EUR 000 MKD 000 Change * MKD

Transcription

1 Annual Report 2011

2 2 ANNUAL REPORT 2011 Key Figures EUR 000 MKD 000 Change * MKD Balance Sheet Data Total Assets 217, ,098 13,380,260 12,368, % Gross Loan Portfolio 164, ,378 10,143,651 9,187, % Business Loan Portfolio 138, ,981 8,529,411 7,194, % EUR < 10,000 31,264 28,403 1,922,920 1,746, % EUR > 10,000 < 30,000 29,770 25,143 1,830,988 1,546, % EUR > 30,000 < 150,000 54,924 43,184 3,378,088 2,656, % EUR > 150,000 22,720 20,252 1,397,414 1,245, % Agricultural Loan Portfolio 14,321 12, , , % Housing Improvement Loan Portfolio 7,518 15, , , % Other 4,407 4, , , % Loan Loss Provisions -4,840-3, , , % Net Loan Portfolio 160, ,583 9,845,961 8,954, % Customer Deposits 145, ,181 8,963,260 8,621, % Liabilities to Banks and Financial Institutions (excluding PCH) 40,394 23,203 2,484,438 1,427, % Total Equity 17,875 16,895 1,099,431 1,039, % Income Statement Operating Income 12,097 12, , , % Operating Expenses 11,081 11, , , % Operating Profit Before Tax 1,016 1,263 62,496 77, % Net Profit 1,016 1,263 62,496 77, % Key Ratios Cost Income Ratio 80.5% 83.5% Return on Equity 5.8% 7.8% Capital Ratio 13.2% 13.6% Operational Statistics Number of Clients 87, , % of which Business Clients 26,895 39, % Number of Loans Outstanding 22,796 25, % Number of Deposit Accounts 108, , % Number of Staff % Number of Branches and Outlets % Exchange rate as of December 31: 2011: EUR 1 = MKD : EUR 1 = MKD * Some of the figures differ from those published in the 2010 Annual Report, due to a changed calculation method

3 CONTENTS 3 Mission Statement 4 Letter from the Supervisory Board 5 The Bank and its Shareholders 6 Special Feature 8 Management Business Review 10 Risk Management 20 Branch Network 26 Organisation, Staff and Staff Development 28 Business Ethics and Environmental Standards 30 The ProCredit Group: Responsible Neighbourhood Banks for Small Businesses and Ordinary People 34 ProCredit in Eastern Europe 38 Our Clients 42 Financial Statements 46 Contact Addresses 90

4 4 ANNUAL REPORT 2011 Mission Statement ProCredit Bank is a development-oriented full-service bank. We offer excellent customer service to private individuals and enterprises. In our operations, we adhere to a number of core principles: we value transparency in our communication with customers, we do not promote consumer lending and we provide services which are based both on an understanding of each client s situation and on sound financial analysis. This responsible approach to banking allows us to build long-term partnerships with our clients based on mutual trust. In our operations with business clients, we focus on very small, small and medium-sized enterprises, as we are convinced that these businesses create jobs and make a vital contribution to the economies in which they operate. By offering simple and accessible deposit facilities and other banking services and by investing substantial resources in financial education we aim to promote a culture of savings and responsibility which can help to bring greater stability and security to ordinary households. Our shareholders expect a sustainable return on investment over the long term, rather than being focused on short-term profit maximisation. We invest extensively in the training and development of our staff in order to create an open and efficient working atmosphere, and to provide friendly and competent service for our customers.

5 LETTER FROM THE SUPERVISORY BOARD 5 Letter from the Supervisory Board 2011 brought many challenges in terms of economic and political developments, both on the global and on the domestic scale. While the real sector suffered from liquidity shortages, the banking sector managed to maintain stability, due mainly to the strict monetary policy implemented by the National Bank of the Republic of Macedonia. Given the circumstances, ProCredit Bank Macedonia s performance was stable and satisfactory. The B++ rating issued by Fitch Ratings, along with ProCredit s primarily German ownership, reinforced our customers trust in us and underscored our resilience in the volatile financial climate. Thanks to our proven credit technology, dedicated staff and continuous outreach to our customers, the bank continued to grow, achieving a solid profit of MKD 62.5 million (EUR 1.0 million). We ended the year with an ROE of 5.8% and a capital adequacy 13.2%, figures that attest to our sound approach to doing business. The loan portfolio expanded by 10.4% to MKD 10.1 billion (EUR 165 million), while deposits totalled MKD 9.0 billion (EUR 146 million). Although the overall level of arrears in the Macedonian banking sector exhibited an upwards trend, we succeeded in limiting our portfolio at risk over 90 days to 2.09%, far below the banking sector average of 9.9%. The high quality of our loan portfolio was mostly due to our responsible approach to banking, low risk profile, careful credit analysis procedures and in-depth knowledge of our clients. As a true neighbourhood bank, we place a premium on providing the best customer care possible and flexible, tailored services. This year we further strengthened our relationship with our clients by deepening our focus and adjusting our services and conditions to accommodate the changing needs of our customers in the uncertain economic climate. As always, we offered a full range of simple, transparent services and continued to foster a savings culture by offering straightforward services with no minimum deposit requirements, which was greatly appreciated by our clients. We also made special efforts to promote financial literacy among our customers and conducted transparency campaigns aimed at the broader community. Progress was also made in terms of redesigning and reorganising our branches so as to provide ever more accessible, fast and reliable service to our customers. In order to be closer to our business clients, we opened a number of new service points in the busiest industrial areas. We also held several financial education events at our four business centres, which are dedicated to providing professional service and tailored advice to entrepreneurs in a comfortable environment. Our staff continued to be our most precious asset and the key driver of our relationship-oriented approach to banking. To ensure the quality of incoming staff, we launched the Young Bankers Programme, a comprehensive training programme aimed at high-potential individuals. As for the coming year, our primary goal is to continue to support small businesses not only when the economy is robust, but also during more challenging times. To this end, we will focus on enterprise lending, support healthy business development and promote ways to optimise productivity. At the same time, we will take steps to increase the use of electronic services as well as to raise greater awareness about energy efficiency measures as a way to cut costs and stimulate sustainable development. On behalf of the Supervisory Board, I would like to express my gratitude to the staff for their unflagging commitment, enthusiasm and hard work during this difficult year. I would also like to thank our shareholders for their vision and continued support of our activities. Members of the Supervisory Board as of December 31, 2011: Helen Alexander (Chairperson) Peter per Reinhold Noll Frieder Woehermann Ulrike Rennate Lassmann Jana Sivcova Members of the Managing Board as of December 31, 2011 Ilir Aliu Jovanka Joleska Popovska Emilija Spirovska Valentina Trajcheva Nikovska Helen Alexander Chairperson of the Supervisory Board

6 6 ANNUAL REPORT 2011 The Bank and its Shareholders ProCredit Bank Macedonia is a member of the ProCredit group, which is led by its Frankfurt-based parent company, ProCredit Holding. ProCredit Holding is the majority owner of ProCredit Bank Macedonia and holds 87.5% of the shares. ProCredit Bank Macedonia was founded in July 2003 as Pro Business Bank by an alliance of international development-oriented investors, many of which are shareholders in ProCredit Holding today. Their goal was to establish a new kind of financial institution that would meet the demand of small and very small businesses in a socially responsible way. The primary aim was not short-term profit maximisation but rather to deepen the financial sector and contribute to long-term economic development while also achieving a sustainable return on investment. Over the years, ProCredit Holding has consolidated the ownership and management structure of all the ProCredit banks to create a truly global group with a clear shareholder structure and to bring to each ProCredit institution all the best practice standards, synergies and benefits that this implies. Today s shareholder structure of ProCredit Bank Macedonia is outlined below. Its current share capital is EUR 10.0 million Shareholder (as of Dec ) ProCredit Holding EBRD Sector Headquarters Share Paid-in capital (In EUR million) Investment Banking Germany UK 87.50% 12.50% Total Capital 100% ProCredit Holding is the parent company of a global group of 21 ProCredit banks. ProCredit Holding was founded as Internationale Micro Investitionen AG (IMI) in 1998 by the pioneering development finance consultancy company IPC. ProCredit Holding is committed to expanding access to financial services in developing countries and transition economies by building a group of banks that are the leading providers of fair, transparent financial services for very small, small and medium-sized businesses as well as the general population in their countries of operation. In addition to meeting the equity needs of its subsidiaries, ProCredit Holding guides the development of the ProCredit banks, provides their senior management, and supports the banks in all key areas of activity, including banking operations, human resources and risk management. It ensures that ProCredit corporate values, international best practice procedures and Basel II risk management principles are implemented group-wide in line with standards also set by the German supervisory authorities. IPC is the leading shareholder and strategic investor in ProCredit Holding. IPC has been the driving entrepreneurial force behind the ProCredit group since the foundation of the banks. ProCredit Holding is a public-private partnership. In addition to IPC and IPC Invest (the investment vehicle of the staff of IPC and ProCredit), the other private shareholders of ProCredit Holding include the Dutch DOEN Foundation, the US pension fund TIAA-CREF, the US Omidyar-Tufts Microfinance Fund and the Swiss investment fund responsability. The public shareholders of ProCredit Holding include KfW (the German promotional bank), IFC (the private sector arm of the World Bank), FMO (the Dutch development bank), BIO (the Belgian Investment Company for Developing Countries) and Proparco (the French Investment and Promotions company for Economic Cooperation). The legal form of ProCredit Holding is a so-called KGaA (Kommanditgesellschaft auf Aktien, or in English a partnership limited by shares). This is a legal form not uncommonly used in Germany which can basically be regarded as a joint stock

7 THE BANK AND ITS SHAREHOLDERS 7 company in which the role of the management board is assumed by a General Partner, and in which the General Partner has consent rights over certain key shareholder decisions. In the case of ProCredit Holding, the General Partner is a small separate company which is owned by the core shareholders of ProCredit Holding AG & Co. KGaA: IPC, IPC Invest, DOEN, KfW and IFC. The KGaA structure will allow ProCredit Holding to raise capital in the future without unduly diluting the influence of core shareholders in ensuring the group maintains dual goals: development impact and commercial success. ProCredit Holding has an investment grade rating (BBB-) from Fitch Ratings Agency. As of the end of 2011, the equity base of the ProCredit group is EUR 469 million. The total assets of the ProCredit group are EUR 5.5 billion. The European Bank for Reconstruction and Development (EBRD) was established in It aims to foster the transition towards open, market-oriented economies and to promote private and entrepreneurial initiative in countries from Central Europe to Central Asia that are committed to democracy, pluralism and market economics. The EBRD seeks to help its countries of operations to implement structural and sectoral economic reforms, promoting competition, privatization and entrepreneurship. In fulfilling its role as a catalyst of change, the Bank encourages co-financing and foreign direct investment from the private and public sectors, helps to mobilise domestic capital, and provides technical cooperation in relevant areas.

8 8 ANNUAL REPORT 2011 Special Feature Employees Who Identify with ProCredit s Mission: The Key to Excellent Customer Service ProCredit Bank s strategic orientation revolves around providing excellent customer service. This cannot be achieved without employees who, besides possessing the right skills and knowledge, are truly committed to their work. In order to attract such individuals, we introduced the Young Bankers Programme in December The programme is aimed at university graduates, with or without work experience, who are interested in finding out about the way ProCredit Bank works and who aspire to gain additional knowledge and experience. Every year the bank opens its doors to more than 100 candidates, who are carefully selected according to pre-defined standards. During the six-month programme, which begins four times a year, the candidates have the chance to learn about different areas related to financial mathematics, accounting, and other banking-related subjects. Most importantly, they are given the opportunity to demonstrate that they have the right qualities (honesty, dedication, and broad perspectives), and can develop the ability to apply them effectively in their daily work. Following a period of classroom training, the second part of the programme covers practical training at branches and service points under the tutelage of experienced employees (mentors). In such an environment, the participants are able to undertake several challenges that require teamwork, organisational skills, and proactive engagement in real banking situations. What I liked most was having the chance to see not only how a typical bank works, but also

9 SPECIAL FEATURE 9 experience the ProCredit way of banking. At the end of the programme, I felt that I wanted to be part of the ProCredit team and build my career there, as my personal values are in line with the bank s key principles, explained Vesna Velkova, who joined the Strumica branch as a Business Client Adviser for very small clients after successfully completing the first Young Bankers Programme. The programme provides mutual benefits for all parties involved: for the people seeking employment and work experience on the one hand, and for ProCredit Bank on the other. Nineteen out of 30 participants from the first two programmes have become members of the ProCredit team. In these cases, the programme clearly made it possible for the bank to find the right people, and for the graduates to find the right employer. This, we believe, ensures a high standard of new employees who will provide high quality service to our customers. For those who do not become a part of the ProCredit team upon completion of the programme, the experience of having taken the course will undoubtedly open up greater possibilities for future employment. For its exceptional contribution to social responsibility in employee relations and to Macedonian society as a whole, the Young Bankers Programme received an award from the Macedonian government s national co-ordinating body for social responsibility.

