ANNUAL REPORT

Transcription

1 ANNUAL REPORT

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3 CONTENTS Financial highlights 5 Statement of the Chief Executive Officer 6 Bank s Profile 12 Objectives of the Bank in Economic environment in 2013 and projections for Financial performance of the Bank 18 Risk management 22 Corporate banking 27 International banking 29 Liquidity management 31 Investments in securities 33 Retail banking 34 Card operations 37 Domestic payment operations 38 Market share of Komercijalna Banka AD Skopje in the banking market of the Republic of Macedonia 40 Marketing activities 41 Information and communication technology 42 Human resources 44 Corporate social responsibility 45 Financial statements 48 Corporate Governance 216 Supervisory Board 219 Board of Directors 220 Management 221 Organizational chart 222 Bank s network of branches and city-branches 223 3

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5 FINANCIAL HIGHLIGHTS (in thousand MKD) 2013 Unconsolidated data 2013 Consolidated data 2012 Data on the profit realized (for the year) Profit before taxes 88,603 91, ,915 Net profit 78,863 81, ,091 Data from the Balance Sheet (as at the end of the year) Total assets 86,833,803 86,832,539 82,775,317 Loans and advances to customers 45,193,155 45,193,155 45,697,417 Placements with, and loans to, banks 984, , ,544 Investments 5,201,860 5,189, ,218 Deposits from banks and other financial institutions 1,676,882 1,668,245 1,084,294 Deposits from other customers 71,764,561 71,764,561 68,325,236 Capital and reserves 9,423,538 9,430,747 9,592,463 Profitability ratios Return on assets (ROA) - before taxation 0.1% 0.1% 0.7% - after taxation 0.1% 0.1% 0.7% Return on equity (ROE) - before taxation 0.9% 1.0% 5.9% - after taxation 0.8% 0.9% 5.9% Expenses ratio 45.4% 45.5% 44.3% Capital and reserves to total assets 10.8% 10.8% 11.6% Capital adequacy* 14.1% 14.1% 13.2% Mid exchange rate as per the Exchange Rate List of the Central Bank EUR USD * Unconsolidated 5

6 STATEMENT OF THE CHIEF EXECUTIVE OFFICER Dear Shareholders, business partners and clients, The past 2013 brought the first signs of recovery of the Macedonian economy. The initial projections for economic growth got realized. According to the data available, the real growth of the gross domestic product in 2013 is assessed to be over 3% and is generated from the high growth of the civil engineering sector as well as from the increased industrial production. Macroeconomic ambient in the Republic of Macedonia in terms of the price stability and stability of the FX denar rate in term of EUR was also characterized with stability in The inflation slowed down, whereas the average annual inflation rate decreased from 3.3% in 2012 to 2.8% in The nominal FX denar rate in terms of EUR was kept on the targeted level. In 2013, certain positive movements were noted in terms of the external position of the country. The external trade was increased for 3.4% and the coverage of the import by export activities raised from 61.5% in 2012 to 64.7% in In addition, the deficit on the current account on the payment balance for the whole 2013 was assessed to be lower than 3% from GDP, as it was in In spite of that, foreign currency reserves of the Central Bank of the Republic of Macedonia in 2013 were decreased for EUR 200 million. Yet, they were kept on a level that, in case of need, could provide adequate defense of the FX denar rate. 6

7 In terms of public finance, the trend of growth of the budget deficit continued in 2013, reaching 3.9%. Main source for financing the growing deficit budget was indebtedness of the state on the domestic market, in particular with banks through issue of government securities. Thus, the debt of the Central Government on the domestic market in 2013 increased for EUR million, or for significant 25%. At the same time, maturity of the domestic debt started to manifest an increasing tendency. The deposit base went on growing in 2013, as a result of high level of the companies and citizens trust in the banking sector. As a result, at the end of the year deposits of the non-government sector were higher for 6.1% compared to the end of In conditions of declined reference interest rate of the Central Bank from 3.75% to 3.25% and declined general interest rate level, loans approved by banks in favor of non-financial entities from the private sector in 2013 raised for 6.4%. Although in the course of the year there was continuous declining trend of lending, the trend was changed in the last quarter. The increased lending was accompanied by further growth of participation of the non-performing loans to nonfinancial entities from the non-government sector in total loans, which, according to the data available at the end of 2013, reached the level of 11.5%. The present risks from more significant further deterioration of the quality of the credit portfolio of banks resulted in cautious approach to possible more significant credit expansion. Despite the positive movements in domestic economy, the trend of deterioration of statement of corporate clients of the Bank continued in the course of the first three quarters of the year, whereas the calculated value impairment of the financial assets exceeded the expectations. Improvement of the statement in the course of the fourth quarter resulted in released provisioning, which caused the Bank to realize a modest result from operation. Also, in the fourth quarter, the new Decision on credit risk management entered into force, which had small adverse effect on the movement of the total provisioning for the year. The realized financial result was additionally affected by the loss recorded for impairment of the foreclosed property in the period from to April Therefore, the profit realized before taxation as at is in the amount of MKD 88.6 million compared to MKD million realized gross profit in the previous year, while net profit for 2013 is in the amount of MKD 78.9 million. The profitability ratios 1 - the rate of Return on Equity (ROE) and the rate of Return on Assets (ROA) are pretty modest and are 0.8% and 0.1% respectively. 1 After taxation 7

8 Dear Shareholders, Pursuant to its strategic determination in the course of 2013, Komercijalna Banka AD Skopje kept on allocating a part of its profit for reserves. For that purpose, from the net profit realized in 2012 the Bank allocated MKD million, which in 2013 allowed the Bank to strengthen its capital position additionally and to meet the supervisory requirements adequately. The realized capital adequacy ratio at the end of the reporting year was 14.1% and it is within the frames of recommendations given by the Central Bank. Apart from increasing the Bank s reserves, in the course of 2013, the growing trend of the total deposits continued as well, increased for additional MKD 3.4 billion, which is an indicator for traditional high trust in the Bank expressed by citizens in the Republic of Macedonia. Liabilities under loans show a growth of around 11.4%, mainly as a result of a loan for liquidity purposes disbursed in December, while in the course of the year there were withdrawn tranches and repaid due installments from the credit lines of the Bank. Corresponding to the growth of resources, the total assets of Komercijalna Banka show an increase of 4.9% reaching the amount of MKD 86.8 billion, whereas the increase is mainly due to the increased investment in securities available for sale, first of all government bills and government bonds, as well as the increased statement of the fixed assets because of movement of the Bank to a new location and putting the new business-administrative buildings and land into operation. The total loans to non-financial sector (net-after provisioning), which reached the amount of MKD 45.2 billion, show a decrease of 1.1% as a result of the continued deterioration of the credit portfolio of clients in the course of the first three quarters of 2013 and more cautious approach while approving new loans to clients. In the course of the past year, Komercijalna Banka AD Skopje maintained its liquidity at the level that allowed it to perform the financial activities smoothly and to meet the legal obligations properly. The excess of liquid assets was placed by the Bank in treasury and government bills, available deposit with the Central Bank and loans to other banks. 8

9 In the reporting period, Komercijalna Banka AD Skopje made additional capitalization of the investment funds management company KB Publikum Invest. On , the Bank acquired 200 ordinary shares of the investment funds management company KB Publikum Invest AD Skopje in the amount of MKD 12.3 million thus increasing the share of the Bank in the total equity capital of this company from 50% to 64.29%, and out of issued total 700 shares, the Bank now holds 450 shares. Thus, the Bank acquired control over the investment funds management company KB Publikum Invest, which changed its status of associated company into a subsidiary. At the end of the first half of the year, the Bank changed location of its head office, putting all of its resources in operation successfully and on time, without jeopardizing the continuity of performing its business activities. In addition, the Bank continued to perform its business activities qualitatively, out of which the most significant ones are as follows: - Promotion of possibilities offered by e-banking, which resulted in increase of the total number of realized electronic orders of legal entities in the denar payment operations of 26.6%, the electronic orders for FX payment operations were increased for 102%, while in the field of retail banking number of orders through the Internet Bank was increased for 21%; - Introduction of modified and new credit products for citizens, with better conditions and lowered interest rates, showing increase of lending to this segment of 12.8%; - Introduction of two new cards: MasterCard Platinum and Debit MasterCard and further mass replacement of cards with magnetic stripe by cards with chip technology which offer bigger safety; - Further expanding of the ATMs and POS terminal network throughout the country, as well as the city-branch network in Skopje; - Introduction of factoring; - Promotion of favorable opportunities for sale of the foreclosed property of the Bank etc. 9

10 In the course of 2013, Komercijalna Banka AD Skopje, pursuant to its strategic determination for social responsibility presented its first Communication on Progress COP, thus becoming an equal member of the United Nations Global Compact. Also, in the domain of corporate social responsibility the Bank realized several projects, however, of which the most significant and distinctive one is the project for access and use of banking products and services by persons with total vision impairment, which is the first of that kind on the banking market in the Republic of Macedonia. Rating and quality of realized activities of the Bank in the course of 2013 were confirmed by the awards for the best bank for FX operations and the best bank by the growth of assets, profitability, strategic relationships, services to clients, competitive prices and innovative technologies awarded by the renowned foreign financial magazine Global Finance, the EBRD award for support to the international trade in global frames, as well as Plaque for the first place by total trade and number of transactions at the Macedonian Stock Exchange realized in The results achieved in certain segments of operation of the Bank shall be considered as encouragement for the forthcoming period for the Bank to continue undertaking all necessary measures in order to respond the challenges which mainly arise from the uncertainty in terms of conditions of the corporate clients. The results achieved from the operation could not have been achieved without exclusive qualitative engagement of the members of the Supervisory Board, management and all employees of the Bank, for which I would like to use this opportunity to express my gratitude on behalf of the Board of Directors. At the same time, I would like to express my gratitude to you, dear shareholders, for your support provided, and to our business partners and clients, for their professionalism and trust shown in the course of the year. Yours truly, Chief Executive Officer, Hari Kostov 10

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12 BANK S PROFILE Komercijalna Banka AD Skopje is one of the leading banks in the Republic of Macedonia, which, in its 58 years of existence, has created an image of a bank with tradition, confidence, safety, innovation and strong local and international reputation. The Bank was established in 1955 as Komunalna Banka of the City of Skopje, specialized for citizens savings, housing loans to citizens and enterprises and financial support to construction of municipalities. Since then, the Bank has gone through several changes, as a result of the changes in the banking sector, and in 1990, it was transformed into a shareholding company under the name of Komercijalna Banka AD Skopje. Today, it is a universal bank with wide range of banking activities, such as taking deposits, lending to legal entities and individuals, issuing bank cards, providing services in the domestic and international payment operations, e-banking, intermediating activities in purchase and sale of foreign currencies, securities, forfeiting, etc. The Bank has wide network of citybranches and branches, which is permanently extended on the whole territory of the country. Its business network is comprised of 11 branches (Prilep, Ohrid, Veles, Strumica, Kocani, Stip, Kumanovo, Kavadarci, Gostivar, Bitola and Tetovo) and 58 city-branches, out of which 40 located in the City of Skopje and the others throughout the country. In order to provide fast and efficient services to satisfy the needs of its clients, the Bank has correspondent relations established with 863 banks in 77 countries in the world. As at 31 December 2013, the shareholders capital of the Bank is comprised of 2,279,067 ordinary shares with nominal value of MKD 1, Out of the total number of issued shares 2,192,055 are voting shares. As at 31 December 2013, Komercijalna Banka AD Skopje has total 5,112 shareholders, compared to 5,120 shareholders as at 31 December East Capital Explorer Investments AB and European Bank for Reconstruction and Development are shareholders with qualified share in the Bank. As at , East Capital Explorer Investments AB, along with the related parties, holds % of the total number of issued shares and % of the total number of voting shares, while European Bank for Reconstruction and Development holds 5.245% of the total number of issued shares and 5.453% of the total number of voting shares. The holders of ordinary shares have the following rights: 1. Right on voting at the Bank s Assembly, 2. Right on part of the profit (dividend) and 3. Right on part of the remaining liquidation or bankruptcy estate. 12

13 Each voting share provides right on one vote at the Bank s Assembly. The shares of Komercijalna Banka AD Skopje are listed on the official market of the Macedonian Stock Exchange and they are included in the calculation of the Macedonian Stock Exchange index, while since 2007, they are also on the super listing. In the course of 2013, the shares of Komercijalna Banka kept the trend as one of the most liquid shares. The average price of the Bank s traded shares was MKD 2, per share or 20% lower than the average price attained in Total 124,267 shares with nominal value of MKD 1, were traded in the course of the reported period. In accordance with the realization of the pension system reform in the Republic of Macedonia, Komercijalna Banka AD along with Prva pokojninska druzba from Ljubljana, in June 2005, established KB Prvo penzisko drustvo AD, whose number of members makes 52.1% of the total number of mandatory pension insurers of the two-pillar pension fund as at 31 December 2013, and 53.9% of the total number of the voluntary pension insurers. The Fund manages 53.5% of the total proceeds paid in the second pillar of the pension system. Komercijalna Banka AD Skopje holds 49% of the equity capital of the pension company. In the course of 2008, Komercijalna Banka AD Skopje, together with the group of investors from Slovenia and Italy, acquired a license from the Securities Exchange Commission (SEC) for establishing the Funds Management Company KB Publikum Invest AD Skopje. In the course of 2009, pursuant to the Statute of the Company and the approval obtained from the SEC the new open-end investment fund KB Publikum Balanced was established. In 2011, the Funds Management Company KB Publikum Invest AD Skopje obtained permission from the SEC to found two new open-end investment funds KB Publikum-Cash and KB Publikum- Bonds. In the course of 2013, Komercijalna Banka obtained the SEC approval for acquiring qualified share in the Funds Management Company KB Publikum Invest AD Skopje, thus increasing its share from 50% to 64.29%. Komercijalna Banka AD Skopje is one of the most successful banks in the Republic of Macedonia with strong local and international reputation, which is confirmed both by its leading position at the Macedonian banking market and the numerous international and national banking awards, such as: Best Foreign Exchange Bank in Macedonia for 2013 from Global Finance Magazine, according to the criteria of transaction size, market share, scope of global coverage, customer service, competitive pricing and innovative technologies; Best Bank in the Republic of Macedonia for 2013, awarded by Global Finance Magazine, according to the criteria that include growth of assets, profitability, strategic relations, services to the clients, competitive conditions and innovative products; award from EBRD for Trade Facilitation Program and improvement of the international trade globally (regarding the volume and quality of the letters of credit and letters of guarantees issued by Komercijalna Banka AD Skopje) and Plaque for achieving first place in turnover and number of transactions at the Macedonian Stock Exchange realized in

14 OBJECTIVES OF THE BANK IN 2014 The priority aims and objectives of the Bank are based on the Policy Statement of the Bank, the results realized from operation and the level of realization of its strategic objectives. The priority aims and objectives of the Bank s Business Policy for 2014 are as follows: 1. Maintenance of the capital value and its increase, through the realization of its policy for further allocation of significant part of its net profit into reserves, which will provide capital adequacy ratio that corresponds to its planned activities; 2. Maximizing profitability from operation by undertaking acceptable risks; 3. Maintenance and eventual increase of the Bank s share at the banking market in the Republic of Macedonia in circumstances characterized by increased competitiveness; 4. Successful and timely compliance with the law regulations regarding the financial reporting as part of the reforms in the banking system in the Republic of Macedonia; 5. Continuous development and improvement of the information technology; 6. Continuous improvement of organization of operation and compliance with its strategic aims and objectives and with the law regulations; 7. Human resources management that will provide higher quality level of its services; 8. As a bearer of the domestic payment operations, the Bank shall be actively engaged in implementation of solutions that will provide fast and qualitative services to clients; 9. Development of its marketing activities; 10. Within the objectives of the Business Policy for 2014, the Bank remains with the obligation that, if the shareholders of Komercijalna Banka provide control package of shares and determine respective parameters, the management of the Bank shall undertake appropriate procedures, measures and activities for attracting potential foreign strategic investor, which should fulfill the respective conditions set out by the consortium of the Bank s shareholders, such as: to be a bank with renown international brand, to reflect the real value of the shares of Komercijalna Banka in the offer and to provide a strategic plan for the future development of the Bank. Having in mind the considerations for the risks existing in the macroeconomic ambient, in the course of 2014, the Bank is also projecting the following additional aims and objectives: 14

15 - adjustment with the newly created market conditions, having in mind the demands of existing and potential clients; - further improvement and modernization in the operation, introduction of new banking products and services, development of new modern banking functions, conquering new market segments, strengthening the competitive position of the Bank, all of these being the main characteristics of the modern and universal banks; - harmonization with the amendments to the Decision on the methodology on record keeping and evaluation of the accounting items and on preparation of financial reports; - harmonization with the new regulations in the domain of management of the risks, improvement of the overall process of their management which would contribute to further stable operation and strengthening the capacity of the Bank to undertake and manage distinctive risks; - improvement of the process for determining the Bank s internal capital; - undertaking operative activities for sale of foreclosed assets in order to minimize negative financial effect in the course of the forthcoming period; - further improvement of the e-banking and promotion of possibilities offered thereby; - development and introduction of mobile banking as a new distribution channel, etc. The realization of the priority aims and objectives of the Bank in 2014 shall be carried out in accordance with the realization of the Strategic Priorities and Macroeconomic Policy of the Government of the Republic of Macedonia, Monetary Policy of the Central Bank for 2014, law regulations, Strategy for Corporate Social Responsibility of the Bank for the period and other acts of the Bank. The activities shall be carried out adhering to the basic principles of the modern banking (liquidity, safety and profitability), adjustment with the economic legislation and developments in the country and abroad, flexible adjustment of the Bank to the needs of the clients and full adherence to the financial and monetary-credit discipline in performing the undertaken liabilities towards business partners. 15

16 ECONOMIC ENVIRONMENT IN 2013 AND PROJECTIONS FOR 2014 In the course of 2013, the activities of Komercijalna Banka AD Skopje were carried in accordance with the Program of Business Policy Measures and Activities for the respective year, aims and objectives of the Macroeconomic Policy of the Central Bank and priorities of the Government for the respective period. 1. From the aspect of international surrounding, the past 2013 was characterized by slow recovery of the global activities in the economy, noting an increase of about 2.5%, in conditions of risks still present, uncertainty and urgent need for reforms of the development policies and plans. The domestic economy noted growth as a result of the positive movements in the construction sector and the recovery of industry, as well as due to the effect of the specific factors such as new foreign investments and the role of the fiscal incentives. The ambience in the economy in the Republic of Macedonia in the course of 2013 is characterized by indicators 2 such as: average inflation monitored in accordance with the cost of living index for the period January-December 2013, compared to the same period in 2012, showing increase of 2.8% (Ø2013/Ø2012), when monitored for the period January-December 2013 and 2012, the physical volume of the industrial production and the volume of goods exchanged showed an increase of 3.2% and 3.4% respectively, the total value of the export is USD 4,266.9 million and of the import is USD 6,599.8 million. The coverage of import by the export is 64.7%, and the trade deficit in the period January-December 2013 is USD 2,332.9 million. In October 2013, the Credit Rating Agency Fitch has confirmed the fiscal stability of Macedonia and kept the country s credit rating to stable BB+ as a result of improved projections for economy growth, moderate budget deficit and government debt, stable currency and stable banking sector. In November the Credit Rating Agency Standard & Poor s has confirmed the longterm credit rating of Macedonia in domestic and foreign currency of BB- (decreased in May from BB ) and kept the short-term rating B, with stable perspectives. The decrease in the long-term rating in May is based on the decreased predictability of the growth and of the fiscal policy effects. 2. During 2013, the Central Bank started to loosen the monetary policy in order to ease the credit conditions and to incite economic activity. Thus, in the course of the fourth quarter of the year, lending activities were significantly accelerated, in conditions of solid growth of deposit potential of the banks. The level of foreign exchange reserves in 2013 is relatively stable, whereby in December foreign exchange reserves reached EUR 1,993 million. 2 Source: State Statistical Office 16

17 In order to loosen the monetary policy, during 2013, the Central Bank reduced the interest rate of treasury bills twice, or from 3.75% it ended to 3.25%, and reduced the interest rate of deposits to 7 days from 2% to 1.5%. Furthermore, from the beginning of 2013, new Decision on obligatory reserve entered into force, according to which the base for calculation of the obligatory reserve is reduced for the amount of newly approved loans to net exporters or loans intended for financing projects for electrical power production. Upon the enactment of the amendments and supplements made to the Decision on obligatory reserve in July 2013, the Central Bank reduced the obligatory reserve requirement for the banks liabilities in domestic currency from 10% to 8%, while increasing the obligatory reserve requirement for the banks liabilities in foreign currency from 13% to 15%, have increased the obligatory reserve rate that is realized in denars from 23% to 30%, enabled application of 0% rate for the banks liabilities towards non-resident financial companies with agreement maturity over one year, as well as for all other liabilities towards nonresidents with agreement maturity over two years, etc. During the 2013, the banking system of Republic of Macedonia kept its stability and safety. The continuous growing trend of the assets in the banking system realized in previous periods continued, but with slower dynamics. According to the latest data published by the Central Bank as at , the annual growth rate of total deposits is 6.1%, where the deposits of households are increased by 6.7%, while the deposits of non-financial companies are increased by 3.1% annually. The annual growth rate of total loans is 6.4%, where loans to households increased by 10.1%, while loans to non-financial companies increased by 3.8%, at annual level. The deposits growth is realized with slower dynamics than expected, as a result of the payment of dividends towards a foreign company and towards the Government, thus causing high single outflow from the enterprises accounts, while credit growth is approximately at the level of expectations The macroeconomic environment in which the Bank is going to exercise its activities in 2014 is mostly similar to those in High uncertainty continues to be present as the optimism for intensive recovery of the economy in Europe, being the moving force for acceleration of the growth of the Macedonian economy, is still without any support for its sustainability, even on a short term. In 2014, the actual GDP growth in the Republic of Macedonia is expected to be about 3.2%, which is a moderate speed up of the growth versus the current year. As for the fiscal policy, the budget deficit growing trend is expected to stop in Its projections for 2014 are 3.5% of GDP. The average inflation rate, measured through the costs of life index, is expected to be 2.3%. It should be a commencement of a trend of inflation relaxing and its leveling on about 2% during the following years. It will certainly be affected by the movements of the international inflation and the global prices of the main products. The macroeconomic frame for 2014 creates an opportunity for increase of the loans to the private sector. Having in mind the modest and lower than expected credit growth in 2013, its increase in 2014 is expected to be intensified and range around 7%. Further increase of the deposits will be the main basis for support of the lending expansion. 3 Source: Central Bank 17

18 FINANCIAL PERFORMANCE OF THE BANK INCOME STATEMENT In 2013, the Bank achieved modest gross positive financial results in the amount of MKD 88,603 thousand being the result of the continuous worsening of the credit portfolio quality during the first three quarters of the year and additionally, as a result of the recorded impairment loss for the assets foreclosed within the period starting from 1 January 2010 until April 2013, pursuant to the new Decision on the accounting and regulatory treatment of the foreclosed assets. The realized net profit for 2013 is in the amount of MKD 78,863 thousand. The net interest income realized shows an increase of 2.7% despite the lowered interest rates, whereas the net interest margin is 3.30%. Thus, the interest under loans approved to clients shows a decline of 3.8% and at the same time it makes 92.5% of the total interest income realized. The interest under investments in cash and cash equivalents, which has small participation in the total interest income realized a decrease of 36.4%, while the interest realized from the investments in securities shows an increase of about 12 times. The net income under fees and commissions noted a decrease of 0.8% versus the one realized in the previous year, mainly due to the decline in the volume of activities related to letters of credit and letters of guarantee, while net FX gains are increased for 3.2%. Other operating income shows a decrease of 71.7% compared to 2012, mainly as a result of higher comparison base from 2012 when the Bank realized significant amount of capital gain from the sale of the facilities where the Bank realized its business activities, as well as from the sale of foreclosed assets. The impairment loss on financial assets on net basis is for 7.6% less, compared to the previous year. The loss realized due to impairment loss on non-financial assets is doubled, as a result of the implementation of the new Decision on the accounting and regulatory treatment of the foreclosed assets. As at , the Bank recorded impairment loss for the assets foreclosed within the period starting from 01 January 2010 until April

19 BANK S RESOURCES As at 31 December 2013, the total Bank s resources reached the amount of MKD 86,833,803 thousand and realized an increase of 4.9% or MKD 4,058,486 thousand compared to the end of The growth of the total resources is mainly a result of the increase of Bank s deposits, reserves and liabilities under loans. Total deposits (deposits of banks and deposits of other clients) take dominant part of 84.6% in the total resources of the Bank, and compared to 2012, they show increase of 5.8%. Deposits of other clients in the amount of MKD 71,764,561 thousand show increase of 5.0%. Within their frames, deposits of households show the highest increase of 6.3%, deposits of public sector are increased for 1.1%, while the deposits of legal entities show increase of 0.8%. In 2013, the trend of higher participation of short-term deposits on the account of long-term ones continued. Thus, the shortterm deposits with growth of 4.4% make 92.8% of the total deposits of other clients of the Bank, while the long-term deposits participate with 7.2% showing an increase of 14.5%. Within the deposits of other clients, the largest part of 63.3% belongs to the time deposits, followed by current accounts and demand deposits participating with 34.4% and the restricted deposits participating with 2.3%. These deposits include the accrued interest payable. The Borrowings, being in the amount of MKD 3,343,221 thousand, show an increase of 11.4%, compared to Within their frames, liabilities under long-term loans take dominant part, showing a decrease of 1.9%, while liabilities under short-term loans show an increase of 42.9%. The decrease of liabilities under long-term loans is mainly due to the repayment of the liabilities due under EIB I, II and III credit lines, of the 19

20 Agriculture Credit Discount Fund, the Social Development Fund of the Council of Europe, CEB and NEPA credit lines administered through MBDP, while the increase of the liabilities under short-term loans is mainly as a result of disbursed loan for liquidity needs, pursuant to the Central Bank s operative frame for liquidity management. As at , other reserves reached the amount of MKD 6,294,081 thousand and show an increase of 5.3% as a result of allocation of a part of the profit for 2012 into reserves in the amount of MKD 314,303 thousand. In 2013, the dynamics of the total resources of the Bank was respectively influenced by the resources of its branches as follows: the Prilep Branch with participation of 5.6%, Ohrid Branch with 3.5%, Kumanovo Branch with 3.3%, Kocani Branch with 3.2%, Strumica Branch with 2.9%, Stip Branch with 2.7%, the branches in Kavadarci, Bitola and Tetovo with 1.8% each, Veles Branch with 1.5% participation and Gostivar Branch with 0.8% participation in the Bank s total resources. BANK`S ASSETS The Bank s total assets in 2013 realized volume and dynamics adequate to the resources and reached the total amount of MKD 86,833,803 thousand. The increase of the total assets is mainly due to the increase of the investments in securities available for sale and real estate and equipment, while the loans to clients and money assets, being the dominant items in the total assets, show a decline. Investments in securities (available for sale and held to maturity) show an increase of MKD 4,834,642 thousand or 14 times compared to 2012, as a result of increased investments in government securities available for sale. Real estate and equipment, having participation of 3.7%, show an increase of 58.4% or MKD 1,196,947 thousand, due to the relocation of the Bank s Head Office and putting into operation of the new business administrative building KB2, as well as increased amount for purchased office furniture, computers and other equipment. 20

21 Investments in associate companies increased for 24.9% under the recorded share in the profit of the associate company KB Prvo penzisko drustvo AD Skopje. In April 2013 the Bank increased its share in the equity capital of the Company for Investment Funds Management - KB Publikum Invest AD Skopje from 50% to 64.29%, thus changing the status of the Company from associate company into a subsidiary of the Bank. Pursuant to the law regulations, the financial statements of the subsidiary have been included into the consolidated financial reports as from the date of control commencement. Total consolidated assets amount in MKD 86,832,539 thousand, total capital and reserves are MKD 9,430,747 thousand and the total net profit is MKD 81,884 thousand. As at , total assets of the subsidiary are 0.01% of the total Bank s assets. Pursuant to the Decision of the Central Bank on consolidated supervision (Official Gazette of RM No. 17/2008), if the amount of total assets of subsidiary is less than 1% of the amount of total assets of the parent entity, then subsidiary will not be included into the consolidated financial reports for the purposes of consolidated supervision. Therefore, the capital adequacy is not calculated on consolidated basis. Cash and cash equivalents, having participation of 33.7% in the total assets, showed a decrease of 2.8% or MKD 830,646 thousand. Loans to and claims from other clients, taking part of 52.0% in the total assets, show a decrease of 1.1% or MKD 504,262 thousand. As from the maturity aspect, 48.2% of the loans are short-term loans, and 51.8% are long-term loans. Compared to 2012, shortterm loans show a decrease of 1.2% and the long-term loans are decreased for 1.0%. When considered by type of debtor, 82.5% of the loans are approved to non-financial legal entities, while 17.5% are loans approved to retail clients. The largest portion of the loans approved to non-financial legal entities or 53.8% are loans approved to small and medium size enterprises, and 46.2% are loans approved to large enterprises, while within the exposures approved to retail clients 72.5% are loans, 15.0% are overdraft facilities on current accounts and 12.5% are utilized credit limits on credit cards. 21

22 RISK MANAGEMENT The modern concept of banking, in conditions of market-oriented economy, is based on proper management of the risks, as one of the basic preconditions for successful operation of any bank. Any probability that certain activity or event may have direct adverse impact on the profit and/or own assets, or may cause difficulties in realization of the Bank s objectives, is a risk. Komercijalna Banka AD Skopje continually manages banking risks by their timely identification, evaluation, monitoring, control and reporting. For that purpose, the Bank had established system for undertaking and managing the risk, which is permanently improved and complied with the amendments and supplements in the law regulations and with the amendments in the international theory and practice, having in mind the Bank s Strategy for undertaking and managing the risks. The Bank s system for managing the risks is in compliance with the nature, size and complexity of the financial activities performed by the Bank and covers the following types of risks: credit risk (including the country risk), liquidity risk, currency risk, market risk, risk from changes of the interest rates in the portfolio of banking activities, risk from Bank s exposure concentration, operational risk (including the legal risk), reputation risk and the strategic risk. In its system for managing the risks, the Bank also includes other risks it is exposed to in the course of its operation, when it is determined that they have significant impact on the performance of the Bank. CREDIT RISK The credit risk is a risk from loss for the Bank, due to the inability of its client to settle its obligations towards the Bank in the agreed amount and within the agreed terms. Credit risk management is performed by the Bank through established processes of identification, assessment, measuring, monitoring and control. Organizational units undertaking the credit risk make its identification through established procedures for assessment of the creditability of clients, and the organizational units managing the credit risk make the identification through the process of measuring, monitoring and control of their performances. As an integral part of the process of assessment of the credit risk, the Bank applies the system of internal ranking of clients, through a developed scoring system for non-financial legal entities and individuals. The scoring system is a two-dimension ranking model comprised of assessment of the client risk and assessment of the transaction risk (exposure to credit risk). 22

23 The process of measuring the credit risk provides quantification of the risk of the clients and their related parties, as well as quantification of the risk of the total portfolio. The result from the scoring model is an important measuring tool. The purpose of the process of monitoring the credit risk is to check the compliance with the Bank s Strategy and adjustment with the legal and internal limits of the Bank. The process of control of the credit risk means maintenance of the quantitative and qualitative risk indicators within the risk frame predicted by the Bank and within the frame prescribed by the law regulations. In addition, there is a warning system for cases when the risk indicators exceed the defined limits. Classification and determination of the provisioning/special reserve for all credit risk exposures are carried out on individual basis. Estimations of the current value of future cash flows are calculated through models based on series of historical data, matrices of migration and experience based assessments of the management. The Bank does not have high credit risk concentration by sectors because the sectors with more than 15% participation therein have internal dispersed structure. Thus, the processing sector, having participation of 18.2%, is divided into different industries. This also refers to the trade sector, while the concentration in finance and insurance business lines refers to exposures towards the Central Bank and first-class banks. Table no.1 Quality of the credit portfolio of the Bank (in %) Risk category A B C D and E

24 CAPITAL ADEQUACY Within the overall process of the risk management of the Bank, management of the Bank s capital, as well as determination of the capital adequacy is a separate, extensive and important process. The Bank defines its own assets and capital adequacy in accordance with the Central Bank s Methodology for determining capital adequacy. Pursuant to the regulation, the credit risk weighted assets and the capital needed to cover the operational risk are calculated by application of a standardized approach. The Bank has established a process for determining the internal capital needed for covering the acceptable level of risk, appropriate to its risk profile and the size and complexity of the current and future financial activities. Capital adequacy ratio, set as relation between the Bank s own assets and risk weighted assets, as at is 14.08% and is within the legally prescribed limit of 8% and over the minimum of 12% defined in the Risk Management Strategy of Komercijalna Banka AD Skopje. Table no.2 period Capital adequacy ratio (in %) % % LIQUIDITY RISK Liquidity risk occurs when the Bank cannot provide sufficient funds to settle its short-term liabilities at their maturity, or when it provides the necessary funds at much higher costs. In the course of 2013, the Bank continued to monitor and manage its liquidity. Pursuant to the law and internal regulations, the Bank permanently fulfilled its legal obligation for the obligatory reserve in denars and in foreign currency, maintained stable level of the cash at counters, in function of protection of the unstable segments of the deposit base, subscribed treasury and government bills, monitored the stability and concentration of the deposit base, harmonization of the inflows and outflows on the Bank s account, residual and prospected maturity and currency compliance of the Bank s assets and liabilities, internal liquidity indices as well as the liquidity rates, performed stresstesting, followed the concentration level etc. In the course of 2013, the Bank had stable current liquidity position, maintained the liquidity rates over the prescribed minimum level and was complied with the internal limits. 24

25 RISK FROM CHANGES IN THE INTEREST RATES IN THE PORTFOLIO OF THE BANKING ACTIVITIES The risk from changes in the interest rates in the portfolio of the banking activities is a risk of loss arising from unfavorable change of the interest rates having impact on the items in the portfolio of the banking activities of the Bank. The Decision on the Interest rates and the effects from its implementation on the Bank s Income Statement is a base for the interest rate risk management. The period analyzed is characterized by continuation of the regular activities regarding the implementation of the Decision on the Interest rates, as well as further consideration of the possibilities for improving and maintaining the competitive position in regards to the other banks. In the course of 2013, the Bank was making regular analysis of the interest bearing assets and liabilities, the realized interest income and interest expenses, the level of change sensitivity of the interest rates, the average risk weighted loan and deposit interest rate, interest spread and net interest margin (NIM), the extent of the interest bearing assets and liabilities with internal and external determination of the interest rates, the ratio of the interest bearing assets and interest bearing liabilities, interest gap, changes in the economic value of the portfolio of banking activities, analysis of the harmonization of the interest rates on the financial assets and liabilities and of the maturity (in)compliance of the interest-sensitive asset and liability positions, risk from the difference in the level of the reference interest rates on instruments with similar characteristics, risk arising from the options incorporated in the interest-sensitive positions, stresstesting, as well as other relevant indicators, as foundation for successful management of the interest rates risk. In the course of 2013, the Bank was complied with the internal and external limits. Taking into account the principles of safety, profitability and competitiveness, during 2013, the Bank continued implementing the concept of differentiated interest rates in accordance with previously set criteria, as well as introducing new products, in accordance with the needs and capabilities of the existing and potential clients. CURRENCY RISK Currency risk is a risk of loss due to change of the exchange rates and/or change of the denar value in relation to value of other foreign currencies. Hence, the denar exchange rate and its stability, foreign currency reserves of the Central Bank and its capacity for intervention, foreign currency reserves of banks, inter-currency relations, the Monetary Policy of the Central Bank, etc., are the factors that have direct or indirect influence and determine the level and exposure to currency risk of the Bank. 25

26 Management of the currency risk means daily monitoring, quantification and control of the aggregate FX position, as a main indicator of the level of currency risk exposure of the Bank. In the course of 2013, the Bank continually followed and managed the currency risk, thus maintaining stable level of aggregate FX position within the legal frames of up to 30% of the own assets. MARKET RISK Market risk is a risk of loss as a result of change of the price of the financial instruments intended for trade. Management of the market risk means management of the trading portfolio of the Bank, with simultaneous adherence to the basic principles of banking operations, safety, liquidity and profitability. In the course of 2013, and as a result of insignificant participation of the trading portfolio in the total activities, the Bank was not obligated to allocate capital for covering of the market risk. OPERATIONAL AND REPUTATION RISK The operational risk is defined as risk from losses due to inadequate or unsuccessful internal processes, persons and systems or due to external events. This definition includes the law (legal) risk, as well. In its daily performance, Komercijalna Banka AD Skopje permanently monitors, records and analyzes the events that caused loss or represent potential operational risk. On the basis of the information obtained and analyses made, the Bank is undertaking specific measures for recovery of the deteriorations and elimination/limiting and control of the risk in future. In order to have successful management of the operational risk, in 2013, the Bank permanently worked on: - monitoring the compliance of the Bank s operation with the law regulations and supervisory standards; - monitoring and undertaking appropriate measures to recover deteriorations of the information system; - undertaking measures for risk elimination in card operation; - continuous alignment with the Law on Money Laundering Prevention and regular reporting to the Office for Financial Intelligence at the Ministry of Finance; - monitoring and undertaking measures for elimination of the risk from natural disasters, thefts, damages of property etc.; - monitoring and control of the implementation of prescribed rules and procedures for operation of the Bank by its employees and undertaking measures for elimination of the risk of incorrect or illegal operation. Pursuant to the legislation requirements, the Bank started with determination of the capital required for operational risk coverage, using standardized approach. 26

