Credit Opinion: Atlas Bank AD Podgorica. Global Credit Research - 12 Oct Ratings. Contacts. Key Indicators

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1 Credit Opinion: Atlas Bank AD Podgorica Global Credit Research - 12 Oct 2011 Podgorica, Montenegro Ratings Category Moody's Rating Outlook Stable Bank Deposits B1/NP Bank Financial Strength E+ Baseline Credit Assessment B2 Adjusted Baseline Credit Assessment B2 Contacts Analyst Phone Christos Theofilou, CFA/Limassol Elena Panayiotou/Limassol Yves Lemay/London Alexios Philippides/Limassol Key Indicators Atlas Bank AD Podgorica (Consolidated Financials)[1] [2]12-10 [2]12-09 [2]12-08 [2]12-07 [2]12-06 Avg. Total Assets (USD million) [3]20.6 Tangible Common Equity (USD million) [3]11.6 Net Interest Margin (%) [4]4.3 PPI / Avg RWA (%) [5]4.0 Net Income / Avg RWA (%) [5]1.7 (Market Funds - Liquid Assets) / Total Assets (%) [4]-22.4 Core Deposits / Average Gross Loans (%) [4]138.1 Tier 1 Ratio (%) [5]23.6 Tangible Common Equity / RWA (%) [5]23.8 Cost / Income Ratio (%) [4]75.7 Problem Loans / Gross Loans (%) [4]5.4 Problem Loans / (Equity + Loan Loss Reserves) (%) [4]16.6 Source: Moody's [1] All ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation [5] Basel I & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE Moody's assigns a standalone bank financial strength rating (BFSR) of E+ to Atlas Bank AD Podgorica ("Atlas Bank"), which maps to B2 on Moody's long-term rating scale. The BFSR reflects its narrow franchise within a developing banking system, and the bank's evolving riskmanagement systems and corporate governance culture. Despite its small size and declining market share, Atlas Bank has a nationwide branch network and a 5% share of the Montenegrin banking sector, as well as an opportunity to consolidate its market position due to problems at the larger banks in the system. The rating also reflects the bank's solid historical financial fundamentals, its adequate capitalisation and liquidity metrics and profitable income statements for each of the past few years. However, the sustained challenging macroeconomic conditions continue to pose risks for Atlas Bank, especially concerning asset quality and earnings. The bank's B1 long-term foreign-currency deposit rating incorporates a one-notch uplift from the B2 baseline credit assessment (BCA, mapped from the BFSR), reflecting Moody's assessment of a moderate probability of systemic support, in case of need. Rating Drivers

2 - A small bank, at an early stage of its development with a developing risk-management system and an evolving corporate-governance culture - High exposure to related-party loans, which have almost doubled over the past year, mitigated by the cash collateral held and the high level of related-party deposits - Historically adequate financial fundamentals, which have out-performed those of its local peers, although current challenging operating conditions continue to pose risks - Potential for systemic support underpins the bank's deposit rating Rating Outlook All ratings carry a stable outlook. What Could Change the Rating - Up The bank's ability to improve its currently weakened asset quality and profitability, while maintaining its adequate capitalisation and funding, under the current challenging market conditions would present a key positive rating driver for the BFSR. However, further upgrades would require a strengthening of the bank's franchise value and risk positioning. What Could Change the Rating - Down Material deterioration in asset quality, in light of the challenging macroeconomic conditions, placing downward pressure on the bank's profitability and capitalisation - or deterioration in its funding/liquidity profile - would exert downward pressure on the ratings. Furthermore, any liquidity and/or solvency problems at Atlas Group, may lead to an abrupt deterioration in the bank's own financial fundamentals given the high number of related-party exposures. Recent Results and Company Events During the first six months of 2011, the bank reported a net loss of around EUR446,000 compared to a profit of around EUR 43,000 over the same period last year. Profitability was negatively affected primarily by a EUR18,000 loss from securities income against a EUR640,000 profit last year, which was partly offset by higher net interest income, amid higher margins and balance sheet expansion. As at end-june 2011, total assets were EUR million, lower by EUR34,000 compared to year-end Deposits remained roughly at the same levels while gross loans experiences a small reduction of 1%. DETAILED RATING CONSIDERATIONS Detailed considerations for Atlas Bank's currently assigned ratings are as follows: Bank Financial Strength Rating Atlas Bank's E+ BFSR reflects its still-developing risk-management systems and corporate-governance culture as well as its narrow franchise within a developing banking system. Despite its small size and declining market share, Atlas Bank has a nationwide branch network and a 5% share of the Montenegrin banking sector, as well as an opportunity to consolidate its market position. The rating also reflects the bank's solid historical financial fundamentals, its adequate capitalisation and liquidity metrics and profitable income statements for each of the past few years, although current challenging macroeconomic conditions continue to pose risks for Atlas Bank, especially concerning asset quality and earnings. For reference, the assigned BFSR is two notches lower than the D outcome of Moody's bank financial strength scorecard. The E+ BFSR captures the developing nature of the Montenegrin banking system, including current challenging market conditions that could have a material adverse effect on the bank's financial fundamentals and weaken the adequate financial indicators recorded over recent years. Qualitative Factors (70%) Factor 