10 10 ANNUAL REPORT 2011 Management Business Review Management from left to right: Ilir Aliu Chief Operating Officer Jovanka Joleska Popovska General Manager Emilija Spirovska Chief Risk Management Officer Valentina Trajcheva Nikovska Chief Financial Officer

11 MANAGEMENT BUSINESS REVIEW 11 Political and Economic Environment 2011 was marked by the eurozone financial crisis as well as by domestic political and economic challenges. Although Macedonia succeeded in maintaining economic stability, the wider economic crisis affected the local economy to a certain extent, especially the real production and export sectors. The slowed economic activity was also partly attributable to the local elections, in which Macedonia s centre-right VMRO-DPMNEled coalition won the greatest number of seats in parliament. Integration into the European and Euro-Atlantic family remained Macedonia s top political and economic priority in 2011, but the unresolved name dispute with Greece continued to impede the country s ability to join international organisations. Nevertheless, Macedonia retained both its candidate country status and its eligibility for admission negotiations. 1 The government s strong commitment to economic development has materialised into a range of generous tax incentives and reform measures, which contributed to Macedonia s number three ranking 2 (out of 183 counties) on the World Bank s 2011 Doing Business list in terms of improved business climate. Citing the country s fiscal stability and favourable growth prospects, Fitch- Ratings reaffirmed the country s BB+ status. 3 Although foreign direct investment remained at a low level (4.15% of GDP as of December ), the government s Invest in Macedonia project and continued efforts to improve the business climate bode well for the country s future economic development. Although economic activity moved in a positive direction in 2011, cautious economic behaviour slowed the pace of growth. Nevertheless, GDP grew by 3% 5 compared with the previous year (2010: 1.8%) 6, mainly due to a rapid rise in wholesale and retail trade and industrial production as well as to a significant increase in construction activity stimulated by high government capital spending. 7 Although in terms of consumer prices the inflation rate declined steadily throughout the year, it was still higher than in the previous year (i.e. equivalent to a 3.9% increase of the CPI 8 ). In order to mitigate the unfavourable economic conditions, the National Bank of the Republic of Macedonia (NBRM) kept the base interest rate at a low level, i.e. 4% 9, and maintained the fixed eurodenar exchange rate policy by providing a stable quantity of foreign currency reserves. Financial Sector Developments Despite the negative impact of the world financial crisis and the eurozone debt crisis on the Macedonian economy, the country s banking system retained its stability as well as the trust of its depositors, mostly as a result of its conservative monetary policy, high levels of capitalisation and liquidity, and sound approach to risk management. During 2011, the NBRM issued two important decisions which helped to ease and strengthen banking activities. The first one, the Decision on Liquidity Risk Management, served to increase banking sector liquidity and boost resistance to external shocks. The second one, the Decision on Reserve Requirements, provided for the release of part of the assets which the banks had set aside as compulsory reserves so that these funds could /package/mk_rapport_2011_en.pdf The Former Yugoslav Republic of Macedonia 2011 Progress Report, European Commission 2 Doing Business Report, World Bank 3 Ministry of Finance Report en.aspx?rbrtxt=31, Gross Domestic Product, State Statistical Office, E94229C54CB565603C50660EB, Foreign Direct Investments, National Bank of Republic of Macedonia 5 aspx?rbrtxt=31, State statistical office, Gross Domestic Product, Table T en.aspx?rbrtxt=31, State statistical office, Gross Domestic Product, Table T za_web.pdf, Ministry of Finance Report 8 en.aspx?id=38&rbr=609, State statistical office, Retail price index and consumer price index Bank of the Republic of Macedonia, Key interest rates of the National Bank of the Republic of Macedonia, Central Bills

12 12 ANNUAL REPORT 2011 be allocated for lending activities, and also stimulated long-term saving. Competition was intense among the Macedonian banking sector s 17 banks and eight savings houses in Early in the year, a state-owned Turkish bank bought one of Macedonia s mediumsized banks, while in June another medium bank surpassed the threshold for the category of MKD 22.5 billion in assets, thereby joining the sector s group of large banks. The sector continued to be highly concentrated; as of year-end, the large banks held 64% of the banking sector s total assets and 57.7% of the total capital and reserves. 10 Due to the losses suffered from the eurozone debt crisis, four European banks with dominant shares in four Macedonian banks had their credit ratings downgraded by world rating agencies. However, domestic banks with foreign capital remained stable and profitable. Despite maintaining a cautious approach to lending, the banking sector achieved growth in this area, primarily due to long-term loans to corporations. As of December 2011, the consolidated loan portfolio had grown by 8.5% to EUR 3.37 billion (WAIR: 8.3%), while the deposit portfolio grew by 9.19% to a volume of EUR 3.78 billion (WAIR: 3.8%). 11 Throughout the year interest rates tended to decline both for newly approved loans and for newly contracted deposits. The capital adequacy ratio of the banking sector was recorded at 16.8% at year-end, which is more than twice the legally prescribed rate. The share of non-performing loans relative to the consolidated gross loan portfolio grew slightly to 9.9%. At the same time, the Return on Average Assets (ROAA) for the banking sector was 0.4% and the Return on Average Equity (ROAE) was 3.4%. 12 All of these indicators attest to the stability and soundness of the Macedonian banking sector. ProCredit Performance The past year saw major changes in the economic environment. Confronted with business uncertainty, volatile financial flows and liquidity gaps, entrepreneurs were forced to rethink their strategies. In keeping with our mission to provide high-quality, professional banking services, we strove to provide the best support possible to our clientele during this challenging year. This approach has enabled us to build and maintain stable and successful relationships with our clients and partners over the years. The gradual redesign of our business model, which has entailed reorganising our business processes, premises and internal structures, has further enhanced our quality of service, with emphasis on a more comprehensive approach to meeting the varied needs of our clients. To this end, we have created new departments, such as the Product Development Department and Branch Network Department. In addition, our decision to restructure our branch network into business centres, branches and service points has improved efficiency by ensuring that business clients and private individuals are now served by employees specialised in satisfying the needs of their respective types of customers. These important changes have helped to better position the bank as a reliable and flexible business partner for very small, small and medium-sized enterprises, as well as for agricultural producers and private individuals. ProCredit Bank provides a full range of services all under one roof. Aiming to be the house bank for very small and small enterprises, we respond to their needs proactively and support their future development. In keeping with this philosophy, our highly trained Business Client Advisers offer personalised professional advice to our small enterprise clients. Our business clients also took advantage of the comprehensive banking packages we offer, including payroll services for their employees BE28DE2C18163, Basic Indicators of the banking system, National Bank of the Republic of Macedonia, Banking System of the Republic of Macedonia F8FFB822B3E, National Bank of the Republic of Macedonia, Statistics, Monetary and interest rate statistics, Outstanding amounts on Deposits and Loans 12 CEBA6B , National Bank of Republic of Macedonia, Financial Stability Indicators

13 MANAGEMENT BUSINESS REVIEW 13 At the same time, ProCredit is an accessible, responsible bank for private clients. We continuously provide outreach in the form of financial education measures, offering straightforward advice and explanations. In particular, we encourage clients who have had little experience with banking to begin using account-based, i.e. cashless, services such as ATMs, POS terminals, Internet-based e-banking, etc. The bank s recently introduced SMS notification and Money Send services have expanded our range in the direction of contemporary and accessible banking. Despite the various economic challenges that came our way in 2011, we achieved strong growth. By end-2011, ProCredit Bank s loan portfolio had increased by 10.4% over the previous year, exhibiting the highest quality in the Macedonian banking sector. Throughout 2011 ProCredit Bank kept a stable balance sheet, a good liquidity position and rigorous risk management structures. On the deposit side, the clients increasing confidence in the bank and its shareholders, especially in times of crisis, was demonstrated by the steady growth of the deposit base during the year. Lending In spite of the economic fluctuations that took place during 2011, which was characterised by strong growth in the first half of the year and a slowdown of economic activity in the second, ProCredit Bank Macedonia retained its position as a reliable lending partner for businesses. In order to bring the bank s full range of financial services closer to small enterprises, ProCredit Bank Macedonia worked to strengthen the operational capacity of the four regional Business Centres. In addition, we strictly maintained our responsible approach to private lending, which guards against overindebtedness.

14 14 ANNUAL REPORT 2011 As a result of dedicated outreach to each of our client groups, the bank achieved sound growth of MKD 956 million (EUR 15.5 million), or 10.4%. In 2011 we disbursed 12,000 loans amounting to MKD 7.5 billion (EUR 121 million), averaging MKD 625,000 (EUR 10,154) each. The majority of the loans disbursed were used to finance working capital, reflecting the low investment appetite of Macedonian companies during this challenging year. Due to the continuous support we offered to SMEs, the total loan portfolio of Very Small, Small and Medium enterprises grew by 18.5% to MKD 8.5 billion (EUR 139 million). Very Small loans grew by 14.0% and represented 37% of the total loan volume at year-end, while Small business loans increased by 27.2% or MKD 722 million (EUR 11.7 million) in volume and made up 33.5% of the total portfolio. Significant growth of 12.2% was achieved in the Medium category, where the outstanding portfolio came to MKD 1.4 billion, accounting for 13.8% of total portfolio. The highest concentration of loans was in the trade sector (37.9%), followed by transport (21.4%), industry and other production (18.9%), other services (9.9%) and construction (7.4%). Recognising the agricultural sector as one of the primary engines for the future development of the Macedonian economy, ProCredit Bank continued to support these enterprises by offering investment loans for modernisation and mechanisation, as well as for working capital. In 2011, the bank disbursed 2,181 agricultural loans or MKD 526 million (EUR 8.6 million). The agricultural portfolio grew by 15.6% to MKD 881 million (EUR 14.3 million). The bank managed to maintain good loan portfolio quality throughout the year. Non-performing loans accounted for just 2.09% of the total portfolio, a lower share than the average banking sector rate of 9.9% as of year-end As a socially responsible institution, ProCredit Bank limits its consumer lending to purposes that enable the borrowers to improve their living standards and contribute to a healthier environment, such as energy efficient home improvements. In 2011 we disbursed 953 housing improvement and energy efficiency loans totalling MKD 429 million (EUR 7.0 million) to private individual clients. Deposits and Other Banking Services In line with our key strategy of being the house bank not only for business clients but also for their employees, ProCredit Bank achieved stable deposit base growth of 4%, bringing the total deposit portfolio to EUR 146 million. The volume of current accounts rose by 27% to EUR 39.1 million (27.5% of total deposits), savings accounts remained at EUR 12.7 million (8.9% of the total) and term deposits slightly decreased by 4.32% to Loan Portfolio Development Number of Loans Outstanding Breakdown by Loan Size* Number (in 000) % 80.6% 5.8% 0.5% Volume (in EUR million) Dec Dec Dec Dec 08 Dec 09 Dec 10 Dec 11* 0 < EUR 10,000 > EUR 150,000 EUR 10,001 EUR 30,000 Total number outstanding EUR 30,001 EUR 150,000 * Starting from 2011 the method of calculation for size categories has been changed < EUR 10,000 EUR 30,001 EUR 150,000 EUR 10,001 EUR 30,000 > EUR 150,000 * 31 Dec 2011 Starting from 2011 the method of calculation for size categories has been changed: breakdown by initial loan amount