27 In the course of 2013, the Bank was not significantly exposed to operational risk. Komercijalna Banka AD Skopje monitors and undertakes measures for protection against reputation risk, either current or future risk, which may have impact on the profit or own assets of the Bank due to unfavorable observing by customers, creditors, shareholders, investors and regulatory bodies. In the period January- December 2013, there are no transactions, activities or events recorded that had caused significant exposure to reputation risk. STRATEGIC RISK The strategic risk is current or future risk on the profit or own funds of the Bank arising from changes in the business environment, negative business decisions, improper implementation of decisions or insufficient responsiveness of the Bank to the changes in the business environment. Strategic risk management includes all the activities connected with adequate preparation of strategic and business plan of the Bank, proper targeting, appropriate allocation of resources, undertaking timely activities depending on the expected influence of the external and internal factors of the environment, compliance with levels of exposure to other risks from operation set out by the respective policies and timely and accurate reporting in terms of realization of the defined objectives and quantifications. CORPORATE BANKING Corporate lending, as a core activity of Komercijalna Banka AD Skopje, is being realized in compliance with the Credit Policy and Procedures of the Bank, aims and objectives of the Central Bank s Monetary Policy and other by-laws and Bank s internal acts regulating the lending activities, with strict adherence to the principles of profitability, efficiency and safety of the placements bearing acceptable credit risk. In the course of the period reported, the Bank made terminology and technical compliance with the last amendments and supplements to the Banking Law, new Decision on Credit Risk Management, Law on Evaluations and its amendments and supplements, with the Guidelines on the criteria and procedures for purchasing claims from exporting clients (forfeiting), as well as with the Policy for identification and monitoring of parties related with the Bank. In its 58 years of existence and successful performance, Komercijalna Banka AD Skopje remained recognizable business partner for its clients, and through active monitoring and appropriate credit support dimensioning it strengthened and improved the relationship with its clients, thus, keeping the high market share in this segment of operation in the banking sector of the Republic of Macedonia. 27

28 Furthermore, in 2013, the Bank successfully continued the issuance of bid bonds in electronic form, whose key benefits are simplified procedure and saving in issuance time and costs. In the course of the period reported, the Bank continued applying the conservative and restrictive approach by making careful analysis on the risks related to the real sector in the Republic of Macedonia that may have negative impact on the quality of the credit portfolio. Also, Komercijalna Banka continued applying interest rates policy of appropriately positioned interest rates for the clients that settle their obligations on regular basis and were ranked as first-class clients with appropriate collateral provided. Permanently focusing on the needs of its creditworthy clients and financing the profitable investment projects, the Bank managed to achieve about 0.4% increase of corporate loans. At the same time, and based on thorough analyses and focusing on diversification of the credit portfolio, the Bank provided financial support to the companies of the industry sectors that were less affected and managed to mitigate the effects from the economic crisis. As a result of the unfavorable circumstances in the real sector, the corporate portfolio noted deterioration, which as a consequence was reflected on the profitability of the Bank. In the domain of lending to legal entities, the activities of the Bank were directed towards providing short-term loans for supporting clients current operation and simultaneously approving long-term loans for investments and working capital. The largest portion of the loans was approved from the Bank s own assets, while the rest was approved from the proceeds of the credit lines placed through the Bank. Following the practice from the previous years and in cooperation with the Macedonian Bank for Development Promotion, the Bank continued to support and to monitor the clients projects through the funds of the credit lines, especially of the credit lines of the European Investment Bank (EIB) for financing small and medium size enterprises, resulting with EUR 19.2 million placed funds. In 2013, the structure of the Bank s credit portfolio was in accordance with the proportions set out for the risk diversification by sectors, according to the Credit Policy of the Bank. Table no.3 Structure of the credit % of portfolio by sectors as at participation Agriculture, hunting, forestry and fishing 1.5% Mining and stone extraction 0.4% Industrial production and processing 34.8% Construction 6.0% Wholesale and retail trade and crafts 50.4% Hotels and restaurants 0.4% Transport, storage and communication 3.2% Activities related to real estate 0.7% Supply of electrical power, gas 0.2% and water Financial and insurance 0.2% activities Other (education, social protection, healthcare, communal, culture, 2.2% administrative and other activities, private households with employed persons) TOTAL 100.0% 28

29 INTERNATIONAL BANKING According to its results achieved, Komercijalna Banka AD Skopje had again confirmed its successful performance in the domain of the international banking, efficiently meeting the needs of its clients, positioning itself as a safe and reliable partner for active inclusion of its clients in the international trade. INTERNATIONAL PAYMENT OPERATIONS In the course of 2013, the total international payment operations for legal entities realized through the Bank noted value increase of 10.1%. The Bank has established highly professional correspondent relations with 863 banks from 77 countries in the world, which are completely put in the function of the Macedonian companies, enabling them to have easier and more successful access to the global market. The permanent quality offered by the Bank in the segment of international banking is mainly due to the permanent research on improvement and unification of the banking practice in regards to the local and international law regulations. As a result of optimization of its personnel and organizational structure, as well as of its reputation abroad, Komercijalna Banka AD Skopje has continually been increasing its capacity in the offer of different consulting services and providing support to export financing. Thus, international payment operations showed increase of 9.5% with the collections and 10.6% with the payments realized. In the course of 2013, activities related to FX e-banking were significantly increased. The number of new active users (legal entities) is 907, the number of new subscriptions for internal FX market for legal entities is 888, while the number of payment orders realized in the course of the year is 23,

30 EXPORT-TRADE FINANCING The comparison data on the documentary credit operations of the Bank show decrease in value in regards to The value of the total issued FX Letters of Guarantee in 2013, compared to 2012, shows a decrease in its value of 39.3%. When analyzed by types of guarantees, the total value of payment guarantees issued in 2013 shows an increase of 10.3%, compared to 2012, while the value of the performance bonds issued declined by 78.3%. The total amount of Letters of Guarantees received (guarantees issued by foreign banks, without obligations for the Bank) in 2013 has decreased by 58.5% in regards to In the course of the period reported the Bank continued its maximum engagement in keeping the confidence and satisfying the needs of its clients, which in large number decided to use the advantages of the documentary financial realization with the intermediation of the Bank. In the course of the period reported, the Bank continued to actively follow the novelties of the International Chamber of Commerce (ICC) regarding the regulation and standardization of the international trade operations. 30

31 In order to provide optimal realization of the export - import transactions and minimization of all types of risks, the Bank offers consulting services regarding the way of defining and concluding the international agreements, making concept of financial constructions, preparation of terms and conditions of Letters of Credit, workout wording of Letters of Guarantee and Letters of Credit, as well as assistance in completing the export documentation. In 2013, Komercijalna Banka AD Skopje continued approving foreign currency loans, both from its own assets and from the proceeds of domestic and foreign credit lines, where, out of total approved FX loans from own assets, 66% are short-term, 23% are long-term loans, while the rest of 11% are revolving loans. During the year, the Bank continued using the funds from EIB, EIB II and EIB III credit lines, which resulted in EUR 19.2 million disbursed funds. The Bank regularly administered its obligations under the FX loans approved from the credit lines of the Social Development Fund of the Council of Europe, Revolving Fund of the Italian Commodity Credit Line, CEB Credit Line and EIB Credit Lines through MBDP. The Bank successfully continued its activities related to forfeiting of claims under international trade payment instruments. Thus, in the period January-December 2013 it forfeited export Letters of Credit with deferred payment in the total amount of EUR 1 million. Komercijalna Banka AD Skopje is a member of the International Forfeiting Association - IFA. At the beginning of 2013, the Bank started its activities related to purchase of claims under export invoices factoring and as at , the total purchased claims amounted in EUR 1.1 million. LIQUIDITY MANAGEMENT In the course of 2013, Komercijalna Banka AD Skopje achieved optimal level of its denar and foreign currency liquidity, which enabled smooth realization of the financial activities and fulfillment of the legal obligations. TREASURY BILLS In accordance with the conditions for realization of the Central Bank s Treasury Bills auctions and the Bank s Policy for liquidity management, in the course of 2013, the Bank was buying Treasury Bills on its behalf and for its account in the total amount of MKD 26,711,000 thousand. GOVERNMENT BONDS In 2013, the Bank participated at the auctions of Government Bonds and on its behalf and for its account bought Government Bonds in denars and in denars with FX clause in the amount of MKD 13,649,860 thousand (in 2012, the Government Bonds bought amounted in MKD 9,100,000 thousand). 31

32 PLACEMENTS WITH DOMESTIC AND FOREIGN BANKS The average amount of the foreign currency assets placed with foreign banks in 2013 was EUR million, which is for 9.4% lower than the average amount of foreign currency assets placed in 2012 (EUR million). In the course of the year reported, the Bank concluded total 80,143 FX purchase agreements, and compared to 2012, when total 77,453 FX purchase agreements were concluded, there is an increase for 2,690 purchase agreements (or 3.5% more). The share of Komercijalna Banka AD Skopje in the FX market in the Republic of Macedonia ranged between 27.28% and 34.13%. INTERNAL FX MARKET The total turnover realized in 2013 at the internal FX market of Komercijalna Banka AD Skopje was EUR 1,912.1 million. Compared to 2012, when the internal FX market turnover amounted in EUR 1,889.1 million, there is an increase of 1.2%. PURCHASE/SALE OF FOREIGN CURRENCIES WITH INTERNATIONAL AND DOMESTIC BANKS The total turnover realized in 2013 under FX transactions was EUR 1,241.6 million, which is for EUR million or 11.0% more, compared to the turnover of EUR 1,118.7 million realized in

33 INVESTMENTS IN SECURITIES INVESTMENTS HELD FOR TRADING In the course of 2013, the Bank kept its investments in stakes held for trading. As at , total investments in stakes amounted MKD 9,823 thousand, out of which MKD 6,008 thousand are issued by Open-end investment fund KB Publikum-Balanced and MKD 3,815 thousand are issued by Open-end investment fund KB Publikum-Cash. As at , Bank s equity investments intended for trading are in the amount of MKD 74,740 thousand and the investments in denationalization government bonds are MKD 1 thousand. INVESTMENTS AVAILABLE FOR SALE As at , the statement of the equity securities available for sale amounted MKD 59,018 thousand and are comprised of securities issued by domestic and foreign financial companies, as well as investments in loss-making companies acquired in accordance with the Law on restructuring part of loss-making companies. Investments in continuous government bonds in denars with FX clause amount in MKD 299,297 thousand. GOVERNMENT BONDS HELD TO MATURITY As at , the value of the bonds issued by the Republic of Macedonia and held to maturity is MKD 6,631 thousand and they are comprised of investments in denationalization bonds. In the course of 2013, the investments in Eurobonds in the amount of MKD 61,505 became completely due. INVESTMENTS IN ASSOCIATES As at , the investment of the Bank into the associate company KB Prvo penzisko drustvo AD Skopje is in the amount of MKD 150,890 thousand. The Bank also increased its share in the company KB Publikum Invest to 64.29% from the equity capital. Thus, the investments in the company in the amount of MKD 12,738 thousand are recorded on the account of investments in subsidiary. 33

34 GOVERNMENT SECURITIES FOR CLIENTS In the course of 2013 and at the Government Bonds and Government Bills auctions, the Bank purchased government securities on its behalf and for the account of its clients in the amount of MKD 3,324,250 thousand, or 53.1% less, compared to 2012 when the purchased government securities amounted in MKD 7,093,120 thousand. TRADING WITH SECURITIES As a result of the unfavorable economic conditions, in the course of the reported period, the activities at the capital market in the Republic of Macedonia were significantly decreased, which contributed for the Bank s activities in this segment of operation to show a drop, compared to the previous year. During 2013, the Bank realized total turnover with securities in the amount of MKD 703,925 thousand and realized 1,874 transactions. CUSTODIAN ACTIVITIES Pursuant to the provisions of the Law on Securities, as at , the Bank has concluded 20 agreements for carrying out custodian services with 18 non-resident legal entities and 2 non-resident individual clients, thus keeping total 45 portfolios with a market value of MKD 1,605,299 thousand. In the course of the period reported, the Bank also provided services related to custody/depositary bank of investment and pension funds registered in the Republic of Macedonia. RETAIL BANKING CITIZENS DEPOSITS As at , the total citizens deposits with Komercijalna Banka AD Skopje are MKD 56,023,656 thousand and compared to the statement as at , when they were MKD 52,717,232 thousand, they show an increase of 6.3%, thus continuing the trend of citizens deposits increase in 2013, as well. Total citizens deposits participate with 78.1% in the deposit base of the Bank, while their participation in the total resources is 64.5% and they are basis for the deposit operations of the Bank. 34

35 As for the maturity structure of the citizens deposits as at , demand deposits participate with 23%, while time deposits participate with 77%. LENDING TO CITIZENS The total credit exposure towards citizens, as at , amounted in MKD 9,495,951 thousand, and compared to the total credit exposure as at when it amounted in MKD 8,417,389 thousand, it shows an increase of 12.8%. In 2013, the Bank approved total 11,806 loans in the total amount of MKD 3,694.4 million, being an increase of the number of the newly-approved loans for 26.9% and increase in the value for 47.1%, compared to The table below illustrates the lending activities of the Bank in relation to citizens, by volume, amount and type of loans. Table no. 4 Purpose Loans with identified purpose for purchasing immovable property and construction Loans approved to citizens (in 000 MKD) Index Number Amount Number Amount 2013/ , , Loans for cars 5 3, , Scholarship loans 11 1, , Loans through merchants , , Tourist loans Loans for energy efficiency improvement 15 1, , Cash loans with no purpose identified 9,707 2,323,246 7,300 1,638, Loans upon pledge of deposit , , Loans upon pledge of shares 5 66, Loans with no purpose identified under mortgage on real estate and draft , , Short-term cash loans with no purpose identified , , Total 11,806 3,694,446 9,301 2,511,

36 The intensified lending activities in the course of 2013 are mainly due to the extended offer of lending products for citizens, introducing new and modified products, improving the terms of the existing loans and lowering the interest rates of certain credit products, such as: consumer loans up to EUR 10,000 with EUR clause and interest rate of 7.65%; car loans with EUR clause and interest rate of 7.55% for clients of the Bank, i.e. 8% for the applicants that are not clients of the Bank; housing loans and loans for purchase of business premises for individuals with EUR clause with annual interest rate of 5.0%, fixed for the first 3 years and 6.65% annual variable for the rest of the repayment period; loans for purchase of real estate with EUR clause through legal entities having a Business Cooperation Agreement concluded with the Bank of 0%-4% fixed for the first 2 years and 6.65% annual variable for the rest of the repayment period; loans for citizens with EUR clause for purchasing real estate owned by the Bank with interest rate of 4% annual fixed for the first two years and 6.65% annual variable for the rest of the repayment period and housing loans to citizens with EUR clause intended for purchase of real estate in the process of enforced collection (auction) at interest rate of 3.75% per annum, fixed for the first 2 years and 6.65% annual variable for the rest of the repayment period. TRANSACTION CURRENT ACCOUNTS In the course of 2013, the Bank opened total 25,328 transaction accounts and issued 7,851 Maestro debit cards, 12,275 Visa Electron debit cards and 496 Debit MasterCard cards. In the period reported, the total inflow on the current accounts is MKD 83.5 billion. The total number of companies paying salaries on transaction accounts with the Bank was increased for 0.5% and is 22,995. The number of transaction accounts where inflows under salaries are received is 116,872, while the number of transaction accounts with pension inflow is 64,068, which is for 2.3% more compared to the previous year. As at , the number of current accounts having overdraft balances was decreased for 16.8%, compared to the same period in On the other side, the number of current accounts with positive balances has increased for 2.1%, and the number of current accounts with overdraft facility decreased for 3.9%. Total placements on transaction accounts under overdraft facility decreased for 2.9%, while the utilization thereof is minimally decreased from 40.9% to 40.8%. 36

37 In this segment of its operation, the Bank is focused on increasing the volume and type of payments by standing orders and increasing the functionality of the e-banking and SMS banking services. Thus, in the course of the period reported, the number of standing orders opened increased for 15%. The number of e-banking registered users increased for 8,012 new subscriptions and reached the number of 66,115 users, out of which 14,190 users may execute payments though Internet by using a list of codes or digital certificate. Also, as at , 657 subscriptions for the SMS banking service were approved to total 466 users. CARD OPERATIONS In 2013, the Bank s operation in this domain was in accordance with the strategy for strengthening the leading position on the banking market in the country. So, the card operations were focused on increasing the turnover and number of transactions, expanding the POS terminals network, increasing the number of ATMs and increasing the number of users of all types of debit and credit cards. In this period, The Bank organized several motivation campaigns for improvement of the sale of cards, as well as for expansion of the sale network and for increase of the trade at points of sale. In 2013, the Bank organized several prize winning games such as: Purchase and win with Maestro and MasterCard of Komercijalna Banka AD Skopje, Business with winning Visa and Shop, celebrate and win for the purpose of increasing the number of transactions and trade with cards of these two brands. CARD ISSUANCE As at , the total number of active cards issued by the Bank is 251,897, which is for 1.7% more than in 2012, as a result of the activities undertaken for raising the number of cards and their increased use in trade. In the course of this period reported the Bank started issuing two new products MasterCard Platinum and Debit MasterCard. Also, in order to increase safety and following the needs of its clients, as from Komercijalna Banka AD Skopje started to issue debit and credit cards from the program of MasterCard Worldwide and Visa International with the up to date DDA chip technology built in, which provides additional safety in use of the payment cards. In 2013, the Bank realized total 9,561,901 transactions with total value of MKD 24,113.0 million. Compared to the total number of transactions of 8,768,085 in 2012, having total value of MKD 23,267.4 million, there is an increase of 9.1% in the number of transactions, while their value is increased for 6%. All indicators point out the successful payment card operations and strengthened leading position of the Bank in this area. 37

38 CARD ACQUIRING Regarding card acquiring, by , the Bank had total 6,789 points of sale opened with POS terminals, which is an increase of their number for 3.5%. In order to meet its clients needs, the Bank established a network of total 154 ATMs installed or 3.4% more than in In the course of 2013, there are total 7,794,395 transactions realized through the Bank s network with total value of MKD 22,898.6 million, being an increase of 5.5% in the number and 3.6% in the value of the transactions realized, in regards to the previous year. DOMESTIC PAYMENT OPERATIONS In the course of 2013 the Bank continued to perform the activities from the domain of domestic payment operations successfully. As at , the Bank s officers at counters processed total 19,549,307 transactions for legal entities and retail clients. Within the total number of transactions processed, 9,195,469 transactions are initiated by legal entities, out of which 5,622,732 are non-cash and 3,572,737 are cash transactions. Most of the non-cash transactions (60%) are processed through the internal clearing, 37% are processed through KIBS and only 3% are payment orders processed through MIPS. Within the cash transactions, 95% are payment and 5% are disbursement transactions. 38

39 Within the total number of processed transactions for individuals, the number of transactions through current transaction accounts notes a drop of 4%, transactions for collection of public services bills note an increase of 4%, while transactions connected with denar and FX savings note a decrease of 7% and 6%, respectively. The Internet Bank service, being quick, safe and more efficient way of realization of transactions in the domestic payment operations, showed permanent dynamic of increase. Thus, in 2013, the number of users of the Internet Bank increased for 19.6%, while the number of electronic payment orders of legal entities is increased for 26.6%, compared to As at , Komercijalna Banka AD Skopje opened total 45,623 denar accounts to legal entities, which, in terms of 2012, note an increase of 2.2%. Pursuant to the law regulations, and for the purpose of meeting the requirements of the Public Revenue Office, the Bank issued 113,288 certificates for the operation of legal entities. Furthermore, in the course of the period reported, the Bank was submitted 56,882 decisions for enforced collection by the competent authorities, Public Revenue Office, municipalities, MRTV and levying officers. The Bank offered additional services, such as: the Standing order service to legal entities, various types of insurance policies, quick money transfer through the service Western Union, visa pins, other types of services related to sale of documents for stakes in the opened investment funds, issuing reports on the turnover movements on the depositors accounts, as required by the Public Revenue Office, monthly keeping of accounts, issuing ID cards in accordance with the Procedures for identification of the authorized persons, activities related to filling in applications for registration of the clients - legal entities in accordance with the law regulations related to money laundering prevention, etc. 39

40 MARKET SHARE OF KOMERCIJALNA BANKA AD SKOPJE IN THE BANKING MARKET OF THE REPUBLIC OF MACEDONIA 4 Table No Total assets 23.5% 23.5% 2 Capital and reserves 22.4% 22.9% 3 Total deposits from non-financial sector 27.5% 27.6% 4 Total net-loans to non-financial sector 22.3% 23.8% 5 Total number of cards issued 16.0% 16.6% 6 Total number of merchants in the country acquiring bank cards issued by KB 39.8% 41.6% 7 Total number of POS and ATM acquiring cards 21.6% 23.6% 8 Total value of realised domestic payment operations 21.0% 21.5% 9 Total number of accounts opened to legal entities % 21.5% Total trading realized at the Macedonian Stock Exchange % 17.9% Total number of transactions realized at the Macedonian Stock Exchange % 17.0% 4 The Central Bank is the source of information; the exceptions are marked in the table. The data refer to the whole year cumulative. 5 Source - ERTS 6 Source - MSE 40

41 MARKETING ACTIVITIES In the course of 2013, marketing activities of the Bank were focused on improving the communication with target groups, advancing the distribution channels, emphasizing the advantages and benefits of the products and services offered by the Bank and attracting new clients. The realized marketing campaigns were comprised of brand campaigns and campaigns for improvement of sale of products and services of the Bank, mainly from the area of retail lending and credit and debit card operations. In order to reward the loyalty of users of the Bank s payment cards from the program of MasterCard, Maestro and Visa, in the course of 2013, the Bank realized three wining games, two of which were fully realized in 2013, and one winning game commenced in 2013 and ended on In order to keep its clients, shareholders and the public informed, the Bank regularly updated the information presented on the electronic media and the printed materials of the Bank. In the course of 2013, the Bank undertook activities to introduce a new system for promotional communication with clients through , in order to properly use this modern channel for direct marketing purposes, i.e. to send intent promotional messages to interested clients, informing, advising about services of the Bank etc. By introducing the method of direct and selected communication with clients, on one hand, it is expected to increase the value the clients receive from the Bank s products and services and to raise the level of their loyalty, and on the other hand to increase to overall efficiency of communication activities from the cost aspect. Throughout the past year, the Bank realized many marketing research projects the results of which were used in planning the future marketing activities of the Bank. The research projects were aimed to assess the factors influencing the usability of certain products offered by the Bank, the level the clients are being informed thereon and the way the information on the Bank s products and services reach them. Traditionally, the Bank supports selected projects from the culture, arts and sport areas which have positive effects on the community and on the image of the Bank, taking account of maximizing the relation of the investments and the effects obtained from all approved sponsorships. In cooperation with the Red Cross of Macedonia, the Bank supported the Project Better socialization of children and adolescents with special needs third year in a row, allowing the children and adolescents with special needs to develop the healthy spirit and creative capacity, inciting empathy and solidarity in citizens and institutions, 41

42 additional education and support to the families having persons with special needs, defining action plans for future activities etc. As a socially responsible company, the Bank financially supported the poorest categories of citizens and also donated funds to associations and citizens that urgently needed financial support. INFORMATION AND COMMUNICATION TECHNOLOGY In the course of 2013, the Bank performed huge infrastructural works because of movement of the Bank and the computer center to the two new locations and realized all the activities required to obtain formal approval from the Central Bank for operation of the Bank in the new premises, as follows: Complete construction of new system hall that meets the required standards for construction and operation of computer system halls (air conditioning, fire protection, continuous power supply on multiple levels, cabling, raised floor, drop ceiling, access control, allocation equipment in it, etc.) following the world standards (TIA-942); Purchase and installation of two modern and high-performance disk systems HP 3PAR N (in the primary computer center) and HP 3PAR 7200 (in the secondary computer center) as well as 10 new HP BL460cGen8 Blade servers placed in c7000 blade chassis, thus making significant qualitative improvement of the information and communication system, which guarantees better performances, top stability, decrease of unused hardware potentials, provided facility for future etc.; Establishment of a new virtual server environment (private cloud) realized with leading software in this area the company VMware. Servers for general purpose and data from all subsystems of the integrated information system of the Bank successfully were migrated within virtual server environment; Establishment of continuous replication of all servers from the primary computer center to the secondary computer center based on : - MS SQL SERVER Log shipping for replication of the main production databases; - Oracle DataGuard for replication of the base for payment card operations; - VMWare vsphere for replication of the production virtual machines needed to establish the critical functions in the secondary computer center; - Standby Continuous Replication for replication of the system for communication and successfully conducted regular annual testing of the plan for continuity in operation of the IT systems of the new infrastructure; Projecting and implementation of LAN network in the two new buildings, for connection of 700 work stations and 700 IP telephone devices; Purchase and implementation of new corporate systems for: video surveillance; access control and recording of working time; IP telephony from the CISCO brand and monitoring the functionality of ATMs and alerting in case of ATMs malfunction (Wincor Nixdorf ProView); 42

43 Completion of the following more important migrations: WAN connectivity for city-branches and branches; telecommunication links to MasterCard, VISA, SWIFT, MIPS/KIBS, Macedonian Stock Exchange and Casys; perimetrical firewalls and DMZ infrastructure; exchange infrastructure for ; servers at DMZ (web, DNS, Symantec Messaging Gateway, KIBS, MIPS) and main switches; Development of software solutions for: recording and administration of loans for social apartments and automatic recording of payments from the payment operations; introducing new loans to individuals with fixed interest rate in the first years of repayment, and in the rest period with variable interest rate; introduction of new types of payment cards (Debit MasterCard and MasterCard Platinum) which allows entry of applications, file generation, authorization, closure of entries, SMS notifications and look into statements through the Internet bank; recording and management of the properties foreclosed by the Bank; distribution of FAX and IVR for statement and balance of accounts in domestic payment operations and reports for delivered faxes in Reporting Services; submission of Applications for employment in the Bank through the Bank Web Portal; establishment of regional centers for distribution of cash; automatic retrieval of ratings of foreign banks from the Bloomberg system and uploading of rating tables in separately made editors in the core applications for the purposes of calculating capital adequacy and internal needs of the Division; automated uploading processing and closure of files with pensions for our clients from France; Development of editor for input of accounts with special conditions for calculation of fees and commission (decrease according to the type of order, PBO, time of entry of the order, code etc.). Parameterization and modification of procedures made for calculation of fees and commission in order processing and closure of date; Separate calculation of commission for Community of owners of residential buildings and reserved fund subaccounts by special tariff and conditions; Development of quick check system for pending transactions distributed among employees is developed within the Software application for foreign payment operations (MegaDevizno), in order to increase efficiency, reduce errors and unnecessary down time. The system replaces multiple checks, menu by menu, transaction by transaction, if the employee has assigned orders for work. It covers work with swift messages, coverage, visas, letters etc. Making adjustments to the Internet bank s web site according to the needs of people with completely impaired vision and recommendations of W3C for those persons; Made amendments to the existing application solutions for proper implementation of the new Decision of the Central Bank for credit risk management which reflects in the modules for calculation of provisioning returning the due liabilities not older than 30 days from non-performing to performing status, solution for recording quality criteria and general indicators for clients, new matrix of impairment percentages and new ranges for days of delay in risk category. 43

44 Within the Business Intelligence Solution in the Bank as well as software solutions supporting the work of Risk Management and Planning Department, several new reports are developed and existing reports are modified in accordance to the changes at legislation or in order to improve the functionality. HUMAN RESOURCES As a modern, independent and market oriented company, Komercijalna Banka AD Skopje pays great attention to its human resources, treating them as one of the most important factors in determining the competitiveness of any company. By investing in its human resources and highlighting their role, the Bank has realized positive impact on the financial performances. The Human Resources Policy of the Bank encompasses planning, selection and employment of new personnel, their introduction to and adjustment to the operative processes, motivation, awarding, assessment of the performances, permanent professional education and training, improvement, allowing personal development and career development, promotion of personnel etc. As at , the total number of the Bank s employees is 1,188. The Bank s personnel qualification structure, as analyzed in the course of the previous years, notes increase of participation of university graduated personnel. The process of permanent education of the Bank s employees includes continuous meeting the needs of respective training and organization thereof. The Bank organizes internal and external trainings as well as attendance of seminars, conferences and courses in the country and abroad. In 2013, the Bank sent 164 employees to get professional training. Internal training in the domain of computer, communication, and organizational skills was visited by 168 employees, and about 200 employees attended internal training in the domain of current operations, domestic payment operations and in the domain of retail banking. Two employees from the International Division received scholarships for specialized EBRD Program and they are among top 25 out of 500 students from 130 banks from 24 countries. In 2013, 394 students from faculties in the country realized internship in respective organizational units in Komercijalna Banka AD Skopje. The following of the law regulations and news in the banking operation, new achievements in the domain of business, economy, banking, is realized by providing professional magazines, publications and literature available to all employees at the Bank s library. 44

45 CORPORATE SOCIAL RESPONSIBILITY In the course of 2013, and through its Coordinative Corporate Social Responsibility Body, Komercijalna Banka AD Skopje continued its activities for investing in the community and managed to increase the awareness for the corporate social responsibility by realizing actual projects, encouraging the internal processes for social responsibility practices and permanent education and engagement of the employees in voluntary activities of the Bank. In terms of corporate social responsibility activities of Komercijalna Banka the most significant for 2013 was the delivery of the first Communication on Progress Report, which made the Bank become an equal member of the United Nations Global Compact. MONITORING THE MARKET NEEDS The monitoring of the market needs in 2013 was focused on the needs of the clients and the stakeholders for qualitative services and new products. The focus of the Bank s activities in this sphere was the education of the clients for the use of Bank s products, monitoring the clients satisfaction from the products and services and being open for information. HUMAN RESOURCES AS TOP PRIORITY The care for the employees was focused on further education and professional training of the staff in order to achieve high level of expertise and integrity, simultaneously paying attention to the security, adherence to the internal policies and codes by the employees, motivation, etc. CORPORATE VOLUNTEERING In the course of the reported period, corporate volunteering was recognized by the sense for the social and economic problems in the community and the contribution in the process of education of the youth. While paying attention to the social and economic circumstances in the community, as well as having in mind the need for social integration of certain groups in the society and the struggle against the poverty, the Bank s management and employees organized different activities, donations and sponsorships at local and national level, in cooperation with the non-government organizations and local institutions. In this context, the Bank realized several projects and donations, such as the Project Women for Women under which the Bank concluded an agreement for cooperation with Macedonian Platform Against Poverty, the Project Hope in cooperation with the Centre for sheltering and education of homeless children from Shuto Orizari suburb by organizing joined activities and donating clothing and toys for the children, continuation 45

46 of the cooperation with the Red Cross of the Republic of Macedonia on the Project Better socialization of children and youth with special needs. Also, along with the City of Skopje and the Switzerland Agency for Development and Cooperation realized cooperation with the Non-government organization Hera for opening the new center for family violence and actively supported the center for disabled persons Message by donating kitchen appliances. Especially important activity, both for the Bank and for the society was realization of the project for providing easier access and use of bank services and products for persons with total vision impairment. It was the first step towards adjustment of the internet banking to the needs of the blind, as well as facilitation of the regulation for operation with transaction accounts, which was for the first time realized by a bank in the Republic of Macedonia. At local level, the Bank s branches in Prilep, Veles, Kumanovo and Gostivar continued their cooperation with the Nongovernment organizations, the Regional Centre for people with intellectual disorder Our message from Kumanovo, the Gostivar Office of the Red Cross of the Republic of Macedonia and the Centre for children with special needs Rainbow from Prilep, for which the branches were awarded Certificates of Gratitude and Certificates of Appreciation, respectively. ETHICAL MANAGEMENT - EDUCATION In the course of the year, the ethical management was focused on cooperation with qualitative business partners that share social responsibility practice, as well as on the improvement of the structure and confidence of the clients, which, as part of the objectives of the Coordinative Body for corporate social responsibility, were realized through education and cooperation with the higher education institutions and primary and secondary schools, as well. The team work and permanent internal training courses intended for raising the awareness and responsibility of the employees for the social problems, both in the process of operation and through the donation actions, contributed to the successful realization of the operative plans and the activities related to the social responsibility. In 2013, at the banking fair Bankexpo, the Bank awarded its best tellers. Traditionally, on the occasion of 31 October - World Savings Day, Komercijalna Banka awarded jubilee awards to its employees with 15 and 30 years uninterrupted working experience with the Bank. 46

47 ENVIRONMENTAL PROTECTION The environmental protection is incorporated in the Credit Policy of the Bank, on the basis of which the Bank defines the level of the environmental risk. Komercijalna Banka has cooperation with organizations which, through their activities, take care for the healthy environment and meet the European and world s standards for environmental protection when purchasing products and services. In the following period, the Bank will continue to undertake activities aimed towards improvement of the quality of life in the society by sharing the values and beliefs in better future with all its clients, employees and all stakeholders, and in compliance with the aims and objectives and priorities defined in the Corporate Social Responsibility Strategy As a result of the active and long lasting social responsibility commitment, Komercijalna Banka is a leader in the banking sector of the Republic of Macedonia. It is confirmed by the awards received in the course of the previous years, such as: awards for Integrated approach to the social responsibility for large enterprises from the Centre for Institutional Development - CIRA, for three years in a row (2009, 2010 and 2011), award from the National Coordinative Social Responsibility Body for 2009, in the category - large enterprises, three awards from the Transparency - Zero Corruption, as well as many certificates of recognition and appreciation from the institutions being sponsored and donated. 47

48 48 FINANCIAL STATEMENTS

49 UNCONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31,

50 50 INDEPENDENT AUDITORS' REPORT

51 51

52 52

53 53

54 AUDITED UNCONSOLIDATED FINANCIAL STATEMENTS OF THE BANK 54

55 STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME Year Ended () Notes Interest income 4,262,693 4,404,151 Interest expense (1,296,659) (1,515,950) Net interest income 6 2,966,034 2,888,201 Fee and commission income 1,058,748 1,064,680 Fee and commission expense (166,457) (164,777) Net fee and commission income 7 892, ,903 Dividend income 5,644 7,007 Foreign exchange gains, net 70,678 68,490 Net gains on financial instruments classified as held for trading 8 34,128 5,593 Other operating income 9 178, ,471 Personnel expenses 10 (918,057) (829,895) Depreciation and amortization 22,23,24 (172,718) (178,971) Other operating expenses 11 (1,199,336) (992,636) Net impairment loss on financial assets 12 (1,804,424) (1,953,625) Operating profit 52, ,538 Share of profit of associates accounted for using the equity method 35,910 23,377 Profit before tax 88, ,915 Income tax expense 13 (9,740) (5,824) Profit for the year 78, ,091 Other comprehensive income Items that are or may be reclassified to profit and loss Revaluation reserve upon assets foreclosure 3,534 - Reclassified to profit and loss (3,534) - Other comprehensive income, net of tax - - Total comprehensive income 78, ,091 Earnings per share 14 Basic (in Denars) Diluted (in Denars) The accompanying notes are an integral part of these financial statements. 55

56 56

57 STATEMENT OF CHANGES IN EQUITY Year ended () Share capital Share premium Revaluation reserve Reserves Retained earnings Total equity Balance, January 1, ,279, ,527-5,389,657 1,085,834 9,526,085 Total comprehensive income Profit for the year 562, ,091 Total comprehensive income for the year , ,091 Transactions with owners, recognized directly in equity Dividends relating to (455,813) (455,813) Transfer to statutory reserve ,121 (590,121) - Tax on dividends paid (39,900) (39,900) Total contributions by and distributions to owners ,121 (1,085,834) (495,713) Balance, December 31, ,279, ,527-5,979, ,091 9,592,463 Balance, January 1, ,279, ,527-5,979, ,091 9,592,463 Total comprehensive income Profit for the year 78,863 78,863 Other comprehensive income Revaluation reserve on date of assets foreclosure upon nonperforming loans - - 3, ,534 Net amount reclassified to profit and loss - - (3,534) - - (3,534) Total comprehensive income for the year ,863 78,863 Transactions with owners, recognized directly in equity Dividends relating to (227,906) (227,906) Transfer to statutory reserve ,303 (314,303) - Tax on dividends paid (19,882) (19,882) Total contributions by and distributions to owners ,303 (562,091) (247,788) Balance, 2,279, ,527-6,294,081 78,863 9,423,538 The accompanying notes are an integral part of these financial statements. 57

58 STATEMENT OF CASH FLOWS Year ended () Notes Profit before tax 88, ,915 Adjustments for: Depreciation of property and equipment and amortization of intangible assets 22,24 171, ,875 Gain on sale of property and equipment 9 (9,767) (356,842) Gain on sale of assets acquired through foreclosure procedure 9 (3,481) (44,761) Loss on sale of assets acquired through foreclosure procedure 11-7,285 Impairment losses on assets acquired through foreclosure procedure , ,857 Depreciation of investment property Impairment losses 12 1,804,424 1,953,625 Dividend income (5,644) (7,007) Interest income 6 (4,262,693) (4,404,151) Interest expense 6 1,296,659 1,515,950 Net trading income (34,128) (5,593) Share of profit from associates accounted for using the equity method (35,910) (23,377) Interest received 4,283,123 4,376,374 Interest paid (1,302,402) (1,522,254) Income tax paid (26,562) (42,126) Operating profit before changes in operating assets and liabilities: 2,354,261 2,388,607 Restricted accounts (1,592) (11,924) Mandatory reserves in foreign currency with NBRM (267,439) 49,415 Financial assets at fair value through profit and loss 3 (20,542) Loans and advances to banks 83, ,722 Loans and advances to customers (1,416,122) (3,151,419) Collected collateral 88,186 (802,355) Other assets 226,448 (41,866) Deposits from banks and other financial institutions 592,879 (16,673) Amounts owed to other depositors 3,445,326 2,285,500 Other liabilities (148,246) 104,411 Net cash from operating activities 4,956,718 1,093,876 Cash flows from investing activities Acquisition of property and equipment (1,349,855) (187,184) Acquisition of intangible assets (9,553) (14,201) Proceeds from sale of property and equipment 12,939 4,898 Acquisition of investments securities (10,592,183) (791,071) Proceeds from sale of investment securities 5,757, ,822 Dividends received 11,068 7,007 Net cash flows (used in) investing activities (6,169,614) (184,729) Cash flows from financing activities Proceeds from borrowed funds 4,986,159 13,012,688 Repayments of borrowed funds (4,645,034) (12,842,091) Dividends paid (227,906) (455,813) Net cash generated from/(used in) financing activities 113,219 (285,216) The accompanying notes are an integral part of these financial statements. 58