1: Franchise Value Atlas Bank has a small and fragile franchise in the Montenegrin market. Its franchise is supported by its association with the Atlas Group of companies. The bank had total assets of EUR 182 million as of end-june 2011 and ranks fourth in Montenegro in terms of deposits (with a 7% market share) and seventh in terms of loans (with a 5% market share). The bank's franchise value is also supported by business generation on both the asset and liability side of the balance sheet across the Atlas group. In particular, it has business relationships with both the group's other companies, but also with third-party companies that have common business interests with the group. The bank's franchise was challenged by the aggressive pre-crisis growth of foreign-owned banks, although this trend has recently reversed. The current market conditions have caused asset-quality and liquidity problems at the larger Montenegrin banks, which should allow Atlas Bank to consolidate its market position as a mid-sized Montenegrin bank. In fact, Atlas Bank's market shares have been growing during the past two years. The bank was able to attract a large number of retail deposits, on the one hand due to competitive pricing but also due to enhanced market confidence as the bank did not face the same severity of problems as its larger Montenegrin peers over the past two years. The bank's franchise however remains constrained by its relatively high earnings volatility - reflecting the currently unstable and weak macroeconomic conditions - and limited geographic diversification. The bank remains dependent on the small Montenegrin economy given that its foreign operations (in Moscow and Cyprus) are yet to contribute materially to profits. The bank plans to convert its representative office in Cyprus into a branch and has recently opened a representative office in Belgrade. Despite its small size, the bank has positive earnings diversification, targeting retail and SME clients, while also offering investment banking services through its 31.5% associate, Invest Banka. The bank's score for franchise value is D-.

3 Factor 2: Risk Positioning Atlas Bank has a developing corporate-governance culture. The Atlas Group directly and indirectly controls the majority of Atlas Bank's shares, which may align high-level strategic decisions to Atlas Group's business interests. It has significant dealings with a number of Atlas Group companies, with related-party loans accounting for 75% of its core (Tier 1) capital, although these relate to both the asset and liability side of the balance sheet (the bank's management maintains that any transactions are performed at "arm's length"). That said, we note that there has been a material strengthening of corporate governance practices in Montenegro in general, and the bank in particular, with an enhancement of the supervisory role of the board of directors and a greater oversight of the bank's risk management and internal control functions. Furthermore, the bank has a moderate liquidity management, as it has certain maturity mismatches in its assets and liabilities profile that may render it vulnerable to sudden deposit withdrawals. Positively, the bank's retail depositor base has grown over the past year and now accounts for around 49% of total deposits, improving the granularity of the bank's depositor base; although we note that in Montenegro, depositor confidence remains fragile as the experience of losses on deposits following the break-up of the former Yugoslavia is still stark. Moody's understands that Atlas Bank has emerged from the crisis in a more robust credit position compared with other domestic entities which has enhanced its market perception. The bank has an evolving risk management, which is probably a reflection of its small size and early stage of development, although we note some material improvements over the past year. Improvements are primarily in the area of risk governance with the empowerment and enhanced independence of the risk management department, which is now more active in the decision making process primarily for credit risk. It has also been tightening its loan-origination criteria. Atlas Bank has relatively high credit concentrations. Its top 20 exposures (including exposures to the Central Bank of Montenegro, CBM) are around 100% of Tier 1 capital. However, a strong mitigating factor is the high level of cash collateral held against these loans, with more than 75% of aggregated top 20 exposures covered by cash collateral. We also understand that the bank addresses all regulatory requirements, has a moderate risk appetite and a well-diversified loan portfolio in terms of industry concentrations. The bank scores E for risk positioning, which adequately captures the above-mentioned factors. Factor 3: Regulatory Environment For a discussion of the regulatory environment, please refer to Moody's Banking System Profile on Montenegro. Factor 4: Operating Environment This factor is common to all Montenegrin banks. Moody's assigns a D score for the overall operating environment. For a more detailed discussion of the operating environment, please refer to Moody's Banking System Profile on Montenegro. Quantitative Factors (30%) Factor 5: Profitability Trend: Weakening Given its small size and early stage of development, Atlas Bank's profitability is modest. The bank's bottom-line has been negatively affected over the past two years by an increase in funding costs, slower balance-sheet growth, lower fee income and substantially reduced trading gains. For 2010, the bank's bottom line profitability has fallen to EUR 0.3 million from EUR 1.2 million, despite stronger trading income. Its recurring earnings power has dropped further (defined as pre-provision income to average assets), which stood at 0.6% in 2010 (2009: 0.9%), down sharply from 