15 MANAGEMENT BUSINESS REVIEW 15 Business Loan Portfolio Breakdown by Maturity Loan Portfolio Quality (arrears >30 days) in % in % of loan portfolio Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 < 12 months months months > 60 months Net write-offs: in 2007: EUR 271,735 in 2008: EUR 299,147 in 2010: EUR 371,461 in 2009: EUR 890,841 in 2011: EUR 609,320

16 16 ANNUAL REPORT 2011 EUR 90.6 million (63.6% of the total). The majority (77.2%) of the funds were held by private individuals, which guarantees a high level of diversification and helps to stabilise the deposit base. We also encouraged our customers to use payment cards as a safe and convenient alternative to cash. During 2011, the share of debit cards that were actively being used increased by 6.3%. Meanwhile, the number of e-banking users nearly doubled, which contributed significantly to the increased number of transactions. In 2011, we also introduced SMS services notifying clients regarding card issuance, renewals, card transactions and payments into their account. As a special incentive in an unpredictable economic environment, we continued to promote fixed interest rates on term deposits. The summer term deposit campaign resulted in around 2,400 new accounts amounting to EUR 21.7 million. More than 40% of the new euro term deposit accounts were opened by new deposit clients. In addition to our account services, we continued to offer a wide range of other banking services to both business and private clients, including salary packages, Internet banking, cards, money transfer facilities and POS terminals. In an effort to enhance overall efficiency and increase convenience for our clients, we reorganised our front offices to introduce one-stop banking services in all of our branches and service points. In the bank s payments business, the number of domestic and international transfers grew by 10.7% and 12.6%, respectively. Financial Results Despite the challenging macroeconomic conditions at home and the wider debt crisis that compromised the stability of the eurozone, ProCredit Bank remained profitable. Our positive financial results were accompanied by considerable loan portfolio growth and a PAR>30 that remained stable at 2.78%. Total assets grew by 8.2% to MKD 13.4 billion (EUR 218 million). At the same time, the bank s liquidity position remained strong and we continued to adapt the structure of our assets, slightly decreasing the share of cash and liquid assets to 21.8% by yearend (2010: 22.8%). The bank s loan portfolio grew by 10.4% in 2011 (2010: 10.2%). The rise was driven by both the 27.2% increase in business loans in the EUR 30, ,000 range and by the increase in business overdrafts, which surged by 36.2%. The bank continued to phase out loans below EUR 2,000, while business loans up to EUR 10,000 increased by 10.1%, reflecting our determination to grow in the EUR 2,000-10,000 range of Very Small loans. Customer Deposits Number of Customer Deposits Breakdown by Size* Volume (in EUR million) Number (in 000) % 9.8% 0.2% o.1% % % Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 0 Term Savings Sight Total number < EUR 100 EUR 10,001 EUR 50,000 EUR 101 EUR 1,000 EUR 50,001 EUR 100,000 EUR 1,001 EUR 10,000 > EUR 100,000 * 31 Dec 2011

17 MANAGEMENT BUSINESS REVIEW 17 Customer deposits increased by 4% in 2011 to MKD 9.0 billion (EUR 146 million). The deposit structure shifted significantly in favour of sight deposits. At the same time, current accounts registered considerable growth of MKD 511 million (EUR 8.3 million). Savings accounts slightly increased while term deposits declined by MKD 252 million (EUR 4.1 million). Sight deposits grew by 27%, which, accompanied by sound currency management, led to a 14% decrease in interest expenses. By the end of the year, the ratio of loans to deposits was 115%. The bank s total operating income for the year amounted to MKD 744 million (EUR 12.1 million), 98.3% of which was generated by net interest income. Net fee and commission income rose by 18.9% to MKD 143 million (EUR 2.3 million). Our dedicated focus on service quality was also reflected in the enlarged share of net fee and commission income relative to total operating income (19.2%, compared to 15.2% in 2010). Efficiency projects and measures to keep costs under strict control reduced operating expenses in 2011 by 4.5% to MKD 681 million (EUR 11.1 million). In addition, further automation of processes along with actions taken to raise staff quality and boost efficiency led to a MKD 37.2 million (EUR 0.6 million) decrease in personnel expenses. Due Domestic Money Transfers International Money Transfers Volume (in EUR million) Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Number (in 000) Dec Volume (in EUR million) Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Number (in 000) Dec 10 Dec Incoming Outgoing Number Incoming Outgoing Number

18 18 ANNUAL REPORT 2011 to the reduction in operating expenses, the bank s cost-income ratio was lowered to 80.5% in All of the above factors resulted in a net profit of MKD 62.5 million (EUR 1.0 million) according to IFRS standards, while the return on equity was 5.8%. The bank s capital adequacy ratio stood at 13.2% as of year-end (2010: 13.6%), well above the regulatory requirement of 8.0%. At the end of the year the bank s shareholders committed EUR 3 million in capital, again demonstrating their confidence in the bank s performance. Outlook In line with the current economic situation, which has been deeply affected by the slowed economic growth in the eurozone, the Macedonian economy is also expected to grow at a slower rate in the coming year. A greater impact on export-oriented companies and a weaker stream of investment activity are therefore anticipated. The NBRM predicts a real GDP increase of around 2.4% and loan portfolio growth for the business sector of 7.4%. Given these macroeconomic projections, we expect that companies will face liquidity challenges and therefore primarily seek out loans to finance working capital. However, we believe in their ability to adapt to the new market conditions and expect to see larger long-term investments in the second half of the year. Our goal will be to continue to actively support small and medium enterprises, which will entail understanding their specific financial requirements, improving our services accordingly and offering special business packages with the full range of financial services. With respect to our lending activities, we intend to offer more flexible loan conditions and collateral requirements and streamline the application process.

19 MANAGEMENT BUSINESS REVIEW 19 We will also remain committed to our socially responsible mission to prevent our clients from overindebting themselves. Lending to enterprises and supporting healthy business development will therefore take precedence and we will continue to promote a savings culture. We expect to see stable growth of the deposit base and even greater interest in electronic services and energy efficiency loans among both businesses and private households. In order to strengthen our dedicated approach to our customers, we will concentrate on making our business centres, branches and service points even more accessible, guaranteeing fast and reliable service. Of course, our employees are our most precious resource, so we will continue to invest in extensive and high-quality training measures both locally and at the ProCredit academies.

20 20 ANNUAL REPORT 2011 Risk Management While ultimate responsibility for risk management lies with the Management Board, it is the Risk Management Department which develops and implements mechanisms to identify, assess, and mitigate the bank s exposure to risk. This department reports to the Chief Risk Management Officer and to the Risk Management Committee, which consists of Management Board members and is responsible for monitoring the full range of risks to which the bank is exposed, as well as bearing decision-making authority in connection with risk. The risk management policies in effect at ProCredit Bank Macedonia, which have been approved by the bank s Management Board, are in full compliance with the legal regulations valid in Macedonia and with the requirements imposed by the National Bank of Macedonia. The policies are based on the Group Handbook on Risk Management and Control, which in turn is based on the German Federal Financial Supervisory Authority s policy document Minimum Requirements for Risk Management. ProCredit Bank Macedonia reports its risk position to the Group Risk Management Committee (GRMC) at monthly intervals. The group s risk management departments also monitor the bank s key risk indicators on an ongoing basis, providing guidance whenever required. Risk management throughout the ProCredit group is based on the concept of risk-bearing capacity, i.e. the principle that each bank s aggregated risk exposures must not exceed its capacity to bear risk, and that the resources available to cover risk are sufficient to absorb any losses that may arise and protect creditors investments. Statistical models and other procedures are used to quantify the risks incurred, and targets are set for each risk category and a limit for the aggregate exposure. In 2011, the level of risk remained well within the predefined targets in every category. ProCredit Bank s culture of internal and external transparency is crucial to our risk management efforts. Thanks to our clearly defined procedures and our encouragement of open communication, our well-trained staff are in a strong position to detect risks and take the steps necessary to mitigate them. Credit Risk Management Lending to small businesses is ProCredit Bank s main asset-side operation and consequently classic credit risk, i.e. the risk that borrowers will be unable to repay, is the most important risk that the bank faces. Credit risk accounts for the largest share of risk in the context of risk bearing capacity calculation. ProCredit Bank Macedonia has adopted credit risk policies based on the ProCredit Group Credit Risk Management Policy and the Group Collat-

21 RISK MANAGEMENT 21 eral Valuation Policy, which together reflects the experience, gained in more than two decades of successful lending operations in developing and transition economies and is in full compliance with Macedonian regulations. For every single customer of the bank a credit exposure limit is set and credit decision-making authority is clearly defined; all decisions to issue a loan, or change its terms, are taken by a credit committee, and all credit risk assessments are carefully documented. Above all, the bank seeks to build and maintain long-term relationships with its customers, thus ensuring that it is fully aware of their financial situation, and great care is taken to avoid overindebting them. Credit risk is also mitigated by the fact that our portfolio is highly diversified. The businesses we serve operate in a wide range of sectors, and their exposure to global market fluctuations is limited. Moreover, the majority of our credit exposures are relatively small. As of end-2011, loans under EUR 30,000 accounted for 50.2% of the total outstanding portfolio, and the average amount out-

22 22 ANNUAL REPORT 2011 standing was EUR 3,676, while the ten largest exposures accounted for only 7.8% of the portfolio. As the vast majority of the bank s loans are repayable in monthly instalments, a borrower s failure to meet a payment deadline is treated as an initial sign of potential default and draws an immediate response from the bank. When a payment of interest or principal is overdue by more than 30 days, the loan in question is assigned to the portfolio at risk (PAR>30), which serves as the key indicator for the quality of the loan portfolio and for measuring classical credit risk. In 2011 the bank s overall PAR>30 slightly rose from 2.7% at the start of the year to 2.78% at yearend. It should be noted that ProCredit Bank s PAR is much better than the average for the Macedonian banking sector as a whole, where according to figures published by the National Bank, 9.9% of loans were still non-performing at the end of the year. One of the ways in which ProCredit Bank has met the challenge to portfolio quality posed by the financial crisis is to offer loan restructuring to those clients that are judged to have the potential to regain stability. Restructurings follow a thorough analysis of each client s changed payment capacity. The decision to restructure a credit exposure is always taken by a credit committee and aims at full recovery. As of end-2011, the total volume of restructured loans in the watch category came to EUR 3.19 million. ProCredit Bank Macedonia takes a conservative approach to loan loss provisioning. Allowances for individually significant exposures with signs of impairment are set aside based on the results of an individual assessment of impairment, while provisioning for impaired loans that are not individually significant is calculated according to historical default rates. For all unimpaired credit exposures, portfolio-based allowances for impairment are made. At the end of the year the coverage ratio (loan loss provisions as a percentage of PAR>30) stood at 106.5%, and as a percentage of the total loan portfolio, provisions amounted to 2.95%. Loans considered to be irrecoverable are consistently written off. Nonetheless, recovery efforts continue even after a loan has been written off, and collateral collection is rigorously enforced. In 2011 net write-offs totalled EUR 609,320 or 0.37% of the gross loan portfolio. Counterparty and Issuer Risk Management Counterparty and issuer risks evolve especially from the bank s need to invest its liquidity reserve, to conclude foreign exchange transactions, or to buy protection on specific risk positions. The risk of incurring losses caused by the unwillingness or inability of a counterparty or issuer to fulfil its obligations is managed according to the ProCredit Group Counterparty Risk Management Policy (incl. Issuer Risk), which defines the counterparty selection and limit setting process, as well as according to the Group Treasury Policy, which specifies the set of permissible transactions and the rules for their processing. These policies are fully in line with Macedonian regulations. As a matter of principle, only large international banks and local banks with a good reputation and financial standing are eligible counterparties. Limits above certain thresholds are conditional on approval by the Group ALCO. In 2011, in response to the latest sovereign debt crisis, counterparty limits were reviewed and in some cases adjusted. Country Risk Management Given ProCredit Bank s focus on lending to businesses in the local market, it does not normally enter into cross-border transactions with high-risk countries, and therefore its exposure to country risk is limited. The group as a whole is exposed to country risk insofar as ProCredit Holding provides funding to ProCredit banks and these operate in transition economies or developing countries, where transfer, convertibility, expropriation, bank regulatory, macroeconomic and security risks play a role. The incurred country risk is however limited through a high degree of diversification across regions and countries and a group exposure limit system defined within the Group Country Risk Management Policy. Furthermore, ProCredit Bank has years of experience