59 STATEMENT OF CASH FLOWS (Continued) Year ended () Notes Net change of cash and cash equivalents Cash and cash equivalents at beginning of year 26,449,595 25,825,664 Net (decrease)/increase in cash and cash equivalents (1,099,677) 623,931 Cash and cash equivalents at the end of the year 15 25,349,918 26,449,595 The accompanying notes are an integral part of these financial statements. 59

60 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 1. General Information Komercijalna Banka AD - Skopje (hereinafter the Bank ), is a shareholding company having its registered office in the Republic of Macedonia. The head office of the Bank was relocated during 2013 from Kej Dimitar Vlahov 4, 1000 Skopje to Orce Nikolov str. No. 3, 1000 Skopje. The Bank operates in the Republic of Macedonia with a network of branch and sub-branches The Bank is registered as a universal type of commercial bank in accordance with the Macedonian laws. The principal activities of the Bank are as follows: - Collecting deposits and other recurrent sources of funds; - Placing loans and advances in the country and abroad, including factoring and financing commercial transactions; - Issuance and administration of payment instruments (cards, cheque, bills of exchange); - Foreign exchange operations; - Domestic and international payment operations, including purchase/sale of foreign currency funds; - Fast money transfer; - Issuing payment guarantees, backing guarantees and other forms of security; - Providing services of renting safe deposit boxes, depositories and depot; - Trading with foreign currencies; - Trading in securities; - Rendering services to custody bank; - Intermediating in selling insurance policies; - Data collection and analysis of companies credit rating; - Sale of shares in investment funds; - Other financial services defined by law, which are within the scope of activities only by a bank. The shares of the Bank are listed on the Macedonian Stock Exchange official market in the segment of super- listing of joint stock companies with special reporting requirements, and is one of the ten companies comprising the Macedonian Stock Exchange index MBI-10. The ID quotation code is the following: Code KMB (common share) ISIN code MKKMBS In 2013, the Bank acquired majority of the voting rights in KB Publicum, thus, changing the status of KB Publicum from associate to subsidiary. KB Publicum is licensed to set up and manage open and closed ended investment funds as approved by the Securities and Exchange Commission. It manages three open-end investment funds, KB Publikum-Balanced, KB Publikum-Bonds and KB Publikum-Cash. These funds are not legal entities and do not perform specific activities The financial statements of the Bank for the year ended 31 December 2013 were authorised for issue by the Supervisory Board on 27 February

61 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Financial Statements (a) (b) (c) (d) (e) Statement on Compliance The financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board ( IASB ). Basis of Measurement The financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss are measured at fair value; available-for-sale financial assets are measured at fair value. These financial statements represent unconsolidated financial statements of the Bank. As the Bank has investment in a subsidiary, it also prepares consolidated financial statements. Functional and Presentation Currency The presented financial statements are expressed in thousands of Denars. The Denar represents the functional and presentation currency of the Bank. Use of Estimates and Judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not available from other sources. Actual results in subsequent periods may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Information about significant areas of estimation uncertainty and critical estimates in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in Note 3.19 to the financial statements. A summary of the principal accounting policies applied in preparing the IFRS financial statements are set out within Note 3 to the financial statements. The accounting policies set out below have been applied consistently for all periods presented in these financial statements, except for the changes described in Note 2.(e) to the financial statements. Changes in accounting policies Except for the changes below, the Bank has consistently applied the accounting policies as set out in Note 3 to all periods presented in these financial statements. The Bank has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January IFRS 10 Consolidated Financial Statements (2011). IFRS 12 Disclosure of Interests in Other Entities. IFRS 13 Fair Value Measurement. Disclosures Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). Presentation of Items of Other Comprehensive Income (Amendments to IAS 1). IAS 19 Employee Benefits (2011). The nature and the effects of the changes are explained below. 61

62 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Financial Statements (Continued) (e) (f) Changes in accounting policies (Continued) Subsidiaries As a result of IFRS 10 (2011), the Bank has changed its accounting policy for determining whether it has control over and consequently whether it consolidates other entities. IFRS 10 (2011) introduces a new control model that focuses on whether the Bank has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. In accordance with the transitional provisions of IFRS 10 (2011), the Bank reassessed its control conclusions as of 1 January No changes in the consolidation conclusions were made. Interests in other entities As a result of IFRS 12, the Bank has expanded disclosures about its interests in equity-accounted investees (see Note 22). Fair value measurement In accordance with the transitional provisions of IFRS 13, the Bank has applied the new definition of fair value, as set out in Note 3.8, prospectively. The change had no significant impact on the measurements of the Bank s assets and liabilities, but the Bank has included new disclosures in the financial statements, which are required under IFRS 13. These new disclosure requirements are not included in the comparative information. However, to the extent that disclosures were required by other standards before the effective date of IFRS 13, the Bank has provided the relevant comparative disclosures under those standards Offsetting financial assets and financial liabilities The amendments to IFRS 7 related to offsetting of financial assets and financial liabilities did not have a significant impact on the financial statements of the Bank. Presentation of items of OCI The amendments to IAS 1, required the Bank to modify the presentation of items of OCI in its statement of profit or loss and OCI, to present items that would be reclassified to profit or loss in the future separately from those that would never be. Comparative information should have been re-presented on the same basis. IAS 19 Employee Benefits Changes in IAS 19 do not have a significant impact on the financial statements of the Bank. Changes in accounting estimates During 2013, the Bank changed its estimates related to the allowance for impairment of loans. Thus, the Bank has started to calculate allowances for impairment of loans on individual bases only, and slight adjustments to the internal rating system as a result of more reliable historical information have been made. The changes are applied prospectively, and the effect in the current period is additional impairment losses of 61,177 thousands of denars. Estimating the effect in future periods is impracticable. 62

63 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Financial Statements (Continued) (g) New Standards and Interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2013, and have not been applied in preparing these financial statements. Those that may be relevant to the Bank are set out below. The Bank does not plan to adopt these standards early. (i) IFRS 9 Financial Instruments (2013), IFRS 9 Financial Instruments (2010) and IFRS 9 Financial Instruments (2009) (together, IFRS 9) IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions relating to financial liabilities. IFRS 9 (2013) introduces new requirements for hedge accounting. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets. The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables. For an investment in an equity instrument that is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual shareby-share basis, to present all fair value changes from the investment in OCI. No amount in OCI would ever be reclassified to profit or loss at a later date. However, dividends on such investments would be recognised in profit or loss, rather than OCI, unless they clearly represent a partial recovery of the cost of the investment. Investments in equity instruments in respect of which an entity does not elect to present fair value changes in OCI would be measured at fair value with changes in fair value recognised in profit or loss. The standard requires derivatives embedded in contracts with a host that is a financial asset in the scope of the standard not to be separated; instead, the hybrid financial instrument is assessed in its entirety for whether it should be measured at amortised cost or fair value. IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability s credit risk in OCI rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39. IFRS 9 (2013) introduces new requirements for hedge accounting that align hedge accounting more closely with risk management. The requirements also establish a more principles-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. The mandatory effective date of IFRS 9 is not specified but will be determined when the outstanding phases are finalised. However, application of IFRS 9 is permitted. The Bank has started the process of evaluating the potential effect of this standard but is awaiting finalisation of the limited amendments before the evaluation can be completed. Given the nature of the Bank s operations, this standard is expected to have a pervasive impact on the Bank s financial statements. (ii) Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) The amendments to IAS 32 clarify the offsetting criteria in IAS 32 by explaining when an entity currently has a legally enforceable right to set-off and when gross settlement is equivalent to net settlement. The amendments are effective for annual periods beginning on or after 1 January 2014 and interim periods within those annual periods. Early application is permitted. The Bank is still evaluating the potential effect of the adoption of the amendments to IAS

64 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies 3.1 Interest Income and Expense Interest income and expense are recognized in profit or loss for all interest bearing instruments on accrual basis, measured at amortized cost using the effective interest rate method. The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability and allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the 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 commissions 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. 3.2 Fee and Commission Income Fees and commissions, except loan origination fees, are generally recognized on an accrual basis over the period of service rendering. Other fees relating to the acquisition and origination of loans are deferred over the life of the loan and amortized using the effective interest rate method. 3.3 Dividend Income Dividend income is recognized when the right to receive payment is established for all shareholders who participate in distribution of profit. 3.4 Foreign currency Transactions Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia ( NBRM ) at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into Denars at the end of the reporting period using official rates of exchange ruling on that date. Foreign exchange gains or losses arising upon the translation of transactions, and the translation of assets and liabilities denominated in foreign currencies are recognized in the profit or loss in the period in which they occurred. Commitments and contingent liabilities denominated in foreign currencies are translated into Denars by applying the official exchange rates at the end of the reporting period. 3.5 Financial Assets Financial assets are classified into the following specified categories: cash and cash equivalents, financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets, loans and receivables. The classification depends on the nature and the purposes of the financial assets and is determined at initial recognition. Financial assets are recognized and derecognized on settlement date, which represents the date when the asset is delivered to/from the Bank Cash and Cash Equivalents Cash and cash equivalents include cash on hand and nostro accounts, that represent demand deposits and placements with other banks and financial institutions, account balances with the NBRM and other financial assets such as treasury and other government bills, as highly liquid assets with maturity up to three months and insignificant changes to fair value. 64

65 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.5 Financial Assets (Continued) Financial Assets at Fair Value through Profit or Loss Financial assets at fair value through profit or loss include held-for-trading financial assets. Held-fortrading financial assets are securities included in a portfolio in which a pattern of short-term profit making exists. Initially, these securities are recognized at cost and subsequently measured at fair value as determined based on their market price. All the respective realized and unrealized gains and losses are included in profit or loss for the period. Interest, if realized, during the period of ownership of these securities, is recognized as net trading income in the profit or loss for the period. The purchase and disposal of securities held-for-trading is recognized at settlement date, which represents the date when the asset is delivered to the Bank. When the settlement date and the trade date are different, then the Bank recognizes the changes in fair value from the trade date to the settlement date through profit and loss Available-for-sale Financial Assets Available-for-sale financial assets 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. This portfolio comprises quoted and unquoted equity investments in shares of banks and other financial institutions and enterprises, where the Bank does not exercise control. Available-for-sale financial assets are initially recognized at cost, including all transaction costs, and subsequently re-measured at fair value based on quoted prices in active markets or amounts derived from cash flow models for unquoted equity investments. Transaction costs represent the costs that are directly attributable to acquisition of the financial asset. Unrealized gains and losses arising on changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously accumulated in the other comprehensive income should be recognized in profit or loss for the period. Interest calculated using the effective interest method and impairment losses are recognized in the profit or loss for the period Held-to-maturity Financial Assets Held-to-maturity financial assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity. If the Bank is to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available-for-sale and the Bank will not be able to classify financial assets held-to-maturity for the current and next two years. These financial assets are measured at amortized cost using the effective interest rate method Loans and receivables Loans and receivables include loans where cash is provided directly to the customer. Loans are initially recognized at fair value, including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Interest on loans originated by the Bank is included in interest income. Loans to customers and financial institutions are stated at their net amount reduced by allowance for impairment and uncollectibility Impairment of Financial Assets The Bank assesses at end of each reporting period whether there is objective evidence that a financial asset 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. 65

66 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.5 Financial Assets (Continued) Impairment of Financial Assets (Continued) 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 recognized in profit or loss is removed from other comprehensive income and recognized in the profit or 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 recognized in profit or loss, the impairment loss is reversed through the profit or loss for the period. However any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. The amount of the impairment loss for financial assets carried at amortized cost is calculated as the difference between the asset s carrying amount and the present value of expected future cash flows discounted at the financial instrument s original effective interest rate Impairment Losses on Loans and Receivables Allowances for impairment and uncollectibility are determined if there is objective evidence that the Bank cannot collect all amounts due on a claim according to the original contractual terms. A claim means a loan, a commitment such as a letter of credit, guarantee or commitment to extend the credit. A provision for loan impairment is reported as a reduction of the carrying amount of the loan, whereas for offbalance sheet items are presented within the provisions. Additions to provisions are made through impairment losses on financial assets in the profit or loss. The allowances for impairment and uncollectibility are determined on the basis of the degree (size) of the risk of uncollectibility or specific country risk on the basis of the following principles: - Separate loan exposures (risks) are assessed on the basis of the type of loan applicant, his/her/its overall financial position, resources and payment records and recoverable value of collaterals. Allowances for losses on impairment and uncollectibility are measured and determined for the difference between the carrying amount of the loan and its estimated recoverable amount, which is, in fact, the present value of expected cash flows; - All allowances for losses on impairment and uncollectibility are reviewed monthly, and any further changes in the amount and timing of expected future cash flows in comparison to previous assessments result in changes in allowances for losses on impairment and uncollectibility recorded in profit or loss; - Any loan, which is considered impossible to be collected, is written off against the relevant allowance for losses on impairment. Further collections are recorded in the profit or loss; - In case of loans granted to borrowers in countries with increased risk of difficulties for servicing external debt, the political and economic circumstances are assessed and additional allowances for sovereign risk are allocated Derecognition of Financial Assets The Bank derecognizes financial assets when the right to receive cash from the financial asset has expired or has transferred its rights to receive cash flows from the asset and substantially all the risks and rewards of ownership of the assets to another entity 3.6 Financial Liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangement. Financial liabilities are classified as deposits from banks, financial institutions and customers, loans payable, other payables and derivative financial instruments. 66

67 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies (Continued) 3.6 Financial Liabilities (Continued) Deposits from Banks and Other Financial Institutions and Customers These financial liabilities are initially recognized at fair value, net of transaction costs incurred. Subsequently they are measured at amortized cost Borrowings Borrowings payable are initially recognized at fair value net of transaction costs incurred. Subsequent measurement is at amortized cost and any difference between net proceeds and the redemption value is recognized in profit or loss over the period of the loan using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability Other Payables Other payables are stated at amortised cost Derecognition of Financial Liabilities The Bank derecognizes financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or have expired. 3.7 Fair value measurement Policy applicable from 1 January 2013 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. 67

68 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.7 Fair value measurement (Continued) The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Policy applicable before 1 January 2013 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, then the Bank establishes fair value using a valuation technique. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price i.e. the fair value of the consideration given or received. However, in some cases the initial estimate of fair value of a financial instrument on initial recognition may be different from its transaction price. If this estimated fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in profit or loss on initial recognition of the instrument. In other cases, the fair value at initial recognition is considered to be the transaction price and the difference is not recognised in profit or loss immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable. If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets at a bid price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. 3.8 Investments in Associates and Subsidiaries An associate is an entity, over which the Bank has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. If the Bank holds, directly or indirectly, 20 per cent or more of the voting power of the investee, it is presumed that the Bank has significant influence. A substantial or majority ownership by another investor does not necessarily preclude the Bank from having significant influence. Investments in an associate are measured using the equity method, by which the investment is initially recognized at cost. Subsequent to the initial measurement, carrying amount is increased or decreased to recognize the Bank s share of the profit or loss of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment. Subsidiaries are investees controlled by the Bank. The Bank controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are recorded in these unconsolidated financial statements at cost. 3.9 Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation and accumulated impairment losses. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditures are recognized in the profit or loss as an expense as incurred. 68

69 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.9 Property and Equipment (Continued) When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Depreciation is charged at estimated rates so as to write off the cost of assets over their estimated useful lives, using the straight-line method. Land is not depreciated. No depreciation is charged on construction in progress until the constructed assets are put into use. The useful life of certain categories of property and equipment are as follows: Buildings Furniture and equipment 40 years 4-20 years The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the profit and loss. The Bank annually reviews its property and equipment for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount Intangible Assets Intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets include computer software and software that was acquired apart from hardware. Software is amortized on a straight-line basis over the estimated useful life, which is five years. The Bank annually reviews its intangible assets and assess whether there is any indication for impairment. If such indications exist, an estimate is performed to assess whether the carrying amount is recoverable. If the carrying amount exceeds the recoverable amount, it is written down to the recoverable amount Impairment of non-financial assets The management of the Bank regularly reviews the carrying amounts of the Bank s non-financial assets. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is written down to its recoverable amount. An impairment loss is recognized as an expense of the current period. If the recoverable amount of an asset is increased due to change in the indications and factors of impairment at the moment the last impairment loss is recognized, the carrying amount of the asset is increased to its current recoverable amount. A reversal of an impairment loss is recognized as income immediately Investment property Investment property includes buildings owned by the Bank with the intention of earning rentals or for capital appreciation or both, and is initially recorded at cost, which includes transaction costs. The classification of the investment property is based on the criteria that the property is mostly held to earn rentals when compared to the property used by the Bank for its own needs. Subsequent to initial recognition, investment property is measured at cost less accumulated depreciation and any accumulated impairment losses. The depreciation of investment property is calculated on a straight-line basis in a way to write off the cost value of assets over their estimated useful lives, which approximates the useful life of similar assets included in property and equipment. Investment property is annually reviewed for impairment. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense of the current period. 69

70 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.13 Assets Acquired Through Foreclosure Proceedings Foreclosed assets include property and equipment acquired through foreclosure proceedings in full or partial recovery of a related loan and is disclosed in assets acquired through foreclosure proceedings. These assets are initially measured at the lower of the appraised value, less estimated cost to sell, charged to the Bank, and the cost of the foreclosed asset. The appraised value is determined by local certified appraiser on the date of foreclosure. The cost is the value stated in an enactment passed by a competent body from where the legal grounds for acquiring the right of ownership arises. After initial recognition, foreclosed assets are reviewed for impairment at least annually and are measured at the lower of their carrying amount and fair value less estimated costs to sell and accumulated impairments, or at least 20% of the net value Assets from fiduciary activities The Bank provides trustee and other fiduciary services in the name and on behalf of legal entities citizens, investment and pension funds and other institutions. Whereby the Bank holds and places assets or received in various financial instruments at the direction of the customer. The Bank receives fee income for providing these services. Managed funds are not assets of the Bank and are not recognized in the financial statements. The Bank is not exposed to any credit risk relating to such placements, as it does not guarantee them Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows Employment benefits Health, pension and social insurance contributions from gross wages and salaries are being paid by the Bank during the year to the national organizations at the statutory rates. Such contributions represent defined contribution benefit plans and are recognized as an expense when employees have rendered services entitling them to the contributions. There is no additional liability to these plans. The Bank is obliged to pay to its employees a termination lump sum upon retirement equal to two monthly average salaries paid in the Republic of Macedonia. The Bank records provisions for retirement to allocate such costs by periods to which they relate. In accordance with IAS 19, these benefits are considered defined pension benefit plans. The carrying amount of the Bank s liabilities arising from employee benefits is calculated at the end of the reporting period. The balance of these liabilities at the end of the reporting period presents the discounted amount of future payments Taxation Income tax expense comprises of current tax and is recognised in profit or loss. According to the tax legislation, entities are obliged to calculate and pay income tax on non-deductible expenses and on paid dividends and other distributions from profit. Income tax rate is 10% (2012: 10%). Tax on non deductable items Basis for calculation of income tax is the amount of non-deductible expenses determined in accordance with the Income Tax Law, reduced by the amount of tax credit. 70

71 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.17 Taxation (Continued) Tax on dividend distribution and other distributions Basis for calculation of income tax on paid dividends is the amount of paid dividends and other distributions from profit made during the current year. Taxation on dividends, i.e. dividends advances paid in cash, is incurred at the moment of payment of dividend Leases Assets leased out under operating lease are included in the statement of financial position as investment property. The Bank leases assets as operating leases. Rental income and expenses is recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease Critical Accounting Judgments and Estimates The most significant areas, for which judgments, estimates and assumptions are required, are: Fair Value of Financial Instruments The fair values of the financial instruments that are not quoted in active markets are determined using internal valuation techniques. These include present value methods, models based on observable input parameters. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed by qualified personnel independent of the area that created the model. Wherever possible, the Bank compares valuations derived from models with quoted prices of similar instruments, and with actual values when realized, in order to further validate and standardize models. A variety of factors are incorporated into the models, including actual or estimated market prices and rates, such as time value and volatility, and market conditions and liquidity. The Bank applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. In the Republic of Macedonia sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. The Management assesses its overall risk exposure and in instances in which it estimates that the value in the books may not be realized, it recognizes a provision. In the opinion of management, the reported carrying amounts for the assets that are not quoted in an active market represent the most valid and useful reporting values under the present market conditions. Allowance for Impairment of Loans The Bank reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the profit and loss, the Bank makes judgments 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 of borrowers in the Bank, or national or local economic conditions that correlate with defaults on assets in the Bank. 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. Useful Lives of Tangible and Intangible Assets The Bank s management determines estimated useful lives and related depreciation and amortization charges for its tangible and intangible assets. The appropriateness of the estimated useful lives is reviewed whenever there is an indication of significant changes in the underlying assumptions, such as anticipated technological developments and changes in the broad economic and industry factors. 71

72 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT The Bank s activities expose it to a variety of financial risks and those activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is a core business activity and the operational risks are an inevitable consequence of being in business. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The most important types of risks identified, evaluated and mitigated by the Bank s risk management policies are credit risk, liquidity risk, market risk and operational risk. Risk Management Framework The Bank has established a Strategy for risk management, adopted by the Supervisory Board of the Bank that is revised regularly. The Strategy defines the main objectives and general directions in undertaking and managing risks, general approach to the risk management, general approach to the internal determining and assessment of the Bank's necessary capital adequacy, general review of the business strategy of the bank, as well as the possible changes in the bank's business strategy and acceptable level of risk the bank can be exposed to during its operations. The Bank s Shareholders Assembly appoints the members of the Supervisory Board and the Audit Committee. The Supervisory Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. The Supervisory Board has established the Board of Directors, Credit Committee and Risk Management Committee These bodies are responsible for monitoring and developing risk management policies in specific areas. The Bank has established an organizational structure, with clearly defined competences and responsibilities. The Risk Management and Planning Division is responsible for monitoring and reporting of global risk exposure, while the organizational units of the Bank, which create risk exposure are responsible for practical application of risk management. Independent Internal Audit Department is responsible for independent review of risk management. According to the Bank s risk management policies which includes set of appropriate risk limits and controls, identifying, monitoring and risk s analysis are made on regular basis. 4.1 Credit Risk A The Bank is exposed to credit risk, which represents the risk of financial loss due to customer s default on their contractual obligations. Credit risk is the most important risk for the Bank s operations; therefore, the management carefully manages the Bank s exposure to credit risk. The exposure to this risk arises principally from lending activities and advances, as well as activities related to off-balance sheet financial instruments, such as loan commitments to enterprises and households, guarantees and letters of credit. Taking into consideration the events arising from the global financial crisis, the Bank applies more restrictive credit policy higher precautions in assessing the creditworthiness of each customer and projects subject to financing. In line with the current circumstances, the Bank tries to maintain a high quality loan portfolio, which is closely monitored, with tightening of the credit collection activities. Credit Risk Management The Bank has an established organizational structure, with clearly defined competences and responsibilities of the Supervisory Board and the Board of Directors regarding credit risk management. The organization of the credit risk management is established on the following levels of hierarchy: - Strategic level - the risk management function is performed by the members of Supervisory Board and the Board of Directors; Risk Management Committee and Audit Committee; - Macro level - the risk management function at the level of business unit, or business line is performed by other persons with special rights and responsibilities performing managing function and/or by special organizational unit responsible for monitoring the credit risk management. Credit risk management at the level of business unit in the Bank includes each Division where the credit risk is undertaken and the persons with special rights and responsibilities that performs the management function in the Division. The duties of these organizational units in the Bank are regulated in the appropriate Policies adopted from the Bank s Supervisory Board. Special organizational unit in the Bank competent for credit risk management is Risk Management and Planning Division Credit Risk Management Department. 72

73 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) A B (a) Credit Risk Management (Continued) All credit exposures exceeding 10% of the Bank s own funds up to the legally determined limit of exposure towards a single client (up to 25% of regulatory capital) are subject to approval by the Supervisory Board. The Credit Committee oversees the overall credit operation of the Bank. Also, the Credit Committee is mainly responsible for approving and proposing to the Risk Management Committee and Board of Directors, all policies, procedures and amendments thereto relating to the extension of credit, to ensure that these policies are applied consistently and complied with throughout the Bank, to approve credit exposure between 3% and 10% from own funds. Board of directors, Corporate Lending Division Manager and Department Managers of the Bank are authorized for approving credit exposures up to 3% of the Bank's own funds. Credit Risk Assessment Loans and Advances In assessing credit risk of loans and advances to customers and to banks at a counterparty level, the Bank uses three components: (I) the probability of default by the client or counterparty on its contractual obligation (expected cash flows); (II) the likely recovery ratio on the defaulted obligations, the loss given default ; (III) the amount and quality of the collateral for the exposure. These credit risk measurements, which reflect expected loss, i.e. the expected loss model and are required by the Basel Committee on Banking Regulations and the Supervisory Practices (the Basel Committee), are embedded in the Bank s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the end of the reporting period (the incurred loss model ) rather than expected losses (Note 4.1.D). (i) The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the Bank are segmented in four rating classes. The Bank s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principal, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their predictive power with regard to default events. Bank s internal rating scale Bank s rating A B C D+E Description of the grade Pass/acceptable for financing Watch (careful) Sub-standard Suspicious (doubtful)+loss 73

74 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) B (a) Credit Risk Assessment (Continued) Loans and Advances (Continued) Bank s rating grade A (pass/acceptable for financing) includes: Claims on the European Central Bank and the central governments and central banks of countries whose claims pursuant to the methodology for determining the capital adequacy have a risk weight of 0%. Part of credit exposure that is secured by first-rate collateral instruments, if the instrument is activated within 60 days of the date of maturity of the exposure; Financial position and cash flows of the client allows its further operation and opportunity to cover the current and future liabilities to the bank; Liabilities based on credit exposure are settled within the maturity period or with a delay of 31 days, or In the last twelve months, no claim on the client has been restructured. Bank s rating grade B (Watch (careful)) includes: The client shows financial weaknesses, but its cash flows are sufficient for regular settlement of due liabilities; Liabilities based on credit exposure are commonly settled with a delay of 60 days, or 90 days as an exception, if the delay only occasionally ranges from 61 to 90 days, or In the last six months, the credit exposure has not been restructured. Bank s rating grade C (Sub-standard) includes: Cash inflows of client are unsuitable for regular settlement of liabilities; There is an inadequate maturity structure between the sources of funding of the program/project for which financial support has been requested from the Bank and proceeds generated from the program/project; The Bank does not hold the necessary and updated information to assess the creditworthiness of the client; The credit exposure is restructured; Liabilities based on credit exposure are commonly settled with a delay of up to 120 days, or 180 days as an exception, if the delay only occasionally ranges from 121 to 180 days; The client - nonfinancial entity has claims based on financial loan on entity enjoying a credit rating equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's") or on entity enjoying a higher credit rating, but its domicile country's credit rating equals to or is lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"), or The client - nonfinancial entity has claims based on financial loan on entity for which no credit rating has been established, but its domicile country's credit rating equals to or is lower than B- (according to the rating of "Standard & Poor's" or "Fitch") or B3 (according to the rating of "Moody's") or its domicile country's credit rating has not been established yet. The Bank may not classify credit exposure to the client under this paragraph, indents 6 and 7 in C risk category, if: The exposure is based on a customs guarantee or bid guarantee; The financial loan does not exceed Denar 31,000,000 (in case of foreign currency financial loan, the Denar equivalent of the loan shall be taken into consideration), or The financial loan is equal to or greater than Denar 31,000,000, and the bank's exposure is greater than the amount of financial loan and the bank has calculated impairment or allocated special reserve, at least in the amount exceeding 20% of the amount of financial loan, whereby the credit exposure or the client meets the criteria for classification in another risk category. 74

75 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) B (a) Credit Risk Assessment (Continued) Loans and Advances (Continued) Bank s rating grade D+E (Suspicious (doubtful) loss) includes: The client is illiquid; The collection of credit exposure depends on the use of collateral instruments; The liabilities based on credit exposure are commonly settled with a delay of up to 240 days, or 300 days, as an exception, if the delay only occasionally ranges from 241 to 300 days; The client (including governments and central banks) enjoys a credit rating equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"); The client's credit rating is higher than the rating referred to in indent 4 of this sub item, but its domicile country's credit rating is equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"), or The client has not been given any credit rating, but its domicile country's credit rating is equal to or lower than B- (according to the rating of "Standard & Poor's" or "Fitch") or B3 (according to the rating of "Moody's") or its domicile country has not been given any credit rating yet. Liabilities based on credit exposure are commonly settled with a delay of over 241 days The client has undergone bankruptcy or liquidation proceedings; The client denies the existence of credit exposure (in court or out-of-court proceedings), or The Bank expects to collect only an insignificant portion of credit exposure to the client. 75

76 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) B (a) (b) C (a) Credit Risk Assessment (Continued) Loans and Advances (Continued) (ii) Loss given default or loss severity represent the Bank s expectations of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigations. (iii) Amount and quality of the collateral depends on the terms, type (immovable property, movable property, inventories, receivables) and the possibility for its enforcement. The Bank divides the clients in two groups: one where the exposure of the Bank is secured with value of the collateral that is lower than the amount of the exposure and second where the value of the collateral is higher than the amount of the exposure. The collateral is not taken into calculation of the expected cash flows from the financial assets, only as an input into the internal rating of the client. Debt Securities and Other Bills The Bank is striving to maintain acceptable level of credit risk exposure regarding debt securities, so investment activities are primarily in government debt securities. Risk Limit Control and Mitigation Policies The Bank manages and controls concentration of credit risk to clients, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Measures for specific control and mitigation of credit risk are prescribed in the Bank s act that regulates credit activities and procedures are obtaining collateral and credit-related contingencies Collateral Collateral always is considered as a secondary factor in granting a credit facility. Security by itself, in lack of ability to generate cash flow, is insufficient to justify the granting of credit facilities. The principal collateral types for loans and advances are: (i) For corporate entities Cash Property Equipment and vehicles Inventory Receivables Guarantees (Bank guarantees, guarantees from legal entities) Securities (Debt securities issued by the Government of RM, Securities issued by legal entities). Loans to corporate entities are generally secured. 76

77 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) C (b) D Risk Limit Control and Mitigation Policies (Continued) (ii) For individuals Property Cars Deposits Securities (Debt securities issued by the Government of RM, Securities issued by legal entities) In some cases draft or draft with endorsers covering the total receivables. Loans to individuals are generally secured. Credit-related contingencies The primary purpose to these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. The Bank issues collateralized and uncollateralized guarantees and letters of credit. The Bank monitors the term of maturity of these credit commitments, because long-term commitments have greater degree of credit risk than short-term commitments, also as uncollateralized commitments regarding collateralized commitments. Impairment and Provisioning Policies The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are specific loss component that relates to individually significant exposures, and a collective loan loss allowance established homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment impairment, by using the available historical experience, experienced judgment and statistical techniques. According to the Bank s policy, there are four internal rating grades. The majority of the impairment provision comes from the bottom two grades. The table below shows the structure of the Bank s loans and advances portfolio regarding internal rating system and the associated impairment provision for each internal rating grade: December 31, 2012 Loans % Impairment % Loans % Impairment % Pass/acceptable for financing (A) Watch (careful) (B) Sub-standard (C) Suspicious (doubtful)+ Loss (D) +(E) Total

78 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) E Maximum Exposure to Credit Risk Before Collateral Held or Other Credit Enhancements Year ended December 31, Credit risk exposure relating to balance sheet assets Loans and advances to banks 984, ,544 Loans to customers Loans to individuals - overdrafts (exemption off-balance sheet exposure) 1,230,743 1,281,213 - credit cards (exemption off-balance sheet exposure) 912, ,047 - loans 6,291,285 5,202,071 - other Loans to corporate entities - Large corporate clients 18,200,646 19,491,738 - Small and medium size companies (SMEs) 18,557,822 18,833,348 Financial assets at fair value through profit and loss 84,565 50,440 Financial assets available for sale 5,195, ,943 Financial assets held to maturity 6,709 73,275 Other assets 286, ,781 51,750,984 47,601,400 Credit risk exposure relating to off-balance sheet assets/liabilities Guarantees 7,664,738 7,984,932 Letters of credit 1,185,606 1,898,599 Unused overdrafts on current accounts 1,774,053 1,825,700 Unused credit cards limits 1,223, ,869 Unused credit limits-non-cancellable 836, ,029 12,684,962 13,471,129 Total credit risk exposure 64,435,946 61,072,529 The above table presents a worst case scenario of credit risk exposure to the Bank as at 31 December 2013 and 2012, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet items, the exposures set out above are based on net carrying amounts as reported in the statement of financial position. As shown above, 72% of the total maximum exposure is derived from loans and advances to banks and customers (2012: 76%); 20% represents off-balance-sheet items (2012: 22%). Management is confident in its ability to continue to control and sustain minimum exposure to credit risk to the Bank resulting from both loans and advances portfolio and off balance sheet items based on the following: 76.2% of the loans and advances are categorized in top two grades on the internal rating system (2012: 83.4%); Loans and advances to customers are collateralized and loans to banks are mostly in first class banks; 53.43% of loans and advances are considered as to be neither past due nor impaired (2012: 55.77%); The decrease of off-balance-sheet items generally resulting of decrease of financial guarantees and Letters of credit. 78

79 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) F (a) Loans and Advances Loans and advances are summarized as follows: Year ended December 31, 2013 Loans and advances Loans and to advances customers to banks Year ended December 31, 2012 Loans and advances Loans and to advances customers to banks Neither past due nor impaired 28,507, ,010 29,186, ,453 Past due but not impaired 3,110,415-3,775,774 - Impaired 22,534,570 37,227 19,936, ,310 Gross 54,152, ,237 52,898,775 1,140,763 Less: allowance for impairment (8,958,903) (6,598) (7,201,358) (183,219) Net 45,193, ,639 45,697, ,544 The total impairment provision for loans and advances amounts to Denar 8,965,501 thousand (2012: Denar 7,384,577 thousand). The total exposure on credit risk is individually impaired. Further information on the impairment allowance for loans and advances is provided in Notes 19 and 20. Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Bank s internal rating system. December 31, December 31, Loans and advances to banks 954, ,453 Loans to customers Loans to individuals - Loans 6,056, ,462 Loans to corporate entities - Large corporate clients 11,243,737 15,650,188 - Small and medium size companies (SMEs) 11,206,462 12,810,467 Total 29,461,083 30,139,570 79

80 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) F (b) (c) Loans and Advances (Continued) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class of customer that were past due but not impaired were as follows: Up to 30 days Up to 90 days Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 3,110, ,110,415 Value of collateral 6,063,561 Up to 30 days Up to 90 days December 31, 2012 Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 3,775, ,775,773 Value of collateral 4,322,764 Loans and advances individually impaired i) Loans and advances The breakdown of individually impaired loans and advances by class and the fair value of related collateral held by the Bank as security, are as follows: Large corporate clients Small and medium size companie s (SMEs) Loans and advanc es to banks Overdrafts Credit cards Retail loans Total Allowanc e for Individua lly impaired loans Gross amount 9,030,233 10,065,264 37,227 1,250,601 1,089,822 1,098,650 22,571,797 8,958,903 Value of collateral 9,881,189 10,817, ,737 1,247,524 21,949,022 80

81 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) F (c) Gross amount Loans and Advances (Continued) Loans and advances individually impaired (Continued) Large corporate clients Small and medium size ompanies (SMEs) Loans and advances to banks Overdrafts Credit cards Retail Loans December 31, 2012 Total Allowanc e for Individua lly impaired loans 5,279,55 3 6,506, , , , ,934 13,051,118 4,632,505 Value of collateral 6,467,943 6,936,465-2, ,954 14,011,326 81

82 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) (d) G The disclosed fair value of collateral is determined by certified appraisals and represents value realizable by the legal owners of the assets. ii) Loans and advances to banks The total gross amount of individually impaired loans and advances to banks as at 31 December 2013 amounts to Denar 37,227 thousand (2012: Denar 187,310 thousand). Generally, no collateral is held by the Bank for these placements. Loans and advances renegotiated Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower s financial position and when the Bank has made concession that it would not otherwise consider. Once the loan is restructured it remains in the same rating grade at least two quarters independent of satisfactory performance after restructuring, except when the quality of the loan was improved and the loan was transferred to a less risky category. The renegotiated loans as at 31 December 2013 and 31 December 2012 are as follows: December 31, 2013 December 31, 2012 Carrying amount Carrying amount Re-structured loans 5,150,252 1,793,933 Debt Securities, Treasury Bills and Other Eligible Bills The table below presents an analysis of debt securities, treasury bills and other eligible bills based on the respective issuer as at 31 December Issuer of the investment securities is the Central Bank of the Republic of Macedonia and the Republic of Macedonia. Fitch Ratings assigned its BB+ long term default rating and BB+ local currency long term default rating to the Republic of Macedonia. Issuer Cash and cash equivalents Trading securities Investment securities Total Central bank of the Republic of Macedonia 3,877, ,877,753 Republic of Macedonia - 1 5,134,458 5,134,459 Total 3,877, ,134,458 9,012,212 82

