December 2003 for assets acquired prior to 1 January 2004, less accumulated depreciation and provision for impairment, where required. Cost includes borrowing costs incurred on specific or general funds borrowed to finance construction of qualifying assets. Costs of repairs and maintenance are expensed when incurred. Cost of replacing major parts or components of property and equipment items are capitalised and the replaced part is retired. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Depreciation Land is not depreciated. Depreciation on other items of property and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. Useful lives in years Leasehold improvements over the term of the underlying lease 5 5 Buildings Office equipment, fixtures and fittings Vehicles 5 5 The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Bank expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. (20)

66 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The Bank didn t hold such assets in the reporting period. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cashgenerating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date Finance lease liabilities Where the Bank is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Bank, the assets leased are capitalised in property and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. The interest cost is charged to the profit and loss over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Bank is not reasonably certain that it will obtain ownership by the end of the lease term Operating Leases The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to the profit and loss on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. (21)

67 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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: cash; non-restricted balances with central banks, including minimum mandatory reserves; treasury bills and other eligible bills; loans and advances to banks and short-term government securities Provisions Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense Financial guarantees contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise in the profit and loss the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the profit and loss under other operating expenses. (22)

68 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other credit related commitments In the normal course of business, the Bank enters into other credit related commitments including loan commitments and letters of credit. Specific provisions are raised against other credit related commitments when the Bank has a present obligation as a result of a past event, when it is probable that there will be an outflow of resources and when the outflow can be reliably measured Pension obligations and other post retirement benefits The Bank, in the normal course of business makes payments to the Romanian State funds on behalf of its Romanian employees for pension, health care and unemployment benefit. Substantially all employees of the Bank are members of the State pension plan. The Bank does not operate any other pension scheme and, consequently, has no obligation in respect of pensions. The Bank has no obligation to provide further services to current or former employees Income taxes (a) Current income tax The Bank records profit tax upon net income from the financial statements in accordance with Romanian Accounting Regulations and profit tax legislation. Romanian profits tax legislation is based on a fiscal year ending on 31 December. In recording both the current and deferred income tax charge for the year ended, the Bank has computed the annual income tax charge based on Romanian profits tax legislation enacted (or substantially enacted) at the balance sheet date. (b) Deferred income tax Differences between financial reporting under International Financial Reporting Standards and Romanian fiscal regulations give rise to differences between the carrying value of certain assets and liabilities and income and expenses for financial reporting and income tax purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. (23)

69 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. The principal temporary differences arise from depreciation of property and equipment, revaluation of certain financial assets and liabilities including derivative contracts, different treatment of loan loss provisions between the statutory rules and IFRS and tax losses carried forward. Deferred tax related to fair value re-measurement of available-for-sale investments, which are charged or credited directly to the other comprehensive income, is also credited or charged directly to the other comprehensive income and subsequently recognised in the profit and loss together with the deferred gain or loss Borrowings Borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the profit and loss over the period of the borrowings using the effective interest method Fiduciary activities The Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Bank. (24)

70 3. FINANCIAL RISK MANAGEMENT Financial risk management is intertwined with the Bank s business activity. Management, aiming to maintain the stability and continuity of its operations, places high priority on the goal of implementing and continuously improving an effective risk management framework to minimize potential negative effects on the Bank s financial results. The Bank s Board of Directors has full responsibility for the development and supervision of the risk management framework. In order to coordinate and timely address all risks, a Risk Committee has been established at the Board level, responsible for the implementation and supervision of the financial risk management policy and principles. The Risk Committee meets on a monthly basis and reports to the Board of Directors on its activities. Both the principles and the existing risk management policy have been created for timely identifying and analyzing the risks assumed by the Bank, establishing the appropriate limits and control systems, as well as systematically monitoring risks and ensuring compliance with established limits. The Bank re-examines the adequacy and effectiveness of the risk management framework annually in order to ensure it keeps pace with market dynamics, changes in the banking products offered, and international best practices. The Piraeus Bank Risk Department operates as an independent unit, entrusted with the executive responsibility for the planning and the implementation of the risk management framework, according to the directions of the Risk Committee. The Bank systematically monitors the under mentioned risks resulting from the use of financial instruments: credit risk, market risk, liquidity risk, and operational risk. 3.1 Credit risk Banking activity and the Bank s profits are closely related to credit risk undertaking. Credit risk is the risk of financial loss for the bank that results when the debtors are in no position to fulfil their contractual/ transactional obligations. Credit risk is considered the most significant for the Bank, and its efficient monitoring and management constitutes a top priority for the Management. The Bank s overall exposure to credit risk mainly results from the approved credit limits and financing of corporate and retail credit, from the Bank s investment and transaction activities, from trading activities in the derivative markets, as well as from the settlement of financial instruments. The level of risk associated with any credit exposure depends on various factors, including the general economic and market conditions prevailing, the debtors financial condition, the amount, the type, and duration of the exposure, as well as the presence of any collateral/security (guarantees). (25)

71 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Implementing a credit policy that portrays the credit risk management principles, ensures effective and uniform credit risk monitoring, Piraeus Bank applies a uniform policy and practice with respect to the credit assessment, approval, renewal and monitoring procedures. All credit limits are reviewed at least once annually and the responsible approval authorities are determined, based on the size and the category of the total credit risk exposure assumed by the Bank for each debtor or group of interrelated debtors (one obligor principle). The Bank s Board of Directors has assigned the executive responsibility for credit risk management to the Credit Committee, and directly supervised by the Board Risk Management Committee. The Credit Committee s objective is to assess and approve the credit limits for bank s legal entities clients and to support the Board Risk Management Committee with respect to the monitoring to the supervision of the proper application and functionality of credit risk management policies Credit risk measurement Reliable credit risk measurement is of top priority within the Bank s risk management framework. The continuous development of infrastructure, systems, and methodologies aimed at quantifying and evaluating credit risk is an essential condition in order to timely and efficiently support management and the business units in relation to decision making, policy formulation and the fulfilment of supervisory requirements. a) Loans and advances For credit risk measurement purposes involved in the Bank s loans and advances at a counterparty level: (i) a customer s creditworthiness and the probability of defaulting on their contractual obligations is systematically assessed, (ii) the Bank s current exposure to credit risk arising from the claim is monitored and (iii) the Bank s probability of potential recovery, in the event of the debtor defaulting on its obligations is estimated, based on existing collateral and security - guarantees provided. The three credit risk measurement parameters are incorporated into the Bank s day to day operations. (i) Systematic evaluation of the customers creditworthiness and assessment of the probability of defaulting on their contractual obligations The Bank assesses the creditworthiness of its borrowers by applying credit rating models appropriate for their special characteristics and features. Theses models have been developed internally and combine financial and statistical analysis together with the expert advice of responsible officers. Whenever possible, these models are tested by benchmarking them against externally available information. (26)

72 3. FINANCIAL RISK MANAGEMENT (CONTINUED) RATING CREDITWORTHINESS POLICY 1 Exceptional Develop relationship. 2 Excellent Develop relationship. 3 Strong Develop relationship. 4 Good Develop relationship in accordance with business growth. 5 Satisfactory Carefully develop relationship taking collateral/security Or Maintain relationship. 6 Adequate Develop relationship taking adequate collateral/security Or Maintain relationship. 7 Marginal Develop relationship taking strong collateral/security; Or Maintain relationship taking adequate collateral/security; Or Restrict relationship Maintain relationship taking strong collateral/security Weak 8 Or Restrict relationship Probable classification/downgrading to Special Mention. 9 Poor Or Reduce relationship taking strong collateral/security. Or Terminate relationship. 10 Very Poor Probable classification/downgrading. Or Maintain relationship undertaking remedial measures or taking Risk Class I collateral/security. Or Terminate relationship. 11 Special Mention Distressed Restructuring Substandard Doubtful / Loss Probable restructuring of debt. Obtain additional strong collateral/security. Or Terminate relationship. Systematic monitoring of development. Systematic monitoring for compliance with the terms of the restructured debt obligation, including servicing. Collection or restructuring of debt obligation with use of business or judicial actions. Systematic monitoring of development. Collection of receivable mainly through judicial actions. Systematic monitoring of development. (27)