23 RISK MANAGEMENT 23 in the local market and the business model has proven to be relatively resistant to macroeconomic and political shocks. Liquidity Risk Management Several factors inherent to the bank s business model offset liquidity risk. Firstly, the bank s diversified, high-quality portfolio of loans means that incoming cash flows are highly predictable. Secondly, our customer deposits are spread across a large number of depositors each holding relatively small amounts. As of December 2011 the average balance in deposit accounts of all types came to EUR 1,279 and the ten largest depositors made up only 6% of total deposit volume. To determine the robustness of the bank s liquidity in the face of potential shocks, the bank performs regular stress tests based on scenarios defined as a group standard by the Group Liquidity Risk Management Policy. In light of the 2011 sovereign debt crisis, the assumptions on which the stress tests are based were challenged and the calculation and targets of the group liquidity reserve were revised. Whenever necessary to bridge liquidity shortages, ProCredit Bank Macedonia, like the other group banks, is able to obtain short-term funding from ProCredit Holding. Currency Risk Management ProCredit Bank Macedonia has a low level of exposure to currency risk because it does not enter into speculative open currency positions, nor does it engage in derivative transactions except for hedging and liquidity purposes. Currency risk is managed in accordance with the Group Foreign Currency Risk Management Policy and local regulations. The bank continuously monitors exchange rate movements and foreign currency markets, and manages its currency positions on a daily basis. Any exceptions to the group policy or

24 24 ANNUAL REPORT 2011 violations of group limits are subject to approval by the Group ALCO. Stress tests are regularly carried out to assess the impact of exchange rate movements on open currency positions (OCP) in each operating currency. The Group Foreign Currency Risk Management Policy allows ProCredit banks to hold strategic open currency positions for the purpose of hedging equity, in which case these positions are closely monitored at both local and group level. As of end-2011, aside from a very small OCP in US dollars and other currencies, ProCredit Bank Macedonia had an OCP of 2.3% of regulatory capital in euros. Interest Rate Risk Management During 2011 interest rates were generally stable. Maturity gap analyses and stress testing are used to measure and analyse the impact of interest rate shifts on the economic value and interest income. As a policy measure to mitigate interest rate risk, ProCredit Bank takes long-term fixed rate funding and offers loans with variable interest rates, allowing the bank to raise (or lower) the rates it charges in line with shifts in the market interest rates. Operational and Fraud Risk Management The operational risk policy of ProCredit Bank Macedonia is in full compliance with local regulations as well as with the Group Operational Risk Policy and the Group Fraud Prevention Policy. To minimise operational risk and the risk of fraud, all processes are precisely documented and subject to effective control mechanisms. Job descriptions are comprehensive, duties are strictly segregated, and dependency on key individuals is avoided. When recruiting, the bank pays close attention to personal integrity, a quality which is reinforced through the bank s strictly enforced code of conduct and through comprehensive training programmes designed to promote a culture of transparency and risk-awareness. The group-wide Risk Event Database (RED) ensures that operational and fraud risks are addressed in a systematic and transparent manner, with all remedial and preventive action clearly

25 RISK MANAGEMENT 25 documented and accessible to management control, both at bank level and at group level. Staff is required to report all events which represent an actual or potential loss exceeding EUR 100 using the RED interface. Those reported events that entail the most extensive risks, or which are considered most likely to be repeated, are subjected to in-depth analysis by the Operational Risk Committee, which then proposes appropriate preventive measures. As part of their initial training, all new staff members are taught how to recognise and avoid operational and fraud risk and how to maintain information security. In 2011, ProCredit Bank Macedonia reported 55 risk events representing a total net risk amount of EUR 26,804. The main types of reported events included a significant number of low impact events such as cash differences and other human or system errors with zero net risk amount, as well as insignificant losses caused by external events. Every year the bank conducts a risk assessment procedure by completing a group-wide questionnaire on fraud risk and operational risk. Each of the risks described here must be mitigated by appropriate controls, the adequacy of which is the subject of the assessment. If the controls are judged to be insufficient, an action plan for remedying the situation is drawn up. The completed assessment is sent to the Group Operational Risk Management Department. A group-wide New Risk Approval (NRA) process is applied to all materially new or changed products, services or business processes. Only after the elimination of any obstacles or deficiencies revealed by the NRA process does management give its approval for the innovation to go ahead. The bank s Business Continuity Policy ensures that the bank can maintain or restore its operations in a timely manner in the event of a serious disruption. As well as defining the steps to be taken to restore normal operations, the bank s Business Continuity Plan specifies the procedure for moving critical operations to temporary locations, the resources that need to be mobilised in each type of case and the expected cost of disruptions in specific areas. It also offers guidance on avoiding disruption in the first place. Anti-Money Laundering ProCredit Bank Macedonia fully endorses the fight against money laundering and terrorist financing, and has implemented the Group Anti- Money Laundering Policy, which meets the requirements of German and EU legislation as well as the stipulations of the Macedonian authorities. No customer is accepted and no transaction is executed unless the bank understands and agrees to the underlying purpose of the business relationship. The Group Anti-Money Laundering Department (Group AML) conducts an annual risk assessment of all ProCredit banks and updates the policy accordingly. In addition, all ProCredit banks submit quarterly reports on their AML activities to Group AML. At ProCredit Bank Macedonia, responsibility for AML activities is exercised by the Legal, Compliance and AML Department. According to local regulations, any cash transaction exceeding EUR 15,000 must be reported to the local authorities. In addition, any attempt to execute a transaction that arouses suspicion of money laundering, terrorist financing or some other criminal activity must be reported. Front-office staff receive intensive training in how to recognise suspicious transactions. An additional automated safeguard is provided by the use of three modules of the AML software manufactured by Tonbeller AG: Siron Embargo, Siron PEP and Siron AML. Capital Adequacy The bank s capital adequacy is calculated on a monthly basis and reported both to the management and to the Group Risk Management Committee, together with rolling forecasts to ensure future compliance with capital adequacy requirements. At year-end 2011 the capital adequacy ratio (tier 1 and tier 2 capital / risk-weighted assets) stood at 16.1%, well above the group-wide minimum standard of 12%, which is also above the locally required minimum of 8%. ProCredit Bank s overall risk rating, issued by Fitch Ratings, remained unchanged in 2011 at BB+.

26 26 ANNUAL REPORT 2011 Branch Network At the end of 2011, ProCredit Bank Macedonia had a total of 35 offices located in 14 different towns and cities, thus covering the following major centres of economic activity: Skopje, Tetovo, Kumanovo, Bitola, Strumica, Stip, Gostivar, Veles, Ohrid, Struga, Prilep, Kicevo, Kavadarci and Kocani. During the year, our main focus was on strengthening our presence in these markets by developing a deeper relationship with both business and private clients. We also expanded our branch network in the capital city Skopje by opening two new offices, one located in the largest and most frequented city mall and the other in the most important industrial area, where a great number of enterprises operate. The structure of our branch network is designed to enable us to be close to our customers and respond individually to their needs. Our enterprise lending business is concentrated in a number of specialised branches, where the majority of our business client advisers and credit analysts are based. These branches provide not only credit but also all of the bank s other services for business clients and private individuals, including various types of account services, foreign exchange, money transfers and utilities payments. In addition to these full-scale branches, the bank also operates smaller service points in strategic, often densely populated neighbourhoods. The service points are designed to be convenient places for both private clients and business clients to do their day-to-day retail banking business, but do not process loan applications. Potential borrowers may submit their applications at a service point, if it is more convenient to do so, but the actual credit analysis and approval takes place at the nearest full-fledged branch. Serbia Bulgaria Kosovo Kumanovo (2) Kocani Tetovo (4) Skopje (15) Gostivar Macedonia Veles Stip Kavadarci Strumica (2) Kicevo Prilep Struga Albania Ohrid Bitola (3) Greece

27 BRANCH NETWORK 27 At the other end of the scale, the bank operates a small number of business centres, which are specifically oriented towards serving the more complex needs of our larger-scale business clients, i.e. up to medium-sized enterprises. These specialised branches are located in the capital, Skopje, and in the regional centres Strumica, Tetovo and Bitola. The interior design of the branches is geared to maximising customer convenience. Signposting directs business clients to physically separate areas staffed by experts in serving enterprises, and rooms for confidential negotiations have been created wherever space has allowed. At the same time, we have introduced a one-stop system that allows customers to perform cash and non-cash transactions at a single front office desk. This streamlined service is available at all 35 of our branches and service points. In order to increase the outreach and efficiency of our branch network, we have introduced various innovative technologies and we encourage our customers to make active use of our technologybased services, particularly in connection with payments. Examples include e-banking via the Internet, SMS notification service and direct debits. In enabling clients to perform their routine banking transactions from other locations and outside normal banking hours, we not only make life more convenient for them, but are also able to devote more time to talking to them in person at the branches about more complex facilities, such as long-term savings options or company payroll services. Among our most popular technology-based services are the Visa, Maestro and local ProCard debit cards, which both business clients and private individuals can use to withdraw cash at any of our 88 ATMs, or to make cashless purchases using POS terminals operated by local merchants, many of whom are themselves customers of ProCredit Bank Macedonia. In 2012 we plan to focus our efforts on strengthening our relationship to clients by continuing to be their house bank and keeping the quality of customer service at the highest possible level.

28 28 ANNUAL REPORT 2011 Organisation, Staff and Staff Development ProCredit Bank is aware that the quality of our relationship with our customers and the quality of service we provide to them depend crucially on the ability of our staff to understand their needs and respond to them in a responsible manner. For this reason, the bank takes great care to ensure that the people we hire identify wholeheartedly with its mission, and are dedicated to developing the skills they need in order to serve our clients well. Recruitment is overseen by the Human Resources Committee, which includes members of the bank s management. It is co-ordinated on a centralised basis by the HR department, following a carefully designed procedure. In line with the ProCredit group s recruitment policy, all shortlisted applicants are now invited to take a maths and logic test, which is set by ProCredit Holding. While these technical skills are obviously necessary, they are not sufficient criteria in themselves. More importantly, the bank seeks candidates who are intrinsically motivated to work for an ethical, development-oriented financial institution, and for whom the beneficial impact of their work on the society in which they live is more important than personal financial gain. In order to assess candidates interpersonal skills and above all their potential commitment to ProCredit s objectives and principles, they are invited to take part in group discussions and role plays, followed by individual in-depth interviews with senior staff of the bank. For university graduates and individuals with practical working experience who are interested in finding out whether a career with ProCredit is right for them, the bank has set up the Young Bankers Programme. For the duration of this six-month course, which covers maths, basic accounting and various banking-specific subjects as well as soft skills, participants receive a stipend. It is a unique opportunity both for them and for the bank to gauge whether their aptitudes and personal qualities fit in well with the special ProCredit way of working. Those who successfully complete the course are eligible for an offer of a permanent position with the bank. Given the importance of human resources for the future of the bank, highly qualified people have been chosen to serve as the head of the HR department and as managers of its three sub-units Recruitment, Training and Development, and Administration. Aside from the Young Bankers Programme, the Training and Development unit organ-

29 ORGANISATION, STAFF AND STAFF DEVELOPMENT 29 ises ongoing training to advance the professional and personal development of the staff. During the year, each of our employees participated in a total of 10.5 internal training days on average, not including attendance at the international ProCredit Academies. Continuing the group-wide initiative to raise the level of mathematical knowledge among its staff, in 2011 ProCredit Bank s training activities focused on advanced financial mathematics and accounting. During the year, 363 of the bank s employees reached the ProCredit group s Maths 2 standard, while another 247 successfully completed the group-wide Basic Accounting course. As usual, we provided basic training opportunities to new employees. We also continued with on-going learning opportunities for all employees by offering different training courses and seminars, and our middle management benefited from several team building activities, organised to support them in further broadening their expertise and interpersonal skills. A large proportion of the training provided to current and potential middle managers takes place at the international ProCredit Academies. In 2011, eight colleagues from ProCredit Bank Macedonia graduated from the ProCredit Regional Academy for Eastern Europe in Veles, Macedonia. Three of the bank s staff earned their ProCredit Banker diploma, marking the successful completion of the highly intensive three-year programme offered at the central ProCredit Academy in Fürth, Germany. The bank s organisational structure is designed to support the building of long-term customer relationships. At head office level, the Small Enterprise Division and Medium Enterprise Division are devoted to handling all of the banking needs specific to business customers, while the Private Clients Division focuses on serving non-business clients. The internal organisation of the branches reflects this customer orientation, with separate front office areas for business clients and private individuals, respectively. Business Client Advisers at the branches are responsible for advising Small and Very Small enterprises on all of the bank s services and for acquiring new customers, while the function of Credit Analysts is to evaluate applications for credit services submitted by comparatively large, complex business clients. Given the bank s continued focus on consolidation and quality in 2011, recruitment of new personnel took place on a relatively limited scale. Nonetheless, 37 people joined the bank in 2011, bringing the total at year-end to 461 (including support staff). ProCredit Bank Macedonia understands that the key to providing high quality service lies in building a team of motivated, professionally competent staff who are jointly committed to the bank s mission and objectives, and who work well together on the basis of mutual trust and respect. In addition to its substantial investment in training, the bank regularly organised gatherings for employees, giving them the opportunity to engage in shared activities in an informal setting. These invents included birthday and New Year s parties, football tournaments, weekend holidays, visiting interesting sites in Macedonia, dinners, etc. One of the largest gatherings was ProCredit Bank Macedonia s eight-year anniversary celebration. Proud of our achievements, we are looking forward to new challenges in the upcoming year.