83 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) G H Debt Securities, Treasury Bills and Other Eligible Bills (Continued) Issuer Cash and cash equivalents Trading securities December 31, 2012 Investment securities Total Central bank of Republic of Macedonia 1,907, ,907,216 Republic of Macedonia 1,591, ,275 1,665,066 Total 3,499, ,275 3,572,282 Repossessed Collateral As at and 2012 the Bank assets obtained through foreclosure procedures amount to: December 31, 2013 December 31, 2012 Carrying amount Carrying amount Property and equipment 2,384,427 2,858,454 83

84 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure a) Geographical sectors The following table breaks down the Bank s credit exposure at their carrying amount, categorized by geographic region, based on the country of domicile of counterparties: Republic of Macedonia EU Countries Non-EU Countries Other in Europe countries Total ASSETS Cash and cash equivalents 29,225,819 13,434,385 11,220,135 1,823,823 2,747,476 Financial assets at fair value through P&L 84,565 84, Loans and advances to banks 984, ,771-24,167 Loans and advances to customers Loans to individuals - Term Loans 6,291,285 6,291, Overdrafts 1,230,743 1,230, Credit cards 912, , Loans to corporate entities - Large corporate customers 18,200,646 18,200, SMEs 18,557,822 18,555,109 2, Financial assets heldto-maturity 6,709 6, Other assets 286, , Total assets at 31 December ,781,652 59,003,567 12,182,619 1,823,823 2,771,643 84

85 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) a) Geographical sectors (Continued) The following table breaks down the Bank s credit exposure at their carrying amount, categorized by geographic region, based on the country of domicile of our counterparties: Republic of Macedonia EU Countries Non-EU Countries Other in Europe countries Total ASSETS Cash and cash equivalents 30,056,465 13,071,802 13,833,080 2,089,870 1,061,713 Financial assets at fair value through P&L 50,440 50, Loans and advances to banks 957, ,544 3,638 - Loans and advances to customers Loans to individuals - Term Loans 5,202,071 5,202, Overdrafts 1,281,213 1,281, Credit cards 889, , Loans to corporate entities - Large corporate customers 19,491,738 19,443,402-48, SMEs 18,833,348 18,782,608 50, Financial assets heldto-maturity 73,275 73, Other assets 528, , Total assets at 31 December ,363,922 59,323,001 14,837,364 2,141,844 1,061,713 85

86 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) b) Industry sector The following table breaks down the Bank s credit exposure at their carrying amount, categorized by industry sector of our counterparties: Total Manufac -turing Commerce and finance Retail customers Agriculture Govern ment and local authorit ies Construc -tion Transport Trade Other ASSETS Cash and cash equivalents 29,225,819-29,225, Financial assets at fair value through profit and loss 84,565-84, Loans and advances to banks 984, , Loans and advances to customers Loans to individuals - Term Loans 6,291, ,291, Overdrafts 1,230, ,230, Credit cards 912, , Loans to corporate entities - Large corporate customers 18,200,646 7,677, ,662 1,389,756 1,150, ,639 5,341,621 2,304,552 - SMEs 18,557,822 5,240, ,539 3,338 2,177, ,025 5,593,717 3,636,983 Financial assets held to maturity 6,709-6, Other assets 286, , Total assets at 31 December ,781,652 12,917,720 30,588,497 8,434,687 1,140,201 1,393,094 3,327,916 1,102,664 10,935,338 5,941,535 86

87 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) b) Industry sector The following table breaks down the Bank s credit exposure at their carrying amount, categorized by industry sector of our counterparties: Total Manufac -turing Commerce and finance Retail customers Agriculture Govern ment and local authorit ies Construc -tion Transport Trade Other ASSETS Cash and cash equivalents 30,056,465-30,056, Financial assets at fair value through profit and loss 50,440-50, Loans and advances to banks 957, , Loans and advances to customers Loans to individuals - Term Loans 5,202, ,202, Overdrafts 1,281, ,281, Credit cards 889, , Loans to corporate entities - Large corporate customers 19,491,738 7,396, ,895 1,376,912 1,423, ,621 6,418,377 2,481,188 - SMEs 18,833,348 5,186, ,025, ,401 2,502,908 1,374,760 5,433,874 3,098,434 Financial assets held to maturity 73,275-73, Other assets 528, , Total assets at 31 December ,363,922 12,583,006 31,666,505 7,372,331 1,098,648 1,588,313 3,926,865 1,696,381 11,852,251 5,579,622 87

88 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.2. Market Risk A B The Bank takes on exposure to market risk. Market risk arises from open positions in interest rate, currency, and price risk, all of which are exposed to general and specific market movements. The Bank estimates the market risk of positions held and the maximum losses expected based upon a number of assumptions for various changes in market conditions. The Board of Directors sets limits on the value of risk that may be accepted, which is monitored on a regular basis. Market Risk Measurement Regarding market risk managing and measuring, the Bank s management on a regular basis through adequate analysis and reporting process, is monitoring: interest rate changes regarding market movements and internal decisions, and the influence on interest bearing assets and liabilities and the net interest margin; changes of foreign currency rates regarding foreign currency assets and liabilities and maintain adequate structure regarding foreign exchange risk exposure; The aim of the Bank is maximizing the stability and profitability, by applying the optimum combination of foreign currency and interest rate structure of the assets and liabilities. Foreign 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 Board of Directors sets limits on the level of exposure by currency and in total for overnight position, which are monitored daily. The table below summarizes the Bank s exposure to foreign currency exchange rate risk at 31 December 2013 and Included in the table are the Bank s assets and liabilities at carrying amounts categorized by currency. 88

89 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS Assets 4. FINANCIAL RISK MANAGEMENT (Continued) 4.2. Market Risk (Continued) B Foreign Currency Risk (Continued) (i) Concentrations of assets and liabilities The Bank had the following significant currency positions: EUR USD MKD Other Total Cash and cash equivalents 14,853,998 3,429,129 8,957,761 1,984,931 29,225,819 Financial assets at fair value through profit and loss 1-84,564-84,565 Financial assets available-for-sale 1,399, ,795,663-5,195,151 Financial assets held-to-maturity 6, ,709 Loans and advances to banks 959,778 24, ,639 Loans and advances to customers 14,674, ,481 29,575,880 18,934 45,193,155 Investments in associates , ,890 Property and equipment - - 3,245,556-3,245,556 Investment property ,461-29,461 Intangible assets ,666-46,666 Current tax assets Other assets 41,818 60, , ,765 Assets acquired through foreclosure procedures - - 2,384,427-2,384,427 Total assets 31,936,250 4,437,798 48,455,738 2,004,017 86,833,803 Liabilities Deposits from banks and other financial institutions 34,436 65,691 1,488,484 88,271 1,676,882 Deposits from other customers 28,761,561 4,406,141 36,720,866 1,875,993 71,764,561 Borrowings 2,868, ,801-3,343,221 Other tax liabilities - - 4,445-4,445 Provisions 12,703 11, , ,757 Other liabilities 108,523 13, ,253 8, ,399 Total liabilities 31,785,643 4,496,863 39,154,523 1,973,236 77,410,265 Net on-balance sheet financial position 150,607 (59,065) 9,301,215 30,781 9,423,538 Contingencies and commitments 4,720, ,677 7,424,940-12,523,205 89

90 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.2. Market Risk (Continued) B Foreign Currency Risk (Continued) (i) Concentrations of assets and liabilities December 31, 2012 EUR USD MKD Other Total Total assets 32,692,495 4,185,954 43,889,305 2,007,563 82,775,317 Total liabilities 31,221,438 4,253,921 35,829,063 1,878,432 73,182,854 Net on-balance sheet financial position 1,471,057 (67,967) 8,060, ,131 9,592,463 Contingencies and commitments 5,067, ,784 7,286,372 2,161 13,308,382 C The table below summarizes the sensitivity analysis for foreign currency risk and the effect on the profit or loss: Increase 2013 Increase 2012 Effect on profit and loss and equity EUR 0.5% 0.5% 753 7,355 USD 5.0% 5.0% (2,953) (3,398) Other 1.0% 1.0% 308 1,291 Interest Rate Risk The Bank s operations are subject to the risk of interest rate fluctuations to the extent that interestbearing assets and interest-bearing liabilities mature or re-price at different times or in different amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in re-pricing characteristics of the various floating rates, such as the savings rates, LIBOR /EURIBOR and different types of interest. Risk management activities are aimed at optimizing net interest income, given market interest rate levels consistent with the Bank s business strategies. Assets-liability risk management activities are conducted in the context of the Bank s sensitivity to interest rate changes. In general, the Bank is asset sensitive because of the majority of the interestbearing assets; the Bank has the right simultaneously to change the interest rates. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rate. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation. 90

91 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.2. Market Risk (Continued) C Interest Rate Risk (Continued) As at 31 December 2013 Assets Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Non-interest bearing Total Cash and cash equivalents 27,502, , ,522,429 29,225,819 Financial assets at fair value through profit and loss ,565 84,565 Financial assets available for-sale - 198,365 4,619, ,297-77,736 5,195,151 Financial assets held-to-maturity ,557 2, ,709 Loans and advances to banks 29,451 1, , ,639 Loans and advances to Customers 1,828,444 3,980,222 32,612,541 2,298,558 2,078,682 2,394,708 45,193,155 Investments in associates , ,890 Other assets , ,765 Total assets 29,360,579 4,380,475 38,186,184 2,602,412 2,080,756 4,517,287 81,127,693 Liabilities Deposits from banks and other financial institutions 981,062 49, , ,940 1,676,882 Deposits from other customers 33,781,657 12,203,026 24,369, ,410,323 71,764,561 Borrowings 571,541 15, ,421 1,593, , ,244 3,343,221 Other liabilities , ,399 Total liabilities 35,334,260 12,267,651 25,684,727 1,593, ,160 2,042,906 77,244,063 Total interest repricing gap (5,973,681) (7,887,176) 12,501,457 1,009,053 1,759,596 2,474,381 3,883,630 As at 31 December 2012 Total assets 28,632,515 5,799,726 19,042,572 15,922,456 4,237,234 4,144,196 77,778,699 Total liabilities 32,952,434 12,387,597 19,034,730 5,811, ,859 2,557,754 73,018,721 Total interest repricing gap (4,319,919) (6,587,871) 7,842 10,111,109 3,962,375 1,586,442 4,759,978 91

92 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.2. Market Risk (Continued) C Interest Rate Risk (Continued) The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At 31 December 2013, if variable interest rates had been 100 basis points higher, or 60 basis points lower (2012: higher/lower 150 basis points) with all other variables were held constant, the Bank s profit or loss for the twelve month period ended 31 December 2013 would increase by approximately Denar 94,196 thousand, and decrease by approximately Denar 56,517 thousand (2012: Denar 190,592 thousand). If adjustable interest rates had been 150 basis points (2012: 200 basis points) higher/lower with all other variables were held constant, the Bank s profit or loss for the twelve month period ended 31 December 2013 would respectively decrease /increase by approximately Denar 575,025 thousand (2012: Denar 617,531 thousand) Liquidity Risk A Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence of liquidity risk may be the failure to meet obligations to repay depositors and fulfill commitments to lend. Liquidity Risk Management Process Liquidity risk management policy of the Bank defines the method of managing the Bank s liquidity. Perception and monitoring of the Bank s liquidity is an essence of its stability and successful working. Implementation of the liquidity risk management policy is done using defined risk management process which includes planning and managing with cash flows, maintaining adequate structure of assets and liabilities, financial instruments for liquidity risk management, adequate diversification of deposits and other liabilities by maturity and client, procedures for identification and monitoring the deposit s stability, monitoring the maturity of assets and liabilities, monitoring the off-balance sheet items, monitoring liquidity ratios, internal liquidity indicators, liquidity stress testing and continuity plan in irregular conditions reporting to Bank s bodies and adequate management information system and responsibilities of Bank s organizational units in liquidity risk management process. The aim of the Bank is maximizing the profitability, by applying the optimum combination of maturity and foreign currency structure of the assets and liabilities. However, the Bank strives to use adequate term structure of funds adjusted to term structure of placements, based on contractual and expected maturity of the deposit base. The primary strategy of the Bank is to maintain its liquidity on the highest level and not to promote significant increase of loan portfolio and increase of profit. The table below analyses the undiscounted contractual cash flows of assets and liabilities of the Bank into relevant maturity buckets based on the remaining period at the date of the statement of financial position to the contractual maturity date for assets and liabilities. The presented information represents the gross nominal outflow/(inflow). Although the Bank has a shortage of short-term assets over short-term liabilities maturing within one month, one to three months, three to twelve months, the Bank s management considers its deposit base as being stabile and liquidity not jeopardized. This is based on statistical data and calculations of expected maturity in order to determine the funding and stability of the deposit base. 92

93 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.3. Liquidity Risk (Continued) A Liquidity Risk Management Process (Continued) Maturities of assets and liabilities Up to 1 month 1-3 months 3-12 months 1-5 years December 31,2013 Over 5 years Total Liabilities Deposits from banks and other financial institutions 1,022,935 49, ,818 30,356-1,677,238 Deposits from other customers 34,537,876 12,186,244 19,874,206 5,671,884 20,823 72,291,033 Borrowings 577,955 15, ,344 1,688, ,385 3,410,356 Provisions 59,309 15,448 40,750 46, ,758 Other liabilities incl. current tax liability 418,646 5,094 2,356 15,561 22, ,844 Total liabilities (contractual maturity dates) 36,616,721 12,271,462 21,171,474 7,451, ,641 78,004,229 Total assets (contractual maturity dates) 27,364,736 4,484,949 20,450,966 20,583,913 8,092,239 80,976,803 Up to 1 month 1-3 months 3-12 months 1-5 years December 31,2012 Over 5 years Total Liabilities Deposits from banks and other financial institutions 511,578 31, , ,084,294 Deposits from other customers 33,485,353 12,353,992 17,972,902 4,462, ,220 68,538,725 Borrowings 211,993 19, ,805 1,792, ,554 3,040,770 Provisions 50,283 18,657 67,920 22,856 3, ,747 Other liabilities incl. current tax liability 564,677 3,285 3,363 37, ,031 Total liabilities (contractual maturity dates) 34,823,884 12,426,877 19,244,781 6,315, ,805 73,435,567 Total assets (contractual maturity dates) 27,348,841 5,897,212 16,092,096 21,178,659 7,141,058 77,657,866 93

94 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.3. Liquidity Risk (Continued) B C Assets Held for Managing Liquidity Risk The Bank holds a diversified portfolio of cash, highly marketable assets and highly-liquid securities to support payment obligations in stressed market environment. The Bank s assets held for managing liquidity risk comprise: Cash and balances with the National Bank of Republic of Macedonia; Treasury bills; Government bills and Government Bond that are readily acceptable in repurchase agreements with central bank; Short-term Loans and advances to banks. Off-balance Sheet Items (Uncollateralized) (a) Guarantees The maturity buckets are based on the remaining contractual maturity date of the guarantees i.e. the earliest period in which the guarantees could be called. (b) Letter of credit The maturity groupings based on the remaining contractual maturity date of letter of credit are also included in the table below. (c) Other This item includes approved undistributed overdrafts on current accounts and cards and loans in Denars for out limiting of the condition of the funds on the current accounts of legal entities in domestic payment operation. The maturity buckets based on the remaining contractual maturity date are summarized in the table below: Up to 1 year 1-5 years Over 5 years Total Guarantees 4,158,873 3,486,611 19,254 7,664,738 Letter of credit 1,064, ,060-1,185,606 Other 3,834, ,834,618 Total 9,058,037 3,607,671 19,254 12,684,962 Up to 1 year 1-5 years December 31, 2012 Over 5 years Total Guarantees 5,898,517 1,835, ,896 7,984,932 Letter of credit 1,842,251 56,348-1,898,599 Other 3,587, ,587,598 Total 11,328,366 1,891, ,896 13,471,129 94

95 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.4. Financial instruments A Fair value Fair value represents the amount at which an asset could be replaced or a liability settled on regular, market conditions between informed and voluntary parties. Fair value has been based on management assumptions according to the profile of the asset and liability base. The following table summarizes the carrying amounts and fair values of those financial assets and liabilities not measured at fair value. Financial instruments not measured at fair value Carrying amount As at 31 December 2013 As at 31 December 2012 Fair value As at 31 December 2012 As at 31 December 2013 Financial assets Loans and advances to banks 984, , , ,544 Loans and advances to customers 45,193,155 45,697,417 45,192,776 45,696,813 - Retail customers(individuals) 8,434,689 7,372,331 8,434,689 7,372,331 - large corporate customers 18,200,644 19,491,738 18,200,644 19,491,738 - SMEs 18,557,822 18,833,348 18,557,444 18,832,744 Financial assets available-for-sale 5,195, ,943 5,195, ,943 Financial assets held-to-maturity 6,709 73,275 6,451 72,646 Financial liabilities Deposits from banks and other financial institutions 1,676,882 1,084,294 1,676,882 1,084,294 Deposits from other customers 71,764,561 68,325,236 71,764,561 68,325,236 Borrowings 3,343,221 3,001,547 3,343,221 3,001,547 The fair value of the above presented financial assets and liabilities are determined within level 2 fair value measurement hierarchy, except for financial assets held-to-maturity within level 1 fair value hierarchy. a) Loans and advances to banks Due to the insignificant risk of change in value, the fair value of loans and advances to banks is equal to their carrying amounts. b) Loans and advances to customers Loans and advances to customers are stated according to amortized cost less impairment. A major part of the loans and advances to customers is with adjustable interest rate. The appraised fair value of loans and advances to customers is determined by the discounted expected future cash flows. Expected future cash flows for determining the fair value are discounted using current market interest rate. 95

96 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.4. Financial instruments (Continued) A B Fair value (Continued) c) Financial assets available-for-sale Fair value for assets classified as available for sale is based on published prices on active market or published prices available from stock exchange, dealer and broker. In cases where this information is not available, fair value is estimated by: information for realized prices of and recent normal commercial transactions among voluntary parties; analysis of discounted cash flows; other alternative models for price determination. d) Financial assets held-to-maturity Fair value for assets classified as held-to-maturity is based on published prices on active market or published prices available from stock exchange, dealer and broker. In cases where this information is not available, fair value is estimated by: information for realized prices of recent normal commercial transactions among voluntary parties; analysis of discounted cash flows; other alternative models for price determination. e) Deposits from banks and other financial institutions Due to their short-term maturity and insignificant risk of changes in value, the fair value of demand and time deposits is equal to their carrying amounts. f) Deposits from customers The fair value of the sight deposits and deposits with adjustable interest rate is their carrying amount. Out of total deposits from customers the amount of deposits with fixed interest rates is nil, thus the carrying amount of total deposits of other customers approximates their carrying amount. g) Borrowings Fair value of borrowings with variable interest rate does not differ from its carrying value due to interest rate adjustment for specific financial liabilities with market interest rates for similar instruments. The fair value of credit lines regulated with special terms and for which the market does not provide reliable estimates of prices for similar instruments, approximately presents their carrying value. Fair value hierarchy The Bank measures financial assets and liabilities at fair value, using fair value hierarchy which reflects the significance of inputs used in determining fair value. The fair value hierarchy includes the following levels: a) Level 1 Fair value is determined directly with reference to quoted market prices of the financial instruments in active markets; b) Level 2 - Fair value is determined using valuation techniques that include active markets inputs, which can be direct, i.e. prices, or indirect, i.e. derived from prices; c) Level 3 - Fair value is determined using valuation techniques that include inputs that cannot be directly or indirectly followed on the active markets, or are not observable. 96

97 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.4. Financial instruments (Continued) B Fair value hierarchy (Continued) For financial instruments carried at fair value, the level in the fair value hierarchy into which the fair values are categorised are as follows: December 31,2013 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss - Debt and other fixed income investments securities Equity investments 84, ,564 Financial assets available-for-sale - Government bills 4,818, ,818,119 - Government bonds 309, ,630 - Equity investments Total assets 5,212, ,212,314 December 31,2012 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss - Debt and other fixed income investments securities Equity investments 50, ,436 Financial assets available-for-sale - Government bills 197, ,803 - Equity investments ,140 96,140 Total assets 248,243-96, ,383 Reconciliation from the beggining to the ending balances for fair values measurements in Level 3 of the fair value hierarchy: Financial assets available for sale Total Balance at 1 January ,288 95,288 Gains/(losses) recognized in: - Profit or loss (8) (8) - Purchases of financial instruments in the period Balance as at 31 December ,140 96,140 Total gains/(losses) recognized in profit or loss for the assets and liabilities outstanding as at 31 December 2012 (8) (8) Balance at 1 January ,140 96,140 Gains/(losses) recognized in: - Profit or loss 13,291 13,291 - Sales of financial instruments in the period (54,767) (54,767) -Reclassified financial instruments in/(from) Level 3 (54,664) (54,664) Balance as at 31 December Total gains/(losses) recognized in profit or loss for the assets and liabilities outstanding as at 31 December ,291 13,291 97

98 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.4. Financial instruments (Continued) B Fair value hierarchy (Continued) During 2013, certain available for sale equity investments securities were transferred out of Level 3 of the fair value hierarchy. Taking into account that for these investments there is no active market, as well as a lack of recent transactions that could be applied in determination the fair value, the investments in available-for-sale securities are stated at their cost, less any impairment. The market for these securities is irregular and is not fully developed, so that the fair value cannot be reliably measured Operational risk Operational risk is a risk of loss as a result of inadequate or failed internal processes; inadequate personnel inadequate or failed systems in the bank or external events. The operational risk shall also include the legal risk. Legal risk is current or prospective risk to the bank's profit and own funds, caused by violation or nonadherence to the legal framework, agreements, prescribed practices, ethics standards, or as a result of misinterpretation of the regulations, rules, agreements and other legal documents. The Bank had established a framework for managing the operational risk that is based on Strategy, Policy and Methodology; appropriate organizational structure and established process for managing this risk. The established framework allows within the various Bank processes to identify risks arising from these processes, their measurement and taking corrective actions in order to avoid the potential adverse effect on the financial results and capital position of the Bank. The adequacy of the established framework for managing operational risk is regularly reviewed. The Identification and measurement of the operational risk, the Bank is doing by analyzing the collected data on loss events and key risk indicators, as well as applying the method of self-assessment through a qualitative approach and analysis of external data losses at other banks. Starting from 30 September 2012, and the requirements of the national legislation, the Bank began setting the capital requirement for operational risk, using the standardized approach. The amount of capital to 31 December 2013 is presented in section 4.6 Capital management Capital management The Bank s objectives regarding capital management, which is a broader concept than the equity on the face of the statement of financial position are: To comply with the capital requirements by the regulator; To safeguard the Bank s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and; To maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are regularly monitored by the Bank s management, employing techniques prescribed by national regulatory authority, i.e. the National Bank of Republic of Macedonia (NBRM). The required information is submitted to regulatory authority on a quarterly basis. In addition, the Bank has established a Process of determining the Internal Capital (PIC) in accordance with the Decision on risk management, prescribed by the NBRM. The process of determining the internal capital is based on adopted Policy and Procedures and within the process, the Bank: determines the internal capital required to cover the acceptable level of risk, in accordance with its risk profile and the size and complexity of current and future financial activities; is aiming to establishing a sustainable level of capital in a long term, taking into account the impact of all material risks, etc. 98

99 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.6. Capital management (Continued) The Bank determines its own funds and capital adequacy in accordance with the Methodology for determining capital adequacy and own funds prescribed by the NBRM. In accordance with the regulation, the credit risk weighted assets and the capital required for coverage of operational risks are calculated based on the standardized approach. The regulatory authority requires that each bank has to maintain capital adequacy ratio above 8%. The Bank s regulatory capital is divided in two groups: Tier 1 that includes: ordinary and non-cumulative non-voting shares and share premium, statutory reserves and retained earnings or loss, items as result of consolidation, less: intangible assets; Tier 2 that includes: cumulative non-voting shares and share premium, hybrid capital liabilities and subordinated liabilities. Investments in other Banks or financial institutions and investments in insurance and re-insurance companies over 10% of capital of such institution are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital. Total risk-weighted asset is a sum of credit risk-weighted assets, currency risk weighted assets, operational risk weighted assets and other risk-weighted assets. According to national regulations, credit risk-weighted assets (on-balance and off-balance) are distributed by appropriate risk weights according to the level of credit quality (credit rating) of the debtor, taking into consideration credit protection instruments.the capital adequacy ratio is calculated as a ratio between the Bank's regulatory capital and the risk weighted assets. The table below summarizes the compositions of regulatory capital and the capital adequacy ratio of the Bank for the years ended 31 December 2013 and 2012 regarding the requirement of regulatory authority. During these two years, the Bank complied with all of the regulatory imposed capital requirements to which the Bank is subject. 99

100 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL RISK MANAGEMENT (Continued) 4.6. Capital management (Continued) December 31, Tier 1 capital 2013 Ordinary and non-cumulative non-voting shares and share premium 3,050,594 Statutory reserves and retained earnings or loss 6,294,081 Items as result of consolidation - Deductions from Tier 1 capital (3,417) Total qualifying Tier 1 capital 9,341,258 Tier 2 capital - Cumulative non-voting shares and share premium - Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital - Deductions from regulatory capital (169,130) Total regulatory capital 9,172,128 Credit risk-weighted assets 57,077,252 FX risk-weighted assets 414,625 Operational risk-weighted assets 7,640,201 Other risks weighted assets - Capital adequacy ratio 14.1% December 31, Tier 1 capital 2012 Ordinary and non-cumulative non-voting shares and share premium 3,050,594 Statutory reserves and retained earnings or loss 5,979,778 Items as result of consolidation - Deductions from Tier 1 capital (7,383) Total qualifying Tier 1 capital 9,022,989 Tier 2 capital Cumulative non-voting shares and share premium - Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital - Deductions from regulatory capital (126,336) Total regulatory capital 8,896,654 Credit risk-weighted assets 57,772,293 FX risk-weighted assets 2,022,851 Operational risk-weighted assets 7,559,934 Other risks weighted assets - Capital adequacy ratio 13.2% The increase of the regulatory capital in 2013 is mainly a result of including part of the profit realized in 2012 to the Bank s reserves. 100

101 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING Segment reporting is carried out by the Bank s operating segments. Operating segment is a component of the activities of the Bank for which the following conditions have been fulfilled: Performs activities as a result based on which incomes are generated and expenditures arise; Is being reviewed by the Bank s Supervisory Board, in order to assess the accomplishments and make decisions for future business activities of the segment; and Financial information for the segment is available. The Bank discloses the information independently for each significant operating segment. A segment is considered significant if: The income of the segment participates with more than 10% in the total income of the Bank; The amount of the profit or loss represents 10% or more from the total income of all operating segments which have made profit, or from the total loss of all the operating segments which have made loss; Total assets of the segment participate with 10% or more in the Bank s total assets; Management has assessed that they are significant to follow for the Bank s management needs. For the purposes of the financial reporting, the Bank groups two or more segments into one operating segment if those operating segments are similar in terms of the variety of the goods and services, the type and the Bank of the users of the goods and of the services and the methods of distribution and offering of the goods and services. As at and 2012 the Bank does not group two or more operating segments into one. The operating segments of Komercijalna Banka are equal as the business lines (BL) prescribed in the Decision on the methodology for determining capital adequacy ( Official Gazette of the Republic of Macedonia No. 47/12), using the standardized approach for the determination of capital required for coverage of operational risk. Geographical areas according to which the Bank is reporting are: Member countries of the European Union; Other European countries, outside the EU; Countries outside Europe, members of the Organization for Economic Cooperation and Development (OECD); Other countries. As at and 2012 there are no significant clients upon which the Bank realizes 10% or more from its total business income or expenditure. 101

102 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING (Continued) A. Operating segments BL 1: Services related to financing of medium and large sized enterprises BL 2: Trading and sales BL 3: Retail banking BL 4: Corporate banking BL 5: Payment and settlement BL 6: Custody services BL 7: Asset management BL 8: Retail brokerage Other insignificant operating segments Unallocated Total Net interest income - - (298,437) 3,264, (18) - - 2,966,034 Net fee and commission income - 2,251 44, , ,786 13,117-2,044 2, ,291 Dividend income - 5, ,644 Net gains/(losses) on financial instruments classified as held for trading - 34, ,128 Other operating income - 130, ,358 (329,832) 54, , ,131 Share of profit of associates accounted for using the equity method ,910-35,910 Income realized between the segments Total income per segment - 172, ,818 3,112, ,948 14,035-2,135 35,910 35,393 4,183,138 Impairment charge for credit losses - - (29,061) (1,775,363) (1,804,424) Personnel expenses - (9,272) (173,054) (132,935) (384,849) (9,272) - (8,539) - (200,136) (918,057) Depreciation and amortization - (1,745) (32,557) (25,009) (72,403) (1,745) - (1,606) - (37,653) (172,718) Other operating expenses - (12,437) (460,552) (445,006) (175,873) (2,529) - (3,959) - (98,980) (1,199,336) Investments in property and equipment - - Total expenses per segment - (23,454) (695,224) (2,378,313) (633,125) (13,546) - (14,104) - (336,769) (4,094,535) Financial result per segment - 149,463 (589,406) 734,669 70, (11,969) 35,910 (301,376) 88,603 Income tax expense (9,740) Profit for the year 78,863 Total assets per segment - 119,007 9,235,899 73,727,121 2,734,077 35,624-31, ,628 86,047,068 Unallocated assets per segment 786, ,735 Total assets 86,833,803 Total liabilities per segment ,902,843 19,254, ,955 12, ,295,862 Unallocated liabilities per segment 114, ,403 Total liabilities 77,410,

103 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING (Continued) A. Operating segments (Continued) BL 1: Services related to financing of medium and large sized enterprises BL 2: Trading and sales BL 3: Retail banking BL 4: Corporate banking BL 5: Payment and settlement BL 6: Custody services BL 7: Asset management BL 8: Retail brokerage December 31, 2012 Other insignificant operating segments Unallocated Total Net interest income - 6,080 (518,173) 3,384,003 16,399 (108) ,888,201 Net fee and commission income - (20,619) 41, , ,744 11,179-2,844-2, ,903 Dividend income - 7, ,007 Net gains/(losses) on financial instruments classified as held for trading - 5, ,593 Other operating income - 30,650 86,098 77,615 83,484 5, , ,961 Share of profit of associates accounted for using the equity method ,377-23,377 Income realized between the segments Total income per segment - 28,711 (391,045) 3,664, ,627 16,099-2,844 23, ,986 4,523,042 Impairment charge for credit losses - - (58,225) (1,895,400) (1,953,625) Personnel expenses - (10,208) (156,850) (115,853) (350,548) (7,552) - (6,805) - (182,079) (829,895) Depreciation and amortization - (2,201) (33,826) (24,984) (75,597) (1,629) - (1,468) - (39,266) (178,971) Other operating expenses - (15,802) (438,443) (245,958) (178,425) (2,286) - (3,835) - (107,887) (992,636) Investments in property and equipment Total expenses per segment - (28,211) (687,344) (2,282,195) (604,570) (11,467) - (12,108) - (329,232) (3,955,127) Financial result per segment (1,078,389) 1,382, ,057 4,632 - (9,264) 23,377 89, ,915 Income tax expense (5,824) Profit for the year 562,091 Total assets per segment - 76,929 7,972,076 71,640,925 2,065,639 20,223-17, ,834 81,914,158 Unallocated assets per segment 861, ,159 Total assets 82,775,317 Total liabilities per segment ,341,484 18,403,507 97,143 27, ,870,088 Unallocated liabilities per segment 312, ,766 Total liabilities 73,182,

104 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 5. SEGMENT REPORTING (Continued) B. Geographical areas Republic of Macedonia EU member countries Europe (other) OECD member countries (without EU members of OECD) Other (insignificant geographical areas) Unallocated Total Total income 4,503,123 (127,495) (91,031) (107,194) 2,548 3,187 4,183,138 Non-current assets* 5,706, ,706,110 December 31, 2012 Total income 4,616,760 (87,688) (39,941) 32,581 1,491 (161) 4,523,042 Non-current assets* 4,996, ,996,618 *Non-current assets include items of property and equipment, investment property, intangible assets and assets acquired through foreclosure procedure. 104

105 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 6. NET INTEREST INCOME December 31, December 31, Interest and similar income Loans and advances: - To banks 2,634 2,964 - To customers 3,941,282 4,097,086 Cash and cash equivalents 186, ,769 Investment securities 132,480 11,332 4,262,693 4,404,151 Interest expense and similar charges Deposits from banks and other financial insitutions 3, Deposits from other customers 1,261,339 1,478,652 Other borrowed funds 32,062 37,109 1,296,659 1,515,950 Interest income from collected previously written off interest amounts to Denar 521,690 thousand (2012: Denar 407,555 thousand). As at 31 December 2013 there is no interest income from financial assets at fair value through profit or loss (2012: none). 7. NET FEE AND COMMISSION INCOME Fee and commission income December 31, December 31, Payment operations -in the country 368, ,932 -abroad 237, ,877 Letters of credit and guarantees 183, ,256 Credit cards 86,019 80,356 Brokerage fees 4,039 5,567 Other 179, ,692 1,058,748 1,064,680 Fee and commission expense Loans 76,976 74,092 Payment operations -in the country 52,607 54,098 -abroad 17,037 21,507 Brokerage fees 628 2,276 Other 19,209 12, , , NET GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS CLASSIFIED AS HELD FOR TRADING December 31, December 31, Gains/(losses) from changes in fair value of equity securities, net (realized/unrealized) 34,128 5,593 Net gains/(losses) on financial instruments classified as held for trading 34,128 5,

106 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 9. OTHER OPERATING INCOME December December 31, 31, Membership fee for credit cards 39,283 41,908 Net foreign currency transactions 35,807 70,066 Rental income 17,803 27,938 Recoveries on loans and advances previously written off 37,226 46,829 Gain on sale of Property Plant and Equipment, and assets acquired through foreclosure procedures 13, ,604 Gain from sale of securities available-for-sale 13,309 - Other 21,777 42, PERSONNEL EXPENSES 178, ,471 December December 31, 31, Wages and salaries 555, ,786 Contributions to defined contribution plans 144, ,146 Other staff costs 95,929 44,732 Taxes and contributions 122, , OTHER OPERATING EXPENSES 918, ,895 December December 31, 31, Insurance premiums for deposits 383, ,851 Services 194, ,701 Administration and marketing costs 91, ,132 Materials 117, ,978 Impairment losses on assets acquired through foreclosure procedure 389, ,857 Loss on sale of assets acquired through foreclosure procedure - 7,285 Tax and contributions 1,909 1,807 Court litigation expenses 4,592 1,331 Other 15,749 21,694 1,199, ,

107 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 12. NET IMPAIRMENT LOSSES ON FINANCIAL ASSETS December 31, December 31, Loans and advances to banks (Note 19) (110,109) 89,974 Loans and advances to customers (Note 20) 1,899,954 1,813,133 Other assets (Note 25) 15,568 25,898 Contingencies and commitments (Note 32) (989) 24, INCOME TAX EXPENSE The major components of income taxes in profit or loss are as follows: 1,804,424 1,953,625 December 31, December 31, Current income tax expense (9,740) (5,824) The total charge for the year can be reconciled to the accounting profit as follows: In % (9,740) (5,824) December December 31, In % 31, Profit before tax , ,00 567,915 Tax calculated at a tax rate of 10% (2012: 10%) , ,791 Tax on expenses non allowable for taxation purposes , ,824 Tax exemption on profit for the current period, payable upon distribution of profit (10.00) (8,860) (10.00) (56,791) Income tax expense , ,824 Effective from January 1, 2009, amendments of the local Income Tax Law have been introduced, with the major change on the taxation of the 2009 net profit. Such change provides for an entire exemption of income tax, after taxation of certain expenses not deductible for tax purposes, if net profit for the year is not intended for distribution of dividends, and will be taxed at the time dividends are paid. The above change has no effect on the distribution of accumulated profits from 2008 and before. For fiscal year 2013, the Bank has taken advantage of the income tax exemption above. 107

108 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 14. EARNINGS PER SHARE The calculation of earnings per share for the year ended 31 December was based on the net profit attributable to ordinary shareholders of Denar 78,863 thousand (2012: 562,091 thousand) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2013 of 2,279,067 shares (2012: 2,279,067 shares). The calculation of the basic and diluted earnings per share is: December 31, December 31, Net profit attributable to shareholders for basic and diluted earnings per share (in thousands of Denars) 78, ,091 Weighted average number of shares for basic and diluted earnings per share 2,279,067 2,279,067 Basic earnings per share (in Denars) Diluted earnings per share (in Denars) The calculation of the weighted average number of ordinary shares for the years ended December 31, 2013 and 2012 is as follows: Number of shares Issued ordinary shares at 1 January 2,279,067 2,279,067 At 31 December 2,279,067 2,279,