73 3 FINANCIAL RISK MANAGEMENT (CONTINUED) According to the Bank s policy, each borrower is rated when their credit limit is initially determined and thereafter, they are systematically re-rated on at least an annual basis. The ratings are also updated in cases when there is updated available information that may have a significant impact on the level of credit risk. The bank regularly tests the predictive capability of the creditworthiness evaluation and rating models used both for Corporate and Retail Credit, thus ensuring its potential of accurately depicting any credit risk and allowing for the timely implementation of measures addressing arising problems. Corporate Credit As far as Corporate Credit is concerned, the credit rating models applied depend on the type of operations and size of the enterprise. For large sized enterprises, Piraeus Bank applies the Moody s Risk Advisor borrower credit rating system. Whereas for small and medium-sized enterprises an internally developed rating system, as well as scoring systems are applied. The Corporate Credit borrowers are rated in fourteen (14) grades, which correspond to the different levels of credit risk and relate to different rates of default probability, allowing for the provisioning against specific exposures. Each rating grade is associated with a specific business development/relationship policy. Retail Credit As far as retail credit is concerned, the Bank is focusing on the application of modern credit risk and fraud prevention measurement methods, using also scoring models, tailored to the profile of Piraeus Bank Romania retail lending customer portfolio. Thus, the approval of a loan is possible only if the calculated score for the applicant is above a certain threshold, established as to ensure that the performance of the retail lending portfolio is according to bank s risk strategy and profile. The specific score is calculated based on a set of characteristics, each characteristic having a weight correlated with its potentially triggered delinquency as resulting from the actual Piraeus Bank Romania portfolio. (ii) Monitoring the Bank s current credit risk exposure The Bank monitors the credit risk exposure of its loans and advances to customers, based on their notional amount. (28)

74 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (iii) Possible recovery based on the existing associated collateral, security, and guarantees Along with the rating of the counterparties creditworthiness, the Bank estimates during the setting/review of credit limits, the recovery rate related to the exposure, in the event the debtors default on their contractual obligations. The estimation of the recovery rate is based on the type of credit and the existence and quality of any collateral / security. In general, the worse the credit rating of a borrower, the larger the probability of them defaulting on their obligations to the Bank, and therefore the collateral, security and guarantees required should be correspondingly of better quality in order to ensure the highest possible recovery rate. b) Securities and other bills For the measurement and evaluation of credit risk entailed in debt securities and other bills, external ratings from rating agencies are used, such as Moody s, Standard & Poor's or other similar organizations. The amount of the Bank s exposure to credit risk from debt securities and other bills is measured based on the market value of on or off balance sheet exposures and/or positions Credit limits management and risk mitigation techniques Piraeus Bank applies credit limits in order to manage and control its credit risk exposure and concentration. Credit limits define the maximum acceptable risk per counterparty, per product, per activity sector and per country. Additionally, limits are set and applied against exposures to financial institutions. The Bank s total exposure to borrower credit risk, including financial institutions, is further controlled by the application of sub- limits that address on and off-balance sheet exposures, as well as daily positions of the trading book in financial instruments, such as foreign exchange forward contracts. In order to set customer limits, the Bank takes into consideration any collateral or security which reduces the level of risk assumed. The Bank categorizes the risk of credits into risk classes, based on the type of collateral / security associated and their potential liquidation. The maximum credit limits that may be approved per risk class are determined by Piraeus Bank, Greece. In Piraeus Bank, no credit is approved by one sole person, since the procedure regularly requires the approval of a minimum of three authorized officers, with the exception of consumer loans and credit cards. Approval authorities are designated based on the level of risk exposure in and their role in contributing to the quality of the Bank s total credit portfolio is particularly significant. (29)

75 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit limits are set with an effective duration of up to twelve months and they are subject to annual or more frequent review. The responsible approval authorities may, in special circumstances, set a shorter duration than twelve months. The outstanding balances along with their corresponding limits are monitored on a daily basis, and any limit excesses are timely reported and dealt with accordingly. The following paragraphs describe further techniques applied by the Bank for credit risk control and mitigation. a) Collateral / Security The Bank obtains collateral/ security against its credit to customers, minimizing thus the overall credit risk and ensuring the timely repayment of its debt claims. To this end, the Bank has established categories of acceptable collateral and has incorporated them in its credit policy, the main types being the following: Pledged deposits of cash Bank letters of guarantee Pledged financial instruments such as stocks or bonds or mutual fund shares Mortgages on real estate property Pledge on movable goods; Assignment of receivables from promissory notes, cheques and invoices The collateral/ security associated with a credit is initially evaluated during the credit approval process, based on their current or fair value, and re-evaluated at regular intervals. In general, no collateral/security is required against exposures to financial institutions, unless it has to do with resale agreements (reverse repos) or other similar bond activities. The Bank generally does not take collateral /security against debt security investments. b) Derivatives The Bank systematically monitors and controls the exposure and duration of its net open positions in the derivative markets. Credit exposures from positions in the derivative markets are part of the overall credit limits set for any counterparty and are taken into consideration during the approval procedure. Usually, no guarantees or securities are taken against exposures in derivative products, except when the Bank demands the application of a safety margin from a counterparty. (30)

76 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Credit risk arises also from the settlement of trades in derivative products. The bank has established and systematically monitors, daily settlement limits for derivative products transactions, which are included in the overall credit limit of any counterparty. c) Credit - related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments Impairment and provisioning policy Piraeus Bank systematically examines whether there is solid and objective evidence that a claim s value has been impaired. To this end, additionally,as of the date of each published financial statement, it conducts an impairment test concerning the value of its loans, according to the general principles and methodology described in the International Accounting Standards, and proceeds with assuming the respective provisions. A claim is considered impaired when its book value exceeds its anticipated recoverable amount. The recoverable amount is estimated by the sum of the present value of future cash flows from anticipated repayments and the present value of the liquidation of any collateral/ guarantees in case the borrower fails to service the loan. In the event that there are indications that the Bank will not be able to receive all payments due, a specific provision is made for the impaired amount associated with the loan. The amount of the provision is set as the difference between the carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate of the loan. (31)

77 3. FINANCIAL RISK MANAGEMENT (CONTINUED) The estimation concerning the existence of impairment and any resulting provisioning is conducted individually at loan level (for both retail and corporate portfolios) for those considered by the Bank as significant, and collectively on a loan group level for those considered less significant. The estimation of impairment is conducted collectively for claims (portfolios of claims) with common risk characteristics, which are not considered significant on an individual basis. Also collective assessment includes loans that have been tested individually for impairment but no impairment has occurred. For impairment estimation on a collective basis, financial assets are grouped according to their similar credit risk characteristics (e.g. according to assessment criteria of the Bank which take into consideration the nature of each asset, the rating of the loan, the number of days overdue the type of security and other such factors). These characteristics are correlated to the estimation of future cash flow for such groups of assets, indicating the debtor s ability to pay amounts due, according to the contractual terms of the financial assets under evaluation. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the previously recognised impairment loss is reduced and the difference is recognised in the profit and loss. Write-offs The Bank proceeds with write-offs of impaired loans against their respective provisions, after all necessary judicial and other procedures have been exhausted and once it is highly expected that these loans will not be collected. The Board of Directors of the Bank and its subsidiaries takes the decision for the write - offs. The Bank continued the monitoring of the written off loans, following their write off, in case that they may become collectable Maximum credit risk exposure before collateral held or other credit enhancements The following table presents the Bank s maximum credit risk exposure on 31 December 2009 and 31December 2008, without including collateral held or other credit enhancements. For on-balance sheet items, credit exposures are based on their carrying amounts as reported on the balance sheet. (32)

