SOCIETE GENERALE EXPRESSBANK AD ANNUAL MANAGEMENT REPORT AND SEPARATE ANNUAL FINANCIAL STATEMENTS

Transcription

1 Translation from Bulgarian SOCIETE GENERALE EXPRESSBANK AD ANNUAL MANAGEMENT REPORT AND SEPARATE ANNUAL FINANCIAL STATEMENTS as at 31 December 2009

2 CONTENT General information...i Management report on the operations of Societe Generale Expressbank AD for ii Independent auditors report to the shareholders of Societe Generale Expressbank AD...1 Income statement...3 Comprehensive income statement...4 Balance sheet...5 Statement of changes in equity...6 Statement of cash flows...7 Notes to the financial statements 1. Corporate information for the Bank Basis of preparation Changes in accounting policy and disclosures Significant accounting judgements, estimates and assumptions Summary of significant accounting policies Future changes in accounting policies Interest income Interest expense Fees and commissions income Fees and commissions expense Gains on financial assets available for sale, financial assets at fair value to profit or loss and derivative financial instruments, net Dividend income Other operating income Loss from impairment of loans to clients and other assets Administrative expenses Components of other comprehensive income Cash and balances with the Central Bank Due from banks Derivative financial instruments Financial assets at fair value through profit or loss Loans to clients Financial assets available for sale Investments in subsidiaries and associates Property and equipment Intangible assets Other assets Due to banks Deposits from clients Payables on lease contracts the Bank as a Lessee Subordinated term debt Income tax Provisions Share-based payment plans Other liabilities Equity and reserves Fair values of financial instruments Additional information on cash and cash equivalents reported in the Cash flow statement Maturity analysis of assets and liabilities and off-balance sheet commitments Commitments and contingent liabilities Related party transactions Credit risk Liquidity risk Market risk Capital management Events after the balance sheet date...68

3 GENERAL INFORMATION Management Board Philippe Charles Lhotte (Chief Executive Officer) Yvan Victor Mirochnikoff Zhivka Stoyanova Sarachinova Elenka Petrova Bakalova Secretary Daniela Hristova Address Varna 92, Vladislav Varnenchik blvd. Legal Advisors Ivelina Manolova Auditors Ernst & Young Audit OOD 1766 Sofia Mladost 4, Business Park Sofia Building 10, floor 2 i

4 MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK 1. Business development The year 2009 was another successful year for Societe Generale Expressbank. Although the posed during the year significant challenges to the global economy and to the financial services industry the efforts of the Management Board and of all teams in the Bank led to a healthy growth, keeping up good levels of profitability and efficiency and confirming once again the strong focus on value creation and the prudent risk policy. As of the end of 2009 the profit of Societe Generale Expressbank reached BGN 22.6 million. Net banking income increased with 18% to BGN million, fuelled by the increase of both net interest income and net fees and commissions income. SGEB is ranged at 3-th position in term of NBI evolution (in %) among the top 10 Bulgarian banks. Operating income Societe Generale Expressbank in BGN thousands Growth (%) Growt h (amou nt) Net interest income 102,387 87, % 14,816 Net fees and commissions income 29,493 25, % 3698 Gain on securities and derivative financial instruments, net 6,792 3, % 3707 Dividend income % -533 Other operating income % -191 Gross operating income 139, , % 21,497 - Net movement in loan loss provisions -35,870-7, % 28,002 Net operating income 103, , % -6,505 As at December 2009 the cumulated net interest income represented the major source of income for the Bank with 73% of gross operating income, almost the same part: 74% in December For 2009 the Bank has generated interest income of BGN million (BGN million in 2008) and thus achieves a yearly growth of 9%. Interest expenses decreased by 4% on year-to-year basis to BGN 57.1 million due mainly to the lower level of interest expenses on placement from banks (-35%; BGN 8.4 million). At the same time there is a significant increase on interest expenses paid on clients deposits (+27%; BGN 7.8 million). As at the end of the year the interest expenses on deposits of clients amounted to BGN 36.2 million against BGN 28.4 million for the previous year. This increase reflects the development of the Bank s market positions, the growth of the Bank s deposit base and rising market interest rates. Interest expenses on clients deposits continued to dominate in the total interest expenses with increasing share: 63% of the total (in 2008 their share was 48%). The net fee and commissions income was up by 14% to BGN 29.5 million, accounting for 21% of gross operating income (almost the same share of 22% in December 2008). The net income from securities and derivative financial instruments is BGN 6.8 million, a 120% yearly increase over the level in December Their share in the total income from banking operations is 5% at the end of 2009 (3% for 2008). The operating expenses grew by 13% on year-to-year basis, reaching the amount of BGN 78.4 million. The increase results mainly from the extending of the bank activity and the enlargement of the branch network. Cost-to-Income Ratio remained at a good level (56.2%) as a result of the strong activity development, optimization and tight control over operating costs. In the environment of an extremely strong competition in the Bulgarian market the assets of the Bank increased by over 14% and amounted to BGN million at the end of the year. SGEB is ranged first among the top 10 Bulgarian banks in terms of assets growth (in %). Due to the active Bank s lending activity the net loan portfolio increased by BGN 229 million (12%). Thanks to the trust of our clients total deposits registered a stable yearly growth of 13% reaching the amount of BGN million. ii