109 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 15. CASH AND CASH EQUIVALENTS December 31, December 31, Cash on hand 1,249,356 1,171,412 Accounts and deposits with NBRM, except mandatory reserves in foreign currency 4,396,715 4,636,572 Current accounts with local banks 11,937 7,246 Current accounts with foreign banks 4,805,149 8,249,735 Time deposits held with banks up to 3 months 11,007,877 8,884,201 Treasury bills up to 3 months 3,877,753 1,907,216 Government bills up to 3 months - 1,591,787 Other short term highly liquid investments 1,131 1,426 Included in cash and cash equivalents 25,349,918 26,449,595 Restricted accounts 177, ,093 Mandatory reserves in foreign currency 3,698,216 3,430,777 29,225,819 30,056,465 The level of mandatory reserves in foreign currency held with the Central Bank in the amount of Denar 3,698,216 thousand (2012:Denar 3,430,777 thousand) is determined by the Decision for mandatory reserves prescribed by the Central Bank. Those reserves are calculated based on the average amount of deposits in foreign currencies existing during one calendar month. The interest income is accrued on these reserves at the rate of 0.1% p.a. (2012: 0.1% p.a.). Accounts and deposits with NBRM, except mandatory reserves in foreign currency in the amount of Denar 4,396,715 thousand (2012: Denar 4,636,572 thousand) represent current account in Denars with NBRM. Interest income is accrued on these reserves at a rate of 1% p.a. (2012: 1% p.a.). Time deposits up to 3 months in the amount of Denar 11,007,877 thousand (2012: Denar 8,884,201 thousand) relate to deposits placed with domestic and foreign banks, with original maturities from 1 day to 3 month, bearing interest at rates in the range from 0.01% to 2.05% per annum (2012: from 0.01% to 2.35% p.a.). Treasury bills up to 3 months in the amount of Denar 3,877,753 thousand (2012: 1,907,216 thousand) are debt securities issued by the National Bank of Republic of Macedonia with maturity due of 35 days, bearing interest at rate of 3.25% per annum (2012:3.75% p.a.). Government bills up to 3 months in 2012 in the amount of Denar 1,591,787 thousand are debt securities with period of maturity up to three months. Restricted accounts in the Denar 177,685 thousand (2012: Denar 176,093 thousand) represent deposits for opened letters of credit, on behalf of the Bank s customers, collateral for Visa International and MasterCard. 109

110 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 16. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS December 31, 2013 December 31, 2012 Held for trading Debt securities Government bonds 1 4 Total debt securities 1 4 Equity investments 84,564 50,436 84,565 50,440 Government bonds in the amount of Denar 1 thousand (2012: Denars 4 thousand) refers to structural government bonds, bearing interest rate at the rate of 2% per year. The quoted equity investments held for trading in the amount of Denar 74,740 thousand (2012: Denar 16,763 thousand) relates to investments in shares issued by domestic banks in the amount of Denar 27 thousand (2012: Denar 26 thousand) and investments in shares issued by domestic non-financial entities in the amount of Denar 74,713 thousand (2012: Denar 16,737 thousand). The other unquoted equity investments in the amount of Denar 9,824 thousand (2012: Denar 33,673 thousand) relate to investments in the open-end investment fund KB Publikum Balansiran in the amount of Denars 6,008 thousand (2012: Denar 5,272 thousand), investments in the open-end investment fund KB Publikum - Paricen in the amount of Denar 3,816 thousand (2012: Denar 3,681 thousand). 17. FINANCIAL ASSETS AVAILABLE-FOR-SALE December 31, December 31, Government bills 4,818, ,803 Government bonds 309,630 - Equity investments 71, ,494 5,199, ,297 Less: Specific allowance for impairment (4,354) (4,354) 5,195, ,943 Investments in available-for-sale debt securities includes government bills in the amount of 4,818,119 thousands of denars (2012: 197,803 thousands of denars) as well as government bonds in the amount of 309,630 thousands of denars (2012: null). The investments in equity instruments available-for-sale in amount 71,756 of thousands of denars (2012: 100,494 thousands of denars) includes the amount of 59,011 thousand of denars (2012: 100,488 thousands of denars) related to the investments in securities issued by financial and non-financial companies, which the Bank has bought on the primary market based upon basic investment in the capital of the companies or on the secondary market. Taking into account that for these investments there is no active market, as well as a lack of recent transactions that could be applied in determination the fair value, the investments in available-for-sale securities are stated at their cost, less any impairment. The market for these securities is irregular and is not fully developed, so that the fair value cannot be reliably measured. 110

111 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 17. FINANCIAL ASSETS AVAILABLE-FOR-SALE (Continued) In addition, other equity instruments available for sale includes investment in subsidiaries in the amount of 12,738 thousands of denars, which in 2012 was classified as investment in associates and which is not intended for sale The rest of the investments in equity instruments available-for-sale refers to investments in loss making companies in the amount of 7 thousands of denars (2012: 7 thousands of denars), which the Bank has acquired in accordance to the legal provisions, and according which the Bank s claims in companies were transformed in permanent holdings, i.e. shares. The Bank does not plan to sell part of investments in available-for-sale equity instruments issued by financial companies whose operations are related to the regular operations of the Bank, and the rest of the investments will be sold when the Bank will estimate that there are favourable conditions at the capital market for their disposal. Movement in specific allowance for impairment is as follows: Year ended Year ended December 31 December Balance at 1 January 4,354 4,354 Net charge/ (release) to profit or loss (Note 12) - - Write-off - - Balance at 31 December 4,354 4, FINANCIAL ASSETS HELD-TO-MATURITY December 31, December 31, Government bonds 6,709 73,275 6,709 73,275 The bonds issued by the Government of the Republic of Macedonia in the amount of 6,709 thousands of denars include bonds for denationalisation IV, V and VI emission (2012: 73,275 thousands of denars out of which Eurobonds issued by the Ministry of Finance of the Republic of Macedonia of 64,469 thousand of denars and bonds for denationalisation in amount of 8,806 thousands of denars) with maturity date to 2017 (2012: 2017), which bear interest at an annual rate of 2% (2012: 2% annually). Income from debt instruments held-to-maturity is recognized as interest income. Total current portion of the financial assets held-to-maturity amounts to Denar 2,152 thousand (2012: Denar 66,604 thousand). 111

112 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 19. LOANS AND ADVANCES TO BANKS December 31, December 31, Placements with foreign banks 990,543 1,140,406 Placements with domestic banks ,237 1,140,763 Less: Specific allowance for impairment (6,598) (183,219) 984, ,544 Total current portion of the loans and advances to banks amounts to Denar 31,214 thousand (2012: Denar 4,293 thousand). Movement in specific allowance for impairment is as follows: Balance at 1 January 183,219 93,245 Net charge/ (release) to profit or loss (Note 12) (110,109) 89,974 Write-off (66,512) - Balance at 31 December 6, , LOANS AND ADVANCES TO CUSTOMERS December 31, December 31, Individuals (retail customers): - Overdrafts 1,427,624 1,457,395 - Credit cards 1,181,964 1,173,599 - Term loans 6,886,363 5,786,395 9,495,951 8,417,389 Corporate entities: - Large corporate customers 20,626,767 20,981,576 - SMEs 24,029,340 23,499,810 44,656,107 44,481,386 54,152,058 52,898,775 Less: Allowance for impairment (8,958,903) (7,201,358) 45,193,155 45,697,417 Current 21,792,210 22,066,675 Non- current 23,400,945 23,630,

113 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 20. LOANS AND ADVANCES TO CUSTOMERS (Continued) Loans and advances to customers include accrued interest and other receivables of Denar 283,527 thousand (2012: Denar 303,957 thousand). Out of the total loans and advances to other customers the Bank has pledged a lien with regard to the sub-loans approved from the credit line of the European Investment Bank ("EIB"), signed between EIB and the Macedonian Bank for Development Promotion ("MBDP"), in favour of MBDP. As at 31 December 2013 the amount of the pledged loans and advances is in the amount of 2,869,763 thousands of denars (2012: 1,617,477 thousands of denars). Movement of allowance for impairment is as follows: Retail customers Overdrafts Credit cards Loans Total Balance at 1 January , , ,692 1,040,642 Net charge/ (release) to profit or loss (Note 12) 3,686 (9,903) 10,632 4,415 Balance at 1 January , , ,324 1,045,057 Net charge/ (release) to profit or loss (Note 12) 20,700 (15,247) 10,754 16,207 Balance at 31 December , , ,078 1,061,264 Corporate entities ` Large corporate customers SMEs Total Balance at 1 January ,559 3,831,226 4,389,785 Net charge/ (release) to profit or loss (Note 12) 931, ,439 1,808,718 Write off - (42,202) (42,202) Balance at 1 January ,489,838 4,666,463 6,156,301 Net charge/ (release) to profit or loss (Note 12) 936, ,463 1,883,746 Release upon foreclosure procedures - (141,914) (141,914) Write off - (494) (494) Balance at 31 December ,426,121 5,471,518 7,897,

114 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 21. INVESTMENTS IN ASSOCIATES The Bank owns 49% of equity interest which is equal to 49% of the voting rights in KB Prvo Penzisko Drustvo AD Skopje. The principle place of business of KB Prvo is Republic of Macedonia. In April 2013 the Bank increased its share in the share capital of KB Publikum, an investment funds managing company, by acquiring additional 14.29% of the shares and voting interests in the Company. As a result, the Bank s equity interest in KB Publikum increased from 50 to 64.29%, thus changing its status from an associate to a subsidiary. The investment is included in Note 17. The shares of KB Prvo Penzisko Drustvo AD Skopje are not publicly listed and consequently do not have published price quotations. December 31, 2013 December 31, 2012 KB Prvo Penzisko Drustvo AD Skopje 120, ,616 Share of results for the year ended 31 December 35,910 26,857 Dividends received (5,425) (15,068) 150, ,405 December 31, 2012 KB Publikum Invest AD Skopje 3,909 Share of results for the year ended 31 December (3,480) Summary financial information on the associates is presented below: Interest Assets Liabilities Equity Revenues Profit/Loss held KB Prvo Penzisko Drustvo AD Skopje 322,724 14, , ,835 73,285 49% 322,724 14, , ,835 73,285 December 31, 2012 Interest Assets Liabilities Equity Revenues Profit/Loss held KB Prvo Penzisko Drustvo AD Skopje 263,057 17, , ,768 54,810 49% 429 KB Publikum Invest AD Skopje 2,532 1, ,958 (6,959) 50% 265,589 19, , ,726 47,851 There are no significant restrictions on the ability of the associates to transfer funds to the Bank in the form of cash dividends or repayment of loans and advances. 114

115 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 22. PROPERTY AND EQUIPMENT Land and Buildings Furniture & Equipment Assets in course of construction Leasehold improveme nts Total Carrying amount 1 January ,325, ,412 87,610 23,105 1,678,803 Additions , ,599 Transfers 135,134 81,969 (232,976) 15,873 - Disposals and write off (464,314) (9,239) - - (473,553) Depreciation charge (46,335) (101,082) - (7,823) (155,240) Carrying amount 31 December , , ,233 31,155 2,048,609 At 31 December 2012 Cost 1,197,960 1,041, ,233 65,503 3,157,823 Accumulated depreciation (247,799) (827,067) - (34,348) (1,109,214) Carrying amount for 31 December , , ,233 31,155 2,048,609 Carrying amount 1 January , , ,233 31,155 2,048,609 Additions - - 1,349,855-1,349,855 Transfers 1,848, ,838 (2,050,137) 4,825 - Disposals and write off - (3,172) - - (3,172) Depreciation charge (44,192) (96,628) - (8,916) (149,736) Carrying amount 31 December ,754, , ,951 27,064 3,245,556 At 31 December 2013 Cost 3,046,435 1,169, ,951 70,329 4,439,303 Accumulated depreciation (291,992) (858,490) - (43,265) (1,193,747) Carrying amount 31 December ,754, , ,951 27,064 3,245,556 The amount of commitments for the purchase of property and equipment in 2013 amounts to Denar 1,773 thousand (2012: Denar 2,963 thousand). As at 31 December 2013 and 31 December 2012 the Bank does not have any property and equipment pledged as collateral. On 26 December 2012 the Bank concluded an agreement for sale of property and equipment in the amount of Denar 467,412 thousand (carrying amount), which as a non-cash transaction has not been presented in the Statement of cash flows for

116 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 23. INVESTMENT PROPERTY At 1 January Cost 33,510 44,035 Accumulated depreciation (3,211) (5,200) Carrying amount 30,299 38, December Carrying amount 1 January 30,299 38,835 Disposals and write off - (7,699) Depreciation charge (838) (837) Carrying amount 31 December 29,461 30,299 At 31 December Cost 33,510 33,510 Accumulated depreciation (4,049) (3,211) Carrying amount 29,461 30,299 Fair value of investment property amounts to Denar 34,300 thousand as at (2012: Denar 82,166 thousand). Investment property comprises of property leased by Komercijalna Banka AD Skopje. he lease contains an initial non-cancellable period of 90 days. The contract is on indefinite period. The fair value of investment property was determined by external, independent property valuation specialist, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The independent valuation specialist provide the fair value of the Bank's investment property portfolio once a year. The fair value measurement for investment property of Denar 34,300 thousand has been categorised as a Level 2 fair value based on the inputs to the valuation technique used (see Note 4.B). Valuation technique and inputs used are based on the cost method, according to the methodology for valuation of investment property 24. INTANGIBLE ASSETS Cost Balance at 1 January 241, ,058 Additions 9,553 14,201 Disposals and write offs (320) (1,002) Balance at 31 December 250, ,257 Accumulated amortisation Balance at 1 January 182, ,347 Charge for the year 22,143 22,635 Disposals and write-offs (320) (981) Balance at 31 December 203, ,001 Carrying amount at 31 December 46,666 59,256 Carrying amount at 1 January 59,256 67,711 As at 31 December 2013 the Bank does not have any commitments for the intangible assets (31 December 2012: none). 116

117 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 25. OTHER ASSETS December 31, December 31, Credit card receivables 96,677 82,543 Other bad and doubtful receivables 134, ,576 Trade receivables 89, ,314 Receivable from KB Prvo Penzisko Drustvo 4,876 9,637 Inventory of office materials 23,198 19,936 Inventory of numismatic collections 20,002 24,066 Fee and commission receivables 27,368 22,410 Advances for property and equipment ,000 Other assets 42,214 33, , ,114 Less: Allowance for impairment (152,257) (137,333) 286, ,781 The current portion of other assets amounts to Denar 278,848 thousand (2012: Denar 522,134 thousand). Movement in specific allowance for impairment is as follows: Year ended Year ended December 31 December Balance at 1 January 137, ,773 Net charge/ (release) to profit or loss (Note 12) 15,568 25,898 Release upon foreclosure procedures (596) - Write-off (48) (4,338) Balance at 31 December 152, ,

118 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 26. ASSETS ACQUIRED THROUGH FORECLOSURE PROCEDURES December 31, December 31, Foreclosed collateral Land 168, ,150 Buildings 1,884,394 2,230,059 Residential buildings and apartments 166, ,075 Other 164, ,170 2,384,427 2,858,454 On 26 December 2012, the Bank entered into a sale agreement of administrative business premises of Macedonia Tabak in the amount of 416,250 thousands of denars (carrying value) and EMO AD Ohrid in the total amount of 73,819 thousands of denars (carrying value). The sale transaction of administrative business premises in 2012 did not generate cash flows, and therefore was not included in the Statement of cash flow. 27. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS December 31, December 31, Demand deposits Banks and other financial institutions 550, ,374 Insurance companies 103,085 83,621 Time deposits Banks and other financial institutions 487, ,292 Insurance companies 460, ,586 Restricted deposits Banks and other financial institutions 75,125 56,421 1,676,882 1,084,294 Current 1,646,882 1,084,239 Non-current 30, Deposits from banks and other financial institutions include accrued interest payable of Denar 2,482 thousand (2012: Denar 2,773 thousand). 118

119 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 28. DEPOSITS FROM OTHER CUSTOMERS December 31, December 31, Public institutions Current / settlement accounts 257, ,761 Time deposits 100, ,554 Companies Current / settlement accounts 11,682,830 11,470,461 Time deposits 3,181,484 3,112,149 Retail customers Current / demand accounts 12,726,723 11,780,903 Time deposits 42,189,588 39,783,182 Restricted deposits Citizens 1,107,345 1,153,147 Companies 518, ,079 71,764,561 68,325,236 Other deposits include accrued interest payable of Denar 391,116 thousand (2012: Denar 397,117 thousand). Restricted deposits in the total amount of Denar 1,731,187 thousand (2012: Denar 1,824,226 thousand) relate to Deposits from other customers, placed for payments abroad, letters of credit, deposits placed as collateral for securing repayment of loans and guarantees, and received early repayments of loans. Current portion of deposits from other customers amounts to Denar 66,598,326 thousand (2012: Denar 63,812,247 thousand). 119

120 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 29. BORROWINGS December 31, 2012 Short-term Long-term Short-term Long-term Domestic borrowings: MBPR- NEPA (Macedonian Bank for Development Promotion funds granted from National Enterprise Promotion Agency) ,460 MBDP (Macedonian Bank for Development Promotion) , ,770 MBPR- ZKDF (Macedonian Bank for Development Promotion funds granted from Agriculture Credit Discount Fund) 15, ,856 20, ,312 Agency for Managing Accounts - 115, ,970 NBRM- Primary issue - 8,809-8,809 Ohridska banka AD Skopje 350, Foreign borrowings administered through domestic financial and government institutions: MBDP CEB (Macedonian Bank for Development Promotion funds granted from CEB) ,625 MBDP IKL (Macedonian Bank for Development Promotion funds granted from Italian Credit Line) , ,050 MBDP EIB (Macedonian Bank for Development Promotion funds granted from EIB) 5,456 2,568,284 4,411 2,473,457 MF - FSR (Ministry of finance funds granted from former lender Council of Europe Social Development Fund) 52 46, , ,490 2,971,731 26,324 2,975,223 Current 1,272, ,871 - Non-current - 2,070,375-2,110,676 Borrowings include accrued interest payable of Denar 6,466 thousand (2012: Denar 5,917 thousand). Current portion of long-term borrowings is Denar 901,356 thousand (2012: Denar 864,547 thousand). 120

121 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 29. BORROWINGS (Continued) Creditor Currency Interest rate Year of maturity Type of security MBDP 5.00% undefined unsecured MKD (NEPA) MBDP 3.0%, 3.8%, 5.0% According to the agreements 4 bills of MKD/EUR concluded with final users exchange MBDP 3months EURIBOR refunded bills of EUR CEB % exchange MBDP According to the agreements 12 bills of EUR IKL 3% concluded with final users exchange MBDP 0,5%, 1% According to the agreements 3 bills of MKD/EUR ZKDF concluded with final users exchange 3months EURIBOR ; 6 bills of MF + 1.4%; 3months exchange EUR FSR EURIBOR %; NBRM Primary issue MBDP - EIB Agency for Managing Accounts Ohridska banka AD Skopje MKD UR MKD 1% bills of exchange According to the agreements concluded with final users MKD 2,3% bills of exchange in form of Notary deed * Pledge of receivables under sub-loan agreements with final users in the form of Notary deed 2020 unsecured unsecured The Bank has pledged a lien in the form of a notary deed on behalf of MBDP based on receivables from sub-loan agreements concluded with final users approved from the credit line with EIB administered through MBDP. As at 31 December 2013 the amount of borrowings for which the Bank has pledged receivables is 2,483,382 thousands of denars (2012: 1,445,333 thousands denars). 30. OTHER LIABILITIES December 31, December 31, Credit card liabilities 89,991 50,811 Liabilities to Ministry of Finance 9,792 16,259 Suppliers payable 20,072 20,457 Advances received 6,302 1,991 Fee and commission 5,903 6,533 Provision for pension and other employee benefit 40,318 40,104 Liabilities for VAT 15, ,347 Undistributed foreign payments from legal companies and citizens 103,566 92,610 Other liabilities 168, , , ,645 Current 421, ,939 Non-current 37,748 37,706 Part of VAT liabilities in 2012 of Denar 240,644 thousands arise from the sale of property and equipment (see note 22). Liabilities were settled in January

122 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 31. EQUITY (a) Share capital Ordinary shares December 31, 2013 December 31, 2012 In number of issued shares Non-voting shares December December 31, , 2012 In number of shares At 1 January 2,279,067 2,279, At 31 December 2,279,067 2,279, At 31 December 2013 the authorised share capital comprised of 2,279,067 (2012: 2,279,067) ordinary shares. Ordinary shares have a par value of Denar 1,000 (2012: Denar 1,000). All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at Shareholders Assembly of the Bank. All shares rank equally with regard to the Bank s residual assets. According to the Bank s shareholders book as at 31 December 2013, 224,728 ordinary shares i.e 9.86% from the total shareholder capital of the Bank (as at 31 December 2012, 226,916 ordinary shares i.e 9,96%) there is limitation of the rights established based on the law and/or Decision or act of the competent body (for example limitation of the vote right according to the Governor decision). As at 31 December 2013 the Bank does not hold treasury shares. The Open-end Investment Fund KB Publikum Balansiran managed by the Bank's subsidiary, KB Publikum Invest AD owns 610 shares, i.e. 0,027% of the total share capital of the Bank (as at 31 December 2012 owns 530 shares, i.e %). The below stated shareholders have more than 5% ownership of the Bank s ordinary shares: In % December 31, December 31, Shareholder East Capital Explorer Investments AB, Stockholm European Bank for Reconstruction and Development, London (b) Reserves Statutory reserve Under local statutory legislation, the Bank is required to set aside 15 percent of its net profit for the year in a statutory reserve until the level of the reserve reaches 1/5 of the court registered capital. Until achieving the minimum required level the statutory reserve could only be used for loss recovery. When the statutory reserve exceeds the minimum required level and when all losses are covered, the statutory reserve can also be used for distribution of dividends, based on a decision of the shareholders meeting, but only if the amount of the dividends for the current business year has not reached the minimum for distribution as prescribed in the Trade Company Law or by the Bank s Statute. According to the amendments on the Trading Companies Law, which came into effect from 1 January 2013, the amount necessary to be allocated to statutory reserve was reduced from 15% to 5%, while the level of reserves does not reach 1/10 of the share capital. Other reserves The other reserves are formed in addition to statutory reserve, based on decisions by the bodies of the Bank for distribution of profit, and can be used to cover certain losses or for other expenses. 122

123 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 31. EQUITY (Continued) (c) Dividends Announced and paid dividends by the Bank December 31, December 31, Announced dividends and paid dividends for the year - - Denars December 31, December 31, Dividend per ordinary share - - Announced dividend after the balance sheet date (the liabilities for dividends are not shown in the statement of financial position. December 31, December 31, Announced dividends after December ,907 In Denars December 31, December 31, Dividend per ordinary share CONTIGENCIES AND COMMITMENTS (a) Off-balance sheet items The following table indicates the contractual amounts of the Bank s contingencies and commitments by category: December 31, December 31, Guarantees in domestic currency 4,198,705 4,197,682 in foreign currency 3,466,033 3,787,250 7,664,738 7,984,932 Letters of credit 1,185,606 1,898,599 Unused credit card limits 1,223, ,869 Unused overdrafts on current accounts 1,774,053 1,825,700 Unused credit limits - no cancellable 836, ,029 Total 12,684,962 13,471,129 Less: provision for off-balance sheet items (161,757) (162,747) 12,523,205 13,308,382 The Bank provides banks guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year. Expirations are not concentrated in any period. These commitments and contingent liabilities have off balance-sheet credit risk because only organisation fees and accruals for probable losses are recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows. 123

124 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 32. CONTIGENCIES AND COMMITMENTS (Continued) Movement in provision is as follows: Year ended December Balance at January 1, ,747 Additional provisions during the year 286,561 (release of provisions during the year) (287,161) Exchange rate effect (390) As at 31 December ,757 (b) Litigations For part of the contingent liabilities in the amount of 265,454 thousands of denars there is a court case upon issued letter of guarantee for Granit AD Skopje. The case was initiated in front of an authorized court in Poland on 16 th of September 2011 by the State Treasury General Directorate for State Roads and Motorways from Warsaw (beneficiary of the guarantee) against Komercijalna Banka AD Skopje, which was received in the Bank on 2 nd of July 2012, requesting a payment upon the issued letter of guarantee in the amount of ,09 PLN, equivalent to 265,454 thousands of denars. The letter of guarantee was issued based on a contract for building a motorway concluded between the plaintiff (State Treasury General Directorate for State Roads and Motorways) and Granit AD Skopje (requestor of the guarantee). The guarantee has been activated and a payment is requested as a result of a breach of contract for building a motorway between the State Treasury General Directorate for State Roads and Motorways of Poland and Granit AD Skopje. There is a separate legal dispute related to this contract, which is handled in front of the authorized courts in Poland. The outcome of this court case cannot be foreseen at the moment. The Bank has not performed a payment upon this issued letter of guarantee as a result of a Decision for temporary suspension issued on the 4 th of February 2011 by the Basic Court in Skopje 2, on request of Granit AD Skopje. The temporary suspension prohibits the beneficiary of the guarantee to undertake any activities which would mean protest or enforcement of the guarantee, at the same time imposing a restriction on the Bank to make payments upon the issued letter of guarantee. The Bank has an obligation to follow the ruling of the Macedonian court, as long as it is in force. If the Bank is to make a payment upon this issued letter of guarantee, the amount will be transformed into a receivable from Granit AD Skopje, and the Bank does not expect collection problems and adverse financial effects. In addition to the above, the Bank is involved in legal proceedings from its daily operations. As of the legal proceedings filed against the Bank amounted to Denar 1,253,561 thousand (2012: Denar 1,024,115 thousand). This amount does not include any penalty interest. The Bank s management believes that the final outcome of the filed legal proceedings will be favorable, and that no material losses will result from the settlement of the aforementioned litigations and has not allocated any provision for litigations as of 31 December 2013 and RELATED PARTY TRANSACTIONS Persons related to the Bank are the following: persons with special rights and responsibilities and persons related thereto (classified as key management personnel), shareholders with qualified holding in the Bank (direct or indirect ownership of at least 5% of the total number of shares or the issued voting shares in a Bank or which makes it possible to exercise a significant influence in the Bank) and entities related thereto and responsible persons of those shareholders legal entities (classified as other related parties). In addition, the Bank has investments in associates and subsidiary. A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and borrowings. The volumes of related party transactions and outstanding balances at the year-end, are as follows: 124

125 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 33. RELATED PARTY TRANSACTIONS (continued) Balance sheet Placements as at 1 January 2013 Placements during the year Withdrawals during the year Placements as at 31 December =(1+2-3) 1. Assets Current accounts a) Subsidiaries b) Associates c) Key management personnel of the Bank 1, ,278 d) Other related parties Trading assets a) Subsidiaries 8, ,823 b) Associates c) Key management personnel of the Bank d) Other related parties Mortgage loans a) Subsidiaries b) Associates c) Key management personnel of the Bank 33,493 31,958 23,641 41,810 d) Other related parties Consumer loans a) Subsidiaries b) Associates c) Key management personnel of the Bank 30,414 41,740 34,160 37,994 d) Other related parties Other loans and claims a) Subsidiaries 1 1,205 1,205 1 b) Associates 11,251 1,533 7,908 4,876 c) Key management personnel of the Bank 98,997 37,540 42,871 93,666 d) Other related parties - - Investment in securities a) Subsidiaries ,309-12,738 b) Associates 120,404 35,910 5, ,890 c) Key management personnel of the Bank d) Other related parties Liabilities Deposits a) Subsidiaries ,882 22,193 8,614 b) Associates , , c) Key management personnel of the Bank 488,595 2,108,170 2,064, ,774 d) Other related parties

126 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 33. RELATED PARTY TRANSACTIONS (Continued) Income and expenditures arising from related party transactions Subsidiaries Associates Year ended Year ended December 31, 2012 Key management personnel of the Bank Total Associates Key management personnel of the Bank Other related parties Total Income Interest Income 34-9,721 9, ,892-14,894 Fee and commission income ,964 4, ,770 1,100 6,531 Net gains from trading Dividend income ,471 5,471 Capital gains from sale of non-current assets Other income 4 35,934 8,075 44,013 26,899 8, ,032 Transfers between entities Total Income ,115 21,760 58,803 27,562 27,793 6,573 61,928 Expenses Interest expense ,609 13, ,310 16,014 30,920 Expenditures for fees and commissions ,577 32,577 Net losses from trading Expenditures for procurement of noncurrent assets Impairment of financial assets, on net basis (23) (71) (1,641) (1,735) (49) 1,893- (1) 1,842 Other expenses - 8 7,040 7,048 3,497 6, ,884 Transfers between entities Total Expenses 229 (62) 19,008 19,176 4,044 22,588 48,592 75,

127 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 33. RELATED PARTY TRANSACTIONS (Continued) Key management personnel Year ended Year ended December 31, December 31, Salaries and other short - term benefits 114, , FUNDS MANAGED ON BEHALF OF THIRD PARTIES 114, ,929 December 31, December 31, Banks and other financial institutions 20,720 18,596 Companies 50,307 51,853 Individuals 19,080 22,752 90,107 93,201 The Bank manages assets on behalf of third parties which are in the form of loans to companies for various investments. The Bank receives fee income for providing these services. Funds managed on behalf of third parties are not assets of the Bank and are not recognized in the statement of financial position. The Bank is not exposed to any credit risk relating to such placements, as it does not guarantee these investments, however, has a fiduciary responsibility to properly handle and invest client funds. Income and expenses of the Funds managed on behalf of third parties are accrued to the account of the respective third party and the Bank has no liability in connection with these transactions. 35. LEASE COMMITMENTS At the end of the reporting period, the future minimum lease payments under non-cancellable operating leases are payable as follows Balance at (current year) Total Maturity period for operating lease payments up to 1 from 1 to up to 1 year 5 years year 71,605 2,491 9,962 59,152 Total 71,605 2,491 9,962 59,152 Balance at December 31, 2012 (previous year) 74,095 2,491 9,962 61,642 Total 74,095 2,491 9,962 61, SUBSEQUENT EVENTS No material events subsequent to the reporting date have occurred which require disclosure in the financial statements. 127

128 NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS 37. EXCHANGE RATES Official exchange rates used in the translation of the items denominated in foreign currencies in the statement of financial position were as follows: In Denars December 31, December 31, EUR USD

129 129

130 130 CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT FOR THE YEAR ENDED DECEMBER 31, 2013

131 INDEPENDENT AUDITORS' REPORT 131

132 132

133 133

134 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE BANK 134

135 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Year Ended () Notes Interest income 4,262,693 4,404,151 Interest expense (1,296,437) (1,515,950) Net interest income 7 2,966,256 2,888,201 Fee and commission income 1,061,981 1,064,680 Fee and commission expense (166,546) (164,777) Net fee and commission income 8 895, ,903 Dividend income 5,653 7,007 Foreign exchange gains, net 70,678 68,490 Net gains/(losses) on financial instruments classified as held for trading 9 34,139 5,593 Other operating income , ,471 Personnel expenses 11 (921,179) (829,895) Depreciation and amortization 23,24,25 (173,442) (178,971) Other operating expenses 12 (1,200,541) (992,636) Impairment charge for credit losses 13 (1,804,424) (1,953,625) Operating profit 55, ,538 Share of profit of associates accounted for using the equity method 35,910 23,377 Profit before tax 91, ,915 Income tax expense 14 (9,742) (5,824) Profit for the year 81, ,091 Other comprehensive income Items that are or may be reclassified to profit and loss Revaluation reserve upon assets foreclosure 3,534 - Reclassified to profit and loss (3,534) - Other comprehensive income, net of tax - - Total comprehensive income for the year 81, ,091 Profit attributable to: Shareholders of the Bank 82, ,091 Non-controlling interests (862) - Profit 81, ,091 Total comprehensive income attributable to: Shareholders of the Bank 82, ,091 Non-controlling interests (862) - 81, ,091 Earnings per share 15 Basic (in Denars) Diluted (in Denars) The accompanying notes are an integral part of these consolidated financial statements. 135

136 136

137 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended () Share capital Share premium Revaluation Retained reserve Reserves earnings Total equity, attributable to the shareholders of the Bank Noncontrolling Interest* Total equity Balance, January 1, ,279, ,527-5,389,657 1,085,834 9,526,085-9,526,085 Profit for the year 562, , ,091 Total comprehensive income , , ,091 Transactions with owners, recognized directly in equity Dividends relating to (455,813) (455,813) - (455,813) Transfer to statutory reserve ,121 (590,121) Tax on dividends paid (39,900) (39,900) - (39,900) Total contributions by and distributions to owners ,121 (1,085,834) (495,713) - (495,713) Balance, December 31, ,279, ,527 5,979, ,091 9,592,463-9,592,463 Balance, January 1, ,279, ,527-5,979, ,091 9,592,463-9,592,463 Total comprehensive income Profit for the year ,746 82,746 (862) 81,884 Other comprehensive income - Revaluation reserve on date of assets foreclosure upon non-performing loans - - 3, ,534-3,534 Net amount reclassified to profit and loss (3,534) - (3,534) - (3,534) Total comprehensive income for the year ,746 82,746 (862) 81,884 Transactions with owners, recognized directly in equity Dividends relating to (227,906) (227,906) - (227,906) Transfer to statutory reserve ,303 (314,303) Acquisition of subsidiary with non-controlling interest ,188 4,188 Tax on dividends paid (19,882) (19,882) - (19,882) Total contributions by and distributions to owners ,303 (562,091) (247,788) 4,188 (243,600) Balance, 2,279, ,527-6,294,081 82,746 9,427,421 3,326 9,430,747 The accompanying notes are an integral part of these consolidated financial statements. 137

138 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended () Notes Profit before tax 91, ,915 Non controlling interest, included in consolidated profit and loss Adjustments for: Depreciation of property and equipment and amortization of intangible assets 23,25 172, ,875 Gain on sale of property and equipment 10 (9,767) (356,842) Gain on sale of assets acquired through foreclosure procedure 10 (3,481) (44,761) Loss on sale of assets acquired through foreclosure procedure 12-7,285 Impairment losses on assets acquired through foreclosure procedure , ,857 Depreciation of investment property Impairment losses 13 1,804,424 1,953,625 Dividend income (5,653) (7,007) Interest income 7 (4,262,693) (4,404,151) Interest expense 7 1,296,437 1,515,950 Net trading income (34,139) (5,593) Share of profit from associates accounted for using the equity method (35,910) (23,377) Interest received 4,283,123 4,376,374 Interest paid (1,302,202) (1,522,254) Income tax paid (26,566) (42,126) Operating profit before changes in operating assets and liabilities: 2,358,824 2,388,607 Restricted accounts (1,592) (11,924) Mandatory reserves in foreign currency with NBRM (267,439) 49,415 Financial assets at fair value through profit and loss (115) (20,542) Loans and advances to banks 83, ,722 Loans and advances to customers (1,416,121) (3,151,419) Collected collateral 88,186 (802,355) Other assets 225,958 (41,866) Deposits from banks and other financial institutions 584,264 (16,673) Amounts owed to other depositors 3,445,326 2,285,500 Other liabilities (148,083) 104,411 Net cash from operating activities 4,952,222 1,093,876 Cash flows from investing activities Acquisition of property and equipment (1,350,352) (187,184) Acquisition of intangible assets (20,620) (14,201) Proceeds from sale of property and equipment 12,938 4,898 Proceeds from sale of investments (4,818,149) 4,751 Dividends received 11,068 7,007 Net cash flows (used in) investing activities (6,165,115) (184,729) Cash flows from financing activities Proceeds from borrowed funds 4,986,159 13,012,688 Repayments of borrowed funds (4,645,034) (12,842,091) Dividends paid (227,906) (455,813) Net cash generated from/(used in) financing activities 113,219 (285,216) The accompanying notes are an integral part of these consolidated financial statements. 138

139 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Year ended () Notes Net change of cash and cash equivalents Cash and cash equivalents at beginning of year 26,449,595 25,825,664 Net (decrease)/increase in cash and cash equivalents (1,099,674) 623,931 Cash and cash equivalents at the end of the year 16 25,349,921 26,449,595 The accompanying notes are an integral part of these consolidated financial statements. 139

140 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General Information Komercijalna Banka AD Skopje (hereinafter the Bank ), is a shareholding company having its registered office in the Republic of Macedonia. The head office of the Bank was relocated during 2013 from Kej Dimitar Vlahov 4, 1000 Skopje to Orce Nikolov str. No. 3, 1000 Skopje. The Bank operates in the Republic of Macedonia with a network of branch and sub-branches. These consolidated financial statements comprise the Bank and its subsidiary KB Publikum Invest AD Skopje (hereinafter KB Publikum ) (collectively the Group ). The Bank is registered as a universal type of commercial bank in accordance with the Macedonian laws. The principal activities of the Bank are as follows: - Collecting deposits and other recurrent sources of funds; - Placing loans and advances in the country and abroad, including factoring and financing commercial transactions; - Issuance and administration of payment instruments (cards, cheque, bills of exchange); - Foreign exchange operations; - Domestic and international payment operations, including purchase/sale of foreign currency funds; - Fast money transfer; - Issuing payment guarantees, backing guarantees and other forms of security; - Providing services of renting safe deposit boxes, depositories and depot; - Trading in foreign currency funds; - Trading in securities; - Rendering services to custody bank; - Intermediating in selling insurance policies; - Data collection and analysis of companies credit rating; - Sale of shares in investment funds; - Other financial services defined by law, which are within the scope of activities only by a bank. The shares of the Bank are listed on the Macedonian Stock Exchange official market in the segment of super- listing, of joint stock companies with special reporting requirements, and is one of the ten companies comprising the Macedonian Stock Exchange index MBI-10. The ID quotation code is the following: Code KMB (common share) ISIN code MKKMBS In 2013 the Bank acquired majority of the voting rights in KB Publikum, thus, changing the status of KB Publikum from associate to subsidiary. KB Publikum is licensed to set up and manage open and closed ended investment funds as approved by the Securities and Exchange Commission. It manages three open-end investment funds, KB Publikum-Balanced, KB Publikum-Bonds and KB Publikum-Cash. These funds are not legal entities and do not perform specific activities. The consolidated financial statements of the Group for the year ended 31 December 2013 were authorised for issue by the Supervisory Board on 27 February