78 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Maximum exposure Credit risk exposures relating to on-balance sheet assets 31 December December 2008 Loans and advances to credit institutions 51,759 81,618 Derivative financial instruments - assets 47,732 7,549 Trading securities: -Treasury bills and other eligible bills 571, ,597 Loans to individuals: 4,882,865 5,152,945 -Mortgages 461, ,769 -Consumer/ personal loans 4,350,552 4,699,361 -Credit cards 71,232 60,815 Loans to corporate entities 1,361,482 1,293,990 -Small/ medium entities 1,350,163 1,239,180 -Large corporate entities 11,319 54,809 Available for sale securities 768,506 6,342 -Bonds 768,506 6,342 Other assets 65,805 28,020 Credit risk exposures relating to off-balance sheet assets Letters of guarantee 194, ,385 Letters of credit 13,092 34,692 Commitments to extent credit 477, ,822 As at 31 December 8,500,060 7,668,200 The amount of unused credit limits includes limits that may not be cancelled (committed). (33)

79 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Loans and advances Loans and advances to customers and to credit institutions are summarised as follows: 31 December December 2008 Loans and Loans and Loans and advances Loans and advances advances to credit advances to credit to customers institutions to customers institutions Loans neither past due nor impaired 5,224,927 51,759 5,915,233 81,618 Past due but not impaired 1,033, ,270 - Impaired 576, ,260 - Gross 6,834,755 51,759 6,660,763 81,618 Less: allowance for impairment (590,407) - (213,828) - Net 6,244,348 51,759 6,446,935 81,618 (34)

80 3. FINANCIAL RISK MANAGEMENT (CONTINUED) a) Loans neither past due nor impaired: Loans and advances to customers 31 December 2009 Loans to individuals Loans to corporate entities Total loans Consumer/ Small/ Large and advances Credit personal medium corporate to customers Grades cards loans Mortgages entities entities Total Standard monitoring 63,330 3,623, ,803 1,068,207 22,525 5,198,838 Special monitoring ,089-26,089 Total 63,330 3,623, ,803 1,094,296 22,525 5,224,927 Provisions calculated with a collective assessment model 1,128 10, , ,742 The criteria used for the above grades are: Corporate loans: Standard monitoring Current loans without an external rating Special monitoring Loans to customers with creditworthiness Special mention from the Bank internal model Retail loans: Standard monitoring Special monitoring Current loans Loans with days in delays between 1 and 90 days (35)

81 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 31 December 2008 Total loans and advances Loans to individuals Loans to corporate entities to customers Consumer/ Small/ Large Credit personal medium corporate Grades cards loans Mortgages entities entities Total Standard monitoring 56,156 4,254, ,344 1,153,806 72,494 5,910,418 Special monitoring ,815-4,815 Total 56,156 4,254, ,344 1,158,621 72,494 5,915,233 Provisions calculated with a collective assessment model 327 7, ,327 1,220 23,162 Loans and advances to credit institutions Grades 31 December December 2008 Standard monitoring 51,759 81,618 (36)

82 3. FINANCIAL RISK MANAGEMENT (CONTINUED) b) Loans and advances past due but not impaired: 31 December 2009 Total loans and advances Loans to individuals Loans to corporate entities to customers Consumer/ Small/ Large Credit personal medium corporate Grades cards loans Mortgages entities entities Total Past due 1-90 days 7, ,467 38, ,982 17, ,196 Past due days 2,168 90, ,516 Past due >180 days - - 3,309 19,403-22,712 Total 9, ,283 41, ,917 17,933 1,033,424 Provisions calculated with a collective assessment model 2, ,754 1,125 13, ,055 Fair value of collateral - 119,313 38, ,161 11, ,684 With respect to mortgage loans the reported fair value of collateral takes into account only properties on which the Bank holds a mortgage. In cases where the property value exceeds the remaining balance of the loan the reported fair value of collateral takes into account the property value up to the amount of the remaining balance of the loan. (37)

83 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 31 December 2008 Total loans and advances Loans to individuals Loans to corporate entities to customers Consumer/ Small/ Large Credit personal medium corporate Grades cards loans Mortgages entities entities Total Past due 1-90 days 4, ,798 18,765 57, ,496 Past due days , ,492-58,207 Past due >180 days ,530-7,567 Total 5, ,946 19,634 67, ,272 Provisions calculated with a collective assessment model , ,311 Fair value of collateral - 53,496 17,803 47, ,424 (38)

84 3. FINANCIAL RISK MANAGEMENT (CONTINUED) c) Loans and advances individually impaired: 31 December 2009 Loans to individuals Loans to corporate entities Total loans Consumer/ Small/ Large and advances Credit personal medium corporate to customers cards loans Mortgages entities entities Total Impaired loans 7, , , ,404 Less: allowance for impairment (5,676) (291,352) - (112,345) (236) (409,609) Net 1,973 89,753-74, ,795 Fair value of collateral - 13,791-85, , December 2008 Loans to individuals Loans to corporate entities Total loans Consumer/ Small/ Large and advances Credit personal medium corporate to customers cards loans Mortgages entities entities Total Impaired loans 2, ,655-51, ,260 Less: allowance for impairment (1,760) (102,049) - (39,545) - (143,354) Net ,606-12, ,906 Fair value of collateral - 1,506-29,619-31,125 (39)

85 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Treasury bills and other eligible bills The table below presents an analysis of trading portfolio and investment securities by rating as at 31 December 2009 and 31 December 2008, based on Standard & Poor s ratings or their equivalent: 31 December 2009 Trading securities Investment securities/afs Total Lower than A Unrated 571, ,646 1,339,232 Total 571, ,646 1,339, December 2008 Trading securities Investment securities/afs Total Lower than A Unrated 133,597 5, ,082 Total 133,597 5, ,082 The Romanian credit rating outlook was placed at Negative outlook based on the Fitch ratings. The Romanian long term credit rating was BB+. All the securities from the portfolio are issued by the Romanian Government The repossessed collateral During the year 2009, the Bank obtained assets after taking possession of collateral held as security for its receivables: Nature of assets 31 December December 2008 Property 5,899 5,060 (40)

86 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Renegotiated loans During 2009, the Bank renegotiated loans. As at 31 December 2009 loans to small/medium entities in the amount of RON 9,594 thousands, loans to large corporate entities in amount of RON 608 thousands and loans to individuals in amount of RON 24,025 thousands have been renegotiated. During 2008, the Bank renegotiated loans. As at 31 December 2008 loans to small/medium entities in the amount of RON 7,847 thousands and loans to large corporate entities in amount of RON 345 thousands have been renegotiated Concentration of risks of financial assets with credit risk exposure Industry sectors The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorized by industrial sector as at 31 December The Bank has allocated exposures to sectors based on the industry sector of our counterparties. In management assessment of the credit risk the concentration factors are the industries in which the clients operate. (41)

87 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Financial Construction& Wholesale Public Other institutions Manufacturing Real Estate and retail trade sector industries Total Loans and advances to credit institutions 51, ,759 Derivative financial instruments - assets 47, ,732 Trading securities , ,586 -Treasury bills and other eligible bills Loans and advances to customers (net of provisions) Loans to individuals ,882,865 4,882,865 - Mortgages , ,080 - Consumer personal loans ,350,552 4,350,552 Credit cards ,232 71,232 Loans to corporate entities 181,384* 171, , , , ,690 1,361,482 Available for sale securities -Bonds , ,506 Other assets , ,385 As at 31 December , , , , ,722 6,010,446 7,815,315 As at 31 December , , , ,237 14,171 5,504,041 6,764,301 *includes leasing companies (42)