5 MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK At the end of 2009 the Bank has one of the most effective branch networks with 147 points of sale. During the year the Bank continued to improve its network structure opening 5 new offices (13 in 2008 and 14 in 2007). The ATM fleet increased by 5 new devices thus expanding the territorial coverage of the bank s operations. The expansion of the branch network had lead to the increase of the staff number of the Bank by 5.2% on year-toyear basis. In 2009 the staff number reached employees. Business development highlights in 2009: Corporate clients: Opening of a Financial Markets department aiming at providing the corporate clients and financial institutions with hedging solutions and access to the foreign exchange and government securities market. The offer of Societe Generale Expressbank combines the unique knowledge of the local market with the global expertise of Société Générale Group. Launch of a SG Factoring subsidiary, active in the field of domestic and international factoring and offering additional options to corporate clients satisfying their requirements to the management of their working capital. New contract for cooperation with the Bulgarian Development Bank for a new credit line of EUR 10 million for on-lending to local small and medium-sized enterprises (SMEs) and a portfolio guarantee with an initial amount of BGN 5 million. Expansion of the package of direct banking services to include a new innovative service for mobile phones BankOn SMS Business which enables companies to register each non-transactional service and provides multi-user access for instantaneous automatic or on demand messages (incoming operations, current balance.) The net loan portfolio to corporate clients was marked with considerable increase by 14% and amounted to BGN million. Funds attracted from corporate clients increased by 20% on year-to-year basis and amounted to BGN 553 million. The share of the term deposits marked significant increase reaching the level of 41% of the total deposits (31% for 2008). During 2009 as well the Bank continued to adapt the services offered to suit the needs of its corporate clients. At the end of 2009, one corporate customer uses 2.46 products against 2.15 used for the previous year. Individual clients: Enlargement of the deposit offers to individual clients with the introduction of new time deposits, SG Garant and deposit Tactica, as also an attractive savings account offer; Launch of Expresso retail loans in Euro, aimed at the affluent segment of retail clients - individuals; Introduction of a new offer for students and youngsters - TI package including daily banking and student loan. As a result, the net exposure to retail loans increased by 7%. The net exposure of mortgage loans reached the amount of BGN 143 million, or 27% yearly increase, while the net exposure related to retail loans grew up to BGN 616 million, or 4% yearly growth. In 2009 funds attracted from individual clients increased on year-to-year basis by 8% to BGN 838 million (60% of total deposits from clients), which is due mainly to the 42% growth in the savings accounts. At the end of 2009, one individual customer used 3.37 products vs used in the previous year due to the active commercial policy and subscriptions made for newly launched services. Funding of bank activities and capital increase Two loans from the Bulgarian Bank for Development (BBD) for a total of 25 million BGN were concluded by SGEB. Those loans responded to specific conditions of use in order to promote the economic development of Bulgaria. At the end of December 2009, SGEB perfectly fulfilled its obligation for credit lines allocation and reported regularly to BBD AD regarding the funds utilised. Societe Generale Expressbank had increased its capital in the first half of 2009 with BGN 50 million which not only improved our capital base but enabled the Bank to follow its ambitious strategy for bank activity development, strictly respecting the regulatory requirements. The capital increase is financed in its full amount by the Group Societe Generale, now being an owner of 99.6% of the shares of Societe Generale Expressbank. The capital increase contributed to the improvement of the normative capital adequacy and raised our financial stability in the more competitive bank environment, where the influence of the crisis of trust in financial markets reflects on every financial institution. 1