30 30 ANNUAL REPORT 2011 Business Ethics and Environmental Standards Business Ethics Part of the overall mission of the ProCredit group is to set standards in the financial sectors in which we operate. We want to make a difference not only in terms of the target groups we serve and the quality of the financial services we provide, but also with regard to business ethics. Our strong corporate values play a key role in this respect. Six essential principles guide the operations of the ProCredit institutions: Transparency: We provide transparent information to our customers, to the general public and to our employees. For example, we ensure that customers fully understand the terms of the contracts they conclude with us, and we engage in financial education in order to raise public awareness of the dangers of intransparent financial offers. A culture of open communication: We are open, fair and constructive in our communication with each other, and deal with conflicts at work in a professional manner, working together to find solutions. Social responsibility and tolerance: We offer our clients sound, well founded advice. Before offering loans to our clients, we assess their economic and financial situation, their business potential and their repayment capacity. On this basis we help them to choose appropriate loan options from which they can genuinely benefit, and to avoid becoming overindebted. Promoting a savings culture is another important part of our mission, as we believe that private savings play an especially crucial role in societies with relatively low levels of publicly funded social welfare provision. And we are committed to treating all customers and employees with fairness and respect, regardless of their origin, colour, language, gender or religious or political beliefs. Service orientation: Every client is served in a friendly, competent and courteous manner. Our employees are committed to providing excellent service to all customers, regardless of their background or the size of their business. High professional standards: Our employees take personal responsibility for the quality of their work and always strive to grow as professionals.

31 BUSINESS ETHICS AND ENVIRONMENTAL STANDARDS 31 A high degree of personal integrity and commitment: Complete honesty is required of all employees in the ProCredit group at all times, and any breaches of this principle are dealt with swiftly and rigorously. These six values represent the backbone of our corporate culture and are discussed and actively applied in our day-to-day operations. Moreover, they are reflected in the ProCredit Code of Conduct, which transforms the group s ethical principles into practical guidelines for all staff. To make sure that new employees fully understand all of the principles that have been defined, induction training includes sessions dedicated to the Code of Conduct and its significance for all members of our team. Regular refresher training sessions help to ensure that employees remain committed to our high ethical standards and are kept abreast of new issues and developments which have an ethical dimension for our institution. These events allow existing staff to analyse recent case studies and discuss any grey areas. We also ensure that requests for loans are evaluated in terms of the applicant s compliance with ethical business practices. No loans are issued to enterprises or individuals if it is suspected that they are making use of unsafe or morally objectionable forms of labour, in particular child labour. Another aspect of ensuring that our institution adheres to the highest ethical standards is our consistent application of best practice systems and procedures to protect ourselves from being used as a vehicle for money laundering, the financing of terrorism or other illegal activities. Staff members are trained to apply the know your customer principle, and to carry out sound monitoring and reporting in line with the applicable regulations. Antimoney laundering and fraud prevention policies are regularly updated and exercised throughout the group to ensure compliance with local and international regulatory standards.

32 32 ANNUAL REPORT 2011 Environmental Standards All of the banks belonging to the ProCredit group set high standards regarding the impact of their operations on the environment. ProCredit banks take a three-pronged approach to environmental challenges: Pillar 1: Internal environmental management system ProCredit Bank Macedonia is putting in place an approach to better understand and improve the sustainability of its own energy use and environmental impact. Our branch construction team is responsible for making sure that our offices are as energy efficient as possible. All ProCredit Bank s premises are entirely equipped with energy regulating systems which automatically reduce the consumption of energy needed for lighting, heating and cooling, thus maximising the usage of daylight and regulating the energy consumed during the absence of employees. In addition, the newly opened branches were all built using energy smart materials such as: energy efficient insulation, windows and bulbs, further reducing energy consumption. Moreover, all promotional materials are printed on special wood and chlorine free paper, which also significantly contributes to the preservation of the environment and the reduction of toxic emissions. Environmental issues are an essential component of the training provided to ProCredit Bank staff at the local, regional and international level. A special internal campaign on green initiatives was launched to raise environmental awareness among staff. The campaign communicated the importance of energy efficiency awareness and its life-improving impact by providing examples of how to reduce the use of energy at home and at work. These examples were presented in the internal newsletter in a series of articles on saving energy, water and paper. In addition, the bank s marketing team distributed small stickers for the electrical appliances and office equipment, such as printers and personal computers, serving as reminders to employees to turn these off when they leave the office or when the equipment is not in use. Moreover, several green clean-up initiatives at various locations throughout Macedonia were carried out by ProCredit Bank s staff.

33 BUSINESS ETHICS AND ENVIRONMENTAL STANDARDS 33 Pillar 2: Management of environmental risk in lending ProCredit Bank Macedonia has implemented an environmental management system based on continuous assessment of the loan portfolio according to environmental criteria, an in-depth analysis of all economic activities which potentially involve environmental risks, and the rejection of loan applications from enterprises engaged in activities which are deemed environmentally hazardous and appear on our institution s exclusion list. By incorporating environmental issues into the loan approval process, ProCredit Bank Macedonia is also able to raise its clients overall level of environmental awareness. Pillar 3: Promotion of green finance ProCredit Bank Macedonia aims to promote economic development that is as environmentally sustainable as possible. In July 2009, we launched a programme of green finance products one of the first of its kind in Macedonia consisting of energy efficiency loans for private individuals as well as for businesses. In addition, EKO specialists at each branch of ProCredit Bank were trained to advise our clients about energy-efficient investment opportunities and guide their decisions towards more energy-efficient solutions. A full-fledged marketing campaign to raise awareness of the green lending programme for private individuals and businesses took place during the autumn. This initiative has also involved building relationships with suppliers of environmentally friendly equipment and services, and encouraging them to offer products bearing the EU standard energy efficiency labels. Since the start of this programme, the bank has disbursed 53 home improvement energy efficiency loans and 69 loans to businesses to finance investments in energy efficient fixed assets. At the end of 2011 the home improvement loan portfolio amounted to approximately EUR 500,000 while outstanding business energy efficiency loans totalled just over EUR 1.2 million. The bank aims to use its green finance products and approach to increase public awareness and understanding. With that goal in mind, ProCredit Bank also took part in several round table discussions targeted at journalists, and suppliers and buyers of energy efficient materials. In this way, ProCredit Bank has established itself as a financial partner that encourages these types of investments by offering preferential terms and conditions.

34 34 ANNUAL REPORT 2011 The ProCredit Group: Responsible Neighbourhood Banks for Small Businesses and Ordinary People The ProCredit group comprises 21 financial institutions providing banking services in transition economies and developing countries. ProCredit banks are responsible neighbourhood banks. This means, in the neighbourhoods in which we work, we aim to: be the house bank of choice for the very small, small and medium-sized enterprises which create jobs and drive economic development, and provide secure, fair and transparent savings and banking services to ordinary people who are looking for an affordable bank they can trust. At the end of 2011 our 16,183 employees, working in some 775 branches, were serving 2.9 million customers in Eastern Europe, Latin America and Africa. The history of the ProCredit group is a rich one and forms the basis of what we are today. The first ProCredit banks were founded more than a decade ago with the aim of making a development impact by providing loans to help small business to grow and offering deposit facilities that would encourage lower-income individuals and families to save. The group has grown strongly over the years, and today we are one of the leading providers of banking services to small business clients in most of the countries in which we operate. Our origins lie in our pioneering microfinance positioning. This positioning has developed as our markets and our clients have developed so our socially responsible approach remains as relevant today as ever. Its importance has been underscored by the financial crisis and subsequent macroeconomic decline which most of our countries of operation experienced. As enterprises adjust to and expand again in their new economic reality and ordinary people rebuild their trust in banks, it is clear that our customers need a reliable banking partner now more than ever. This has also given us the impetus to further strengthen our comprehensive customer-oriented approach with more highly specialised and well trained staff. Unlike most other banks operating in our markets, we have always avoided aggressive consumer lending and speculative lines of business. Instead, the ProCredit banks work in close contact with their clients to gain a full understanding of the problems and opportunities of small businesses. Our credit technology, developed over many years with the support of the German consulting company IPC, relies on the careful individual analysis of credit risks. By making the effort to know our clients well and maintain long-term relationships based on trust and understanding, we are able to support them not only when the economy is buoyant, but also during a downturn and recovery. Over the last two years, the ability of our business client advisers to proactively make appropriate adaptations to payment plans where necessary to reflect clients new and more challenging sales environments has played an important role in maintaining good loan portfolio quality. This is in contrast to many of the markets in which we operate where Non Performing Loan portfolios have been very high, also in the SME sector, which suggests that bank behaviour has in many cases increased the risk of bankruptcy rather than help businesses emerge more strongly from the economic shock. We not only extend loans, but also offer our enterprise clients a broad range of other banking services such as cash management, domestic and international money transfers, payroll services, POS terminals and payment and credit cards. Using our rigorous approach to financial analysis, we promote, in so far as we can, financial education and enhanced financial record keeping amongst our clients. These services are geared towards assisting our business clients to operate more efficiently and more formally and thus help to strengthen the real economy and the banking sector as a whole. In these terms ProCredit has a whole customer service orientation rather than a product selling approach. Our staff and our branches are becoming more specialised and better equipped to cater to the needs of different client categories. Today we have less of a focus on micro-micro loans than we did in the past. The minimum loan size for enterprise clients is EUR/USD 2,000 in most countries since we found that below this limit there is such broad access to loans from consumer finance providers that excess had become more of a challenge for many clients than access. For these groups we prefer to offer deposit accounts and other banking services rather than credit.