88 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.2 Market risk Market risk is the possibility of economic loss arising from movements in market prices and rates including equity and commodity prices as well as interest and foreign exchange rates. Market risk can generally affect both trading and banking book positions, as well as both the asset and the liability side of the balance sheet. Piraeus Bank Group applied for its subsidiaries up to date, generally accepted techniques for the measurement of market risk, such as Earnings at Risk and Sensitivity Indicators. As stated in the PBR s Risk Strategy and Risk Profile the interest rate, equity prices and foreign exchange rate risks-related objectives are to be maintained to a medium risk level. The Earning at Risk (EaR) expresses the sensitivity of the net income from the interest rate to interest rate modifications for a pre-defined period, usually one year. In accordance with the PBR Market risk management policy, the value of EaR limit cannot exceed 10% of the value of the bank s own funds. The interest rate risk is considered as being low, medium or high when reaching the values from the table below: Low risk Medium risk High risk EaR limit (% of the Bank s own funds) >1.5 The risk originating in price modifications is considered as being low, medium or high when reaching the values from the table below: Low risk Medium risk High risk Level of potential losses (expressed in th Eur) < > 700 Regarding the foreign exchange rates risk, the bank has established a total open position level of EUR 30 million equivalent and a maximum accepted level of the potential loss originating in the exchange activity of EUR 600 thousand, a level beyond which the foreign exchange risk is considered as being a significant risk. (43)

89 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Sensitivity analysis All amounts in RON thousands 31 December 2009 Effect on income statements Interest rate (± 100 b.p.) ±55,744 Foreign exchange (± 20%) ±465, December 2008 Effect on income statements Interest rate (± 100 b.p.) ±55,624 Foreign exchange (± 20%) ±290,575 At 31 December 2009, if market interest rates had been 100 basis points higher and with all other variables held constant, the net profit for the year would have been RON 55,744 ths. higher (2008: RON 55,624 ths. higher). At 31 December 2009, if RON had weakened by 20% against other relevant currencies (all other variables held constant) net profit for the year would have been RON 465,136 ths. lower (2008: RON 290,575 lower). The majority of assets and liabilities in foreign currencies is in EUR. Sensitivity calculation parameters Interest Rate Sensitivity: calculations based on IR Gap report duration equivalent measures. Based on the last year interest rate fluctuation and Treasury Department forecasts analysis the interest rate can vary between 100 ± bps. FX Rates Sensitivity: calculations based on open foreign currency positions. (44)

90 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.3 Currency risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. Romania is just recently moving out of a long period of high rates of inflation and significant currency devaluation. As such, there is a consequent risk of loss in value in respect of net monetary assets held in Romanian Lei. The table below summarises the Bank s exposure to foreign currency exchange rate risk at 31 December. Included in the table are the bank s assets and liabilities at carrying amounts, categorised by currency. (45)

91 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Total RON EUR USD Other currencies At 31 December 2009 Foreign exchange risk of assets Cash and balances with central Banks 1,003, ,397 9,092 8,712 1,686,539 Due from banks 32,394 14,723 3,392 1,250 51,759 Loans and advances to customers, net of provisions 1,816,562 2,610,827 13,654 1,803,305 6,244,348 Derivative Assets 47,732 47,732 Investments securities 574, ,203 1,340,092 Intangibles 21,283 21,283 Property and equipment 198, ,421 Other assets and prepayments 63,734 58,374 1,716 7, ,385 Total assets (A) 3,758,353 4,114,524 27,854 1,820,828 9,721,559 Foreign exchange risk of liabilities Due to banks 1,710,621 1,119, ,266 16,516 2,993,036 Due to customers 2,936,062 2,154,325 94,189 14,897 5,199,473 Derivative liabilities 18,031 18,031 Borrowings from banks and other financial institutions 63,521 63,521 Deferred tax liabilities 47,656 47,656 Other liabilities 55,438 27, ,599 Total liabilities (B) 4,767,808 3,364, ,179 31,815 8,405,316 Net on-balance sheet financial position (A-B) (1,009,455) 750,010 (213,325) 1,789,013 1,316,243 Net off balance sheet position ,933 2,192 57, ,902 Net currency position (1,009,455) 942,943 (211,133) 1,846,790 1,569,145 (46)

92 3. FINANCIAL RISK MANAGEMENT (CONTINUED) Total RON EUR USD Other currencies At 31 December 2008 Foreign exchange risk of assets Cash and balances with central Banks 478,874 1,980,437 3,237 5,826 2,468,374 Due from banks 60,458 18, ,536 81,618 Loans and advances to customers, net of provisions 2,131,153 2,451,001 20,780 1,844,001 6,446,935 Derivative Assets 7, ,549 Investments securities 139, ,939 Intangibles 12, ,542 Property and equipment 210, ,482 Other assets and prepayments 30,916 55,524 1, ,260 Total assets (A) 3,071,913 4,505,655 26,088 1,852,043 9,455,699 Foreign exchange risk of liabilities Due to banks 1,066,732 1,117,033 50,410 1,822,045 4,056,221 Due to customers 2,143,043 1,739,250 83,386 23,402 3,989,080 Derivative liabilities 68, ,082 Borrowings from banks and other financial institutions - 60, ,152 Deferred tax liabilities 43, ,198 Other liabilities 48,022 34, ,254 Total liabilities (B) 3,369,076 2,951, ,111 1,845,735 8,299,987 Net on-balance sheet financial position (A-B) (297,163) 1,554,589 (108,023) 6,308 1,155,713 Net off balance sheet position ,211 1,135 9, ,315 Net currency position (297,163) 1,909,800 (106,888) 16,277 1,522,026 Other currencies include mainly British Pound and Swiss Franc. (47)

93 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.4 Interest rate risk Interest sensitivity of assets, liabilities and off balance sheet items repricing analysis Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Bank sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. The table below summarises the Bank s exposure to interest rate risks. Included in the table are the Bank s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. In the table, assets and liabilities in foreign currency are converted into RON using spot FX rates. (48)

94 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 1 month 1 year Non Up to to 3 months to Over 5 interest 1 month 3 months to 1 year 5 years years bearing Total At 31 December 2009 Assets Cash and balances with central Banks 1,520, ,148 1,686,539 Due from banks 51, ,759 Loans to customers 1,466,636 3,554, , ,116 35,650 22,799 6,244,348 Derivate Assets ,732 47,732 Investment securities - 2, , ,225-37,806 1,340,092 Intangibles ,283 21,283 Property and equipment , ,421 Deferred income tax assets Other assets , ,385 Total assets 3,038,786 3,556,799 1,246,409 1,218,341 35, ,574 9,721,559 Liabilities Due to banks 1,972, , ,444 2,993,036 Due to customers 3,076,439 1,530, ,195 3, ,761 5,199,473 Derivate liabilities ,031 18,031 Subordinated loan - 63, ,521 Deferred tax liabilities ,656 47,656 Other liabilities 26, ,059 83,599 Total liabilities 5,075,430 2,515, ,195 3, ,049 8,405,316 Total interest rate gap (2,036,643) 1,041, ,214 1,215,166 35, ,524 1,316,244 (49)

95 3. FINANCIAL RISK MANAGEMENT (CONTINUED) The table below presents comparative figures: 1 month 1 year Non Up to to 3 months to Over 5 interest 1 month 3 months to 1 year 5 years years bearing Total At 31 December 2008 Assets Cash and balances with central Banks 2,319, ,188 2,468,374 Due from banks 81, ,618 Loans to customers 2,500,822 3,062, ,244 12,530 1,044 93,674 6,446,935 Derivate Assets ,549 7,549 Investment securities - 5,555 17, ,052-8, ,939 Intangibles ,542 12,542 Property and equipment , ,482 Deferred income tax assets Other assets ,260 88,260 Total assets 4,901,626 3,068, , ,582 1, ,745 9,455,699 Liabilities Due to banks 4,041, ,621 4,056,221 Due to customers 2,696, , , ,459 3,989,080 Derivate liabilities ,082 68,082 Subordinated loan - 59, ,152 Deferred tax liabilities ,198 43,198 Other liabilities 812 1,636 7,473 22, ,716 83,254 Total liabilities 6,739, , ,730 23, ,450 8,299,987 Total interest rate gap (1,837,525) 2,380, ,796 98, ,295 1,155,711 (50)