6 MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK 10 years of successful partnership between Societe Generale and Expressbank Launching of a special internal and external communication on the occasion of the 10 years successful partnership between Societe Generale and Expressbank. The campaign was reinforced with 2 special events in Varna and in Sofia for clients, partners, media, and key opinion makers an evening cocktail in Varna and a concert of Sylvie Vartan, followed by a cocktail in the presence of the artist in Sofia. Implementation of a Merchandising concept in all offices of Societe Generale Expressbank aiming at facilitating communications with clients using specialised marketing materials such as: commercial documentation with commercial offers, product representing materials and promotions of the bank as also information signs guiding clients in the office premises. Corporate social responsibility Continuation of the successful partnership programs with the National Academy of Art, New Symphony Orchestra and Karin Dom Centre for Rehabilitation and Social Integration of Children with Special Needs. High growth in terms of national and regional activities, sponsorships and donation activities supporting several events in the field of culture, education, sports and music and modern dance. Ratings The global rating agency Fitch Ratings confirmed a 'BBB+ (long-term issuer default rating - IDR) to the Bulgarian subsidiary of Societe Generale - Societe Generale Expressbank with a negative outlook. Currently, this is the highest rating Fitch could assign to a bank in Bulgaria. 2. Business development planned for 2010 The main goal of the Bank for 2010 will be to follow closely the established policy of consistent and profitable development with good risk management. In order to increase the gained market positions Societe Generale Expressbank is planning to enlarge its commercial offers and to implement innovative products and financial services adapted to the changes in the environment and aiming at the expansion of both the corporate and individual segments. SGEB also plans to restructure its branch network and rationalise its back office operations to increase its efficiency. In general, the main expectations of the Bank are related to the targets for increasing the portfolio of financial services and their quality, better standard of service to clients and long-term customer relationships. The most important priorities to face the challenges are the stable liquidity position, reliable risk management and reinforcement of the capital base in order to pursue the development with a sound financial structure. 3. Events after the balance sheet date No events have occurred after the balance sheet date which might impact the separate annual financial statements. 4. Dividends In accordance with a decision of the General Assembly of the Shareholders no dividends have been distributed for Bank s exposure to the price, credit, liquidity and cash flow risks Credit risk The Bank manages its credit risk of non-repayment by the borrowers of the total loan amount and interest due by the means of implemented lending activity internal rules. These rules have been developed for the purpose of providing for the Bank s requirements for extending loans, classification of risk exposures, loan loss provisions and credit committee activity. 1