35 THE PROCREDIT GROUP: RESPONSIBLE NEIGHBOURHOOD BANKS FOR SMALL BUSINESSES AND ORDINARY PEOPLE 35 We would judge our development impact not just by the number of loans disbursed, but also by the sustainability of the enterprises we work with in economic, social and environmental terms; by the stability and quality of the income that associated families and employees enjoy; by the reduction of household vulnerability because people save; by the calibre of our staff; and by the impact we have in promoting transparent financial institutions more widely. Our targeted efforts to foster a savings culture in our countries of operation have enabled us to build a stable deposit base. ProCredit deposit facilities are appropriate for a broad range of lower- and middle-income customers. We place particular emphasis on working with the owners, employees and families associated with our core target group of very small, small and medium-sized businesses. ProCredit banks offer simple savings accounts and place great emphasis on promoting financial literacy in the broader community. In addition to deposit facilities, we offer our clients a full range of standard retail banking services. Over 2011 ProCredit institutions managed to maintain a high level of liquidity given the stability of their loyal retail deposit base. The ProCredit group has a simple business model: providing banking services to a diverse range of enterprises and the ordinary people who live and work around our branches. As a result, our banks have a transparent, low-risk profile. We do not rely heavily on capital market funding and have ProCredit Holding Germany ProCredit Mexico Banco ProCredit Honduras Banco ProCredit El Salvador Banco ProCredit Nicaragua Banco ProCredit Colombia Banco ProCredit Ecuador Banco Los Andes ProCredit Bolivia ProCredit Bank Serbia ProCredit Bank Bosnia and Herzegovina ProCredit Bank UNMIK/Kosovo ProCredit Bank Albania ProCredit Bank Macedonia ProCredit Savings and Loans Ghana ProCredit Bank Democratic Republic of Congo Banco ProCredit Mozambique ProCredit Bank Ukraine ProCredit Bank Moldova ProCredit Bank Romania ProCredit Bank Georgia ProCredit Bank Armenia ProCredit Bank Bulgaria The international group of ProCredit institutions; see also

36 36 ANNUAL REPORT 2011 no exposure to complex financial products. Furthermore, our staff are well trained, flexible and able to provide competent advice to clients, guiding them through difficult times as well as good times. Despite the turmoil of the global financial markets, the performance of the ProCredit group has been remarkably stable: we ended 2011 with a good liquidity position, comfortable capital adequacy, PAR over 30 days of 3.8%, and a Return on Equity of 10.4%. Given the depressed macroeconomic situation in many of our countries of operation, this was a strong performance. Our shareholders have always taken a conservative, long-term view of business development, aiming to strike the right balance between a shared developmental goal reaching as many small enterprises and small savers as possible and achieving commercial success. Strong shareholders provide a solid foundation for the ProCredit group. It is led by ProCredit Holding AG & Co. KGaA, a German-based company that was founded by IPC in ProCredit Holding is a public-private partnership. The private shareholders include: IPC and IPC Invest, an investment vehicle for ProCredit staff members; the Dutch DOEN Foundation; the US pension fund TIAA-CREF; the US Omidyar-Tufts Microfinance Fund; and the Swiss investment fund responsability. The public shareholders include the German KfW Bankengruppe (KfW banking group); IFC, the private sector arm of the World Bank; the Dutch development bank FMO; the Belgian Investment Company for Developing Countries (BIO) and Proparco, the French Investment and Promotions Company for Economic Co-operation. The group also receives strong support from the EBRD and Commerzbank, our minority shareholders in Eastern Europe, and from the Inter-American Development Bank (IDB) in Latin America. With the strong support of its shareholders and other partners, the ProCredit group ended the year with a total capital adequacy ratio of 15% a figure that reflects their confidence in the group. ProCredit Holding is not only a source of equity for its subsidiaries, but also a guide for the development of the ProCredit banks, providing the personnel for their senior management and offering support in all key areas of activity. The holding company ensures the implementation of ProCredit corporate values, best practice banking operations and Basel II risk management principles across the group. The group s business is run in accordance with the rigorous regulatory standards imposed by the German banking supervisory authority (BaFin). ProCredit Holding and the ProCredit group place a strong emphasis on human resource management. Our ethical neighbourhood bank concept is not limited to our target customers and how we reach them; it above all concerns the way in which

37 THE PROCREDIT GROUP: RESPONSIBLE NEIGHBOURHOOD BANKS FOR SMALL BUSINESSES AND ORDINARY PEOPLE 37 we work with our staff and how we encourage them to work with their customers. The strength of our relationships with our customers will continue to be central to working with them effectively in 2012 and achieving steady business results. In 2011 there was a strong focus on staff quality, recruitment and training. The 6-month Young Banker stipend programme, which all ProCredit banks offer to all potential new recruits, continues to develop. This symbolises our commitment to skill development in all our countries of operation. A responsible approach to neighbourhood banking requires decentralised decision-making and a high level of judgment and adaptability from all staff members, especially our branch managers. Our corporate values embed principles such as open communication, transparency and professionalism into our day-to-day business. Key to our success is therefore the recruitment and training of dedicated staff. We maintain a corporate culture that promotes the professional development of our employees while fostering a deep sense of personal and social responsibility. A central plank in our approach to training is the ProCredit Academy in Germany, which provides an intensive part-time training programme over a period of three years for high- potential staff from each of the ProCredit institutions. The curriculum includes technical training and also exposes participants to subjects such as anthropology, history, philosophy and ethics in an open and multicultural learning environment. Our goal in covering such varied topics is to give our future managers the opportunity to develop their knowledge and views of the world. At the same time, we aim to improve their communication and staff management skills. The group also operates two Regional Academies in Latin America (Colombia) and in Eastern Europe (for our African and Eastern European colleagues) to support the professional development of middle managers at the local level. The group s strategy for 2012 is to consolidate the tremendous efforts we have made to over the last two years to strengthen our institutions and our client relationships. We will further expand our business as the house bank of choice for small and very small enterprises, offering tailored loans and other banking services. At the same time we will continue to improve the speed and convenience of our services for all clients will also be the year that we begin operations at our planned ProCredit Bank in Germany and bring the group under the supervision of the German Federal supervising authorities (BaFin, the Bundesanstalt für Finanzdienstleistungsaufsicht, and the Bundesbank). The group is well prepared, having overhauled its reporting and risk management systems to bring all institutions into line with the requirements of German banking regulations (KWG). Nevertheless full implementation will require our attention. Strong investment in our staff remains the key priority. Together we look forward to further strengthening the development impact and commercial success of the group.

38 38 ANNUAL REPORT 2011 ProCredit in Eastern Europe ProCredit banks operate in 11 countries across Eastern Europe. As a leading provider of banking services to very small, small and medium-sized businesses, we position ourselves as the house bank for small business in the region. ProCredit banks provide a high standard of transparent, professional services to all their clients the ordinary people who live and work in the vicinity of the 475 ProCredit branches across the region. The macroeconomic environment continued to be challenging in 2011 for most of the South Eastern and Eastern European countries in which ProCredit works, particularly in the last quarter of 2011 in the wake of deep uncertainty about the economic future of Greece and the euro zone. There was little GDP or banking sector growth in most Balkan countries in South Eastern Europe. Only in Serbia and Albania did banking sectors grow by more than 5%. The countries further east (Armenia, Georgia, Moldova and Ukraine) experienced more steady GDP growth of 4-5%, with growth in the banking sector in Georgia being notably strong. Non-performing loans (NPLs, i.e. loans more than 90 days overdue) of banking sectors were also persistently high, at well over 10% in most markets where ProCredit operates. Many Western bank groups were reducing risk-weighted assets in the region with more stringent central capital adequacy requirements. Generally, government spending remained tight, consumer confidence low and investment activity by the small and medium enterprise sector depressed in Prospects for 2012 are similar since there is unlikely to be an economic turnaround in the euro zone which could drive growth in the region. The role of ProCredit banks against this still vulnerable economic backdrop is a valuable one as our clients and the financial markets in which we operate adjust to the new economic reality in the region. For the financial sectors in which we work, ProCredit banks have represented consistency, good risk management and a high degree of financial transparency throughout the recent unsettled years. ProCredit banks have been notable in continuing to lend steadily and responsibly to support small businesses while banking sectors as a whole have tended to be erratic. For our business clients, ProCredit banks remain a reliable and responsible partner. We specialise in working with very small, small and medium enterprises, because these clients are central to developing the economy and employment opportunities. Our approach is based on building relationships with our clients and a thorough understanding of their business. In the current climate, we support our business clients with prudent business development and efficient cash management. Given the overall weak investment climate in 2011, we put particular emphasis on efficient working capital facilities in the form of credit lines and overdrafts. We work with each client to identify their credit capacity based on their ability to repay their debt even in volatile times. The outstanding loan portfolio of the 11 ProCredit banks in Eastern Europe stood at EUR 2.9 billion at the end of 2011 (an increase of 7.2% from the end of 2010). Growth was particularly strong in our core Small Business client category (defined as business clients with a credit capacity of EUR 30, ,000) which grew by 14.1% in We have approximately 321,000 business clients in total across the region. ProCredit staff have been proactive in acquiring new clients and serving existing clients. Our lending activities aim to foster local production and service industries, and include the provision of agricultural loans. We are keen to support a sector that has been particularly neglected by other banks and that is vital for employment and social cohesion outside the main urban areas. For clients facing difficulties we support businesses to restructure to avoid bankruptcy where appropriate. Given our thorough understanding of our clients businesses, we are able, where necessary, to adapt loan repayment schedules if the sales pattern of a business has changed significantly. This has meant that arrears and write-off figures for the ProCredit banks in Eastern Europe are low relative to banking sectors as a whole. The combined portfolio at risk (PAR) >30 days for the Eastern European institutions as a percentage of their loan portfolio was 4.2% at the end of 2011 (PAR>90 days stood at 3.1%). Write-offs for the group in the region amounted to 1.4% of the loan portfolio. In these terms ProCredit continues to demonstrate that with a responsible approach to lending, based on an assessment of the real situ-

39 PROCREDIT IN EASTERN EUROPE 39 Belarus Russia Germany Poland Czech Republic Ukraine Slovakia France Switzerland Austria Slovenia Hungary Romania Moldova Italy Croatia Bosnia and Herzegovina Serbia Montenegro Kosovo Macedonia Albania Bulgaria Georgia Armenia Azerbaijan Turkey Greece Syria Tunesia Iraq Israel ation of an enterprise, a high degree of financial stability can be achieved for clients and in bank performance. ProCredit banks have also had to strengthen their structures for the recovery of written-off and nonperforming loans, however. The weaknesses of the legal system in many countries in the region in supporting banks to realise registered collateral have become very apparent since the financial crisis. The ultimate success and timeliness of recovery efforts will be an important factor in determining banks willingness to expand SME finance in the future. For our private clients, ProCredit banks have also been a symbol of stability and transparency in turbulent years. ProCredit has focused for many years on promoting a savings culture because setting money aside can help clients build a buffer against the vagaries of life. The ratio of deposits to GDP in Eastern European countries is still well below Western European levels. We offer simple and reliable retail banking services. Our belief in transparent, direct communication is particularly important in fostering clients trust. We understand that our clients want to know in simple language how to save safely; they also want to access their money when they need it and they want access to convenient and efficient transaction services. Our experience confirms that customers appreciate the transparent, responsible approach we take. ProCredit banks fund most of their lending activities with local savings. The ratio of deposits to loans in the ProCredit banks in the region is 84%. Not only did we not have to rely on unpredictable capital markets for funds in 2011, but ProCredit banks in the region remained highly liquid throughout the year and our cost of funds declined. Looking forward, in addition to the savings services they provide, ProCredit banks will continue to be conservative with consumer loans for their

40 40 ANNUAL REPORT 2011 private clients, but will expand their provision of convenient banking services, such as e-banking and direct debit, and will continue to provide responsible housing improvement, energy efficiency and other loans which help build a family s assets. For our staff, ProCredit banks offer unique opportunities for professional development and job satisfaction given our strong client orientation, open communication culture and unusual commitment to staff training. In terms of institution building activities, ProCredit banks in Eastern Europe were focused on consolidating many of the measures introduced in 2010 to improve the quality and efficiency of our services. Our staff is the key element in our approach to being a stable, down-to-earth and personal banking partner. The ProCredit group invests heavily to achieve high standards in staff recruitment and development. The six-month Young Banker stipend programme introduced by all ProCredit banks in the region is fast becoming a well-known and innovative feature of bank recruitment in many countries, with its strong emphasis not just on a broad-based technical training, but also on individual ethics and the responsibilities of a banking sector to promote sustainable economic development. To complement the international ProCredit Academy in Germany, we have an Eastern European academy, located near Skopje in Macedonia, which is dedicated to the training of ProCredit middle managers. The regional academy is an important channel for rapid and consistent communication region-wide and one that helps us adapt quickly to face new challenges. Investment in our staff is an ongoing commitment and will remain a central plank in the ProCredit Bank approach. A qualified, motivated and professional team lies at the root of our lasting success across Eastern Europe.