96 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.5 Liquidity risk The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw-downs and guarantees. The Bank does not maintain cash resources to meet all of these needs, as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The liquidity risk is also monitored as per Central Bank requirements and there is no noncompliance noted. a) Non derivative cash flows The table below presents, at the balance sheet date, the cash flows payable by the Bank under non-derivative financial liabilities by the remaining contractual maturities. The amounts input are the contractual undiscounted cash flows based on the contract. The Bank manages liquidity risk according to the estimated undiscounted cash flows. Liabilities in foreign currency have been translated into RON based on the prevailing foreign currency exchange rates. The negative gap from the tenors up to 3 months is due to the short time deposits from banks and customers that based on the bank s experience and expectations will be renewed. (51)

97 3. FINANCIAL RISK MANAGEMENT (CONTINUED) At 31 December 2009 Up to 3 months Over 5 1 month 1-3 months to 1 year 1-5 years years Total Liabilities Due to banks 1,456, ,494,721 63,521 3,014,952 Due to customers 3,116,517 1,566, ,084 44, ,249,105 Borrowings from banks and other financial institutions ,521 63,619 Other liabilities 110,406 3,982 14,479 20, ,285 Credit commitments 477, ,560 Letters of guarantee and letters of credit 307, ,184 Total liabilities (contractual maturity dates) 5,468,377 1,570, ,563 1,559, ,344 9,261,705 Total Assets (contractual maturity dates) 2,274, ,202 2,393,295 3,570,391 3,037,712 11,543,692 (52)

98 3. FINANCIAL RISK MANAGEMENT (CONTINUED) At 31 December 2008 Up to 3 months Over 5 1 month 1-3 months to 1 year 1-5 years years Total Liabilities Due to banks 2,950,050 2,604 2,440 1,050,000 60,152 4,065,246 Due to customers 2,743, , , ,037,475 Borrowings from banks and other financial institutions ,136 60,510 Other liabilities 137,732 7,609 11,267 37, ,535 Credit commitments 703, ,822 Letters of guarantee and letters of credit 200, ,077 Total liabilities (contractual maturity dates) 6,735, , ,619 1,088, ,431 9,061,585 Total Assets 2,710, ,182 1,684,286 4,171,797 4,090,539 13,028,252 (53)

99 3. FINANCIAL RISK MANAGEMENT (CONTINUED) b) Derivative cash flows The Bank s derivatives that are settled on a net basis include currency forward and currency swaps. The table below analyses, at balance sheet date, the derivative financial instruments (both derivative assets and derivative liabilities) that will be settled on a gross basis based on their remaining period according to the contract. The total pay leg (outflow) and receive leg (inflow) and for each type of derivative and for each maturity group are disclosed at their contractual undiscounted amounts. At 31 December 2009 Up to Over 5 1 month 1-3 months 3-12 months 1-5 years years Total Derivatives held for trading -Foreign exchange derivatives Outflow 1,165, ,524 1,086, ,250,404 Inflow (1,178,119) (1,043,921) (1,171,952) - - (3,393,992) At 31 December 2008 Derivatives held for trading -Foreign exchange derivatives Outflow 2,056, , , ,844-2,722,570 Inflow (2,016,988) (286,400) (270,200) (125,060) - (2,698,648) (54)

100 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 3.6 Fair values of financial assets and liabilities The following table summarizes the fair values and the carrying amounts of those financial assets and liabilities not presented on the bank s balance sheet at their fair value. Carrying amounts Fair value Carrying amounts Fair value 31 December December December December 2008 Financial assets Due from banks 51,759 51,759 81,618 81,618 Loans and advances to customers 6,834,754 6,834,754 6,660,763 6,660,763 Financial liabilities Deposits from banks 2,993,036 2,993,036 4,056,221 4,056,221 Due to customers 5,199,473 5,199,473 3,989,081 3,989,081 Other borrowed funds 63,521 63,521 60,152 60,152 Financial assets and liabilities at fair value Level 1: includes instruments quoted in active markets for identical assets or liabilities; Level 2: includes instruments whose fair value is determined using inputs that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3: includes instruments whose fair value is determined using inputs that are not based on observable market data (unobservable inputs). 31 December 2009 Level 1 Level 2 Level 3 Total Trading securities 571, ,586 Bonds - 768, ,506 Derivative financial assets - 47,732-47,732 Equity investments available for sale Total assets - 1,387, ,388,684 Derivative financial liabilities - 18,031-18,031 Total liabilities - 18,031-18,031 (55)

101 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 31 December 2008 Level 1 Level 2 Level 3 Total Trading securities - 133, ,597 Bonds - 6,342-6,342 Derivative financial assets - 7,549-7,549 Equity investments available for sale Total assets - 147, ,345 Derivative financial liabilities - 68,082-68,082 Total liabilities - 68,082-68,082 a. Due from other banks Due from other banks includes inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. b. Loans and advances to customers Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. Considering that the products are priced based on variable interest rates, there are no significant differences between fair value and carrying value. c. Investment securities available for sale Fair value of investment securities are fair values by reference to prices quoted on the secondary market for securities where secondary market exists or by using discounted cash flows techniques using market rates. (56)

102 3. FINANCIAL RISK MANAGEMENT (CONTINUED) d. Deposits and borrowings The estimated fair value of deposits with no stated maturity, which includes non-interestbearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits and other borrowings without quoted market price is based on discounted cash flows using interest rates for new debts with similar remaining maturity. 3.7 Capital adequacy Capital adequacy and the use of regulatory capital of Piraeus Bank is on a regular basis monitored by the responsible department of the Bank and is filed, in a quarterly basis, with the supervisory authorities namely the National Bank of Romania. The supervisory authority requires each bank to hold a minimum level of the regulatory capital according to the sum of risk which the institution undertakes. The institution should maintain the ratio of total regulatory capital to the risk weighted assets at or above 8%. The main Bank s objectives which determine the use of the regulatory capital are: - To comply with the regulatory requirements which are defined and set by the supervisory authorities of the country where the Bank operates. - The preservation of the Bank s ability to continue unhindered its operations, thus to continue to provide returns and benefits to its shareholders. - To retain a vigorous and stable capital base in order to be able to support the Bank s management business plans. The regulatory capital of the Bank, as defined by the National Bank of Romania can be differentiated into two tiers, Tier I and Tier II capital. In order for the regulatory capital to be determined, own share capital must undergo some regulatory adjustments, such as the deduction of intangible assets and goodwill, the deduction of the revaluation gain of investment property, the deduction of part of the available of sale reserve, the deduction of the proposed distribution of dividend etc. The capital adequacy is calculated on the basis of the financial information in accordance with Romanian Accounting Standards. (57)

103 3. FINANCIAL RISK MANAGEMENT (CONTINUED) 31 December December 2008 Tier I capital Share capital Legal reserve and other reserves Retained earnings (11) (34) Current profit/ (loss) Less: intangible assets (17) (11) Total 1, Tier II Capital Subordinated debt General Reserve for credit risk - - Total Tier II TOTAL 1, Risk - weighted assets: On - balance sheet 4,580 5,732 Off - balance sheet 395 1,964 Total risk - weighted assets: 4,975 7,696 Capital Adequacy ratio (Basel II) 19.24% 12.10% The amounts are in RON millions. (58)