141 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Consolidated Financial Statements (a) (b) (c) (d) (e) Statement on Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standard Board ( IASB ). Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for the following: financial instruments at fair value through profit or loss are measured at fair value; available-for-sale financial assets are measured at fair value. Functional and Presentation Currency The presented consolidated financial statements are expressed in thousands of Denars. The Denar represents the functional and presentation currency of the Group. Use of Estimates and Judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not available from other sources. Actual results in subsequent periods may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Information about significant areas of estimation uncertainty and critical estimates in applying accounting policies that have the most significant effect on the amount recognized in the consolidated financial statements are described in Note 3.20 to the consolidated financial statements. A summary of the principal accounting policies applied in preparing the consolidated financial statements are set out within Note 3 to the consolidated financial statements. The accounting policies set out below have been applied consistently for all periods presented in these consolidated financial statements. Changes in accounting policies Except for the changes below, the Group has consistently applied the accounting policies as set out in Note 3 to all periods presented in these consolidated financial statements. The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January IFRS 10 Consolidated Financial Statements (2011) IFRS 12 Disclosure of Interests in Other Entities. IFRS 13 Fair Value Measurement. Disclosures Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). Presentation of Items of Other Comprehensive Income (Amendments to IAS 1). IAS 19 Employee Benefits (2011). The nature and the effects of the changes are explained below. 141

142 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Consolidated Financial Statements (Continued) (e) Changes in accounting policies (Continued) Subsidiaries As a result of IFRS 10 (2011), the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates other entities. IFRS 10 (2011) introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect those returns. In accordance with the transitional provisions of IFRS 10 (2011), the Group reassessed its control conclusions as of 1 January No changes in the consolidation conclusions were made. Interests in other entities As a result of IFRS 12, the Group has expanded disclosures about its interests in subsidiaries (see Note 33) and equity-accounted investees (see Note 22). Fair value measurement In accordance with the transitional provisions of IFRS 13, the Group has applied the new definition of fair value, as set out in Note 3.8, prospectively. The change had no significant impact on the measurements of the Group s assets and liabilities, but the Group has included new disclosures in the consolidated financial statements, which are required under IFRS 13. These new disclosure requirements are not included in the comparative information. However, to the extent that disclosures were required by other standards before the effective date of IFRS 13, the Group has provided the relevant comparative disclosures under those standards Offsetting financial assets and financial liabilities The amendments to IFRS 7 related to offsetting of financial assets and financial liabilities did not have a significant impact on the consolidated financial statements of the Group. Presentation of items of OCI The amendments to IAS 1, required the Group to modify the presentation of items of OCI in its statement of profit or loss and OCI, to present items that would be reclassified to profit or loss in the future separately from those that would never be. Comparative information should have been represented on the same basis. As the Group does not have items of other comprehensive income, this change did not have significant impact on the consolidated financial statements of the Group. IAS 19 Employee Benefits Changes in IAS 19 do not have a significant impact on the consolidated financial statements of the Group. (f) Changes in accounting estimates During 2013, the Group changed its estimates related to the allowance for impairment of loans. Thus, the Group has started to calculate allowances for impairment of loans on individual bases only, and slight adjustments to the internal rating system because of more reliable historical information have been made. The changes are applied prospectively, and the effect in the current period is additional impairment losses of MKD 61,177 thousand. Estimating the effect in future periods is impracticable. 142

143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2. Basis of Preparation of Consolidated Financial Statements (Continued) (g) New Standards and Interpretations not yet adopted A number of new standards, amendments to standards and interpretations have been issued but are not yet effective for annual periods beginning after 1 January 2013, and have not been applied in preparing these consolidated financial statements. Those that may be relevant to the Group are set out below. The Group does not plan to adopt these standards early. (i) IFRS 9 Financial Instruments (2013), IFRS 9 Financial Instruments (2010) and IFRS 9 Financial Instruments (2009) (together, IFRS 9) IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions relating to financial liabilities. IFRS 9 (2013) introduces new requirements for hedge accounting. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets. The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables. For an investment in an equity instrument that is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual shareby-share basis, to present all fair value changes from the investment in OCI. No amount recognised in OCI would ever be reclassified to profit or loss at a later date. However, dividends on such investments would be recognised in profit or loss, rather than OCI, unless they clearly represent a partial recovery of the cost of the investment. Investments in equity instruments in respect of which an entity does not elect to present fair value changes in OCI would be measured at fair value with changes in fair value recognised in profit or loss. The standard requires derivatives embedded in contracts with a host that is a financial asset in the scope of the standard not to be separated; instead, the hybrid financial instrument is assessed in its entirety for whether it should be measured at amortised cost or fair value. IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability s credit risk in OCI rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39. IFRS 9 (2013) introduces new requirements for hedge accounting that align hedge accounting more closely with risk management. The requirements also establish a more principles-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. The mandatory effective date of IFRS 9 is not specified but will be determined when the outstanding phases are finalised. However, application of IFRS 9 is permitted. The Group has started the process of evaluating the potential effect of this standard but is awaiting finalisation of the limited amendments before the evaluation can be completed. Given the nature of the Group s operations, this standard is expected to have a pervasive impact on the Group s consolidated financial statements. (ii) Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) The amendments to IAS 32 clarify the offsetting criteria in IAS 32 by explaining when an entity currently has a legally enforceable right to set-off and when gross settlement is equivalent to net settlement. The amendments are effective for annual periods beginning on or after 1 January 2014 and interim periods within those annual periods. Early application is permitted. The Group is still evaluating the potential effect of the adoption of the amendments to IAS

144 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies 3.1 Basis of consolidation Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date i.e. when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss Non-controlling interests ( NCI ) NCI are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 144

145 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (continued) 3.2 Interest Income and Expense Interest income and expense are recognized in profit or loss for all interest bearing instruments on accrual basis, measured at amortized cost using the effective interest rate method. The effective interest rate method is a method of calculating the amortized cost of a financial asset or a financial liability and allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group 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 commissions 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. 3.3 Fee and Commission Income Fees and commissions, except loan origination fees, are generally recognized on an accrual basis over the period of service rendering. Other fees relating to the acquisition and origination of loans are deferred over the life of the loan and amortized using the effective interest rate method. 3.4 Dividend Income Dividend income is recognized when the right to receive payment is established for all shareholders who participate in distribution of profit. 3.5 Foreign currency Transactions Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia ( NBRM ) at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into Denars at the end of the reporting period using official rates of exchange ruling on that date. Foreign exchange gains or losses arising upon the translation of transactions, and the translation of assets and liabilities denominated in foreign currencies are recognized in the profit or loss in the period in which they occurred. Commitments and contingent liabilities denominated in foreign currencies are translated into Denars by applying the official exchange rates at the end of the reporting period. 3.6 Financial Assets Financial assets are classified into the following specified categories: cash and cash equivalents, financial assets at fair value through profit or loss, held-to-maturity financial assets, available-for-sale financial assets, loans and receivables. The classification depends on the nature and the purposes of the financial assets and is determined at initial recognition. Financial assets are recognized and derecognized on settlement date, which represents the date when the asset is delivered to the Group Cash and Cash Equivalents Cash and cash equivalents include cash on hand and nostro accounts, that represent demand deposits and placements with other banks and financial institutions, account balances with the NBRM and other financial assets such as treasury and government bills, as highly liquid assets with maturity up to three months and insignificant changes to fair value Financial Assets at Fair Value through Profit or Loss Financial assets at fair value through profit or loss include held-for-trading financial assets. Held-fortrading financial assets are securities included in a portfolio in which a pattern of short-term profit making exists. Initially, these securities are recognized at cost and subsequently measured at fair value as determined based on their market price. 145

146 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.6 Financial Assets (Continued) Financial Assets at Fair Value through Profit or Loss (Continued) All the respective realized and unrealized gains and losses are included in profit or loss for the period. Interest, if realized, during the period of ownership of these securities, is recognized as net trading income in the profit or loss for the period. The purchase and disposal of securities held-for-trading is recognized at settlement date, which represents the date when the asset is delivered to the Group. When the settlement date and the trade date are different, then the Group recognizes the changes in fair value from the trade date to the settlement date through profit and loss Available-for-sale Financial Assets Available-for-sale financial assets 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. This portfolio comprises quoted and unquoted equity investments in shares of banks and other financial institutions and enterprises, where the Group does not exercise control. Available-for-sale financial assets are initially recognized at cost, including all transaction costs, and subsequently re-measured at fair value based on quoted prices in active markets or amounts derived from cash flow models for unquoted equity investments. Transaction costs represent the costs that are directly attributable to acquisition of the financial asset. Unrealized gains and losses arising on changes in the fair value of available-for-sale financial assets are recognized in other comprehensive income, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously accumulated in the other comprehensive income should be recognized in profit or loss for the period. Interest calculated using the effective interest method and impairment losses are recognized in the profit or loss for the period Held-to-maturity Financial Assets Held-to-maturity financial assets are financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity. If the Group is to sell other than, an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available-for-sale and the Group will not be able to classify financial assets held-to-maturity for the current and next two years. These financial assets are measured at amortized cost using the effective interest rate method Loans and receivables Loans and receivables include loans where cash is provided directly to the customer. Loans are initially recognized at fair value, including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method. Interest on loans originated by the Group is included in interest income. Loans to customers and financial institutions are stated at their net amount reduced by allowance for impairment and uncollectibility Impairment of Financial Assets The Group assesses at end of each reporting period whether there is objective evidence that a financial asset 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. 146

147 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.6 Financial Assets (Continued) Impairment of Financial Assets (Continued) 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 recognized in profit or loss is removed from other comprehensive income and recognized in the profit or 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 recognized in profit or loss, the impairment loss is reversed through the profit or loss for the period. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. The amount of the impairment loss for financial assets carried at amortized cost is calculated as the difference between the asset s carrying amount and the present value of expected future cash flows discounted at the financial instrument s original effective interest rate Impairment Losses on Loans and Receivables Allowances for impairment and uncollectibility are determined if there is objective evidence that the Group cannot collect all amounts due on a claim according to the original contractual terms. A claim means a loan, a commitment such as a letter of credit, guarantee or commitment to extend the credit. A provision for loan impairment is reported as a reduction of the carrying amount of the loan, whereas for off-balance sheet items are presented within the provisions. Additions to provisions are made through impairment losses on financial assets in the profit or loss. The allowances for impairment and uncollectibility are determined on the basis of the degree (size) of the risk of uncollectibility or specific country risk on the basis of the following principles: - Separate loan exposures (risks) are assessed on the basis of the type of loan applicant, his/her/its overall financial position, resources and payment records and recoverable value of collaterals. Allowances for losses on impairment and uncollectibility are measured and determined for the difference between the carrying amount of the loan and its estimated recoverable amount, which is, in fact, the present value of expected cash flows; - All allowances for losses on impairment and uncollectibility are reviewed and tested monthly, and any further changes in the amount and timing of expected future cash flows in comparison to previous assessments result in changes in allowances for losses on impairment and uncollectibility recorded in profit or loss; - Any loan which, is considered impossible to be collected, is written off against the relevant allowance for losses on impairment. Further collections are recorded in the profit or loss; - In case of loans granted to borrowers in countries with increased risk of difficulties for servicing external debt, the political and economic circumstances are assessed and additional allowances for sovereign risk are allocated Derecognition of Financial Assets The Group derecognizes financial assets when the right to receive cash from the financial asset has expired or has transferred its rights to receive cash flows from the asset and substantially all the risks and rewards of ownership of the assets to another entity. 147

148 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.7 Financial Liabilities Financial liabilities are classified in accordance with the substance of the contractual arrangement. Financial liabilities are classified as deposits from banks, financial institutions and customers, loans payable, other payables and derivative financial instruments Deposits from Banks and Other Financial Institutions and Customers These financial liabilities are initially recognized at fair value, net of transaction costs incurred. Subsequently they are measured at amortized cost Borrowings Borrowings payable are initially recognized at fair value net of transaction costs incurred. Subsequent measurement is at amortized cost and any difference between net proceeds and the redemption value is recognized in profit or loss over the period of the loan using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability Other Payables Other payables are stated at amortised cost Derecognition of Financial Liabilities The Group derecognizes financial liabilities when, and only when, the Group s obligations are discharged, cancelled or have expired. 3.8 Fair value measurement Policy applicable from 1 January 2013 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. 148

149 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.8 Fair value measurement (Continued) The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Policy applicable before 1 January 2013 Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, then the Group establishes fair value using a valuation technique. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price i.e. the fair value of the consideration given or received. However, in some cases the initial estimate of fair value of a financial instrument on initial recognition may be different from its transaction price. If this estimated fair value is evidenced by comparison with other observable current market transactions in the same instrument (without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets, then the difference is recognised in profit or loss on initial recognition of the instrument. In other cases, the fair value at initial recognition is considered to be the transaction price and the difference is not recognised in profit or loss immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable. If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets at a bid price. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. 3.9 Investments in Associates An associate is an entity, over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. If the Group holds, directly or indirectly, 20 per cent or more of the voting power of the investee, it is presumed that the Group has significant influence. A substantial or majority ownership by another investor does not necessarily preclude the Group from having significant influence. Investments in associates are measured using the equity method, by which the investment is initially recognized at cost. Subsequent to the initial measurement, carrying amount is increased or decreased to recognize the Group s share of the profit or loss of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation and accumulated impairment losses. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditures are recognized in the profit or loss as an expense as incurred. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. 149

150 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.10 Property and Equipment (Continued) Depreciation is charged at estimated rates so as to write off the cost of assets over their estimated useful lives, using the straight-line method. Land is not depreciated. No depreciation is charged on construction in progress until the constructed assets are put into use. The useful life of certain categories of property and equipment are as follows: Buildings Furniture and equipment 40 years 4-20 years The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the net sales proceeds and the carrying amount of the asset and is recognized in the profit and loss. The Group annually reviews its property and equipment for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount Intangible Assets Intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets include computer software and software that was acquired apart from hardware. Software is amortized on a straight-line basis over the estimated useful life, which is five years. The Group annually reviews its intangible assets and assess whether there is any indication for impairment. If such indications exist, an estimate is performed to assess whether the carrying amount is recoverable. If the carrying amount exceeds the recoverable amount, it is written down to the recoverable amount Impairment of non-financial assets The management of the Group regularly reviews the carrying amounts of the Group s non-financial assets. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is written down to its recoverable amount. An impairment loss is recognized as an expense of the current period. If the recoverable amount of an asset is increased due to change in the indications and factors of impairment at the moment the last impairment loss is recognized, the carrying amount of the asset is increased to its current recoverable amount. A reversal of an impairment loss is recognized as income immediately Investment property Investment property includes buildings owned by the Group with the intention of earning rentals or for capital appreciation or both, and is initially recorded at cost, which includes transaction costs. The classification of the investment property is based on the criteria that the property is mostly held to earn rentals when compared to the property used by the Group for its own needs. Subsequent to initial recognition, investment property is measured at cost less accumulated depreciation and any accumulated impairment losses. The depreciation of investment property is calculated on a straight-line basis in a way to write off the cost value of assets over their estimated useful lives, which approximates the useful life of similar assets included in property and equipment. Investment property is annually reviewed for impairment. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized as an expense of the current period. 150

151 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.14 Assets Acquired Through Foreclosure Proceedings Foreclosed assets include property and equipment acquired through foreclosure proceedings in full or partial recovery of a related loan and is disclosed in assets acquired through foreclosure proceedings. These assets are initially measured at the lower of the appraised value, less estimated cost to sell, charged to the Group, and the cost of the foreclosed asset. The appraised value is determined by local certified appraiser on the date of foreclosure. The cost is the value stated in an enactment passed by a competent body from where the legal grounds for acquiring the right of ownership arises. After initial recognition, foreclosed assets are reviewed for impairment at least annually and are measured at the lower of their carrying amount and fair value less estimated costs to sell and accumulated impairments, or at least 20% of the net value Assets from fiduciary activities The Group provides trustee and other fiduciary services in the name and on behalf of legal entities citizens, investment and pension funds and other institutions. Whereby the Group holds and places assets or received in various financial instruments at the direction of the customer. The Group receives fee income for providing these services. Managed funds are not assets of the Group and are not recognized in the consolidated financial statements. The Group is not exposed to any credit risk relating to such placements, as it does not guarantee them Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows Employment benefits Health, pension and social insurance contributions from gross wages and salaries are being paid by the Group during the year to the national organizations at the statutory rates. Such contributions represent defined contribution plans and are recognized as an expense when employees have rendered services entitling them to the contributions. There is no additional liability to these plans. The Group is obliged to pay to its employees a termination lump sum upon retirement equal to two monthly average salaries paid in the Republic of Macedonia. The Group records provisions for retirement to allocate such costs by periods to which they relate. In accordance with IAS 19, these benefits are considered defined pension benefit plans. The carrying amount of the Group s liabilities arising from employee benefits is calculated at the end of the reporting period. The balance of these liabilities at the end of the reporting period presents the discounted amount of future payments. 151

152 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.18 Taxation 3.19 Leases Income tax expense comprises of current tax and is recognised in profit or loss. According to the tax legislation, entities are obliged to calculate and pay income tax on non-deductible expenses and on paid dividends and other distributions from profit. The tax rate is 10% (2012: 10%). Tax on non deductable items Basis for calculation of income tax is the amount of non-deductible expenses determined in accordance with the Income Tax Law, reduced by the amount of tax credit. Tax on dividend distribution and other distributions Basis for calculation of income tax on paid dividends is the amount of paid dividends and other distributions from profit made during the current year. Taxation on dividends, i.e. dividends advances paid in cash, is incurred at the moment of payment of dividend. Assets leased out under operating lease are included in the statement of financial position as investment property. The Group leases assets as operating leases. Rental income and expenses is recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease 3.20 Critical Accounting Judgments and Estimates The most significant areas, for which judgments, estimates and assumptions are required, are: Fair Value of Financial Instruments The fair values of the financial instruments that are not quoted in active markets are determined using internal valuation techniques. These include present value methods, models based on observable input parameters. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed by qualified personnel independent of the area that created the model. Wherever possible, the Group compares valuations derived from models with quoted prices of similar instruments, and with actual values when realized, in order to further validate and standardize models. A variety of factors are incorporated into the models, including actual or estimated market prices and rates, such as time value and volatility, and market conditions and liquidity. The Group applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. In the Republic of Macedonia sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, for which published market prices are presently not readily available. The Management assesses its overall risk exposure and in instances in which it estimates that the value in the books may not be realized, it recognizes a provision. In the opinion of management, the reported carrying amounts for the assets that are not quoted in an active market represent the most valid and useful reporting values under the present market conditions. Allowance for Impairment of Loans The Group reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the profit and loss, the Group makes judgments 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 of borrowers in the Group, or national or local economic conditions that correlate with defaults on assets in the Group. 152

153 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Summary of Significant Accounting Policies (Continued) 3.20 Critical Accounting Judgments and Estimates (Continued) Allowance for Impairment of Loans (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. Useful Lives of Tangible and Intangible Assets The Group s management determines estimated useful lives and related depreciation and amortization charges for its tangible and intangible assets. The appropriateness of the estimated useful lives is reviewed whenever there is an indication of significant changes in the underlying assumptions, such as anticipated technological developments and changes in the broad economic and industry factors. Determination of control over investees Management applies its judgment to determine whether the control indicators set out in accounting policy 3.1 indicate that the Group has a control over an investee or an investment fund. Investment funds The Group acts as fund manager to three investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the funds (comprising any carried interests and expected management fees) and the investors rights. The assets of the investment funds are legally separated from the assets of the Group, In case of bankruptcy of the Group, the assets of the investment funds belong to the holders of stakes in the investment funds. In addition, the Group has week aggregate economic interests in the funds. As a result, the Group has concluded that it acts as agent for the investors in all cases, and therefore has not consolidated these funds. 4. Acquisition of subsidiaries On 25 April 2013, the Group obtained control of KB Publikum, an investment funds managing company, by acquiring additional 14.29% of the shares and voting interests in the company. As a result, the Group s equity interest in KB Publiikum increased from 50 to 64.29%. The information relating to KB Publikum is for the period from 25 April to 31 December In the period from 25 April to 31 December 2013, KB Publikum contributed revenue of 3,618 thousand of denars and loss of 2,415 thousand of denars to the Group s results. If the acquisition had occurred on 1 January 2013, Management estimates that consolidated revenue would have been 5,711,790 thousand of denars, and consolidated profit for the year would have been 80,445 thousand of denars. In determining these amounts, Management have assumed that the fair value adjustments, determined provisionally, that arose on the acquisition date would have been the same if the acquisition had occurred on 1 January Consideration transferred The consideration transferred included 12,309 thousand of denars in cash, for 200 ordinary shares issued by KB Publikum. Acquisition-related costs The Group incurred acquisition related costs of MKD 31 thousand as fees to the Security and Exchange Commission of the Republic of Macedonia and the Central Register of the Republic of Macedonia. The costs have been included in administrative expenses in

154 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. Acquisition of subsidiaries (Continued) Identifiable assets acquired and liabilities assumed The following table summarizes the recognized amounts of assets acquired and liabilities assumed at the acquisition date. In thousands of denars Note 25 April 2013 ASSETS Cash and cash equivalents 108 Financial assets held for trading 2,188 Deposits with banks 8,600 Property and equipment Intangible assets Other assets 108 Total assets 11,887 LIABILITIES Trade payables and other liabilities 159 Total liabilities 159 Total identifiable net assets acquired 11,728 Measurement of fair values Financial assets held for trading Held for trading financial assets are measured at fair value at acquisition date. Financial assets and financial liabilities The carrying amount of cash and cash equivalents, bank deposits, other assets and liabilities to suppliers and other liabilities, is identical to their fair value at acquisition date due to the short term maturity. Property and equipment and intangible assets Items of property and equipment and intangible assets are carried at cost less accumulated depreciation/amortization and accumulated impairment losses, if any. Due to their insignificant participation in total assets, it is not expected that their fair value will significantly alter the fair value of the net assets acquired. Goodwill Goodwill arising from the acquisitions has been recognised as follows: In thousands of denars Note Consideration transferred 12,309 NCI, based on their proportionate interest in the recognised amounts of assets and liabilities 4,188 Fair value of pre-existing interest in KB Publikum 5,864 Fair value of identifiable net assets (11,728) Goodwill 25 10,

155 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT The Group s activities expose it to a variety of financial risks and those activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is a core business activity and the operational risks are an inevitable consequence of being in business. The Group s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Group s financial performance. The most important types of risks identified, evaluated and mitigated by the Group s risk management policies are credit risk, liquidity risk, market risk and operational risk. Risk Management Framework The Group has established a Strategy for risk management, adopted by the Supervisory Board that is revised regularly. The Strategy defines the main objectives and general directions in undertaking and managing risks, general approach to the risk management, general approach to the internal determining and assessment of the Group's necessary capital adequacy, general review of the business strategy of the Group, as well as the possible changes in the Group's business strategy and acceptable level of risk the Group can be exposed to during its operations. The Shareholders Assembly appoints the members of the Supervisory Board and the Audit Committee. The Supervisory Board has overall responsibility for the establishment and oversight of the Group s risk management framework. The Supervisory Board has established the Board of Directors, Credit Committee and Risk Management Committee These bodies are responsible for monitoring and developing risk management policies in specific areas. The Group has established an organizational structure, with clearly defined competences and responsibilities. The Risk Management and Planning Division is responsible for monitoring and reporting of global risk exposure, while the organizational units of the Group, which create risk exposure are responsible for practical application of risk management. Independent Internal Audit Department is responsible for independent review of risk management. According to the Group s risk management policies which includes set of appropriate risk limits and controls, identifying, monitoring and risk s analysis are made on regular basis. 5.1 Credit Risk A The Group is exposed to credit risk, which represents the risk of financial loss due to customer s default on their contractual obligations. Credit risk is the most important risk for the Group s operations; therefore, the management carefully manages the Group s exposure to credit risk. The exposure to this risk arises principally from lending activities and advances, as well as activities related to off-balance sheet financial instruments, such as loan commitments to enterprises and households, guarantees and letters of credit. Taking into consideration the latest events arising from the global financial crisis, the Group applies more restrictive credit policy, higher precautions in assessing the creditworthiness of each customer and projects subject to financing. In line with the current circumstances, the Group tries to maintain a high quality loan portfolio, which is closely monitored, with tightening of the credit collection activities. Credit Risk Management The Group has an established organizational structure, with clearly defined competences and responsibilities of the Supervisory Board and the Board of Directors regarding credit risk management. The organization of the credit risk management is established on the following levels of hierarchy: - Strategic level - the risk management function is performed by the members of Supervisory Board and the Board of Directors; Risk Management Committee and Audit Committee; - Macro level - the risk management function at the level of business unit, or business line is performed by other persons with special rights and responsibilities performing managing function and/or by special organizational unit responsible for monitoring the credit risk management. Credit risk management at the level of business unit in the Group includes each Division where the credit risk is undertaken and the persons with special rights and responsibilities that performs the management function in the Division. The duties of these organizational units in the Group are regulated in the appropriate Policies adopted from the Supervisory Board. Special organizational unit in the Group competent for credit risk management is Risk Management and Planning Division Credit Risk Management Department. 155

156 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) A B (a) Credit Risk Management (Continued) All credit exposures exceeding 10% of the Group s own funds up to the legally determined limit of exposure towards a single client (up to 25% of regulatory capital) are subject to approval by the Supervisory Board. The Credit Committee oversees the overall credit operation of the Group. Also, the Credit Committee is mainly responsible for approving and proposing to the Risk Management Committee and Board of Directors, all policies, procedures and amendments thereto relating to the extension of credit, to ensure that these policies are applied consistently and complied with throughout the Group, to approve credit exposure between 3% and 10% from own funds. Board of directors, Corporate Lending Division Manager and Department Managers are authorized for approving credit exposures up to 3% of the Group's own funds. Credit Risk Assessment Loans and Advances In assessing credit risk of loans and advances to customers and to banks at a counterparty level, the Group uses three components: (I) (II) (III) the probability of default by the client or counterparty on its contractual obligation (expected cash flows); the likely recovery ratio on the defaulted obligations, the loss given default ; the amount and quality of the collateral for the exposure. These credit risk measurements, which reflect expected loss, i.e. the expected loss model and are required by the Basel Committee on Banking Regulations and the Supervisory Practices (the Basel Committee), are embedded in the Group s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the end of the reporting period (the incurred loss model ) rather than expected losses (Note 4.1.D). (i) The Group assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the group are segmented in four rating classes. The Group s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. This means that, in principal, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Group regularly validates the performance of the rating and their predictive power with regard to default events. Group s internal rating scale Group s rating A B C D+E Description of the grade Pass/acceptable for financing Watch (careful) Sub-standard Suspicious (doubtful)+loss 156

157 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) B (a) Credit Risk Assessment (Continued) Loans and Advances (Continued) Group s rating grade A (pass/acceptable for financing) includes: Claims on the European Central Bank and the central governments and central banks of countries whose claims pursuant to the methodology for determining the capital adequacy have a risk weight of 0% Part of credit exposure that is secured by first-rate collateral instruments, if the instrument is activated within 60 days of the date of maturity of the exposure; Financial position and cash flows of the client allows its further operation and opportunity to cover the current and future liabilities to the group; Liabilities based on credit exposure are settled within the maturity period or with a delay of 31 days, or In the last twelve months, no claim on the client has been restructured. Group s rating grade B (Watch (careful)) includes: The client shows financial weaknesses, but its cash flows are sufficient for regular settlement of due liabilities; Liabilities based on credit exposure are commonly settled with a delay of 60 days, or 90 days as an exception, if the delay only occasionally ranges from 61 to 90 days, or In the last six months, the credit exposure has not been restructured. Group s rating grade C (Sub-standard) includes: Cash inflows of client are unsuitable for regular settlement of liabilities; There is an inadequate maturity structure between the sources of funding of the program/project for which financial support has been requested from the Group and proceeds generated from the program/project; The Group does not hold the necessary and updated information to assess the creditworthiness of the client; The credit exposure is restructured; Liabilities based on credit exposure are commonly settled with a delay of up to 120 days, or 180 days as an exception, if the delay only occasionally ranges from 121 to 180 days; The client - nonfinancial entity has claims based on financial loan on entity enjoying a credit rating equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's") or on entity enjoying a higher credit rating, but its domicile country's credit rating equals to or is lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"), or The client - nonfinancial entity has claims based on financial loan on entity for which no credit rating has been established, but its domicile country's credit rating equals to or is lower than B- (according to the rating of "Standard & Poor's" or "Fitch") or B3 (according to the rating of "Moody's") or its domicile country's credit rating has not been established yet. The Group may not classify credit exposure to the client under this paragraph, indents 6 and 7 in C risk category, if: The exposure is based on a customs guarantee or bid guarantee; The financial loan does not exceed Denar 31,000,000 (in case of foreign currency financial loan, the Denar equivalent of the loan shall be taken into consideration), or The financial loan is equal to or greater than Denar 31,000,000, and the Group's exposure is greater than the amount of financial loan and the Group has calculated impairment or allocated special reserve, at least in the amount exceeding 20% of the amount of financial loan, whereby the credit exposure or the client meets the criteria for classification in another risk category. 157

158 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) B (a) Credit Risk Assessment (Continued) Loans and Advances (Continued) Group s rating grade D+E (Suspicious (doubtful) loss) includes: The client is illiquid; The collection of credit exposure depends on the use of collateral instruments; The liabilities based on credit exposure are commonly settled with a delay of up to 240 days, or 300 days, as an exception, if the delay only occasionally ranges from 241 to 300 days; The client (including governments and central banks) enjoys a credit rating equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"); The client's credit rating is higher than the rating referred to in indent 4 of this subitem, but its domicile country's credit rating is equal to or lower than CCC+ (according to the rating of "Standard & Poor's" or "Fitch") or Caa1 (according to the rating of "Moody's"), or The client has not been given any credit rating, but its domicile country's credit rating is equal to or lower than B- (according to the rating of "Standard & Poor's" or "Fitch") or B3 (according to the rating of "Moody's") or its domicile country has not been given any credit rating yet. Liabilities based on credit exposure are commonly settled with a delay of over 241 days The client has undergone bankruptcy or liquidation proceedings; The client denies the existence of credit exposure (in court or out-of-court proceedings), or The Group expects to collect only an insignificant portion of credit exposure to the client. (ii) Loss given default or loss severity represent the Group s expectations of the extent of loss on a claim should default occurs. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigations. (iii) Amount and quality of the collateral depends on the terms, type (immovable property, movable property, inventories, receivables) and the possibility for its enforcement. The Group divides the clients in two groups: one where the exposure of the Group is secured with value of the collateral that is lower than the amount of the exposure and second where the value of the collateral is higher than the amount of the exposure. The collateral is not taken into calculation of the expected cash flows from the financial assets, only as an input into the internal rating of the client. 158

159 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) B (b) C (a) Credit Risk Assessment (Continued) Debt Securities and Other Bills The Group is striving to maintain acceptable level of credit risk exposure regarding debt securities, so investment activities are primarily in government debt securities. Risk Limit Control and Mitigation Policies The Group manages and controls concentration of credit risk to clients, and to industries and countries. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Measures for specific control and mitigation of credit risk are prescribed in the act that regulates credit activities and procedures are obtaining collateral and credit-related contingencies Collateral Collateral always is considered as a secondary factor in granting a credit facility. Security by itself, in lack of ability to generate cash flow, is insufficient to justify the granting of credit facilities. The principal collateral types for loans and advances are: (i) For corporate entities Cash Property Equipment and vehicles Inventory Receivables Guarantees (Bank guarantees, guarantees from legal entities) Securities (Debt securities issued by the Government of RM, Securities issued by legal entities). Loans to corporate entities are generally secured. 159

160 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) C Risk Limit Control and Mitigation Policies (Continued) (ii) For individuals Property Cars Deposits Securities (Debt securities issued by the Government of RM, Securities issued by legal entities) In some cases draft or draft with endorsers covering the total receivables. Loans to individuals are generally secured. (b) Credit-related contingencies D The primary purpose to these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. The Group issues collateralized and uncollateralized guarantees and letters of credit. The Group monitors the term of maturity of these credit commitments, because long-term commitments have greater degree of credit risk than short-term commitments, also as uncollateralized commitments regarding collateralized commitments. Impairment and Provisioning Policies The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment impairment, by using the available historical experience, experienced judgment and statistical techniques. According to the Group s policy, there are four internal rating grades. The majority of the impairment provision comes from the bottom two grades. The table below shows the structure of the Group s loans and advances portfolio regarding internal rating system and the associated impairment provision for each internal rating grade: December 31, 2012 Loans % Impairment % Loans % Impairment % Pass/acceptable for financing (A) Watch (careful) (B) Sub-standard (C) Suspicious (doubtful)+ Loss (D) +(E) Total

161 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) E Maximum Exposure to Credit Risk Before Collateral Held or Other Credit Enhancements Year ended December 31, Credit risk exposure relating to balance sheet assets Loans and advances to banks 984, ,544 Loans to customers Loans to individuals - overdrafts (exemption off-balance sheet exposure) 1,230,743 1,281,213 - credit cards (exemption off-balance sheet exposure) 912, ,047 - loans 6,291,285 5,202,071 - other Loans to corporate entities - Large corporate clients 18,200,646 19,491,738 - Small and medium size companies (SMEs) 18,557,822 18,833,348 Financial assets at fair value through profit and loss 84,703 50,440 Financial assets available for sale 5,182, ,943 Financial assets held to maturity 6,709 73,275 Other assets 287, ,781 51,738,874 47,601,400 Credit risk exposure relating to off-balance sheet assets/liabilities Guarantees 7,664,738 7,984,932 Letters of credit 1,185,606 1,898,599 Unused overdrafts on current accounts 1,774,053 1,825,700 Unused credit cards limits 1,223, ,869 Unused credit limits-noncallable 836, ,029 12,684,962 13,471,129 Total credit risk exposure 64,423,836 61,072,529 The above table presents a worst case scenario of credit risk exposure to the Group as at 31 December 2013 and 2012, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet items, the exposures set out above are based on net carrying amounts as reported in the statement of financial position. As shown above, 72% of the total maximum exposure is derived from loans and advances to banks and customers (2012: 76%); 20% represents off-balance-sheet items (2012: 22%). Management is confident in its ability to continue to control and sustain minimum exposure to credit risk to the Group resulting from both loans and advances portfolio and off balance sheet items based on the following: 76.2% of the loans and advances are categorized in top two grades on the internal rating system (2012: 83.4%); Loans and advances to customers are collateralized and loans to banks are mostly in first class banks; 53.43% of loans and advances are considered as to be neither past due nor impaired (2012: 55.77%); The decrease of off-balance-sheet items generally resulting of decrease of financial guarantees and Letters of credit. 161

162 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) F (a) Loans and Advances Loans and advances are summarized as follows: Year ended December 31, 2013 Loans and advances Loans and to advances customers to banks Year ended December 31, 2012 Loans and advances Loans and to advances customers to banks Neither past due nor impaired 28,507, ,010 29,186, ,453 Past due but not impaired 3,110,415-3,775,774 - Impaired 22,534,570 37,227 19,936, ,310 Gross 54,152, ,237 52,898,775 1,140,763 Less: allowance for impairment (8,958,903) (6,598) (7,201,358) (183,219) Net 45,193, ,639 45,697, ,544 The total impairment allowance for loans and advances amounts to Denar 8,965,501 thousand (2012: Denar 7,384,577 thousand). The total exposure on credit risk is individually impaired. Further information on the impairment allowance for loans and advances is provided in Notes 20 and 21. Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Group s internal rating system. December 31, December 31, Loans and advances to banks 954, ,453 Loans to customers Loans to individuals - Loans 6,056, ,462 Loans to corporate entities - Large corporate clients 11,243,737 15,650,188 - Small and medium size companies (SMEs) 11,206,462 12,810,467 Total 29,461,083 30,139,

163 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) F (b) (c) Loans and Advances (Continued) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class of customer that were past due but not impaired were as follows: Up to 30 days Up to 90 days Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 3,110, ,110,415 Value of collateral 6,063,561 Up to 30 days Up to 90 days December 31, 2012 Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 3,775, ,775,773 Value of collateral 4,322,764 Loans and advances individually impaired i) Loans and advances The breakdown of individually impaired loans and advances by class and the fair value of related collateral held by the Group as security, are as follows: Large corporate clients Small and medium size companies (SMEs) Loans and advances to banks Overdrafts Credit cards Retail loans Total Allowance for Individuall y impaired loans Gross amount 9,030,233 10,065,264 37,227 1,250,601 1,089,822 1,098,650 22,571,797 8,958,903 Value of collateral 9,881,189 10,817, ,737 1,247,524 21,949,

164 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) F (c) Loans and Advances (Continued) Loans and advances individually impaired (Continued) Large corporate clients Small and medium size compan ies (SMEs) Loans and advance s to banks Overdrafts Credit cards Retail Loans December 31, 2012 Total Allowanc e for Individua lly impaired loans Gross amount 5,279,553 6,506, , , , ,934 13,051,118 4,632,505 Value of collateral 6,467,943 6,936, , ,954 14,011,

165 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) F (d) G Loans and Advances (Continued) The disclosed fair value of collateral is determined by certified appraisals and represents value realizable by the legal owners of the assets. ii) Loans and advances to banks The total gross amount of individually impaired loans and advances to banks as at 31 December 2013 amounts to Denar 37,227 thousand (2012: Denar 187,310 thousand). Generally, no collateral is held by the Group for these placements. Loans and advances renegotiated Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower s financial position and when the Group has made concession that it would not otherwise consider. Once the loan is restructured it remains in the same rating grade at least two quarters independent of satisfactory performance after restructuring, except when the quality of the loan was improved and the loan was transferred to a less risky category. The renegotiated loans as at 31 December 2013 and 31 December 2012 are as follows: December 31, 2013 December 31, 2012 Carrying amount Carrying amount Re-structured loans 5,150,252 1,793,933 Debt Securities, Treasury Bills and Other Eligible Bills The table below presents an analysis of debt securities, treasury bills and other eligible bills based on the respective issuer as at 31 December Issuer of the investment securities is the Central Bank of the Republic of Macedonia and the Republic of Macedonia. Fitch Ratings assigned its BB+ long term default rating and BB+ local currency long term default rating to the Republic of Macedonia. Issuer Cash and cash equivalents Trading securities Investment securities Total Central bank of the Republic of Macedonia 3,877, ,877,753 Republic of Macedonia - 1 5,134,458 5,134,459 Total 3,877, ,134,458 9,012,