4.9% in 2007, while bottom line income to average assets was around 0.2% from 0.7% in 2009, down from 1.5% in However, certain regulatory changes in provisioning requirements and the classification of bad loans (see Asset quality below) helped to cushion the impact of the macroeconomic slowdown on the bank's profitability, by protecting it from a higher rise in loan-loss provisioning expenses. The bank scores a D+ for profitability with a weakening trend. Going forward, we expect 2011 to be an equally tough year, as the same factors are still at play, with increased competition for deposits pushing costs higher, notwithstanding the slight improvement in economic conditions. The bank has reported a EUR 0.4 million loss for the first half of 2011, due to lower trading income. Factor 6: Liquidity Atlas Bank's funding profile seems to have stabilized, following systemic deterioration in liquidity/funding conditions during the last quarter of 2008 and early As a consequence, liquidity metrics have been gradually improving. As of end-december 2010, liquid assets - including the minimum regulatory requirements - stood at 30.3% (year-end 2008: 19.7%) of total assets, with the gross loans-to-customer deposits ratio at a more comfortable 83% (year-end 2008: 93%). On the funding side, Atlas Bank is almost exclusively dependent on customer deposits, with approximately 49% of deposits derived from retail clients and the top-ten depositors accounting for an elevated 26% of the total as at end-december Atlas Bank benefits from the deposits of Atlas Group and other related parties and the amount of these deposits has increased. This should continue to support the bank's funding profile, although Moody's cautions that in a scenario where the financial conditions of the group deteriorate, this may result in liquidity pressure on the bank. Atlas Bank has secured EUR 9 million in an eight-year loan from the EIB (related to a total EUR 100 million dispersed to the Montenegrin banking system to boost SME lending) and has a EUR 4.2 million IDB loan facility. An additional EUR 9 million from the EIB is in the pipeline, which should support loan growth going forward.

4 The bank scores C+ for liquidity, which takes into account the bank's strong liquidity metrics and moderate liquidity management, in light of a fragile depositor confidence in Montenegro. Factor 7: Capital Adequacy Trend: Weakening The bank's total capital adequacy ratio is moderate and has weakened to 14.2% (2009: 15.7%) and shareholders' funds as a percentage of total assets at 15.6% as at year-end 2010 (2009: 18.0%) primarily due to a fair value loss in its investment securities held in the "Available for sale" account. It has historically followed a conservative dividend policy, although in 2010 it continued to pay preferred dividends even though this resulted in a loss for its common shareholders. The bank scores A for capital adequacy with a weakening trend to indicate our expectations for lower capital amid the losses made during 1H2011. Any further decline in capital ratios will exert negative pressure on the ratings, given the bank's lower provisioning coverage. Factor 8: Efficiency Trend: Weakening The bank's efficiency indicators are weak, although this is to be expected given the small size of its balance sheet. Non-interest expenses stood at 4.7% of total assets as at year-end 2010 (year-end 2009: 5.2%) and its cost-to-income ratio at approximately 88.8%, compared with 85.5% in The bank has invested significant capital to establish a countrywide branch network and to improve its IT systems, although its foreign investments are yet to contribute to its bottom line. At the same time, we note management's commitment to some cost-discipline measures, rationalising both staff and branches at the bank. The bank scores E for efficiency. Going forward, we expect cost-to-income levels to remain weak, as lower income should continue to weigh on the cost-to-income ratio. Factor 9: Asset Quality Asset quality is moderate with non-performing loans (NPLs) as a percentage of gross loans at 4.7% at end-2010 from 6.3% at end The rise in NPLs was less than initially anticipated due to the repayment of a few large problematic loans as well as new regulation implemented by the CBM. The new regulation increased the time-past-due requirement of NPL classification to 90 days from 60 days previously, bringing it in line with international norms. New regulations have also re-classified the performing status of restructured loans previously overdue by less than 180 days (from fewer than 90 days previously). Moody's also notes that the figure is understated by the fact that all "loss" (i.e., "Category E") loans are written off. The CBM has also lowered the provisioning requirements for loans that are classified in the performing categories A and B, to 0% and 3% respectively, from the 1% and 3%-8% required previously. This leads to a moderate provisioning coverage of the loan portfolio of around 44% as at end-december 2010, from 64% as at year-end The level of net NPLs (excluding loan-loss reserves) as a percentage of shareholders equity was nonetheless relatively low at 10% as at end-december 2010, which indicates that only a small portion of capital is at risk from unprovisioned problematic exposures. Going forward we expect asset quality levels remain moderate, supported by a slight improvement in operating conditions. The above notwithstanding, asset-quality indicators remain a key driver in light of the concentrated nature of the bank's loan book. The bank scores C for asset quality. Global Local Currency Deposit Rating (Joint Default Analysis) Montenegro has adopted the euro as its official currency, without having been an official member of the European Monetary Union. It therefore does not have a 'local' currency, nor does Moody's assign a