104 4. CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) De-recognition of financial assets The Bank derecognises an asset if it transfers substantially all the risks and rewards of ownership of the asset. The transfer of risks and rewards is evaluated on the Bank s exposure, before and after the transfer, to the variability in amount and timing of the cash flows that are likely to occur. The entity continues to recognise the asset if it retains substantially all the risks and rewards of ownership of the asset. Derecognition requires the transferor s exposure to the risks and rewards of ownership to change substantially. The Bank determines whether it has retained control of the asset. Control is based on the transferee s practical ability to sell the asset. The transferee has this ability if it can sell the asset in its entirety unilaterally to an unrelated third party without needing to impose further restrictions on the transfer. A transferee has the practical ability to sell the asset if it is traded in an active market because the transferee could purchase the asset in the market if it needs to return the asset to the transferor. The transferor has lost control if an asset subject to a call option can be readily obtained by the transferee in the market although he has retained some of the risks and rewards in relation to the asset. However, the contractual right to dispose of an asset is of little practical use if there is no market for the asset. The asset is derecognised if the Bank has lost control. The Bank continues to recognise the asset to the extent of its continuing involvement if it has retained control. Specifically, the Bank transfers to Piraeus Bank Athens, London Branch loans on the basis of the assignment contract concluded. It has been assessed that all the risks and rewards related to those loans are transferred to the London branch and hence the derecognition criteria are met. (b) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment on a monthly basis. The impairment review is in compliance with the approved management policy for assessment of risk exposures. In determining whether an impairment loss should be recorded in the profit and loss, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status or the financial performance of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. (59)

105 4. CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (CONTINUED) Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (c) Fair value of derivatives The fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are thoroughly analysed before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data; however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. 5. NET INTEREST INCOME Interest income Loans and advances to customers 842, ,203 Current accounts and deposits to banks 50,955 54,969 Investment securities 42,007 4, , ,541 Interest expense Deposits from banks 217, ,804 Customer deposits 448, ,880 Borrowings 3,322 8, , ,174 (60)

106 6. NET FEE AND COMMISSION INCOME Fee and commission income Loans servicing fee (Note 27) 238,214 90,847 Payments transactions 26,531 38,275 Credit commitments 2,388 3,357 Gold swap Cards transactions 5,873 3, , ,677 Fee and commission expense Transactions with banks 2,859 5,120 Cards transactions 2,805 2,124 Funding commitment Other ,175 7,522 The commission income from loans servicing fees represent commission charged to Piraeus Bank London, to which the Bank sold a portfolio of loans receivables and for which the Bank continues to render administration services against this commission. 7. NET TRADING INCOME Foreign exchange: - Derivative transaction gains less losses 270,871 85,859 - Spot transaction gains less losses 57, ,075 - Translation gains less losses 41,331 (26,167) 370, ,767 (61)

107 8. OTHER INCOME Dividends income Other income Gain / (Loss) on disposal of fixed assets 533 3,020 Reversal of provisions for letters of guarantees (Note 28) - - 2,084 3, IMPAIRMENT CHARGE FOR CREDIT LOSSES Impairment charge for loans (Note 14) 389, ,426 Recoveries from loans previously written off (108) (687) 389, , OTHER OPERATING EXPENSE Salaries 111, ,630 Social security and other contributions 27,228 31,623 Rent 77,405 46,108 Insurance 78,698 53,024 Depreciation and amortisation (Notes 17 and 18) 42,309 29,773 Advertising expenses 6,205 17,197 Services from third parties 16,796 9,782 Telecommunication 16,755 13,561 Consumables 4,545 7,103 Transportation expenses 1,328 2,608 Guarantee fund 6,260 1,735 Maintenance of other fixed assets 5,483 3,364 Repairs 3,473 2,249 Utilities 8,282 7,505 Cards operations 4,866 3,844 Other 5,586 10, , ,984 (62)

108 11. INCOME TAX EXPENSE The income tax consists of current and deferred income tax as follows: Current tax (credit) expense 21,403 5,244 Deferred income tax charge 4,429 23,580 25,832 28,824 The tax on Bank s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows: Profit before income tax 106, ,104 Theoretical tax charge at the applicable statutory rate at 16% 17,038 31,857 Non-deductible expenses 9,576 4,640 Income which is exempt of taxation (131) (105) Effect of tax losses carry forward (652) (7,567) Income tax expense for the year 25,832 28,824 The non-deductible expenses in the current year are mainly due to the treatment of the reevaluation for trading securities ( 5,687 th RON) and accrual for salary bonus (3,176 th RON) which are not deductible under the Romanian fiscal provisions. The differences between regulations issued by the Romanian Ministry of Finance and the accounting rules applied in preparing these financial statements give rise to temporary differences between the carrying value of certain assets and liabilities for financial reporting and tax purposes. Current income tax is calculated applying a rate of 16 % (2008: 16%). Deferred income taxes are calculated on all temporary differences under the liability method using a profit tax rate of 16% (2008: 16%). (63)

109 11. INCOME TAX EXPENSE (CONTINUED) Deferred income tax assets and liabilities are attributable to the following items: Tax Tax recognized recognized in income in 31 Dec 2009 statement OCI 31 Dec 2008 (RON) (RON) (RON) (RON) expense/ (credit) Tax effect of deductible temporary differences Loan origination fees Provision for credit commitments Other accruals 675 (5,531) - 6,206 Gain on fair value of investment securities available for sale (5,531) 29 6,248 Tax effect of taxable temporary differences Inflation of fixed assets and equity investments 1, Provisions for impairment of loans 47,766 (364) - 48,129 Sale/repurchase transactions (538) (1,021) ,343 (1,103) - 49,446 Net tax effect of temporary differences 47,656 4,428 (29) 43,198 Total 47,656 4,428 (29) 43,198 (64)

110 11. INCOME TAX EXPENSE (CONTINUED) Tax Tax recognized recognized in income in 31 Dec 2008 statement OCI 31 Dec 2007 (RON) (RON) (RON) (RON) expense/ (credit) Tax effect of deductible temporary differences Loan origination fees - (180) Provision for credit commitments Other accruals 6,206 4,193-2,013 Gain on fair value of investment securities available for sale 42 - (21) 21 6,248 4,013 (21) 2,214 Tax effect of taxable temporary differences Inflation of fixed assets and equity investments Provisions for impairment of loans 48,129 27,017-21,112 Sale/repurchase transactions ,446 27,595-21,851 Net tax effect of temporary differences 43,198 23, ,637 Total 43,198 23, ,637 Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable. As of 31 December 2009 the Bank has no tax losses carry forward. (65)

111 12. CASH AND BALANCES WITH CENTRAL BANK Cash 129, ,188 Current account 1,557,179 2,319,186 - in RON 930,575 1,919,223 - in EUR 626, ,963 Term deposits - - 1,686,539 2,468,374 Current accounts are required to satisfy the mandatory reserve requirements of the National Bank of Romania. This reserve is a minimum average deposit with a holding period of one month, based on resources attracted on previous month. The cash balance held with central bank at the reporting date meet these requirements. During 2009 the interest rate ranged between 5.6% at the beginning of the year, reaching 3.4 % by the end of the year (2008: 5.2%) for reserves held in RON, and between 2.8 % and 1.3 % for reserves held in EUR (2008: 1.3 % 2.8 %) The interest rates for term deposits with National Bank of Romania ranged from 10.3% in January 2009 to 8 % in December 2009 (during 2008 this interest rate ranged between 8% and 10.3%). All these balances were included in cash and cash equivalents (Note 26). 13. LOANS AND ADVANCES TO BANKS Current accounts and other receivables from banks 19,199 9,693 Placements with banks 32,560 71,925 51,759 81,618 During 2009 interest on placements in USD ranged from 0.3% to 2.0% (2008: 2.5% to 5.8%) and for placements in EUR from 0.2% to 3.8% (2008: 2.0% to 6.8%). Interest rates on placements in RON ranged from 4.0% to 20.0% (2008: 6.0% to 100.0%), while on placements in GBP ranged from 0.4% to 1.8% ( % to 5.5%). The average interest rate on placements was 6.3% (2008: 12.5%). Placements with banks are granted to local Romanian banks for which ratings are not available. (66)