7 MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK For the purpose of risk control related to the loan portfolio of corporate clients, review of the financial position of the companies - borrowers, the quality of their management, the development of the economic sector and condition of the collateral is carried out at least once a year. Loans to individuals are managed on a loan portfolio basis. Risk Management Directorate monitors the positions of non-performing loans by risk groups and products and analyses the reasons for delays in payment. Liquidity risk Societe Generale Expressbank manages its liquidity risk in accordance with the requirements of the effective local regulatory framework. Liquidity control is carried out through asset management (securing liquid assets to meet the current resource needs) and liability management (attraction of cash market resources aimed to compensate the deficit in cash inflows). The Bank manages its liquidity risk to match the maturity structures of assets and liabilities through a Liquidity Committee. The Bank's management takes ongoing measures for the proper allocation of the liquid assets and current liabilities and exercises daily control on liquidity at various levels aimed at effective liquidity management. Market risk The Bank manages its market risk by means of analyses of the movements in exchange rate and interest rate levels, the mismatch in the maturity structure of assets and liabilities and analyses of profitability ratios. Current thresholds of open currency positions are fixed and their compliance is monitored centrally. The Bank manages its foreign currency positions by placing short-term foreign currency deposits within the Bank, by concluding FX swaps with Société Générale, Paris and by concluding FX spots deals with Bulgarian National Bank. The Bank analyses the movements in the financial instrument s value arising as a result of changes in the market prices. Interest rate risk The exposure of the Bank to interest rate risk is monitored through analyses of the mismatch of all interest-bearing exposures, including derivatives. All loans of the Bank bear floating interest rates equal to the floating basic interest rate plus a surcharge provided for in the respective contract. The basic interest rate is set by the Bank s management in response to the changes in the market conditions prevailing in the country. 1

8 On a letterhead of Ernst & Young TO THE SHAREHOLDERS OF SOCIETE GENERALE EXPRESSBANK AD Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying financial statements of SOCIETE GENERALE EXPRESSBANK AD, which comprise the balance sheet as of 31 December 2009, and the income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as endorsed by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the SOCIETE GENERALE EXPRESSBANK AD as of 31 December 2009, and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards as endorsed by the European Union. Report on Other Legal Requirements Pursuant to the requirements of the Bulgarian Accountancy Act, article 38, paragraph 4, we read the Annual Management Report accompanying the financial statements for the year ended In our opinion, the information given in the Annual Management Report is consistent with the accompanying annual financial statements as of 31 December signature /illegible/ Nikolay Garnev, CPA Registered auditor Managing Director Ernst & Young Audit OOD 31 March 2009 Sofia, Bulgaria Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

9 INCOME STATEMENT for the year ended 31 December 2009 Notes Interest income 3 159, ,785 Interest expense 4 (57,064) (59,214) Net interest income 102,387 87,571 Fees and commissions income 5 34,718 29,893 Fees and commissions expense 6 (5,225) (4,098) Net fees and commissions income 29,493 25,795 Gains on available-for-sale financial assets at fair value through profit or loss and derivative financial instruments, net 7 6,792 3,085 Dividend income Other operating income Operating income 139, ,945 Net change in loan loss provisions for loans to clients 10 (35,311) (7,679) Net change in loan loss provisions for other assets 10 (559) (189) Net operating income 103, ,077 Administrative expenses 11 (78,429) (70,561) Income from released provisions 28-1,277 Profit before tax Income tax expense 27 Profit for the year 25,143 40,793 (2,508) (4,159) 22,635 36,634 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

10 STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2009 Notes Profit for the year 22,635 36,634 Other comprehensive income Net (loss) from available-for-sale financial assets (235) (304) Gain on revaluation of properties - 10,004 Income tax related to the components of the other comprehensive income (970) Other comprehensive income for the year, net of taxes 12 (211) 8,730 Total comprehensive income for the year, net of taxes 22,424 45,364 Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. 4

11 BALANCE SHEET as at 31 December 2009 Notes ASSETS Cash and balances with the Central bank , ,701 Due from banks ,670 27,651 Derivative financial instruments 15 6,602 - Financial assets at fair value through profit or loss 16 48,258 - Income tax receivables 27 1,212 1,248 Other assets 22 5,886 3,874 Loans to clients 17 2,215,304 1,986,374 Financial assets available for sale 18 49,389 60,733 Investments in subsidiaries and associates 19 5,878 5,878 Property and equipment 20 83,469 83,320 Intangible assets 21 12,606 13,624 Total assets 2,882,053 2,522,403 LIABILITIES AND EQUITY LIABILITIES Due to banks 23 1,019, ,509 Derivative financial instruments 15 6, Deposits from clients 24 1,390,689 1,236,601 Payables on lease contracts 25 1,666 2,319 Deferred tax liabilities 27 3,750 3,927 Other liabilities 30 21,243 24,760 Subordinated debt 26 88,165 88,340 Total liabilities 2,532,017 2,245,004 EQUITY Issued capital 31 33,674 28,530 Treasury shares redeemed 31 - (22) Issue premium 45, Retained earnings 217, ,085 Revaluation reserve 33,104 33,315 Other reserves 31 20,469 20,469 Total equity 350, ,399 TOTAL LIABILITIES AND EQUITY 2,882,053 2,522,403 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