global local-currency deposit rating. Foreign Currency Deposit Rating Atlas Bank's foreign-currency deposit rating of B1 is based on its BFSR of E+ (which translates into a BCA of B2), and on Moody's judgment that there is a moderate probability that the Montenegrin authorities would support Atlas Bank in a period of financial distress. The rating is therefore supported by Atlas Bank's B2 BCA and by Montenegro's Ba3 systemic support indicator. The bank receives a one-notch uplift from its BCA. The foreign-currency deposit rating of the bank is at the same level as the foreign-currency deposit ceiling. Montenegro is considered a fully "euro-ised" country for our assessment of systemic support. However, the Montenegrin authorities appear committed to ensure the stability of the banking sector and avoid the possibility of depositors losing money. This commitment is demonstrated by the recent bailout of Prva Banka Crne Gore and the fact that since 2001, when the CBM was established, no depositor has lost money despite a number of banks facing financial difficulties. ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. Bank Financial Strength Ratings do not take into account the probability that the bank will receive such external support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the assignment of Bank Financial Strength Ratings include bank-specific elements such as financial fundamentals, franchise value, and business and asset diversification. Although Bank Financial Strength Ratings exclude the external factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and

5 relative fragility of the financial system, and the quality of banking regulation and supervision. Moody's uses the Baseline Credit Assessment (BCA) to map BFSRs onto the 21-point Aaa-C rating scale and like the BFSR, it reflects a bank stand- alone default risk. Each point on the Aaa-C scale represents a specific probability of default and therefore allows Moody's to use the BCA as an input to Moody's Joint Default Analysis (JDA), described below. The baseline credit assessment reflects what the local currency deposit rating of the bank with the given BFSR would be without any assumed external support from a government or third party Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the Bank Financial Strength Rating as well as Moody's opinion of any external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, Moody's Bank Deposit Ratings are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, and includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and explicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors, but they do recognise the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of any external elements of support into the bank's Baseline Credit Assessment. In assigning the local currency deposit rating to a bank, the JDA methodology also factors in the rating of the various potential support providers (parent company, cooperative group, regional or national governments), as well as the degree of dependence that may exist between each one of them and the bank. Moody's assessment of the probability of systemic support (by a national government) is derived from the analysis of the capacity of a government and its central bank to provide support on a system-wide basis. The systemic support indicator is determined for a particular country and serves as an input for all bank ratings in that country. The support indicator can be set at, above or, in rare cases, below the government's local currency bond rating for that country. National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss expectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign Currency Debt Rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's bank financial strength scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. Rating Factors Atlas Bank AD Podgorica Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (70%) D- Factor: Franchise Value D- Neutral Market Share and Sustainability x Geographical Diversification x Earnings Stability x Earnings Diversification [2] Factor: Risk Positioning E Neutral Corporate Governance [2] x - Ownership and Organizational Complexity x - Key Man Risk x

6 - Insider and Related-Party Risks x Controls and Risk Management x - Risk Management x - Controls x Financial Reporting Transparency x - Global Comparability x - Frequency and Timeliness x - Quality of Financial Information x Credit Risk Concentration x - Borrower Concentration x - Industry Concentration x Liquidity Management x Market Risk Appetite x Factor: Operating Environment D Neutral Economic Stability x Integrity and Corruption x Legal System x Financial Factors (30%) C Factor: Profitability D+ Weakening PPI / Average RWA - Basel I 1.78% Net Income / Average RWA - Basel I 0.88% Factor: Liquidity C+ Neutral (Mkt funds-liquid Assets) / Total Assets % Liquidity Management x Factor: Capital Adequacy A Weakening Tier 1 Ratio - Basel I 19.54% Tangible Common Equity / RWA - Basel I 19.38% Factor: Efficiency E Weakening Cost / Income Ratio 83.53% Factor: Asset Quality C Neutral Problem Loans / Gross Loans 5.62% Problem Loans / (Equity + LLR) 18.66% Lowest Combined Score (9%) D Economic Insolvency Override Neutral Aggregate Score D Assigned BFSR E+ [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information [2] - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral 2011 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATIONS") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY'S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY'S OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY'S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY'S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY'S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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