112 14. LOANS AND ADVANCES TO CUSTOMERS Companies 1,529,322 1,349,814 Individuals 5,305,433 5,310,949 6,834,755 6,660,763 Less Impairment provision (590,407) (213,828) 6,244,348 6,446,935 Analysis by sector 2009 % of total 2008 % of total Companies 1,529,321 1,349,814 Trade 384,489 6% 481,354 7% Manufacturing 194,047 3% 259,581 4% Construction and Real Estate 153,090 2% 213,677 3% Agriculture 26,709 0% 29,969 0% Transport 46,707 1% 65,408 1% Tourism 39,560 1% 42,311 1% Energy 9,369 0% 6,758 0% Other 675,351 9% 250,757 4% Individuals Consumers loans and overdrafts 4,762,360 70% 4,854,219 73% Mortgage 462,417 7% 392,978 6% Credit Card Advances 80,656 1% 63,752 1% Total portfolio before provision 6,834,754 6,660,763 Less allowance for loan impairment (590,407) (213,828) (67)

113 14. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) Allowance for loan losses 31 December 2009 Companies Individuals Total At the beginning of the year 55, , ,828 Charge for the year (Note 9) 112, , ,294 Loans written off during the year as uncollectible - (12,715) (12,715) At the end of the year 167, , , December 2008 Companies Individuals Total At the beginning of the year 25,231 60,461 85,692 Charge for the year (Note 9) 30, , ,426 Loans written off during the year as uncollectible - (4,290) (4,290) At the end of the year 55, , ,828 (68)

114 15. DERIVATIVE FINANCIAL ASSETS AND DERIVATIVE LIABILITIES At 31 December 2009 Contract/ Fair values notional amount Assets Liabilities Derivative held for trading Foreign exchange derivatives Currency forwards 291,287 6,690 4,251 Currency swaps 2,946,389 39,210 8,544 Interest Rate Swaps 1,041,177 1,832 5,236 Total recognized derivative 4,278,853 47,732 18,031 At 31 December 2008 Derivative held for trading Foreign exchange derivatives Currency forwards 1,116, ,053 Currency swaps 1,608,089 7,217 62,029 Total recognized derivative 2,724,778 7,549 68, SECURITIES Investment Securities Available for Sale Treasury securities 2,442 5,182 - in RON 2,442 5,182 Bonds issued by Romanian Government - in RON 424, in EUR 340,787 - Equity investments - unlisted Total amounts 768,506 6,342 Treasury securities including Treasury Bills in RON are issued by the Romanian Ministry of Public Finance on the local market with interest rates between 10.0% and 14.3% (2008: 9.0% to 14.3%). (69)

115 16. SECURITIES (CONTINUED) Equity investments comprise investments in other financial institutions. The movement in the investment securities is presented below: Total At 1 January ,342 Additions 765,203 Disposals (sale and redemption) (3,222) Gains from changes in fair value 183 At 31 December ,506 At 1 January ,828 Disposals (sale and redemption) (15,355) Losses from changes in fair value (130) At 31 December ,342 Trading securities Treasury securities issued by Romanian Government 571, ,597 - in RON 571, ,597 (70)

116 17. INTANGIBLE ASSETS Computer Software software in development Total Year ended 31 December 2009 Opening net book amount 9,181 3,360 12,541 Additions 15,894 8,448 24,342 Disposals/transfers (413) (9,133) (9,546) Amortisation charge (6,161) - (6,161) Accumulated depreciation for disposals and impairment provision Closing net book amount 18,608 2,675 21,283 At 31 December 2009 Cost 37,552 2,675 40,226 Accumulated amortisation (18,944) - (18,944) Net book amount 18,608 2,675 21,283 Year ended 31 December 2008 Opening net book amount 5, ,854 Additions 7,460 4,609 12,069 Disposals/transfers - (2,160) (2,160) Amortisation charge (4,221) - (4,221) Closing net book amount 9,181 3,361 12,542 At 31 December 2008 Cost 22,071 3,361 25,432 Accumulated amortisation (12,890) - (12,890) Net book amount 9,181 3,361 12,542 o/w Assets held under finance lease contracts: 2009: : (71)

117 18. PROPERTY AND EQUIPMENT Furniture Assets in Buildings Leasehold and course of & Land improvements equipment construction Total Year ended 31 December 2009 Opening net book amount - 110,590 80,006 19, ,483 Additions - 18,347 15,857 5,467 39,671 Disposals/transfers - (248) (2,766) (14,876) (17,890) Depreciation charge - (17,264) (18,885) - (36,149) Accumulated depreciation for disposals ,285-2,306 Closing net book amount - 111,446 76,497 10, ,421 At 31 December 2009 Cost - 149, ,165 10, ,699 Accumulated depreciation - (37,611) (47,667) - (85,278) Net book amount - 111,445 76,498 10, ,421 Year ended 31 December 2008 Opening net book amount 87,114 43,317 47,533 28, ,433 Additions 8,787 52,971 46,676 47, ,346 Disposals/transfers (96,537) 24,445 (1,099) (56,494) (129,685) Depreciation charge (1,665) (9,683) (14,202) - (25,550) Accumulated depreciation for disposals 2,301 (461) 1,098-2,938 Closing net book amount - 110,589 80,006 19, ,482 At 31 December 2008 Cost - 130, ,073 19, ,917 Accumulated depreciation - (20,368) (31,067) - (51,435) Net book amount - 110,589 80,006 19, ,482 o/w Assets held under finance lease contracts: 2009: ,793 2,977 20, : ,885 2,646 27,531 (72)

118 19. OTHER ASSETS Other financial assets - Balance due from Piraeus Bank London 65,805 28,020 Other assets Prepayments 43,419 51,781 Current income tax receivables - 1,854 Gold 1,963 - Other assets 20,198 6, ,385 88, DEPOSITS FROM BANKS Term deposits 2,461,302 3,977,030 Sight deposits 30,949 79,191 Repurchase agreements 500,785-2,993,036 4,056, DUE TO CUSTOMERS Term deposits 4,234,254 2,934,988 Current accounts 634, ,723 Collateral deposits 288, ,357 Repurchase agreements 42, ,012 5,199,473 3,989,080 During 2009, interest rates ranged from 9.0% to 25.5% (2008: from 8.0% to 23.0%) on RON denominated term deposits and from 3.5% to 9.3% (2008: from 3.5% to 8.0%) on EUR denominated term deposits. A currency analysis and residual maturity profile of amounts due to customers is presented in Note 3. (73)

119 22. OTHER BORROWED FUNDS Subordinated loan 63,521 60,152 The Bank contracted a subordinated loan of EUR 15,000,000 on 15 November 2005 from Piraeus Bank Athens. The loan was fully drawn as at 31 December The loan carries variable interest rate (3M Eurib+0.5%) and is repayable in a single instalment in The Bank is not subject to any covenants from the subordinated loan agreement. 23. OTHER LIABILITIES Other financial liabilities Payables to suppliers 13,477 11,662 Revaluation of spot transactions Other accruals 19,851 25,336 Other liabilities Finance lease payables 26,540 32,538 Other tax and social contributions payable 6,401 12,537 Current income tax payable 16,134 - Settlement of accounts - - Other liabilities 1,196 83, ,254 Finance lease liabilities are analysed as follows: 31 December December 2008 No later than 1 year 11,884 11,664 Later than 1 year and no later than 5 years 17,014 24,627 Later than 5 years - 7 Future finance charges on finance leases (2,358) (3,759) Present value of finance lease liabilities 26,540 32,538 Present value of finance lease liabilities is as follows: No later than 1 year 10,579 9,921 Later than 1 year and no later than 5 years 15,961 22,611 Later than 5 years ,540 32,538 (74)