12 STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2009 Share Treasury Share Retained Other capital shares premium earnings reserves (note 31) (note 31) (note 31) (note 31) Revalua tion reserve At 1 January ,530 (22) ,085 20,469 33, ,399 Total comprehensive income ,635 - (211) 22,424 Increase in issued capital 5,144-44, ,000 Treasury shares redeemed Total At 31 December ,674-45, ,720 20,469 33, ,036 At 1 January ,530 (22) ,451 20,469 24, ,035 Total comprehensive income ,634-8,730 45,364 At 31 December ,530 (22) ,085 20,469 33, ,399 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

13 CASH FLOW STATEMENT for the year ended 31 December 2009 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108 Notes OPERATING ACTIVITIES Profit before tax 25,143 40,793 Adjustments to reconcile profit before tax to net cash flows Non-monetary: Depreciation and amortisation 11 11,347 9,440 Gain on available-for-sale securities 402 (868) Received non-monetary dividends - (203) Loss /(Profit) from sales of property, plant and equipment (88) 269 Impairment losses on loans to clients and other receivables 10 35,870 14,215 Proceeds from deferred fees on loans and off-balance sheet commitments (12,163) (9,805) Movement in the employee retirement benefits obligations provision Revaluation of financial assets at fair value through profit or loss Provisions released 28 - (1,277) Revaluation of derivative financial instruments 7 (103) 140 Adjustments in assets and liabilities Change in the minimum statutory reserve and balances on blocked accounts with the Central Bank ,585 (152,151) Change in derivative financial instruments - (1,973) Change in due from banks Change in financial assets at fair value through profit or loss 16 (48,385) 17,783 Change in loans to clients 17 (260,042) (623,868) Change in other assets 22 (2,571) 847 Change in due to banks , ,306 Change in deposits from clients ,088 94,603 Change in other payables and provisions 30 3,917 12,320 Income taxes paid 27 (2,625) (4,280) Net cash flows (used in) operating activities 168,410 (103,199) (continued on page 8) 7

14 CASH FLOW STATEMENT for the year ended 31 December 2009 (continued from page. 7) Notes INVESTING ACTIVITIES Purchases of property, plant and equipment and intangible assets 20,21 (10,410) (14,656) Proceeds from sales of property, plant and equipment ,090 Purchases of financial assets available for sale 18 (56,065) (25,301) Proceeds from available-for-sale assets 76,497 5,958 Investments in subsidiaries 19 - (1,550) Net cash flows used in investing activities 10,112 (34,459) FINANCING ACTIVITIES Payments on finance lease contracts 25 (723) (573) Utilisation of subordinated debt 26-57,025 Loans repaid (6,297) - Loans received 23 25,000 19,558 Capital increase 50,213 - Net cash flows from financing activities 68,193 76,010 Change in cash and cash equivalents 246,715 (61,648) Cash and cash equivalents at 1 January 33 89, ,039 Cash and cash equivalents at 31 December ,106 89,391 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and approved for issue by virtue of a decision of the Management Board dated 29 March The accompanying notes on pages 9 to 74 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