41 PROCREDIT IN EASTERN EUROPE 41 Name ProCredit Bank Albania ProCredit Bank Armenia ProCredit Bank Bosnia and Herzegovina ProCredit Bank Bulgaria ProCredit Bank Georgia ProCredit Bank Kosovo ProCredit Bank Macedonia ProCredit Bank Moldova** ProCredit Bank Romania ProCredit Bank Serbia ProCredit Bank Ukraine Highlights* Founded in October branches 24,658 loans / EUR 178 million in loans 180,000 deposit accounts / EUR 232 million 635 employees Founded in December branches 5,613 loans / EUR 48 million in loans 20,733 deposit accounts / EUR 22 million 284 employees Founded in October branches 17,427 loans / EUR 126 million in loans 82,722 deposit accounts / EUR 108 million 425 employees Founded in October branches 33,337 loans / EUR 586 million in loans 217,586 deposit accounts / EUR 437 million 1,391 employees Founded in May branches 43,968 loans / EUR 316 million in loans 435,440 deposit accounts / EUR 238 million 1,525 employees Founded in January branches 85,656 loans / EUR 517 million in loans 426,851 deposit accounts / EUR 664 million 1,071 employees Founded in July branches 22,796 loans / EUR 164 million in loans 108,797 deposit accounts / EUR 144 million 461 employees Founded in December branches 11,177 loans / EUR 90 million in loans 45,831 deposit accounts / EUR 33 million 540 employees Founded in May branches 24,541 loans / EUR 192 million in loans 111,314 deposit accounts / EUR 159 million 783 employees Founded in April branches 79,403 loans / EUR 532 million in loans 282,248 deposit accounts / EUR 274 million 1,315 employees Founded in January branches 14,478 loans / EUR 176 million in loans 133,857 deposit accounts / EUR 147 million 1,337 employees Contact Legal address: Rr. Dritan Hoxha. Nd. 92, H.15, Njësia Bashkiake Nr. 11, Tirana P.O. Box 1026 Tel./Fax: / info@procreditbank.com.al 105/1 Teryan St., area Yerevan Tel./Fax: / 853 info@procreditbank.am 8 Emerika Bluma Sarajevo Tel./Fax: / 971 info@procreditbank.ba 26 Todor Aleksandrov Blvd Sofia Tel./Fax: / 5110 contact@procreditbank.bg D. Agmashenebeli Ave Tbilisi Tel./Fax: / info@procreditbank.ge 16 Mother Tereze Boulevard Prishtina Tel./Fax: / info@procreditbank-kos.com 109a Jane Sandanski Blvd Skopje Tel./Fax: / 01 info@procreditbank.com.mk 65 Stefan cel Mare Ave. office 901, Chisinau Tel./Fax: / office@procreditbank.md Buzesti St., Sector Bucharest Tel./Fax: / headoffice@procreditbank.ro 17 Milutina Milankovica Belgrade Tel./Fax: / 905 info@procreditbank.rs 107a Peremohy Ave Kyiv Tel./Fax: /01 info@procreditbank.com.ua * The figures in this section have been compiled on the basis of the financial and operational reporting performed in accordance with group-wide standards; they may differ from the figures reported in the bank s local statements. ** Not including finance company ProCredit Moldova.

42 42 ANNUAL REPORT 2011 Our Clients Zoran Nikolovski, Owner and Manager of Bakeries Zoran Nikolovski is the owner and manager of Vesna, a bakery. As he was growing up, he learned the art of preparing burek, a traditional filled pastry made of a thin flaky dough. Zoran has followed the family tradition started by his grandfather who founded the business 50 years ago. One thing I learned from my father and grandfather is that being in direct contact with the clients and understanding their preferences is the key to success. My wife Blagica and I constantly ask our clients for suggestions and we make sure our products taste just right. Searching for possibilities to grow his business, he found out about the broad range of services offered to businesses by ProCredit Bank after receiving a recommendation from a client: One of my customers, who comes to my shop every day, suggested I look into ProCedit Bank. He emphasised that the bank offered fast, flexible and reliable service. After receiving this recommendation and then going to a branch office of ProCredit Bank, he was issued his first loan to purchase new ovens in 2006, which enabled him to produce a greater variety of baked goods in addition to burek, and in doing so, satisfy his customers demand for new kinds of pastries. Mr. Nikolovski greatly appreciates the excellent service he receives from ProCredit Bank staff and is pleased with the personal approach taken by the client advisers. They are available at all times to make suggestions concerning the right financial instrument for his planned investment measures. He was granted his second loan last year, which he then used to open his second bakery. So far, I have never felt the need to change my bank. Ever since we started banking with ProCredit Bank, the business has grown. It is not a coincidence; it is because I have found the right, all-around support for my business. At his new location, he sees great market potential for supplying freshly baked bread to local supermarkets. In the near future,he is planning to invest in additional space and equipment, which he hopes to finance with support from ProCredit Bank.

43 OUR CLIENTS 43 Mr. Omer Fejzulai, Manager of a Company Producing Natural Snacks Mr. Omer Fejzulai grew up with the smell of freshly baked peanuts and chickpeas around him in the shop owned by his grandfather and then his father at the Old Bazaar in the historic part of Skopje, a tradition which he has continued with his own business. The most important thing in every business is trust and the ability to build a long-term relationship. Initially, I started building the Bako nuts brand based solely on trust. In 2002, I met a business partner from Iran who in good faith supplied me with 40 tonnes of nuts, receiving only a promise to work hard to repay him for his products. As his business began to grow, the need for support from a trustworthy financial institution became evident. He therefore became a client of ProCredit Bank in 2005 and with his first loan, bought a van to transport his products more efficiently throughout all of Macedonia. Currently,he manages his entire turnover with ProCredit Bank. From the very beginning, ProCredit Bank s honest approach changed my opinion about banks. When I visit the bank, I know that I will get the right information from a friendly team of experts. I m happy that I ve found a bank which works on the same principles as mine, namely trust, commitment and friendliness. With his wife Fetije and his sons, he has managed to transform their business from a simple operation to a full-fledged company with a steadily growing brand. With ProCredit Bank s support,he has built a new production facility and now employs 21 workers, producing 2.5 tonnes daily. In addition, he has bought several machines needed for the processing and packaging of the goods. In the future, he plans to expand into agriculture and grow his own nuts, seeds, fruits and vegetables so as to no longer rely on imports. He hopes to receive continued support from ProCredit Bankto purchase the land for his plantation. Entrepreneurs have visions for the future. This is the spirit that drives the business and every business should have what I have found in ProCredit Bank: a financial partner that believes in my goals and objectives. A huge part of my success is due to ProCredit Bank s trust in my business.

44 44 ANNUAL REPORT 2011 Mr. Dragan Petkovski, Owner and Manager of a Construction Materials Trade and Production Company Dragan Petkovski from Kumanovo, a dynamic business town in northern Macedonia, is the owner and manager of Orhideja Doni, a specialised company that sells construction materials and produces the steel structures used to reinforce concrete. He has successfully managed his own company, with the help of his wife, since To date they have eight employees and regularly supply materials to a widespread network of construction companies. I decided to found this business as a single owner and only later on did I employ my wife, Orhideja. Everybody said that the construction industry was not for women, but I believed that together we could do much better. Now, she is deeply and successfully involved in every single aspect of the business. According to Mr. Petkovski, the construction industry is very dynamic and very often one cannot predict the exact demand or anticipate a good business opportunity. Because of this it was crucial that they find a fast and flexible bank that understood their needs. They decided to approach ProCredit Bank in 2007, since ProCredit s reputation matched this profile exactly. People in our town said that ProCredit Bank was open, flexible and always willing to serve their clients in the most efficient manner possible. We decided to submit an application for a business overdraft. From that moment on, we have banked exclusively with ProCredit Bank and we recommend it to all our partners and friends. The business overdraft was followed by several credit lines for working capital and to expand their fleet of vehicles. Their plans are to diversify their business into the transportation and logistics segment. They are optimistic that their current application for financial support from ProCredit Bank will be approved for this project as well. This has been my wish since I got involved in this business, but it has required a huge investment. I know that competition is tough, but I believe that the key to success is patience and hard work, as well as the support of my family and my bank.

45 OUR CLIENTS 45 Rozita Talevska Hristivska, Director of a Foundation for Start-Ups Rozita Talevska Hristovska is the executive director of a foundation for start-up businesses in Bitola, the third largest city in Macedonia. She first learned about ProCredit Bank the day the branch near her family business opened, and became a client in When asked what initially attracted her to ProCredit Bank and what influenced her decision to become a client, she recalled first being attracted by ProCredit s creative logo. But ProCredit Bank is much more than just clever marketing. In her opinion, the bank truly cares about its clients. After several years of banking with ProCredit, she has never once thought about switching to another institution. She points out the remarkable staff members who are always ready to serve her needs with a friendly attitude. She personally believes that the positive atmosphere at ProCredit Bank creates a chain reaction of positive thoughts, events, and outcomes. ProCredit employees are really a priceless resource. They go the extra mile to help me, making me feel like anything is possible when I leave the bank and go about my daily business. Also, I really appreciate the bank s invitation to the different events it organises. This is one way in which they show their commitment to building a long-term, honest relationship. Ms. Hristovska uses many of the bank s services: debit and credit cards, overdrafts, savings accounts and e-banking. For her, saving and thinking long-term are very important. In this context, the transparent reliable interest rates that ProCredit Bank offers are crucial. With future aspirations of becoming an international consultant, she requires flexibility to manage her financial resources quickly and from different locations. Having this in mind, she considers e-banking to be one of the most valuable services and intends to take advantage of it more actively in the future. Furthermore, she really appreciates the bank s efficiency.

46 46 ANNUAL REPORT 2011 Financial Statements For the year ended 31 December Prepared in accordance with International Financial Reporting Standards. Independent auditor s report To the Shareholders and Supervisory Board of ProCredit Bank AD Skopje We have audited the accompanying financial statements of ProCredit Bank AD Skopje, whichh comprise the statement of financial position as of 31 December 2011 and the income statementt and the statement of comprehensive income, statement of changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with 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 auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion. PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

47 FINANCIAL STATEMENTS 47 Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of ProCredit Bank AD Skopje as of 31 December and of its financial performance e and its cash flows for the year than ended in accordance with International Financial Reporting Standards. Pricewaterhousee Coopers Revizija doo Skopje 24 April 2012 PricewaterhouseCoopers Revizija doo, Oktomvriska Revolucija Blvd. bb. Hyperium Business Center, 2 nd floor, Skopje, Republic of Macedonia, VAT No. MK , T: +389 (02) /901, F:+389 (02) ,

48 48 ANNUAL REPORT 2011 Income Statement For the year ended 31 December 2011 Note Year ended Year ended in 000 MKD 31 Dec Dec 2010 Interest and similar income 1,228,471 1,355,750 Interest and similar expenses (496,822) (579,510) Net interest income 22, , ,240 Allowance for impairment losses on loans and advances 10, 26 (113,512) (73,503) Net interest income after allowances 618, ,737 Fee and commission income 189, ,654 Fee and commission expenses (46,652) (50,311) Net fee and commission income 23, , ,343 Result from foreign exchange transactions 28 33,667 30,462 Net result from available-for-sale financial assets 29 3,907 Net other operating income/(expense) 30 (54,716) (62,113) Operating income (17,142) (31,651) Personnel expenses 31 (292,214) (310,571) Other administrative expenses 31 (387,305) (412,742) Other tax expenses 15, 32 (2,018) 9,578 Operating expenses (681,537) (713,735) Operating result 62,496 77,694 Profit for the year from continuing operations 62,496 77,694 Profit for the year 62,496 77,694 The notes on pages 53 to 87 are an integral part of these financial statements.

49 FINANCIAL STATEMENTS 49 Statement of Comprehensive Income For the year ended 31 December 2011 Year ended Year ended in 000 MKD 31 Dec Dec 2010 Profit for the year 62,496 77,694 Change in revaluation reserve from available-for-sale financial assets (2,545) 6,142 Change in deferred tax on revaluation reserve from available for sale assets 338 (615) Other comprehensive income for the year, net of tax (2,207) 5,527 Total comprehensive income for the year 60,289 83,221 The notes on pages 53 to 87 are an integral part of these financial statements.