120 24. SHARE CAPITAL Subscribed share capital 943, ,894 Restatement for hyperinflation in previous years 57,693 57,693 1,001, ,587 Shareholder Piraeus Bank SA, Athens 99.99% 99.99% Individuals 0.01% 0.01% % % The court registered share capital of the Bank consists of 190,169,944 allotted and fully paid ordinary shares (2008: 173,159,254) of RON 5 each (2008: RON 5 each). Each share carries one vote. The difference in the value of share capital disclosed and the nominal value of the shares issued relates the shares issued based on the revaluation reserve recognised under the Romanian Accounting Standards (and not recognised under IFRS) in 2004 carried forward. During the year 2009 the Bank increased the share capital by RON 85,053,450 by issuing a number of 17,010,690 shares with the same nominal value of RON 5 /share. The share capital was contributed in cash in amount of RON 76,185,000. The share capital was increased from unutilised profit of 2008 with RON 8,868,450. During 2008 there was no increase in the share capital. 25. OTHER RESERVES Statutory reserve 20,413 15,759 General reserve for banking risks 10,994 10,994 Available for sale (deficit) reserve (66) (220) 31,341 26,533 The total amount of distributable reserves calculated according to Romanian Law as of December 2009 is 56,286 th RON. (75)

121 25. OTHER RESERVES (CONTINUED) The movement in the other reserves is detailed below by each category of reserve: Statutory reserve At the beginning of the year 15,760 13,220 Transfer as distribution of profit 4,653 2,539 At the end of the year 20,413 15,759 General reserve for banking risks At the beginning of the year 10,994 10,994 Transfer as distribution of profit - - At the end of the year 10,994 10,994 Available for sale reserve / (deficit) At the beginning of the year (220) (110) Decrease in fair value of investments securities, gross 183 (131) Deferred tax liability (29) 21 At the end of the year (66) (220) In accordance with the Romanian law on banks and banking activities, the Bank must distribute the profit as dividends or make a transfer to retained earnings (reserves) on the basis of the financial statements prepared under Romanian Accounting Regulations ( RAR ). Amounts transferred to reserves must be used for the purposes designated when the transfer is made. Since the beginning of 2004, under Romanian banking legislation the Bank is required to create the statutory reserve, appropriated at the rate of 5% of the gross profit, until the total reserve is equal to 20% of the issued and fully paid up share capital; and until 2007 the bank was required to create - the general reserve for banking risk, appropriated from the gross profit at the rate of 1% of assets bearing banking risks. Computation of reserves according to statutory requirements as at 31 December 2009 cannot diminish reserves accumulated as at 31 December (76)

122 25. OTHER RESERVES (CONTINUED) After reducing taxes and setting aside the legal and general reserves as discussed above, the remaining balance of net profit may be distributed to shareholders. Dividends may only be declared from current statutory profit. The statutory reserves may be distributed subject to the approval of the Annual General Meeting of the Shareholders but would be taxed upon distribution. 26. CASH AND CASH EQUIVALENTS Cash and balances with Central Banks (Note 12) 1,686,539 2,468,374 Loans and advances to banks (Note 13) 51,759 81,618 1,738,298 2,549,992 (77)

123 27. RELATED PARTY TRANSACTIONS The nature of the related party relationships for those related parties with whom the Bank entered into significant transactions or had significant balances outstanding at 31 December are detailed below. Transactions were entered into with related parties during the ordinary course of business at market rates Group Group Management Parent entities Management Parent entities Assets Current accounts at banks - 11, ,063 - Loans to Companies , Loans to management 12, , Balance due from Piraeus Bank London , ,020 Derivative instruments - 43, ,820 - Total assets 12,317 54, ,274 12,662 25,883 28,020 Liabilities Deposits from banks - 1,646,393 21,141-3,662,499 - Asset management liabilities (principal and interest) 4,769-20,798 - Due to customers , ,243 Subordinated loan - 63, ,152 - Deposits from management 4, , Leasing liability , ,538 Derivative instruments - 13, ,303 - Total liabilities 4,941 1,728, ,732 4,038 3,798, ,781 (78)

124 27. RELATED PARTY TRANSACTIONS (CONTINUED) Key Group Key Group Management Parent entities Management Parent entities Revenues Interest on loans to companies Interest on money market placements Commission income from asset management agreement - 238, ,087 90,847 Total revenues , ,083 90,965 Expenses Interest on deposits from customers and management , ,936 Interest on deposits from banks - 182, ,490 - Interest expense with loans - - 1,929 5,572 Expense with management salaries 15, , Total expenses 16, ,402 21,793 15, ,490 12,508 Piraeus Bank Athens is the Bank s ultimate parent. The related parties mainly include entities from Piraeus Bank Group (Piraeus Leasing Romania, Piraeus Insurance Romania, Piraeus Real Estate Romania) and local management. During 2009 the Bank sold a portfolio of loan receivables in the amount of EUR million (2008: EUR 1, million) to Piraeus Bank London branch. The consideration received equals the loans fair value. The Bank continues to administer this portfolio of loans and receive a service fee (Note 6). (79)

125 28. COMMITMENTS AND CONTINGENCIES Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding amounts are: Unused credit facilities 477, ,822 Letters of guarantee 194, ,385 Letters of credit 13,092 34, , ,899 (80)

126 28. COMMITMENTS AND CONTINGENCIES (CONTINUED) Taxation risk The Romanian taxation system has just undergone a process of consolidation and harmonisation with European Union legislation. However, there are still different interpretations of the fiscal legislation. In various circumstances, the tax authorities may have different approaches to certain issues, and assess additional tax liabilities, together with late payment interest and penalties (accruing at a rate of approximately 36% p.a. in 2008, same for 2009). In Romania, tax periods remain open for 5 years. The Company s management considers that the tax liabilities included in these financial statements are fairly stated, and they are not aware of any circumstances which may give rise to a potential material liability in this respect. Assets pledged/restricted Assets pledged are detailed below: Securities 549, ,154 The securities pledged represent 543,362 th RON ( 102,012 th RON-2008) repo transactions and 6,502 th RON ( 6,142 th RON- 2008) - guarantees for the bank s operations through Clearing House and Transfond. In the committed rent contracts for the branches, where the Bank is the lessee, the future minimum lease payments under non cancellable building operating leases are as follows: No later than 1 year 73,298 73,512 Later than 1 year and no later than 5 years 273, ,554 Later than 5 years 263, , , , SUBSEQUENT EVENTS The management of the Bank is closely monitoring the recently volatile macro-economic situation in Greece, where its parent company is domiciled. Management believes that, as at the date of approval of these financial statements, there is no impact of those events on the financial position and financial performance of the Bank. (81)

127 30. OPERATING ENVIRONMENT OF THE BANK The economy of Romania continues to display characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country; a low level of liquidity in the public and private debt and equity markets and relatively high inflation. Additionally, the banking sector in Romania is particularly impacted by adverse currency fluctuations and economic conditions. Furthermore, the need for further developments in the bankruptcy laws, in formalised procedures for the registration and enforcement of collateral and other legal, fiscal impediments contribute to the difficulties experienced by banks currently operating in the Romania. The prospects for future economic stability in Romania are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal and regulatory developments. 31. THE FINANCIAL CRISIS Additionally, the banking sector in Romania is particularly impacted by currency fluctuations and macroeconomic conditions. The borrowers of the Bank may also be negatively affected by the financial and economic environment which could in turn impact their ability to repay their outstanding loans. Management closely monitors the evolution of the loan portfolio and the cash flow forecast such to ensure it reflects the revised estimates of expected future cash flows in the impairment assessments. In addition, the ongoing global financial and economic crisis has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The full extent of the impact of the ongoing global financial and economic crisis is proving to be difficult to fully anticipate or completely guard against. Management is taking all the necessary measures to support the sustainability and development of the Bank s business in the current circumstances. (82)

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