15 1. Corporate information for the Bank Societe Generale Expressbank AD ( the Bank ) is a joint-stock company established in Bulgaria in June 1993 as a result of the merger of twelve commercial banks. The bank was registered in the Trade Register of Varna District Court by virtue of a decision No 4024 dated 26 June As of 30 November 1999 major shareholder of the Bank is Societe Generale Paris, holding 99.69% of the capital, which is the ultimate parent company of the bank. In compliance with the full licence issued to Societe Generale Expressbank AD by the Bulgarian National Bank the Bank operates as a universal bank offering the full package of banking services and products on the banking market. In 2005 the name of the Bank was changed by virtue of a decision of the shareholders from the former SG Expressbank AD to Societe Generale Expressbank AD. The registered address and address of management of the Bank are at 92, Vladislav Varnenchik Blvd., Varna city. The Bank performs its operations in Bulgaria through a headquarters office, 20 branches and 147 offices, the total number of personnel at 31 December 2009 consists of 1,461 employees (2008 1,391). In 2005 the Bank incorporated a subsidiary Sogelease-Bulgaria EOOD, which is 100% owned by the Bank. Sogelease-Bulgaria EOOD specialises in the fields of finance and operating leases, and offers its services to all business and industry segments, except for the real estate segment. In 2008 the participation of the Bank in the share capital of the insurance joint stock company Sogelife Bulgaria AD decreased from 49% to 41.55%. The object of the company s business activity includes the following types of insurances: Life and Rent insurance, Endowment insurance connected with Investment Fund, additional insurance, and Accident insurance. In 2008 the Bank established a subsidiary "Societe General Factoring" EOOD, 100% owned by the Bank. The object of the business activity of this company is factoring of clients payables. The Bank has a two-tier management system Management and Supervisory Boards. Two of the Management Board members are Executive Directors of the Bank Basis of preparation The Bank s financial statements have been prepared on have been prepared on a historical cost basis with the exception of financial assets at fair value through profit or loss, derivative financial instruments and financial assets available for sale and the Bank s properties that are stated at fair value. The Bank s financial statements have been prepared in Bulgarian levs and all amounts have been rounded to the nearest thousand of Bulgarian levs (BGN 000), unless otherwise stated. The accompanying financial statements are the separate financial statements of the Bank. The Bank also prepares and presents consolidated financial statements for the Group comprising the Bank and its subsidiaries Sogelease Bulgaria EOOD and Societe Generale Factoring EOOD. The consolidated financial statements are issued and published simultaneously with the separate financial statements. Statement of compliance The financial statements of the Bank have been prepared in accordance with the International Financial Reporting Standards, as endorsed by the European Union (IFRS as endorsed by the EU). In general, the Bank presents its assets and liabilities in the balance sheet by a level of liquidity. Analysis regarding the recovery of assets or settlement of liabilities in the respective intervals by estimated maturity is given in Note 34. 9

16 2.1. Basis of preparation (continued) Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the income statement, unless so is allowed by a particular accounting standard or interpretation as specifically disclosed in the accounting policies of the Bank. 2.2 Changes in accounting policy and disclosures New and amended standards and interpretations applicable for reporting periods ended 31 December 2009 The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted for the first time the following new and amended interpretation during the current reporting period. They did not have any impact on the financial status and/or operating results of the Group. IFRS 1 First-time Adoption of International Financial Reporting Standards - Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) IFRS 2 Share-based Payments Vesting Conditions and Cancellations (Amendment) IFRS 7 Financial Instruments: Disclosures (Amendment) IFRS 8 Operating Segments IAS 1 Presentation of Financial Statements (Revised) IAS 23 Borrowing Costs (Revised) IAS 27 Consolidated and Separate Financial Statements - Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation (Amendment) IFRIC 9 IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (Amendment) IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 18 Transfers of Assets from Customers Improvements to IFRSs (issued in 2008 and 2009) The principal effect of these changes is as follows: IFRS 1 First-time Adoption of International Financial Reporting Standards Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) The amendments to IFRS 1 allow the cost of investments in subsidiaries, jointly controlled entities or associates (in the opening IFRS financial statements) to be determined as either cost in accordance with IAS 27 or deemed cost. As the Bank is not a first time adopter of IFRS, these amendments did not have an impact on its financial statements. 10