166 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) G H Debt Securities, Treasury Bills and Other Eligible Bills (Continued) Issuer Cash and cash equivalents Trading securities December 31, 2012 Investment securities Total Central bank of Republic of Macedonia 1,907, ,907,216 Republic of Macedonia 1,591, ,275 1,665,066 Total 3,499, ,275 3,572,282 Repossessed Collateral As at and 2012 the Group assets obtained through foreclosure procedures amount to: December 31, 2013 December 31, 2012 Carrying amount Carrying amount Property and equipment 2,384,427 2,858,

167 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure a) Geographical sectors The following table breaks down the Group s credit exposure at their carrying amount, categorized by geographic region, based on the country of domicile of counterparties: Republic of Macedonia EU Countries Non-EU Countries Other in Europe countries Total ASSETS Cash and cash equivalents 29,225,823 13,434,389 11,220,135 1,823,823 2,747,476 Financial assets at fair value through P&L 84,703 84, Loans and advances to banks 984, ,771-24,167 Loans and advances to customers Loans to individuals - Term Loans 6,291,285 6,291, Overdrafts 1,230,743 1,230, Credit cards 912, , Loans to corporate entities - Large corporate customers 18,200,646 18,200, SMEs 18,557,822 18,555,109 2, Financial assets heldto-maturity 6,709 6, Other assets 287, , Total assets at 31 December ,782,284 59,004,199 12,182,619 1,823,823 2,771,

168 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) a) Geographical sectors (Continued) The following table breaks down the Group s credit exposure at their carrying amount, categorized by geographic region, based on the country of domicile of our counterparties: Republic of Macedonia EU Countries Non-EU Countries Other in Europe countries Total ASSETS Cash and cash equivalents 30,056,465 13,071,802 13,833,080 2,089,870 1,061,713 Financial assets at fair value through P&L 50,440 50, Loans and advances to banks 957, ,544 3,638 - Loans and advances to customers Loans to individuals - Term Loans 5,202,071 5,202, Overdrafts 1,281,213 1,281, Credit cards 889, , Loans to corporate entities - Large corporate customers 19,491,738 19,443,402-48, SMEs 18,833,348 18,782,608 50, Financial assets heldto-maturity 73,275 73, Other assets 528, , Total assets at 31 December ,363,922 59,323,001 14,837,364 2,141,844 1,061,

169 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) b) Industry sector The following table breaks down the Group s credit exposure at their carrying amount, categorized by industry sector of our counterparties: Total Manufac -turing Commerce and finance Retail customers Agriculture Govern ment and local authorit ies Construc -tion Transport Trade Other ASSETS Cash and cash equivalents 29,225,823-29,225, Financial assets at fair value through profit and loss 84,703-84, Loans and advances to banks 984, , Loans and advances to customers Loans to individuals - Term Loans 6,291, ,291, Overdrafts 1,230, ,230, Credit cards 912, , Loans to corporate entities - Large corporate customers 18,200,646 7,677, ,662 1,389,756 1,150, ,639 5,341,621 2,304,552 - SMEs 18,557,822 5,240, ,539 3,338 2,177, ,025 5,593,717 3,636,983 Financial assets held to maturity 6,709-6, Other assets 287, , Total assets at 31 December ,782,284 12,917,720 30,589,129 8,434,687 1,140,201 1,393,094 3,327,916 1,102,664 10,935,338 5,941,

170 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.1 Credit Risk (Continued) I Concentration of Risks of Financial Assets with Credit Risk Exposure (Continued) b) Industry sector (Continued) The following table breaks down the Group s credit exposure at their carrying amount, categorized by industry sector of our counterparties: Total Manufac -turing Commerce and finance Retail customers Agriculture Govern ment and local authorit ies Construc -tion Transport Trade Other ASSETS Cash and cash equivalents 30,056,465-30,056, Financial assets at fair value through profit and loss 50,440-50, Loans and advances to banks 957, , Loans and advances to customers Loans to individuals - Term Loans 5,202, ,202, Overdrafts 1,281, ,281, Credit cards 889, , Loans to corporate entities - Large corporate customers 19,491,738 7,396, ,895 1,376,912 1,423, ,621 6,418,377 2,481,188 - SMEs 18,833,348 5,186, ,025, ,401 2,502,908 1,374,760 5,433,874 3,098,434 Financial assets held to maturity 73,275-73, Other assets 528, , Total assets at 31 December ,363,922 12,583,006 31,666,505 7,372,331 1,098,648 1,588,313 3,926,865 1,696,381 11,852,251 5,579,

171 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.2. Market Risk A B The Group takes on exposure to market risk. Market risk arises from open positions in interest rate, currency, and price risk, all of which are exposed to general and specific market movements. The Group estimates the market risk of positions held and the maximum losses expected based upon a number of assumptions for various changes in market conditions. The Board of Directors sets limits on the value of risk that may be accepted, which is monitored on a regular basis. Market Risk Measurement Regarding market risk managing and measuring, the Group s management on a regular basis through adequate analysis and reporting process, is monitoring: interest rate changes regarding market movements and internal decisions, and the influence on interest bearing assets and liabilities and the net interest margin; changes of foreign currency rates regarding foreign currency assets and liabilities and maintain adequate structure regarding foreign exchange risk exposure; The aim of the Group is maximizing the stability and profitability, by applying the optimum combination of foreign currency and interest rate structure of the assets and liabilities. Foreign Currency Risk The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for overnight position, which are monitored daily. The table below summarizes the Group s exposure to foreign currency exchange rate risk at 31 December 2013 and Included in the table are the Group s assets and liabilities at carrying amounts categorized by currency. 171

172 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Assets 5. FINANCIAL RISK MANAGEMENT (Continued) 5.2. Market Risk (Continued) B (i) Foreign Currency Risk (Continued) Concentrations of assets and liabilities The Group had the following significant currency positions: EUR USD MKD Other Total Cash and cash equivalents 14,853,998 3,429,129 8,957,765 1,984,931 29,225,823 Financial assets at fair value through profit and loss 1-84,702-84,703 Financial assets available-for-sale 1,399, ,782,925-5,182,413 Financial assets held-to-maturity 6, ,709 Loans and advances to banks 959,778 24, ,639 Loans and advances to customers 14,674, ,481 29,575,880 18,934 45,193,155 Investments in associates , ,890 Property and equipment - - 3,245,684-3,245,684 Investment property ,461-29,461 Intangible assets ,378-57,378 Current tax assets Other assets 41,818 60, , ,255 Assets acquired through foreclosure procedures - - 2,384,427 2,384,427 Total assets 31,936,250 4,437,798 48,454,474 2,004,017 86,832,539 Liabilities Deposits from banks and other financial institutions 34,436 65,691 1,479,847 88,271 1,668,245 Deposits from customers 28,761,561 4,406,141 36,720,866 1,875,993 71,764,561 Borrowings 2,868, ,801-3,343,221 Other taxes liabilities - - 4,445-4,445 Provisions 12,703 11, , ,757 Other liabilities 108,563 13, ,378 8, ,563 Total liabilities 31,785,683 4,496,862 39,146,011 1,973,236 77,401,792 Net on-balance sheet financial position 150,567 (59,064) 9,308,463 30,781 9,430,747 Contingencies and commitments 4,720, ,677 7,424,940-12,523,

173 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.2. Market Risk (Continued) B Foreign Currency Risk (Continued) (i) Concentrations of assets and liabilities December 31, 2012 EUR USD MKD Other Total Total assets 32,692,495 4,185,954 43,889,305 2,007,563 82,775,317 Total liabilities 31,221,438 4,253,921 35,829,063 1,878,432 73,182,854 Net on-balance sheet financial position 1,471,057 (67,967) 8,060, ,131 9,592,463 Contingencies and commitments 5,067, ,784 7,286,372 2,161 13,308,382 C The table below summarises the sensitivity analysis for foreign currency risk and the effect on the profit or loss: Increase 2013 Increase 2012 Effect on profit and loss and equity EUR 0.5% 0.5% 753 7,355 USD 5.0% 5.0% (2,953) (3,398) Other 1.0% 1.0% 308 1,291 Interest Rate Risk The Group s operations are subject to the risk of interest rate fluctuations to the extent that interestbearing assets and interest-bearing liabilities mature or re-price at different times or in differing amounts. In the case of floating rate assets and liabilities, the Group is also exposed to basis risk, which is the difference in re-pricing characteristics of the various floating rates, such as the savings rates, LIBOR/EURIBOR and different types of interest. Risk management activities are aimed at optimizing net interest income, given market interest rate levels consistent with the Group s business strategies. Assets-liability risk management activities are conducted in the context of the Group s sensitivity to interest rate changes. In general, the Group is asset sensitive because of the majority of the interestbearing assets; the Group has the right simultaneously to change the interest rates. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rate. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation. 173

174 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.2. Market Risk (Continued) C C Interest Rate Risk (Continued) As at 31 December 2013 Assets Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Non-interest bearing Total Cash and cash equivalents 27,502, , ,522,433 29,225,823 Financial assets at fair value through profit and loss ,703 84,703 Financial assets available for-sale - 198,365 4,619, ,297-64,998 5,182,413 Financial assets held-to-maturity ,557 2, ,709 Loans and advances to banks 29,451 1, , ,639 Loans and advances to Customers 1,828,444 3,980,222 32,612,541 2,298,558 2,078,682 2,394,708 45,193,155 Investments in associates , ,890 Other assets , ,255 Total assets 29,360,579 4,380,475 38,186,184 2,602,412 2,080,756 4,505,181 81,115,587 Liabilities Deposits from banks and other financial institutions 979,268 43, , ,918 1,668,245 Deposits from customers 33,781,635 12,203,026 24,369, ,410,345 71,764,561 Borrowings 571,541 15, ,421 1,593, , ,244 3,343,221 Other liabilities , ,563 Total liabilities 35,332,444 12,261,751 25,683,807 1,593, ,160 2,043,070 77,235,591 Total interest repricing gap (5,971,865) (7,881,276) 12,502,377 1,009,053 1,759,596 2,462,111 3,879,996 As at 31 December 2012 Total assets 28,632,515 5,799,726 19,042,572 15,922,456 4,237,234 4,144,196 77,778,699 Total liabilities 32,952,434 12,387,597 19,034,730 5,811, ,859 2,557,754 73,018,721 Total interest repricing gap (4,319,919) (6,587,871) 7,842 10,111,109 3,962,375 1,586,442 4,759,

175 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.2. Market Risk (Continued) C Interest Rate Risk (Continued) The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At 31 December 2013, if variable interest rates had been 100 basis points higher, or 60 basis points lower (2012: higher/lower 150 basis points) all other variables being held constant, the Group s profit or loss for the twelve month period ended 31 December 2013 would increase by approximately Denar 94,196 thousand, and decrease by approximately Denar 56,517 thousand (2012: Denar 190,592 thousand). If adjustable interest rates had been 150 basis points (2012: 200 basis points) higher/lower with all other variables were held constant, the Bank s profit or loss for the twelve month period ended 31 December 2013 would respectively decrease//increase by approximately Denar 575,025 thousand (2012: Denar 617,531 thousand). The sensitive analysis refers to the Bank, because of the insignificant participation (under 1%) of total assets of the subsidiary in the assets of the Bank Liquidity Risk A Liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence of liquidity risk may be the failure to meet obligations to repay depositors and fulfill commitments to lend. Liquidity Risk Management Process Liquidity risk management policy of the Group defines the method of managing the Group s liquidity. Perception and monitoring of the Group s liquidity is an essence of its stability and successful working. Implementation of the liquidity risk management policy is done using defined risk management process which includes planning and managing with cash flows, maintaining adequate structure of assets and liabilities, financial instruments for liquidity risk management, adequate diversification of deposits and other liabilities by maturity and client, procedures for identification and monitoring the deposit s stability, monitoring the maturity of assets and liabilities, monitoring the off-balance sheet items, monitoring liquidity ratios, internal liquidity indicators, liquidity stress testing and continuity plan in irregular conditions reporting to Group s bodies and adequate management information system and responsibilities of Group s organizational units in liquidity risk management process. The aim of the Group is maximizing the profitability, by applying the optimum combination of maturity and foreign currency structure of the assets and liabilities. However, the Group strives to use adequate term structure of funds adjusted to term structure of placements, based on contractual and expected maturity of the deposit base. The primary strategy of the Group is to maintain its liquidity on the highest level and not to promote significant increase of loan portfolio and increase of profit. The table below analyses the undiscounted contractual cash flows of assets and liabilities of the Group into relevant maturity buckets based on the remaining period at the date of the statement of financial position to the contractual maturity date for assets and liabilities. Although the Group has a shortage of short-term assets over short-term liabilities maturing within one month, one to three months, three to twelve months, the Group s management considers its deposit base as being stabile and liquidity not jeopardized. This is based on statistical data and calculations of expected maturity in order to determine the funding and stability of the deposit base. 175

176 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.3. Liquidity Risk (Continued) A Liquidity Risk Management Process (Continued) Maturities of assets and liabilities Up to 1 month 1-3 months 3-12 months 1-5 years December 31,2013 Over 5 years Total Liabilities Deposits from banks and other financial institutions 1,021,119 43, ,898 30,356-1,668,602 Deposits from customers 34,537,876 12,186,244 19,874,206 5,671,884 20,823 72,291,033 Borrowings 577,955 15, ,344 1,688, ,385 3,410,356 Provisions 59,309 15,448 40,750 46, ,757 Other liabilities incl. current tax liability 418,752 5,141 2,356 15,572 22, ,008 Total liabilities 36,615,011 12,265,609 21,170,554 7,451, ,641 77,995,756 (contractual maturity dates) Total assets 27,365,214 4,484,952 20,450,981 20,583,913 8,079,639 80,964,699 (contractual maturity dates) Up to 1 month 1-3 months 3-12 months 1-5 years December 31,2012 Over 5 years Total Liabilities Deposits from banks 511,578 31, , ,084,294 Deposits from other customers 33,485,353 12,353,992 17,972,902 4,462, ,220 68,538,725 Borrowings 211,993 19, ,805 1,792, ,554 3,040,770 Provisions 50,283 18,657 67,920 22,856 3, ,747 Other liabilities incl. current tax liability 564,677 3,285 3,363 37, ,031 Total liabilities 34,823,884 12,426,877 19,244,781 6,315, ,805 73,435,567 (contractual maturity dates) Total assets 27,348,841 5,897,212 16,092,096 21,178,659 7,141,058 77,657,866 (contractual maturity dates) 176

177 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.3. Liquidity Risk (Continued) B Assets Held for Managing Liquidity Risk The Group holds a diversified portfolio of cash, highly marketable assets and highly-liquid securities to support payment obligations in stressed market environment. The Group s assets held for managing liquidity risk comprise: Cash and balances with the National Bank of Republic of Macedonia; Treasury bills; Government bills and Government bonds that are readily acceptable in repurchase agreements with central bank; Short-term Loans and advances to banks. C Off-balance Sheet Items (Uncollateralized) (a) Guarantees The maturity buckets are based on the remaining contractual maturity date of the guarantees i.e. the earliest period in which the guarantees could be called. (b) Letter of credit The maturity groupings based on the remaining contractual maturity date of letter of credit are also included in the table below. (c) Other This item includes approved undistributed overdrafts on current accounts and cards and loans in Denars for out limiting of the condition of the funds on the current accounts of legal entities in domestic payment operation. The maturity buckets based on the remaining contractual maturity date are summarized in the table below: Up to 1 year 1-5 years Over 5 years Total Guarantees 4,158,873 3,486,611 19,254 7,664,738 Letter of credit 1,064, ,060-1,185,606 Other 3,834, ,834,618 Total 9,058,037 3,607,671 19,254 12,684,962 Up to 1 year 1-5 years December 31, 2012 Over 5 years Total Guarantees 5,898,517 1,835, ,896 7,984,932 Letter of credit 1,842,251 56,348-1,898,599 Other 3,587, ,587,598 Total 11,328,366 1,891, ,896 13,471,

178 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.4. Financial instruments A Fair value Fair value represents the amount at which an asset could be replaced or a liability settled on regular, market conditions between informed and voluntary parties. Fair value has been based on management assumptions according to the profile of the asset and liability base. The following table summarizes the carrying amounts and fair values of those financial assets and liabilities not measured at fair value. Carrying amount As at 31 December 2013 As at 31 December 2012 As at 31 December 2013 Fair value As at 31 December 2012 Financial assets Loans and advances to banks 984, , , ,544 Loans and advances to customers 45,193,155 45,697,417 45,192,776 45,696,813 - Retail customers(individuals) 8,434,689 7,372,331 8,434,689 7,372,331 - large corporate customers 18,200,644 19,491,738 18,200,643 19,491,738 - SMEs 18,557,822 18,833,348 18,557,444 18,832,744 Financial assets available-for-sale 5,182, ,943 5,182, ,943 Financial assets held-to-maturity 6,709 73,275 6,451 72,646 Financial liabilities Deposits from banks and other financial institutions 1,668,245 1,084,294 1,668,245 1,084,294 Deposits from customers 71,764,561 68,325,236 71,764,561 68,325,236 Borrowings 3,343,221 3,001,547 3,343,221 3,001,547 The fair value of the above presented financial assets and liabilities are determined within level 2 fair value measurement hierarchy, except for financial assets held-to-maturity within level 1 fair value hierarchy. a) Loans and advances to banks Due to the insignificant risk of change in value, the fair value of loans and advances to banks is equal to their carrying amounts. b) Loans and advances to customers Loans and advances to customers are stated according to amortized cost less impairment. A major part of the loans and advances to customers is with adjustable interest rate. The appraised fair value of loans and advances to customers is determined by the discounted expected future cash flows. Apprised future cash flows for determining the fair value are discounted using current market interest rate. 178

179 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.4. Financial instruments (Continued) A B Fair value (Continued) c) Financial assets available-for-sale Fair value for assets classified as available for sale is based on published prices on active market or published prices available from stock exchange, dealer and broker. In cases where this information is not available, fair value is estimated by: information for realized prices of and recent normal commercial transactions among voluntary parties; analysis of discounted cash flows; other alternative models for price determination. d) Financial assets held-to-maturity Fair value for assets classified as held-to-maturity is based on published prices on active market or published prices available from stock exchange, dealer and broker. In cases where this information is not available, fair value is estimated by: information for realized prices of recent normal commercial transactions among voluntary parties; analysis of discounted cash flows; other alternative models for price determination. e) Deposits from banks and other financial institutions Due to the insignificant risk of changes in value, the fair value of demand and time deposits is equal to their carrying amounts. f) Deposits from customers The fair value of the sight deposits and the deposits with adjustable interest rate is their carrying amount. g) Borrowings Fair value of borrowings with variable interest rate does not differ from its carrying value due to interest rate adjustment for specific financial liabilities with market interest rates for similar instruments. The fair value of credit lines regulated with special terms and for which the market does not provide reliable estimates of prices for similar instruments, approximately presents their carrying value. Fair value hierarchy The Group classifies all financial assets and liabilities at fair value, using fair value hierarchy which reflects the significance of inputs used in determining fair value. The fair value hierarchy includes the following levels: a) Level 1 Fair value is determined directly with reference to quoted market prices of the financial instruments in active markets; b) Level 2 - Fair value is determined using valuation techniques that include active markets inputs, which can be direct, i.e. prices, or indirect, i.e. derived from prices; c) Level 3 - Fair value is determined using valuation techniques that include inputs that cannot be directly or indirectly followed on the active markets, or are not observable. 179

180 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.4. Financial instruments (Continued) B Fair value hierarchy (Continued) For financial instruments carried at fair value, the level in the fair value hierarchy into which the fair values are categorised are as follows: December 31,2013 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss - Debt and other fixed income investments securities Equity investments 84, ,702 Financial assets available-for-sale - Government bills 4,818, ,818,119 - Government bonds 309, ,630 - Equity investments Total assets 5,212, ,212,452 December 31,2012 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss - Debt and other fixed income investments securities Equity investments 50, ,436 Financial assets available-for-sale -Government bills 197, ,803 - Equity investments ,140 96,140 Total assets 248,243-96, ,383 Reconciliation from the beginning to the ending balances for fair values measurements in Level 3 of the fair value hierarchy: Financial assets available for sale Total Balance at 1 January ,288 95,288 Gains/(losses) recognized in: - Profit or loss (8) (8) - Purchases of financial instruments in the period Balance as at 31 December ,140 96,140 Total gains/(losses) recognized in profit or loss for the assets and liabilities outstanding as at 31 December 2012 (8) (8) Balance at 1 January ,140 96,140 Gains/(losses) recognized in: - Profit or loss 13,291 13,291 - Sales of financial instruments in the period (54,767) (54,767) -Reclassified financial instruments in/(from) Level 3 (54,664) (54,664) Balance as at 31 December Total gains/(losses) recognized in profit and loss for the assets and liabilities outstanding as at 31 December ,291 13,

181 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.4. Financial instruments (Continued) B Fair value hierarchy (Continued) During 2013, certain available for sale equity investments securities were transferred out of Level 3 of the fair value hierarchy. Taking into account that for these investments there is no active market, as well as a lack of recent transactions that could be applied in determination the fair value, the investments in available-for-sale securities are stated at their cost, less any impairment. The market for these securities is irregular and is not fully developed, so that the fair value cannot be reliably measured. 5.5 Operational risk Operational risk is a risk of loss as a result of inadequate or failed internal processes; inadequate personnel inadequate or failed systems in the Group or external events. The operational risk shall also include the legal risk. Legal risk is current or prospective risk to the Group's profit and own funds, caused by violation or nonadherence to the legal framework, agreements, prescribed practices, ethics standards, or as a result of misinterpretation of the regulations, rules, agreements and other legal documents. The Group had established a framework for managing the operational risk that is based on Strategy, Policy and Methodology; appropriate organizational structure and established process for managing this risk. The established framework allows within the various Group processes to identify risks arising from these processes, their measurement and taking corrective actions in order to avoid the potential adverse effect on the financial results and capital position of the Group. The adequacy of the established framework for managing operational risk is regularly reviewed. The Identification and measurement of the operational risk, the Group is doing by analyzing the collected data on loss events and key risk indicators, as well as applying the method of self-assessment through a qualitative approach and analysis of external data losses at other banks. Starting from 30 September 2012, and the requirements of the national legislation, the Group began setting the capital requirement for operational risk, using the standardized approach. The amount of capital to 31 December 2013 is presented in section 5.6 Capital management Capital management According to the Decision on consolidated supervision (Official Gazette of the Republic of Macedonia No.17/2008) of the Central Bank, if total assets of the subordinate entity represent less than 1% of the assets of the parent entity, subordinate entity will not be included in the consolidated financial statements for purposes of consolidated supervision. Based on the above, capital adequacy is not determined on a consolidated basis. The Bank s objectives regarding capital management, which is a broader concept than the equity on the face of the statement of financial position are: To comply with the capital requirements by the regulator; To safeguard the Bank s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and; To maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are regularly monitored by the Bank s management, employing techniques prescribed by national regulatory authority, i.e. the National Bank of Republic of Macedonia (NBRM). The required information is submitted to regulatory authority on a quarterly basis. 181

182 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.6. Capital management (Continued) In addition, the Bank has established a Process of determining the Internal Capital (PIC) in accordance with the Decision on risk management, prescribed by the NBRM. The process of determining the internal capital is based on adopted Policy and Procedures and within the process, the Bank: determines the internal capital required to cover the acceptable level of risk, in accordance with its risk profile and the size and complexity of current and future financial activities; is aiming to establishing a sustainable level of capital in a long term, taking into account the impact of all material risks, etc. The Bank determines its own funds and capital adequacy in accordance with the Methodology for determining capital adequacy and own funds prescribed by the NBRM. In accordance with the regulation, the credit risk weighted assets and the capital required for coverage of operational risks are calculated based on the standardised approach. The regulatory authority requires that each bank has to maintain capital adequacy ratio above 8%. The Bank s regulatory capital is divided in two groups: Tier 1 that includes: ordinary and non-cumulative non-voting shares and share premium, statutory reserves and retained earnings or loss, items as result of consolidation, less: intangible assets; Tier 2 that includes: cumulative non-voting shares and share premium, hybrid capital liabilities and subordinated liabilities. Investments in other Banks or financial institutions and investments in insurance and re-insurance companies over 10% of capital of such institutions are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital. Total risk-weighted asset is a sum of credit risk-weighted assets, currency risk weighted assets, operational risk weighted assets and other risk-weighted assets. According to national regulations, credit risk-weighted assets (on-balance and off-balance) are distributed by appropriate risk weights according to the level of credit quality (credit rating) of the debtor, taking into consideration credit protection instruments.the capital adequacy ratio is calculated as a ratio between the Bank's regulatory capital and the risk weighted assets. The table below summarizes the compositions of regulatory capital and the capital adequacy ratio of the Bank for the years ended 31 December 2013 and 2012 regarding the requirement of regulatory authority. During these two years, the Bank complied with all of the regulatory imposed capital requirements to which the Bank is subject. 182

183 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. FINANCIAL RISK MANAGEMENT (Continued) 5.6. Capital management (Continued) Tier 1 capital December 31, 2013 Ordinary and non-cumulative non-voting shares and share premium 3,050,594 Statutory reserves and retained earnings or loss 6,294,081 Items as result of consolidation - Deductions from Tier 1 capital (3,417) Total qualifying Tier 1 capital 9,341,258 Tier 2 capital - Cumulative non-voting shares and share premium - Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital - Deductions from regulatory capital (169,130) Total regulatory capital 9,172,128 Credit risk-weighted assets 57,077,252 FX risk-weighted assets 414,625 Operational risk-weighted assets 7,640,201 Other risks weighted assets - Capital adequacy ratio 14.1% December 31, Tier 1 capital 2012 Ordinary and non-cumulative non-voting shares and share premium 3,050,594 Statutory reserves and retained earnings or loss 5,979,778 Items as result of consolidation - Deductions from Tier 1 capital (7,383) Total qualifying Tier 1 capital 9,022,989 Tier 2 capital Cumulative non-voting shares and share premium - Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital - Deductions from regulatory capital (126,336) Total regulatory capital 8,896,654 Credit risk-weighted assets 57,772,293 FX risk-weighted assets 2,022,851 Operational risk-weighted assets 7,559,934 Other risks weighted assets - Capital adequacy ratio 13.2% The increase of the regulatory capital in 2013 is mainly a result of including part of the profit realized in 2012 to the Bank s reserves 183

184 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. SEGMENT REPORTING Segment reporting is carried out by the Group s operating segments. Operating segment is a component of the activities of the Group for which the following conditions have been fulfilled: Performs activities as a result based on which incomes are generated and expenditures arise; Is being reviewed by the Group s Supervisory Board, in order to assess the accomplishments and make decisions for future business activities of the segment; and Financial information for the segment is available. The Group discloses the information independently for each significant operating segment. A segment is considered significant if: The income of the segment participates with more than 10% in the total income of the Group; The amount of the profit or loss represents 10% or more from the total income of all operating segments which have made profit, or from the total loss of all the operating segments which have made loss; Total assets of the segment participate with 10% or more in the Group s total assets; Management has assessed that they are significant to follow for the Group s management needs. For the purposes of the financial reporting, the Group groups two or more segments into one operating segment if those operating segments are similar in terms of the variety of the goods and services, the type and the group of the users of the goods and of the services and the methods of distribution and offering of the goods and services. As at and 2012 the Group does not group two or more operating segments into one. The operating segments of Komercijalna Banka are equal as the business lines (BL) prescribed in the Decision on the methodology for determining capital adequacy ( Official Gazette of the Republic of Macedonia No. 47/12), using the standardized approach for the determination of capital required for coverage of operational risk. Geographical areas according to which the Group is reporting are: Member countries of the European Union; Other European countries, outside the EU; Countries outside Europe, members of the Organization for Economic Cooperation and Development (OECD); Other countries. As at and 2012 there are no significant clients upon which the Group realizes 10% or more from its total business income or expenditure. 184

185 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. SEGMENT REPORTING (Continued) A. Operating segments BL 1: Services related to financing of medium and large sized enterprises BL 2: Trading and sales BL 3: Retail banking BL 4: Corporate banking BL 5: Payment and settlement BL 6: Custody services BL 7: Asset management BL 8: Retail brokerage Other insignificant operating segments Unallocated Total Net interest income - - (298,437) 3,264, (18) ,966,256 Net fee and commission income - 2,251 44, , ,786 13,117-2,044 3,162 2, ,435 Dividend income - 5, ,653 Net gains/(losses) on financial instruments classified as held for trading - 34, ,139 Other operating income - 130, ,363 (329,841) 54, ,691 32, ,819 Share of profit of associates accounted for using the equity method ,910-35,910 Income realized between the segments Total income per segment - 172, ,823 3,113, ,948 14,035-2,135 43,783 35,393 4,191,212 Impairment charge for credit losses - - (29,061) (1,775,363) (1,804,424) Personnel expenses - (9,272) (173,054) (132,935) (384,849) (9,272) - (8,539) (3,122) (200,136) (921,179) Depreciation and amortization - (1,745) (32,557) (25,009) (72,403) (1,745) - (1,606) (724) (37,653) (173,442) Other operating expenses - (12,437) (460,552) (445,006) (175,873) (2,529) - (3,959) (1,205) (98,980) (1,200,541) Investments in property and equipment Total expenses per segment - (23,454) (695,224) (2,378,313) (633,125) (13,546) - (14,104) (5,051) (336,769) (4,099,586) Financial result per segment - 149,464 (589,401) 734,864 70, (11,969) 38,732 (301,376) 91,626 Income tax expense (9,742) Profit for the year 81,884 Total assets per segment - 119,007 9,235,899 73,721,121 2,734,077 35,624-31, ,364 86,045,804 Unallocated assets per segment 786, ,735 Total assets 86,832,539 Total liabilities per segment ,902,843 19,245, ,955 12, ,287,389 Unallocated liabilities per segment 114, ,403 Total liabilities 77,401,

186 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. SEGMENT REPORTING (Continued) A. Operating segments (Continued) BL 1: Services related to financing of medium and large sized enterprises BL 2: Trading and sales BL 3: Retail banking BL 4: Corporate banking BL 5: Payment and settlement BL 6: Custody services BL 7: Asset management BL 8: Retail brokerage December 31, 2012 Other insignificant operating segments Unallocated Total Net interest income - 6,080 (518,173) 3,384,003 16,399 (108) ,888,201 Net fee and commission income - (20,619) 41, , ,744 11,179-2,844-2, ,903 Dividend income - 7, ,007 Net gains/(losses) on financial instruments classified as held for trading - 5, ,593 Other operating income - 30,650 86,098 77,615 83,484 5, , ,961 Share of profit of associates accounted for using the equity method ,377-23,377 Income realized between the segments Total income per segment - 28,711 (391,045) 3,664, ,627 16,099-2,844 23, ,986 4,523,042 Impairment charge for credit losses - - (58,225) (1,895,400) (1,953,625) Personnel expenses - (10,208) (156,850) (115,853) (350,548) (7,552) - (6,805) - (182,079) (829,895) Depreciation and amortization - (2,201) (33,826) (24,984) (75,597) (1,629) - (1,468) - (39,266) (178,971) Other operating expenses - (15,802) (438,443) (245,958) (178,425) (2,286) - (3,835) - (107,887) (992,636) Investments in property and equipment Total expenses per segment - (28,211) (687,344) (2,282,195) (604,570) (11,467) - (12,108) - (329,232) (3,955,127) Financial result per segment (1,078,389) 1,382, ,057 4,632 - (9,264) 23,377 89, ,915 Income tax expense (5,824) Profit for the year 562,091 Total assets per segment - 76,929 7,972,076 71,640,925 2,065,639 20,223-17, ,834 81,914,158 Unallocated assets per segment 861, ,159 Total assets 82,775,317 Total liabilities per segment ,341,484 18,403,507 97,143 27, ,870,088 Unallocated liabilities per segment 312, ,766 Total liabilities 73,182,

187 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. SEGMENT REPORTING (Continued) B. Geographical areas Republic of Macedonia EU member countries Europe (other) OECD member countries (without EU members of OECD) Other (insignificant geographical areas) Unallocated Total Total income 4,511,197 (127,495) (91,031) (107,194) 2,548 3,187 4,191,212 Non-current assets* 5,716, ,716,950 December 31, 2012 Total income 4,616,760 (87,688) (39,941) 32,581 1,491 (161) 4,523,042 Non-current assets* 4,996, ,996,618 *Non-current assets include items of property and equipment, investment property, intangible assets and assets acquired through foreclosure procedure. 187

188 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7. NET INTEREST INCOME December 31, December 31, Interest and similar income Loans and advances: - To banks 2,634 2,964 - To customers 3,941,282 4,097,086 Cash and cash equivalents 186, ,769 Investment securities 132,480 11,332 4,262,693 4,404,151 Interest expense and similar charges Deposits from banks 3, Deposits from customers 1,261,117 1,478,652 Other borrowed funds 32,062 37,109 1,296,437 1,515,950 Interest income from collected previously written off interest amounts to Denar 521,690 thousand (2012: Denar 407,555 thousand). As at 31 December 2013 there is no interest income from financial assets at fair value through profit or loss (2012: none). 8. NET FEE AND COMMISSION INCOME Fee and commission income December 31, December 31, Payment operations -in the country 368, ,932 -abroad 237, ,877 Letters of credit and guarantees 183, ,256 Credit cards 86,019 80,356 Brokerage fees 4,039 5,567 Other 182, ,692 1,061,981 1,064,680 Fee and commission expense Loans 76,976 74,092 Payment operations -in the country 52,607 54,098 -abroad 17,037 21,507 Brokerage fees 628 2,276 Other 19,298 12, NET GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS CLASSIFIED AS HELD FOR TRADING 166, ,777 December 31, December 31, Gains/(losses) from changes in fair value of equity securities, net (realized/unrealized) 34,139 5,593 Net gains/(losses) on financial instruments classified as held for trading 34,139 5,

189 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. OTHER OPERATING INCOME December 31, December 31, Membership fee for credit cards 39,283 41,908 Net foreign currency transactions 35,807 70,066 Rental income 17,057 27,938 Recoveries on loans and advances previously written off 37,226 46,829 Gain on sale of Property Plant and Equipment, and assets acquired through foreclosure procedures 13, ,604 Gain from sale of securities available-for-sale 13,309 - Remeasurement to fair value of pre-existing interest in acquiree 5,435 - Other 21,776 42, PERSONNEL EXPENSES 183, ,471 December 31, December 31, Wages and salaries 557, ,786 Contributions to defined contribution plans 145, ,146 Other staff costs 96,123 44,732 Taxes and contributions 122, , OTHER OPERATING EXPENSES 921, ,895 December 31, December 31, Insurance premiums for deposits 383, ,851 Services 195, ,701 Administration and marketing costs 91, ,132 Materials 117, ,978 Impairment losses on assets acquired through foreclosure procedure 389, ,857 Loss on sale of assets acquired through foreclosure procedure - 7,285 Tax and contributions 1,909 1,807 Court litigation expenses 4,593 1,331 Other 15,750 21,694 1,200, ,

190 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. IMPAIRMENT CHARGE FOR CREDIT LOSSES December 31, December 31, Loans and advances to banks (Note 20) (110,109) 89,974 Loans and advances to customers (Note 21) 1,899,954 1,813,133 Other assets (Note 26) 15,568 25,898 Contingencies and commitments (Note 34) (989) 24, INCOME TAX EXPENSE The major components of income taxes in profit or loss are as follows: 1,804,424 1,953,625 December 31, December 31, Current income tax expense (9,742) (5,824) The total charge for the year can be reconciled to the accounting profit as follows: In % (9,742) (5,824) December December 31, In % 31, Profit before tax , ,00 567,915 Tax calculated at a tax rate of 10% (2012: 10%) , ,791 Tax on expenses non allowable for taxation purposes , ,824 Tax exemption on profit for the current period, payable upon distribution of profit (10.00) (9,163) (10.00) (56,791) Income tax expense , ,824 Effective from January 1, 2009, amendments of the local Income Tax Law have been introduced, with the major change on the taxation of the 2009 net profit. Such change provides for an entire exemption of income tax, after taxation of certain expenses not deductible for tax purposes, if net profit for the year is not intended for distribution of dividends, and will be taxed at the time dividends are paid. The above change has no effect on the distribution of accumulated profits from 2008 and before. For fiscal year 2013, the Group has taken advantage of the income tax exemption above. 190

191 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. EARNINGS PER SHARE The calculation of earnings per share for the year ended 31 December 2013 was based on the net profit attributable to ordinary shareholders of Denar 82,746 thousand (2012: 562,091 thousand) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2013 of 2,279,067 shares (2012: 2,279,067 shares). The calculation of the basic and diluted earnings per share is: December 31, December 31, Net profit attributable to shareholders for basic and diluted earnings per share (in thousands of Denars) 82, ,091 Weighted average number of shares for basic and diluted earnings per share 2,279,067 2,279,067 Basic earnings per share (in Denars) Diluted earnings per share (in Denars) The calculation of the weighted average number of ordinary shares for the years ended December 31, 2013 and 2012 is as follows: Number of shares Issued ordinary shares at 1 January 2,279,067 2,279,067 At 31 December 2,279,067 2,279,