17 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations applicable for reporting periods ended 31 December 2009 (continued) IFRS 2 Share-based Payments Vesting Conditions and Cancellations (Amendment) The standard restricts the definition of vesting condition to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. The share-based payments made by the Bank do not bear such rights. This amendment of IFRS 2 did not have an impact on its financial statements. IFRS 7 Financial Instruments: Disclosures (Amendment) The amended standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognised at fair value. In addition, reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. The disclosures of fair value measurement are presented in Note 32. The disclosures of fair value measurement and liquidity risk are not affected by the amendments and are presented in Notes 32 and 38 respectively. IFRS 8 Operating Segments IFRS 8 replaced IAS 14 Segment Reporting. IFRS 8 adopts a management approach to segment reporting. The information reported by the enterprises would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the statement of financial position and income statement and entities will need to provide explanations and reconciliations of the differences. As the Bank does not report any operating segments, the new IFRS did not have an impact on its disclosures. IAS 1 Presentation of Financial Statements (Revised) The standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented as a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Bank has elected to present two statements. IAS 23 Borrowing Costs (Revised) The revised IAS 23 requires capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The revised IAS did not have an impact on the Bank s financial statements. 11

18 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations applicable for reporting periods ended 31 December 2009 (continued) IAS 27 Consolidated and Separate Financial Statements Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) The amended IAS 27 requires all dividends from subsidiaries, jointly controlled entities or associates to be recognized in profit or loss in separate financial statements. The revision to IAS 27 will have to be applied prospectively. Further, it allows cost of an investment in a subsidiary, in limited reorganizations, to be based on the previous carrying amount of the subsidiary rather than its fair value. The amendments of IAS 27 did not have an impact on the financial statements of the Bank. IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation (Amendment) The standards have been amended to allow a limited scope exception for puttable financial instruments to be classified as equity if they fulfil a number of specified criteria. The amendments did not have any impact on the financial position or financial performance of the Bank. IFRIC 9 IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (Amendment) This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. IAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit or loss. The amendments did not have any impact on the financial statements of the Bank. IFRIC 12 Service Concession Arrangements This interpretation regulates the accounting of service concession arrangements by the concession operators (contractors). Тhе interpretation did not have any impact on the financial statements of the Bank. IFRIC 13 Customer Loyalty Programmes This Interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled. The adoption of this Interpretation did not have any impact on the financial statements of the Bank as no such schemes currently exist. IFRIC 15 Agreements for the Construction of Real Estate The interpretation is to be applied retrospectively. It clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue. This interpretation did not have any impact on the Bank s financial statements. 12

19 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations applicable for reporting periods ended 31 December 2009 (continued) IFRIC 16 Hedges of a Net Investment in a Foreign Operation The interpretation is to be applied prospectively. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. This interpretation did not have any impact on the Bank s financial statements as it does not apply hedging accounting. IFRIC 18 Transfers of Assets from Customers IFRIC 18 applies to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers and addresses the following issues: (a) Is the definition of an asset met?; (b) If the definition of an asset is met, how should the transferred item of property, plant and equipment be measured on initial recognition?; (c) If the item of property, plant and equipment is measured at fair value on initial recognition, how should the resulting credit be accounted for?; (d) How should the entity account for a transfer of cash from its customer? This interpretation did not have any impact on the Bank s financial position or performance. Improvements to International Financial Reporting Standards (issued in 2008 and 2009) In May 2008 and April 2009, the International Accounting Standards Board ( IASB ) issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Bank. IAS 16 Property, Plant and Equipment: replaces the term net selling price with fair value less costs to sell. IAS 18 Revenue: Guidance (which accompanies the standard) was added to determine whether an entity is acting as a principal or as an agent. The features to consider are whether the entity: - has primary responsibility for providing the goods or service; - has inventory risk; - has discretion in establishing prices; - bears the credit risk. This improvement did not have any effect on the financial position of the Bank. IAS 36 Impairment of Assets: when discounted cash flows are used to estimate fair value less cost to sell additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate value in use. 13

20 2.2. Changes in accounting policies and disclosures (continued) Improvements to IFRSs (issued in 2008 and 2009) (continued) Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Bank: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 7 Financial Instruments: Disclosures IAS 1 Presentation of Financial Statements IAS 8 Accounting Policies, Change in Accounting Estimates and Error IAS 10 Events after the Reporting Period IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosures of Government Assistance IAS 23 Borrowing Costs IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 31 Interest in Joint Ventures IAS 34 Interim Financial Reporting IAS 38 Intangible Assets IAS 40 Investment Properties IAS 39 Financial Instruments: Recognition and Measurement IAS 38 Intangible Assets IAS 41 Agriculture Reclassifications In order to achieve better presentation and understanding of the financial statements of the Bank, Management is of the opinion that it is necessary to present the net change in the 2008 impairment loss provision related to other assets amounting to BGN 189 thousand on a separate in the income statement. For the purpose, the amount of other operating income for 2008 was reduced by BGN 319 thousand and the amount of administrative expenses for 2008 was increased by BGN 508 thousand. 2.3 Significant accounting judgements, estimates and assumptions The preparation of financial statements requires the management to apply judgement in making accounting estimates and assumptions, which have effect on the amount of reported assets and liabilities, the disclosure of the contingent liabilities at the date of the balance sheet, as well as on the income and expenses reported for the period. Actual results in the future could differ from such estimates and the differences may be material to the financial statements. These estimates are reviewed on a regular basis and if a change is needed, it is accounted in the period the changes become known. The most significant judgements and estimates are as follows: Useful life of property, plant and equipment, and intangible assets Financial reporting of property, plant and equipment, and intangible assets involves the use of estimates for their expected useful life and residual values, which are based on judgments of the Bank s management. In assessing the fair values of the buildings Management used estimates based on market data. 14

21 2.3 Significant accounting judgements, estimates and assumptions (continued) Fair value of financial instruments Where the fair values of financial assets and liabilities on the balance sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets, where possible, but where this is not feasible, a degree of judgement is required by Management in establishing fair values. For the reliable measurement of the fair value of the financial instrument Management uses a comparison to the current market price of similar financial assets or alternative valuation techniques e.g. the discounted cash flows method. The judgement includes considerations of comparativeness of financial instruments, estimation of future cash flows, liquidity and model inputs such as correlation and sensitivity of longer dated derivative financial instruments. For determining the impairment of debt securities classified as financial assets at fair value, the Bank performs financial data analyses of the company-issuer in case the securities have been issued by a commercial company. Government bonds issued by the State or by government institutions are not being assessed of counterparty risk default by the Bank as the Bank considers the issuer as one with good and stable credit rating. Allowance for impairment losses and uncollectability The Bank reviews its problematic loans at each reporting date to assess whether an allowance for impairment should be recorded in the income statement. In particular, judgement by management is required for the analysis on financial performance of the borrowers and availability of sources of the borrower to repay its loans when determining the risk category in which the borrower should be classified and the level of allowance required respectively. In addition to individually classified and provided loans, the Bank also conducts an analysis on a portfolio basis to determine allowance against individually insignificant exposures which have a greater concentration of risk that the loans existing at the balance sheet date may not be recovered. This analysis takes into consideration factors such as analysis of historical losses and risks determined on a portfolio basis. Impairment of equity investments The Bank treats its equity investments classified as available-for-sale financial assets as impaired when there has been a significant or prolonged decline in their fair value below the carrying amount or where other objective evidence of impairment exist. The determination of what is significant or prolonged requires judgement in evaluating all significant factors, such as the share price volatility, etc. Employee benefit liabilities The cost of retirement benefit plan is determined using actuarial valuation. The actuarial valuation involves making assumptions about discount rates, future salary increases, personnel turnover rates and mortality rates. Due to the longterm nature of the plan, such estimates are subject to significant uncertainty. 2.4 Summary of significant accounting policies Foreign currency translation The financial statements are presented in Bulgarian levs the functional and presentational currency of the Bank. Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated in the functional currency at the closing rate of exchange set by the Bulgarian National Bank at the end of each day. All exchange differences are taken to the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost on acquisition in foreign currency are translated in the functional currency using the exchange rate as at the date of the initial transaction (acquisition). 15