192 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. CASH AND CASH EQUIVALENTS December 31, December 31, Cash on hand 1,249,359 1,171,412 Accounts and deposits with NBRM, except mandatory reserves in foreign currency 4,396,715 4,636,572 Current accounts with local banks 11,938 7,246 Current accounts with foreign banks 4,805,149 8,249,735 Time deposits held with banks up to 3 months 11,007,877 8,884,201 Treasury bills up to 3 months 3,877,753 1,907,216 Government bills up to 3 months - 1,591,787 Other short term highly liquid investments 1,131 1,426 Included in cash and cash equivalents 25,349,922 26,449,595 Restricted accounts 177, ,093 Mandatory reserves in foreign currency 3,698,216 3,430,777 29,225,823 30,056,465 The level of mandatory reserves in foreign currency held with the Central Bank in the amount of Denar 3,698,216 thousand (2012:Denar 3,430,777 thousand) is determined by the Decision for mandatory reserves prescribed by the Central Bank. Those reserves are calculated based on the average amount of deposits in foreign currencies existing during one calendar month. The interest income is accrued on these reserves at the rate of 0.1% p.a. (2012: 0.1% p.a.). Accounts and deposits with NBRM, except mandatory reserves in foreign currency in the amount of Denar 4,396,715 thousand (2012: Denar 4,636,572 thousand) represent current account in Denars with NBRM. Interest income is accrued on these reserves at a rate of 1% p.a. (2012: 1% p.a.). Time deposits up to 3 months in the amount of Denar 11,007,877 thousand (2012: Denar 8,884,201 thousand) relate to deposits placed with domestic and foreign banks, with original maturities from 1 day to 3 month, bearing interest at rates in the range from 0.01% to 2.05% per annum (2012: from 0.01% to 2.35% p.a.). Treasury bills up to 3 months in the amount of Denar 3,877,753 thousand (2012: 1,907,216 thousand) are debt securities issued by the National Bank of Republic of Macedonia with maturity due of 35 days, bearing interest at rate of 3.25% per annum (2012:3.75% p.a.). Government bills up to 3 months in 2012 in the amount of Denar 1,591,787 thousand are debt securities with period of maturity up to three months. Restricted accounts in the Denar 177,685 thousand (2012: Denar 176,093 thousand) represent deposits for opened letters of credit, on behalf of the Group s customers, collateral for Visa International and MasterCard. 192

193 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS December 31, 2013 December 31, 2012 Held for trading Debt securities Government bonds 1 4 Total debt securities 1 4 Equity investments 84,702 50,436 84,703 50,440 Government bonds in the amount of Denar 1 thousand (2012: Denars 4 thousand) refers to structural government bonds, bearing interest rate at the rate of 2% per year. The quoted equity investments held for trading in the amount of Denar 74,878 thousand (2012: Denar 16,763 thousand) relates to investments in shares issued by domestic banks in the amount of Denar 27 thousand (2012: Denar 26 thousand) and investments in shares issued by domestic non-financial entities in the amount of Denar 74,851 thousand (2012: denar 16,737 thousand). The other unquoted equity investments in the amount of Denar 9,824 thousand (2012: Denar 33,673 thousand) relate to investments in the open-end investment fund KB Publikum Balansiran in the amount of Denars 6,008 thousand (2012: Denar 5,272 thousand), and investments in the open-end investment fund KB Publikum - Paricen in the amount of Denar 3,816 thousand (2012: Denar 3,681 thousand). 18. FINANCIAL ASSETS AVAILABLE-FOR-SALE December 31, December 31, Government bills 4,818, ,803 Government bonds 309,630 - Equity investments 59, ,494 5,186, ,297 Less: Specific allowance for impairment (4,354) (4,354) 5,182, ,943 Investments in available-for-sale debt securities includes government bills in the amount of 4,818,119 thousands of denars (2012: 197,803 thousands of denars) as well as government bonds in the amount of 309,630 thousands of denars (2012: 0 denars). The investments in equity instruments available-for-sale in amount of 59,018 thousands of denars (2012: 100,494 thousands of denars) include the amount of 59,011 thousand of denars (2012: 100,488 thousands of denars) related to the investments in securities issued by financial and non-financial companies, which the Group has bought on the primary market based upon basic investment in the capital of the companies or on the secondary market. Taking into account that for these investments there is no active market, as well as a lack of recent transactions that could be applied in determination the fair value, the investments in available-for-sale securities are stated at their fair value, less any impairment. The market for these securities is irregular and is not fully developed, so that the fair value cannot be reliably measured. 193

194 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 18. FINANCIAL ASSETS AVAILABLE-FOR-SALE (Continued) The rest of the investments in equity instruments available-for-sale refers to investments in loss making companies in the amount of 7 thousands of denars (2012: 7 thousands of denars), which the Group has acquired in accordance to the legal provisions, and according to which the Group s claims in companies were transformed in permanent holdings, i.e. shares. The Group does not plan to sell part of investments in available-for-sale equity instruments issued by financial companies whose operations are related to the regular operations of the Group, and the rest of the investments will be sold when the Group will estimate that there are favourable conditions at the capital market for their disposal. Movement in specific allowance for impairment is as follows: Year ended Year ended December 31 December Balance at 1 January 4,354 4,354 Net charge/ (release) to profit or loss (Note 13) - - Write-offs - - Balance at 31 December 4,354 4, FINANCIAL ASSETS HELD-TO-MATURITY December 31, December 31, Government bonds 6,709 73,275 6,709 73,275 The bonds issued by the Government of the Republic of Macedonia in the amount of 6,709 thousands of denars includes bonds for denationalisation IV, V and VI emission (2012: 73,275 thousands of denars which included Eurobonds issued by the Ministry of Finance of the Republic of Macedonia and bonds for denationalisation in amount of 8,806 thousands of denars) with maturity date to 2017 (2012: 2017), which bear interest at an annual rate of 2% (2012: 2% annually). Income from debt instruments held-to-maturity is recognized as interest income. Total current portion of the financial assets held-to-maturity amounts to Denar 2,152 thousand (2012: Denar 66,604 thousand). 194

195 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. LOANS AND ADVANCES TO BANKS December 31, December 31, Placements with foreign banks 990,543 1,140,406 Placements with domestic banks ,237 1,140,763 Less: Specific allowance for impairment (6,598) (183,219) 984, ,544 Total current portion of the loans and advances to banks amounts to Denar 31,214 thousand (2012: Denar 4,293 thousand). Movement in specific allowance for impairment is as follows: Balance at 1 January 183,219 93,245 Net charge/ (release) to profit or loss (Note 13) (110,109) 89,974 Write off (66,512) - Balance at 31 December 6, , LOANS AND ADVANCES TO CUSTOMERS December 31, December 31, Individuals (retail customers): - Overdrafts 1,427,624 1,457,395 - Credit cards 1,181,964 1,173,599 - Term loans 6,886,363 5,786,395 9,495,951 8,417,389 Corporate entities: - Large corporate customers 20,626,767 20,981,576 - SMEs 24,029,340 23,499,810 44,656,107 44,481,386 54,152,058 52,898,775 Less: Allowance for impairment (8,958,903) (7,201,358) 45,193,155 45,697,417 Current 21,792,210 22,066,675 Non- current 23,400,945 23,630,

196 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. LOANS AND ADVANCES TO CUSTOMERS (Continued) Loans and advances to customers include accrued interest and other receivables of Denar 283,527 thousand (2012: Denar 303,957 thousand). Out of the total loans and advances to other customers the Group has pledged a lien with regard to the sub-loans approved from the credit line of the European Investment Bank ("EIB"), signed between EIB and the Macedonian Bank for Development Promotion ("MBDP"), in favour of MBDP. As at 31 December 2013 the amount of the pledged loans and advances is in the amount of 2,869,763 thousands of denars (2012: 1,617,477 thousands of denars). Movement of allowance for impairment is as follows: Retail customers Overdrafts Credit cards Loans Total Balance at 1 January , , ,692 1,040,642 Net charge/ (release) to profit or loss (Note 13) 3,686 (9,903) 10,632 4,415 Balance at 1 January , , ,324 1,045,057 Net charge/ (release) to profit or loss (Note 13) 20,700 (15,247) 10,754 16,207 Balance at 31 December , , ,078 1,061,264 Corporate entities Large corporate customers SMEs Total Balance at 1 January ,559 3,831,226 4,389,785 Net charge/ (release) to profit or loss (Note 13) 931, ,439 1,808,718 Write offs - (42,202) (42,202) Balance at 1 January ,489,838 4,666,463 6,156,301 Net charge/ (release) to profit or loss (Note 13) 936, ,463 1,883,746 Release upon foreclosure procedures - (141,914) (141,914) Write offs - (494) (494) Balance at 31 December ,426,121 5,471,518 7,897,

197 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 22. INVESTMENTS IN ASSOCIATES The Group owns 49% of equity interest which is equal to 49% of the voting rights in KB Prvo Penzisko Drustvo AD Skopje. The principle place of business of KB Prvo Penzisko Drustvo AD Skopje is Republic of Macedonia. The shares of KB Prvo Penzisko Drustvo AD Skopje are not publicly listed and consequently do not have published price quotations. On 25 April 2013, the Group obtained control of KB Publikum, an investment funds managing company, by acquiring additional 14.29% of the shares and voting interests in the Company. As a result, the Group s equity interest in KB Publikum increased from 50 to 64.29%, changing the status from an associate to a subsidiary. December 31, 2013 December 31, 2012 KB Prvo Penzisko Drustvo AD Skopje 120, ,616 Share of results for the year ended 31 December 35,910 26,857 Dividends received (5,425) (15,068) 150, ,405 December 31, 2012 KB Publikum Invest AD Skopje 3,909 Share of results for the year ended 31 December (3,480) Summary financial information on the associates is presented below: Assets Liabilities Equity Revenues Profit/ (loss) Interest held KB Prvo Penzisko Drustvo AD Skopje 322,724 14, , ,835 73,285 49% 322,724 14, , ,835 73,285 December 31, 2012 Assets Liabilities Equity Revenues Profit/ (loss) Interest held KB Prvo Penzisko Drustvo AD Skopje 263,057 17, , ,768 54,810 49% 429 KB Publikum Invest AD Skopje 2,532 1, ,958 (6,959) 50% 265,589 19, , ,726 47,851 There are no significant restrictions on the ability of the associates to transfer funds to the Bank in the form of cash dividends or repayment of loans and advances. 197

198 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23. PROPERTY AND EQUIPMENT Land and Buildings Furniture & Equipment Assets in course of construction Leasehold improvements Total Carrying amount 1 January ,325, ,412 87,610 23,105 1,678,803 Additions , ,599 Transfers 135,134 81,969 (232,976) 15,873 - Disposals and write off (464,314) (9,239) - - (473,553) Depreciation charge (46,335) (101,082) - (7,823) (155,240) Carrying amount 31 December , , ,233 31,155 2,048,609 At 31 December 2012 Cost 1,197,960 1,041, ,233 65,503 3,157,823 Accumulated depreciation (247,799) (827,067) - (34,348) (1,109,214) Carrying amount for 31 December , , ,233 31,155 2,048,609 Carrying amount 1 January , , ,233 31,155 2,048,609 Additions ,349, ,350,352 Transfers 1,848, ,886 (2,050,185) 4,825 - Disposals and write off - (3,172) - - (3,172) Depreciation charge (44,192) (96,833) - (9,080) (150,105) Carrying amount 31 December ,754, , ,951 27,100 3,245,684 At 31 December 2013 Cost 3,046,435 1,169, ,951 70,528 4,439,800 Accumulated depreciation (291,992) (858,696) - (43,428) (1,194,116) Carrying amount 31 December ,754, , ,951 27,100 3,245,684 The amount of commitments for the purchase of property and equipment in 2013 amounts to Denar 1,773 thousand (2012: Denar 2,963 thousand). As at 31 December 2013 and 31 December 2012 the Group does not have any property and equipment pledged as collateral. On 26 December 2012 the Bank concluded an agreement for sale of property and equipment in the amount of Denar 467,412 thousand (carrying amount), which as a non-cash transaction has not been presented in the Statement of cash flows for

199 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 24. INVESTMENT PROPERTY At 1 January Cost 33,510 44,035 Accumulated depreciation (3,211) (5,200) Carrying amount 30,299 38, December Carrying amount 1 January 30,299 38,835 Disposals and write off - (7,699) Depreciation charge (838) (837) Carrying amount 31 December 29,461 30,299 At 31 December Cost 33,510 33,510 Accumulated depreciation (4,049) (3,211) Carrying amount 29,461 30,299 Fair value of investment property amounts to Denar 34,300 thousand as at (2012: Denar 82,166 thousand). Investment property comprises of property leased by Komercijalna Banka AD Skopje. The lease contains an initial non-cancellable period of 90 days. The contract is on indefinite period. The fair value of investment property was determined by external, independent property valuation specialist, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The independent valuation specialist provide the fair value of the Bank's investment property portfolio once a year. The fair value measurement for investment property of Denar 34,300 thousand has been categorised as a Level 2 fair value based on the inputs to the valuation technique used (see Note 5.B). Valuation technique and inputs used are based on the cost method, according to the methodology for valuation of investment property. 25. INTANGIBLE ASSETS Cost Balance at 1 January 241, ,058 Acquisitions through business combination 11,067 - Other additions 9,553 14,201 Disposals and write offs (320) (1,002) Balance at 31 December 261, ,257 Accumulated amortisation Balance at 1 January 182, ,347 Charge for the year 22,498 22,635 Disposals and write-offs (320) (981) Balance at 31 December 204, ,001 Carrying amount at 31 December 57,378 59,256 Carrying amount at 1 January 59,256 67,711 Acquisitions through business combinations include goodwill in the amount of Denar 10,633 thousand (2012: nil). As at 31 December 2013 the Group does not have any commitments for the intangible assets (31 December 2012: none). 199

200 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26. OTHER ASSETS December 31, December 31, Credit card receivables 96,677 82,543 Other bad and doubtful receivables 134, ,576 Trade receivables 89, ,314 Receivable from KB Prvo Penzisko Drustvo 4,876 9,637 Inventory of office materials 23,198 19,936 Inventory of numismatic collections 20,002 24,066 Fee and commission receivables 27,843 22,410 Advances for property and equipment ,000 Other assets 42,229 33, , ,114 Less: Allowance for impairment (152,257) (137,333) 287, ,781 The current portion of other assets amounts to Denar 279,338 thousand (2012: Denar 522,134 thousand). Movement in specific allowance for impairment is as follows: Year ended Year ended December 31 December Balance at 1 January 137, ,773 Net charge/ (release) to profit or loss (Note 13) 15,568 25,898 Release upon foreclosure procedures (596) - Write-off (48) (4,338) Balance at 31 December 152, ,

201 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27. ASSETS ACQUIRED THROUGH FORECLOSURE PROCEDURES December 31, December 31, Foreclosed collateral Land 168, ,150 Buildings 1,884,394 2,230,059 Residential buildings and apartments 166, ,075 Other 164, ,170 2,384,427 2,858,454 On 26 December 2012, the Bank entered into a sale agreement of administrative business premises of Macedonia Tabak in the amount of 416,250 thousands of denars (carrying value) and EMO AD Ohrid in the total amount of 73,819 thousands of denars (carrying value). The sale transaction of administrative business premises in 2012 does not generate cash flows, and therefore was not included in the Statement of cash flow. 28. DEPOSITS FROM BANKS AND OTHER FINANCIAL INSTITUTIONS December 31, December 31, Demand deposits Banks and other financial institutions 549, ,374 Insurance companies 103,085 83,621 Time deposits Banks and other financial institutions 480, ,292 Insurance companies 460, ,586 Restricted deposits Banks and other financial institutions 75,125 56,421 1,668,245 1,084,294 Current 1,638,245 1,084,239 Non-current 30, Deposits from banks and other financial institutions include accrued interest payable of Denar 2,460 thousand (2012: Denar 2,773 thousand). 201

202 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29. DEPOSITS FROM CUSTOMERS December 31, December 31, Public institutions Current / settlement accounts 257, ,761 Time deposits 100, ,554 Companies Current / settlement accounts 11,682,830 11,470,461 Time deposits 3,181,484 3,112,149 Retail customers Current / demand accounts 12,726,723 11,780,903 Time deposits 42,189,588 39,783,182 Restricted deposits Citizens 1,107,345 1,153,147 Companies 518, ,079 71,764,561 68,325,236 Other deposits include accrued interest payable of Denar 391,116 thousand (2012: Denar 397,117 thousand). Restricted deposits in the total amount of Denar 1,731,187 thousand (2012: Denar 1,824,226 thousand) relate to deposits from customers, placed for payments abroad, letters of credit, deposits placed as collateral for securing repayment of loans and guarantees, and received early repayments of loans. Current portion of deposits from other customers amounts to Denar 66,598,326 thousand (2012: Denar 63,812,247 thousand). 202

203 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30. BORROWINGS December 31, 2012 Short-term Long-term Short-term Long-term Domestic borrowings: MBPR- NEPA (Macedonian Bank for Development Promotion funds granted from National Enterprise Promotion Agency) ,460 MBDP (Macedonian Bank for Development Promotion) , ,770 MBPR- ZKDF (Macedonian Bank for Development Promotion funds granted from Agriculture Credit Discount Fund) 15, ,856 20, ,312 Agency for Managing Accounts - 115, ,970 NBRM- Primary issue - 8,809-8,809 Ohridska banka AD Skopje 350, Foreign borrowings administered through domestic financial and government institutions: MBDP CEB (Macedonian Bank for Development Promotion funds granted from CEB) ,625 MBDP IKL (Macedonian Bank for Development Promotion funds granted from Italian Credit Line) , ,050 MBDP EIB (Macedonian Bank for Development Promotion funds granted from EIB) 5,456 2,568,284 4,411 2,473,457 MF - FSR (Ministry of finance funds granted from former lender Council of Europe Social Development Fund) 52 46, , ,490 2,971,731 26,324 2,975,223 Current 1,272, ,871 - Non-current - 2,070,375-2,110,676 Borrowings include accrued interest payable of Denar 6,466 thousand (2012: Denar 5,917 thousand). Current portion of long-term borrowings is Denar 901,356 thousand (2012: Denar 864,547 thousand). Creditor Currency Interest rate Year of maturity Type of security MBDP (NEPA) MKD 5.00% Undefined unsecured MBDP MKD/EUR 3.0%, 3.8%, 5.0% According to the agreements concluded with final users 4 bills of exchange MBDP CEB EUR 3months EURIBOR refunded bills of exchange % MBDP IKL EUR 3% According to the agreements concluded 12 bills of exchange with final users MBDP ZKDF MKD/ EUR 0,5%, 1% According to the agreements concluded 3 bills of exchange with final users MF FSR EUR 3months EURIBOR + 1.4%; 3months EURIBOR % ; bills of exchange NBRM Primary issue MKD bills of exchange MBDP - EIB EUR 1% According to the agreements concluded with final users Agency for Managing Accounts Ohridska banka AD Skopje 14 bills of exchange in form of Notary deed * Pledge of receivables under sub-loan agreements with final users in the form of Notary deed MKD unsecured MKD 2,3% unsecured 203

204 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30. BORROWINGS (Continued) The Group has pledged a lien in the form of a notary deed on behalf of MBDP based on receivables from sub-loan agreements concluded with final users approved from the credit line with EIB administered through MBDP. As at 31 December 2013 the amount of borrowings for which the Group has pledged receivables is 2,483,382 thousands of denars (2012: 1,445,333 thousands denars). 31. OTHER LIABILITIES December 31, December 31, Credit card liabilities 89,991 50,811 Liabilities to Ministry of Finance 9,792 16,259 Suppliers payable 20,127 20,457 Advances received 6,271 1,991 Fee and commission 5,903 6,533 Provision for pension and other employee benefit 40,318 40,104 Liabilities for VAT 15, ,347 Undistributed foreign payments from legal companies and citizens 103,566 92,610 Other liabilities 168, , , ,645 Current 421, ,939 Non-current 37,759 37,706 Part of VAT liabilities in 2012 of Denar 240,644 thousands arise from the sale of property and equipment (see note 22). 32. EQUITY (a) Share capital Ordinary shares December 31, 2013 December 31, 2012 In number of issued shares Non-voting shares December December 31, , 2012 In number of shares At 1 January 2,279,067 2,279, Issued shares during the year At 31 December 2,279,067 2,279, At 31 December 2013 the authorised share capital comprised of 2,279,067 (2012: 2,279,067) ordinary shares. Ordinary shares have a par value of Denar 1,000 (2012: Denar 1,000). All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at Shareholders Assembly. All shares rank equally with regard to the Bank s residual assets. 204

205 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32. EQUITY (Continued) According to the shareholders book as at 31 December 2013, on 224,728 ordinary shares i.e 9.86% from the total shareholder capital of the Bank (as at 31 December 2012, 226,916 ordinary shares i.e 9,96%) there is limitation of the rights established based on the law and/or Decision or act of the competent body (for example limitation of the vote right according to the Governor decision). As at 31 December 2013 the Bank does not hold treasury shares. The Open-end Investment Fund KB Publikum Balansiran managed by the Bank's subsidiary, KB Publikum Invest AD owns 610 shares, i.e % of the total share capital of the Bank (as at 31 December 2012 owns 530 shares, i.e %). The below stated shareholders have more than 5% ownership of the Bank s ordinary shares: In % December 31, December 31, Shareholder East Capital Explorer Investments AB, Stockholm 10,0 10,0 European Bank for Reconstruction and Development, London 5,25 5,25 (b) Reserves Statutory reserve Under local statutory legislation, the Group is required to set aside 15 percent of its net profit for the year in a statutory reserve until the level of the reserve reaches 1/5 of the court registered capital. Until achieving the minimum required level the statutory reserve could only be used for loss recovery. When the statutory reserve exceeds the minimum required level and when all losses are covered, the statutory reserve can also be used for distribution of dividends, based on a decision of the shareholders meeting, but only if the amount of the dividends for the current business year has not reached the minimum for distribution as prescribed in the Trade Company Law. According to the amendments on the Trading Companies Law, which came into effect from 1 January 2013, the amount necessary to be allocated to statutory reserve was reduced from 15% to 5%, while the level of reserves does not reach 1/10 of the share capital. Other reserves The other reserves are formed in addition to statutory reserve, based on decisions by the bodies of the Group for distribution of profit, and can be used to cover certain losses or for other expenses. (c) Dividends Announced and paid dividends by the Group December 31, December 31, Announced dividends and paid dividends for the year - - Denars December 31, December 31, Dividend per ordinary share - - Dividend per preference share 205

206 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32. EQUITY (Continued) (c) Dividends (Continued) Announced dividend after the reporting date (the liabilities for dividends are not shown in the statement of financial position December 31, December 31, Announced dividends after reporting date - 227,907 In Denars December 31, December 31, Dividend per ordinary share GROUP SUBSIDIARIES (a) (b) (c) See accounting policy Note 3.1. Significant subsidiaries The significant subsidiary of the Group is KB Publikum. Its principle place of business is the Republic of Macedonia. The Bank holds 64.29% of ownership interest (2012: 50%). Financial support During 2013 the Bank increased its participation in the share capital of KB Publikum in the amount of MKD 12,309 thousands and acquired additional 200 regular shares with nominal value of 1000 EUR per share. The additional capital was paid to support the Company s legal activities and to meet the minimal capital requirements for the investment funds management companies. Other financial support was not provided during the year (2012: null) Significant restrictions The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities. 206

207 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33. GROUP SUBSIDIARIES (Continued) (d) NCI in subsidiaries The table below provides information for subsidiaries that have tangible significant non-controlling interest KB Publikum in thousands of denars Note 31 December 2013 Assets Cash and cash equivalents 1,798 Held for trading financial assets 138 Bank deposits 6,820 Property and equipment Intangible assets Other assets 517 Total assets 9,479 Liabilities Liabilities to suppliers and other liabilities 165 Total liabilities 165 Net assets 9,314 Carrying amount of non-controlling participation 3,326 For the period from Revenue 3,618 Expenses (6,033) Profit/(loss) (2,415) Total comprehensive income/(loss) (2,415) Profit/(loss) of non-controlling interest (862) For the year ended 31 December 2013 Cash flows from operating activities (3,130) Cash flows from investing activities (6,808) Cash flows from financing activities, before dividends to non-controlling interest 10,809 Cash flows from financing activities, dividends to non-controlling interest - Net increase of cash and cash equivalents 871 On 25 April 2013 the participation in the KB Publikum s shareholder equity increased from 50% to 64.29%, thus changing the status of the company from associate to a subsidiary. The non controlling interest is 35.71%. 207

208 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34. CONTIGENCIES AND COMMITMENTS (a) Off-balance sheet items The following table indicates the contractual amounts of the Group s contingencies and commitments by category: December 31, December 31, Guarantees in domestic currency 4,198,705 4,197,682 in foreign currency 3,466,033 3,787,250 7,664,738 7,984,932 Letters of credit 1,185,606 1,898,599 Unused credit card limits 1,223, ,869 Unused overdrafts on current accounts 1,774,053 1,825,700 Unused credit limits - noncallable 836, ,029 Total 12,684,962 13,471,129 Less: provision for off-balance sheet items (161,757) (162,747) 12,523,205 13,308,382 The Group provides banks guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year. Expirations are not concentrated in any period. These commitments and contingent liabilities have off balance-sheet credit risk because only organisation fees and accruals for probable losses are recognised in the statement of financial position until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows. Movement in provision is as follows: Year ended December Balance at January 1, ,747 Additional provisions during the year 286,561 (release of provisions during the year) (287,161) Exchange rate effect (390) As at 31 December ,757 (b) Litigations For part of the contingent liabilities in the amount of 265,454 thousands of denars there is a court case upon issued letter of guarantee for Granit AD Skopje. The case was initiated in front of an authorized court in Poland on 16 th of September 2011 by the State Treasury General Directorate for State Roads and Motorways from Warsaw (beneficiary of the guarantee) against Komercijalna Banka AD Skopje, which was received in the Bank on 2 nd of July 2012, requesting a payment upon the issued letter of guarantee in the amount of ,09 PLN, equivalent to 265,454 thousands of denars. The letter of a guarantee was issued based on a contract for building a motorway concluded between the plaintiff (State Treasury General Directorate for State Roads and Motorways) and Granit AD Skopje (requestor of the guarantee). The guarantee has been activated and a payment is requested as a result of a breach of contract for building a motorway between the State Treasury General Directorate for State Roads and Motorways of Poland and Granit AD Skopje. There is a separate legal dispute related to this contract, which is handled in front of the authorized courts in Poland. The outcome of this court case cannot be foreseen at the moment. 208

209 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 34. CONTIGENCIES AND COMMITMENTS (Continued) (b) Litigations (Continued) The Group has not performed a payment upon this issued letter of guarantee as a result of a Decision for temporary suspension issued on the 4 th of February 2011 by the Basic Court in Skopje 2, on request of Granit AD Skopje. The temporary suspension prohibits the beneficiary of the guarantee to undertake any activities, which would mean protest or enforcement of the guarantee, at the same time imposing a restriction on the Bank to make payments upon the issued letter of guarantee. The Bank has an obligation to follow the ruling of the Macedonian court, as long as it is in force. If the Bank is to make a payment upon this issued letter of guarantee, the amount will be transformed into a receivable from Granit AD Skopje, and the Bank does not expect collection problems and adverse financial effects. In addition to the above, the Group is involved in legal proceedings from its daily operations. As of the legal proceedings filed against the Group amounted to Denar 1,253,561 thousand (2012: Denar 1,024,115 thousand). This amount does not include any penalty interest. The management believes that the outcome of the filed legal proceedings will be favorable, and that no material losses will result from the settlement of the aforementioned litigations and has not allocated any provision for litigations as of 31 December 2013 and RELATED PARTY TRANSACTIONS Persons related to the Group are the following: persons with special rights and responsibilities and persons related thereto (classified as key management personnel), shareholders with qualified holding in the Group (direct or indirect ownership of at least 5% of the total number of shares or the issued voting shares in a Group or which makes it possible to exercise a significant influence in the Group) and entities related thereto and responsible persons of those shareholders legal entities (classified as other related parties). In addition, the Group has investments in associates. A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and borrowings. The volumes of related party transactions and outstanding balances at the year-end, are as follows: Balance sheet Placements as at 1 January 2013 Placements during the year Withdrawals during the year Placements as at 31 December =(1+2-3) 1. Assets Current accounts a) Subsidiaries b) Associates c) Key management personnel of the Group 1, ,278 d) Other related parties Trading assets a) Subsidiaries b) Associates c) Key management personnel of the Group d) Other related parties Mortgage loans a) Subsidiaries b) Associates c) Key management personnel of the Group 33,493 31,958 23,641 41,810 d) Other related parties

210 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35. RELATED PARTY TRANSACTIONS (Continued) Balance sheet (Continued) Consumer loans a) Subsidiaries b) Associates c) Key management personnel of the Group 30,414 41,740 34,160 37,994 d) Other related parties Other loans and claims a) Subsidiaries b) Associates 11,251 1,533 7,908 4,876 c) Key management personnel of the Group 98,997 37,540 42,871 93,666 d) Other related parties Investment in securities a) Subsidiaries b) Associates 120,404 35,910 5, ,890 c) Key management personnel of the Group d) Other related parties Deposits 2.Liabilities a) Subsidiaries b) Associates , , c) Key management personnel of the Group 488,595 2,108,170 2,064, ,774 d) Other related parties

211 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35. RELATED PARTY TRANSACTIONS (Continued) Income and expenses arising from related party transactions Year ended Year ended December 31, 2012 Subsidiaries Asso ciates Key management personnel of the Group Other related parties Total Subsidiaries Associates Key management personnel of the Group Other related parties Total Income Interest Income - - 9,721-9, ,892-14,894 Income from fees and commisions ,964-4, ,770 1,100 6,531 Net gains from trading Dividend income ,471 5,471 Capital gains from sale of non-current assets Other income - 35,934 8,075-44,009-26,899 8, ,032 Transfers between entities Total Income - 36,115 21,760-57,875-27,562 27,793 6,573 61,

212 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35. RELATED PARTY TRANSACTIONS (Continued) Income and expenses arising from related party transactions (Continued) Expenses Interest expense ,609-13, ,310 16,014 30,920 Fee and commission expense ,577 32,577 Net losses from trading Expenditures for procurement of noncurrent assets Impairment of financial assets, on net basis - (71) (1,641) - (1,712) - (49) 1,893 (1) 1,842 Other expenditures - 8 7,040-7,048-3,497 6, ,884 Total Expenses - (62) 19,008-18,946-4,044 22,588 48,592 75,

213 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 35. RELATED PARTY TRANSACTIONS (Continued) Key management personnel Year ended Year ended December 31, December 31, Salaries and other short - term benefits 116, , FUNDS MANAGED ON BEHALF OF THIRD PARTIES 116, ,929 December 31, December 31, Banks and other financial institutions 20,720 18,596 Companies 50,307 51,853 Individuals 19,080 22,752 90,107 93,201 The Group manages assets on behalf of third parties which are in the form of loans to companies for various investments. The Group receives fee income for providing these services. Funds managed on behalf of third parties are not assets of the Group and are not recognized in the statement of financial position. The Group is not exposed to any credit risk relating to such placements, as it does not guarantee these investments, however, has a fiduciary responsibility to properly handle and invest client funds. Income and expenses of the Funds managed on behalf of third parties are accrued to the account of the respective third party and the Group has no liability in connection with these transactions. 37. LEASE COMMITMENTS At the end of the reporting period, the future minimum lease payments under non-cancellable operating leases are payable as follows Balance at (current year) Total Maturity period for operating lease payments up to 1 from 1 to up to 1 year 5 years year 71,605 2,491 9,962 59,152 Total 71,605 2,491 9,962 59,152 Balance at December 31, 2012 (previous year) 74,095 2,491 9,962 61,642 Total 74,095 2,491 9,962 61, SUBSEQUENT EVENTS No material events subsequent to the reporting date have occurred which require disclosure in the consolidated financial statements. 213

214 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 39. EXCHANGE RATES Official exchange rates used in the translation of the items denominated in foreign currencies in the statement of financial position were as follows: In Denars December 31, December 31, EUR 61, USD 44,

215 215

216 CORPORATE GOVERNANCE The corporate governance of Komercijalna Banka AD Skopje is based on the rules for managing and management monitoring with the Bank defined by the Code of Corporate Governance passed by the Shareholders Assembly of the Bank on March 25 th, 2009, as amended and supplemented by decisions on amendments and supplements adopted at the general Meeting of the Bank s Assembly in 2010, 2011, 2012 and According to the Code, corporate management is a combination of mutual relations between the Board of Directors, other persons with special rights and responsibilities performing management functions in the Bank, the Supervisory Board, Bank s shareholders and other stakeholders. In its regular operations the Bank shows strict adherence to the principles of corporate governance, which include guaranteeing the rights and interests of the shareholders, transparency in the ownership structure, division of duties, regular and efficient control and audit, adherence to the laws, ethical standards and practices, independence and objectivity and all other principles defined. In the course of 2013, Bank s managing bodies performed their activities in accordance with their competences defined by the law regulations and the Statute of the Bank: In the course of the reported period, the Shareholders Assembly held one regular General Meeting on 27 March At the General Meeting, the Assembly adopted the Annual Account of the Bank and the Financial Statements for 2012, considered and adopted all reports and proposed material on the performance of the Bank in 2012, passed the Program of Measures and Activities of the Business Policy and financial plan of the Bank for 2013, the Decision on adoption of the Report on the compliance of the Bank s operation with the Code of Corporate Governance of the shareholders companies listed at the Macedonian Stock Exchange and the Decision on amendments and supplements to the Code of Corporate Governance of Komercijalna Banka AD Skopje. 216

217 In the course of 2013, the Supervisory Board of the Bank had 12 regular meetings where it considered different issues in the domain of the Bank s operation and performed other current activities under its competence. In the course of 2013 and pursuant to the Banking Law, the Supervisory Board performed its function as a team comprised of 7 members, as follows: 1. Mrs. Sava Dimitrova President of the Supervisory Board, 2. Mr. Taki Fiti Ph.D., - Vice President, 3. Ms. Margot Jacobs Member, 4. Mr. Zvone Taljat Member, 5. Mr. Alexandru Tanase Member, 6. Mr. Simon Naumoski Independent Member and 7. Mr. Aleko Angelovski - Independent Member. The members of the Supervisory Board Mr. Alexandru Tanase, Mr. Zvone Taljat and Ms.Margot Jacobs are experts in the sphere of finances, and the members Mr. Simon Naumoski and Mr. Aleko Angelovski are independent members of the Supervisory Board. When electing the independent members, the Bank fully adhered to the independency criteria prescribed by the Banking Law. During 2013, the Board of Directors of the Bank performed its activities in accordance with the Banking Law, Statute of the Bank and other by-laws. The Board of Directors is comprised of three members with a mandate of six years, as follows: - Mr. Hari Kostov Chief Executive Officer and President of the Board of Directors, - Mr. Ilija Iloski Chief Operative Officer and - Mrs. Maja Stevkova Shterieva, Ph.D. Chief Finance Officer. The Decisions on appointing the members of the Board of Directors were made by the Supervisory Board of the Bank on 29 September 2010 and 31 May In the course of the period reported, Risk Management Committee of the Bank had 53 meetings where it monitored the overall operation of the Bank. The Committee performed its activities in compliance with the Banking Law, Statute 217

218 of the Bank and other acts and reported to the Supervisory Board. It is comprised of five members and six alternate members with a mandate of six years, as follows: Mr. Hari Kostov President, Mrs. Maja Stevkova Shterieva, Ph.D Vice President, Mrs. Suzana Moskovska Member, Mrs. Biljana Maksimovska Popovikj Member and Mrs. Teodora Gushkova Prodanova Member. The alternate members of the Risk Management Committee are Mrs. Tatjana Leskaroska Minoska, Mrs. Vesna Kiprijanova, Mrs. Biljana Hadzi-Velkova, Mr. Nikola Dzambazovski, Mrs. Lidija Ilikj and Mrs. Irena Zhivkovikj Zareva. In 2013, the Audit Committee of the Bank had 4 regular meetings and made decisions and considered respective information and reports that are under its competence. The Audit Committee is comprised of five members, with a mandate of four years, as follows: Mrs. Sava Dimitrova, Mr. Taki Fiti, Ph.D., Mr. Aleko Angelovski, Mr. Blazho Nedev, Ph.D. and Mr. Marjan Andonov. Mr. Blazho Nedev Ph.D. and Mr. Marjan Andonov are independent members of the Committee. When electing the independent members of the Audit Committee, the Bank fully adhered to the independency criteria prescribed by the Banking Law. In the course of 2013, the Credit Committee of the Bank held 53 meetings and considered and approved many information, credit analyses, reviews and reports under its competence. The Credit Committee had also considered and approved the draft-decisions under the competence of the Risk Management Committee and the draft-decisions under the competence of the Supervisory Board of the Bank. It is comprised of five members and six alternate members, with a mandate of four years, as follows: Mr. Ilija Iloski President, Mrs. Maja Stevkova Shterieva, Ph.D. Vice President, Mrs. Biljana Maksimovska Popovikj Member, Mrs. Gabriela Stojanovska Member and Mrs. Suzana Moskovska Member. The alternate members of the Credit Committee of the Bank are: Mrs. Tatjana Leskaroska Minoska, Mrs. Vesna Kiprijanova, Mrs. Biljana Hadzi-Velkova, Mr. Nikola Dzambazovski, Mrs. Lidija Ilikj and Mrs. Zorica Pejkoska. 218

219 SUPERVISORY BOARD Sava Dimitrova President AD Evropa Skopje General Manager Margot Jacobs Member East Capital Private Equity AB, Stockholm, Sweden Senior Advisor Taki Fiti, Ph.D. Vice President Faculty of Economics Skopje Professor Simon Naumoski Independent Member Zvone Taljat Member Publikum Holding, Ljubljana Manager Aleko Angelovski Independent Member Alexandru Tanase Member European Bank for Reconstruction and Development Senior Banker 219

220 BOARD OF DIRECTORS Hari Kostov President Komercijalna Banka AD Skopje, Chief Executive Officer Ilija Iloski Member Komercijalna Banka AD Skopje, Chief Operative Officer Maja Stevkova Shterieva, Ph.D Member Komercijalna Banka AD Skopje, Chief Finance Officer 220