50 50 ANNUAL REPORT 2011 Statement of Financial Position For the year ended 31 December 2011 in 000 MKD Note Assets Cash and cash equivalents 8, 33 2,151,715 2,189,464 2,359,107 Loans and advances to banks 19, , , ,558 Available-for-sale financial assets 6, 35 56,548 64, ,170 Loans and advances to customers 9, 36 10,143,651 9,187,500 8,339,804 Allowance for losses on loans and advances to customers 10, 37 (297,690) (233,412) (192,522) Property, plant and equipment 12, 13, , , ,429 Intangible assets 11, 38 67,093 66,677 73,730 Current tax assets 15, Deferred tax assets 15, Other financial assets 42 57,303 45,232 42,913 Other non-financial assets ,956 83,989 67,664 Assets of discontinued operations held for sale Total assets 13,380,260 12,368,558 12,116,304 Liabilities Liabilities to banks 16, 43 4,141 3,292 33,783 Liabilities to customers 16, 44 8,963,260 8,621,818 8,695,598 Borrowings 45 2,489,554 1,876,956 1,300,097 Debt securities 300,070 Other financial liabilities 46 15,337 16,185 18,962 Other non-financial liabilities 46 3,565 8,142 11,333 Provisions 18, 19, 47 10,262 8,706 3,504 Deferred tax liabilities 17, ,673 Subordinated debt 20, , , ,004 Hybrid capital , , ,360 Total liabilities 12,280,829 11,329,416 11,160,384 Subscribed capital , , ,712 Legal reserve 73,785 59,727 49,005 Retained earnings 411, , ,690 Revaluation reserve from available-for-sale financial instruments ,040 (2,487) Total equity 1,099,431 1,039, ,920 Total equity and liabilities 13,380,260 12,368,558 12,116,304 The notes on pages 53 to 87 are an integral part of these financial statements.

51 FINANCIAL STATEMENTS 51 Statement of Changes in Equity For the year ended 31 December 2011 in 000 MKD Attributable to equity holders of the parent company Total Share Capital Legal Retained Revaluation capital reserve reserve earnings reserve Balance at January 1, ,712 59, ,663 3,040 1,039,142 Profit for the year ,496 62,496 Revaluation of afs securities (2,545) (2,545) Other comprehensive income Total comprehensive income for the year ,058 48,438 (2,207) 60,289 Transfer to legal reserve 14,058 (14,058) Balance at December 31, ,712 73, , ,099,431 Balance at January 1, ,712 49, ,690 (2,487) 955,920 Profit for the year ,694 77,694 Revaluation of afs securities 6,142 6,142 Other comprehensive income (615) (615) Total comprehensive income for the year ,722 66,973 5,527 83,222 Transfer to legal reserve 10,722 (10,722) Balance at December 31, ,712 59, ,663 3,040 1,039,142 The notes on pages 53 to 87 are an integral part of these financial statements.

52 52 ANNUAL REPORT 2011 Cash Flow Statement For the year ended 31 December 2011 Note Year ended Year ended in 000 MKD 31 Dec Dec 2010 Cash flow statement from operating activities Profit before tax 62,496 77,694 Adjustments for: Depreciation of property and equipment 39 61,969 70,649 Written off property and equipment 39 8,970 8,973 Amortisation of intangible assets 38 20,466 19,962 Impairment losses ,512 73,503 Interest income 25 (1,228,471) (1,355,750) Interest expenses , ,510 Interest receipts 1,236,305 1,805,054 Interest paid (424,331) (649,830) Cash flows from operating profits before changes in operating assets and liabilities 347, ,765 (Increase)/ Decrease in operating assets Restricted accounts 24,593 6,947 Balances with the NBRM (72,271) 16 Loans and advances to customers ( 1,005,385) ( 843,192) - Tax on non-deductible expenses (257) 772 Other assets (44,688) (18,367) Increase/(Decrease) in operating liabilities Deposits from banks and other financial institutions 273 (30,490) Customers and other depositors 259,302 13,927 Other liabilities (6,414) (6,572) Net cash from / (used in) operating activities (497,109) (247,194) Cash flows from investing activities Purchase of property, plant and equipment (82,123) ( 70,930) Proceeds from the sale of property, plant and equipment 5,162 2,022 Purchase of investment securities (91,516) Proceeds from investment securities 9,000 Net cash (used in) / from investing activities (76,961) ( 151,424) Cash flows from financing activities Proceeds from borrowings 2,119,478 2,984,147 Repayments of borrowings (1,520,699) (2,423,556) Proceeds from debt securities (300,070) Net cash from (used in) / financing activities 598, ,521 Net increase in cash and cash equivalents 24,709 (138,097) Cash and cash equivalents at beginning of year 2,147,567 2,285,664 Cash and cash equivalents at end of year 33 2,172,276 2,147,567 The notes on pages 53 to 87 are an integral part of these financial statements.

53 FINANCIAL STATEMENTS 53 Notes to the Financial Statements For the year ended 31 December 2011 (All amounts in MKD thousands unless otherwise stated) A. Basis of Preparation 1. Compliance with International Financial Reporting Standards ProCredit Bank AD Skopje ( the bank ) prepares its financial statements in accordance with the International Financial Reporting Standards (IFRS). The bank s financial statements for the year ended December 31, 2011 were prepared in accordance with the IFRS as issued by the IASB and its predecessor body. Additionally, the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body were applied. There was no early adoption of any standard not yet effective. Management prepared these financial statements on a going concern basis. In making this judgement management considered the bank s financial position, current intentions, profitability of operations and access to financial resources and analysed the impact of the recent financial crisis on future operations of the Bank. Reclasification of items in the financial statements The third statement of financial position as of 1 January 2010 is presented in these financial statements due to the fact that the Bank has reclassified items in its financial statements. Changes in presentation have been presented in Note C. 2. Compliance with local law ProCredit Bank AD Skopje is a joint stock company. For supervisory purposes ProCredit Bank AD qualifies as a bank according to the Macedonian Banking Law and is therefore supervised by the National Bank of the Republic of Macedonia (NBRM). ProCredit Bank s financial statements were prepared in accordance with the IFRS. The bank s financial statements for the fiscal year 2011 were approved for issue by the Supervisory Board on 18 April Use of assumptions and estimates The bank s financial reporting and its financial results are influenced by accounting policies, assumptions, estimates, and management judgement which necessarily have to be made in the course of preparing the financial statements. All estimates and assumptions necessary for compliance with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events and are considered appropriate under the given circumstances. Accounting policies and the management s judgement with respect to certain items are especially critical for the bank s results and financial situation due to their materiality in amount. This applies to the following positions: (a) Impairment of credit exposures The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired, on the level of the client exposure including related parties. To determine an allowance for individually significant (large) impaired client exposure, the bank performed a detailed case-bycase analysis of the capacity and willingness of the borrower to service the obligation. The allowance reflects the difference between the carrying value of the loan/client exposure and the present value of future cash flows that the bank expects to realize from the claim against the borrower, discounted at the financial asset s original effective interest rate. To determine the allowance for a collateralized financial asset the bank estimates future cash flows considering the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. To determine the bank-wide rates to be applied for collective loan loss provisioning, the bank and ProCredit Holding performed an evaluation of the quality of the loan portfolio, taking into account historical loss experiences of most of the ProCredit institutions. This migration analysis is based on statistical data from 2000 until 2011 and therefore reflects both, average losses during a period of constant growth and favourable economic environments as well as average losses during the period of global recession in nearly all of the ProCredit group s countries of operation. To the extent that the net present value of estimated cash flows differs by +/- 0.5%, the provision would be estimated MKD 49,137,000 higher or lower (2010: MKD 44,500,000). Further information on the bank s accounting policy on loan loss provisioning can be found in note (10) and note (53). (b) Impairment of repossessed property The Bank assesses the need for impairment of repossessed property yearly. If repossessed property has been impaired, the bank recognizes impairment losses for subsequent write-down of the asset to its fair value less cost to sell. When the reason for impairment ceases to exist, the Bank reverses impairment and recognizes gains up to the cumulative impairment loss which has been recognized earlier for the same asset. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. All amounts are presented in thousands of Macedonian denars (MKD), unless otherwise stated. For computational reasons, the figures in the tables may exhibit rounding differences of ± one unit (MKD, %, etc.). The fiscal year of the bank is the calendar year. 4. Accounting developments (a) Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became effective for the bank from 1 January 2011: Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. As a result of the revised standard, the bank now also discloses contractual commitments to purchase and sell goods or services to its related parties. Improvements to International Financial Reporting Standards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an in-

54 54 ANNUAL REPORT 2011 tangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on the acquiree s share-based payment arrangements that were not replaced, or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date, and not the amount obtained during the reporting period; IAS 1 was amended to clarify the requirements for the presentation and content of the statement of changes in equity; IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. The above amendments resulted in additional or revised disclosures, but had no material impact on measurement or recognition of transactions and balances reported in these financial statements. The financial effect of collateral required to be disclosed by the amendments to IFRS 7 is presented in these financial statements by disclosing collateral values separately for (i) those financial assets where collateral and other credit enhancements are equal to, or exceed, carrying value of the asset ( over-collateralised assets ) and (ii) those financial assets where collateral and other credit enhancements are less than the carrying value of the asset ( undercollateralised assets ). Other revised standards and interpretations effective for the current period. IFRIC 19 Extinguishing financial liabilities with equity instruments, amendments to IAS 32 on classification of rights issues, clarifications in IFRIC 14 IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction relating to prepayments of minimum funding requirements and amendments to IFRS 1 First-time adoption of IFRS, did not have any impact on these financial statements. Unless otherwise stated above, the amendments and interpretations did not have any significant effect on the bank s financial statements. (b) New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2012 or later, and which the bank has not early adopted. IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities, and in December 2011 the adoption of the standard was postponed by 1 January Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent payments of principal and interest only (that is, it has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted. IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements currently found in IAS 28 Investments in associates. IFRS 12 requires entities to disclose information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgments and assumptions made in determining whether an entity controls, jointly controls, or significantly influences its interests in other entities, extended disclosures on share of non-controlling interests in group activities and cash flows, summarized financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities.

55 FINANCIAL STATEMENTS 55 IFRS 13, Fair value measurement, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The guidance on control and consolidated financial statements was replaced by IFRS 10, Consolidated Financial Statements. Other revised standards and interpretations: The amendments to IFRS 1 First-time adoption of IFRS, relating to severe hyperinflation and eliminating references to fixed dates for certain exceptions and exemptions, will not have any impact on these financial statements. The amendment to IAS 12 Income taxes, which introduces a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale, will not have any impact on these financial statements. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the bank s financial statements. B. Summary of Significant Accounting Policies IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities Non-Monetary Contributions by Ventures. Changes in the definitions have reduced the number of types of joint arrangements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. [The bank is currently assessing the impact of the amended standard on its financial statements.] IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from the Board s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventures using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this exception, other guidance remained unchanged. Disclosures Transfers of Financial Assets Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011.). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity s balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognized, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. Amendments to IAS 1, Presentation of Financial Statements (issued June 2011, effective for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to statement of profit or loss and other comprehensive income. 5. Measurement basis These financial statements were prepared under the historical cost convention, unless IFRS require recognition at fair value. Financial instruments measured at fair value for accounting purposes on an ongoing basis include all instruments classified as available-forsale. The measurement techniques applied to the balance sheet positions are specified in the accounting policies listed below. Fair value is defined as the amount at which a transaction could be concluded between two knowledgeable, willing parties at arm s length. The IFRS define a so-called hierarchy of fair value determination which reflects the relative reliability of different methods of determining fair value: (a) Active market: Quoted price (Level 1) Observe quoted prices for identical financial instruments in active markets. (b) Valuation technique using observable inputs (Level 2) Observe quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets or use valuation models where all significant inputs are observable. (c) Valuation technique with significant non-observable inputs (Level 3) Use valuation models where one or more significant inputs are not observable. Only if the first best method of determining the fair value is not available may the next best determination method be applied. If possible, the bank obtains fair values from quoted market prices; otherwise, the next best available measurement technique is applied. 6. Financial assets The bank classifies its financial assets in the following categories: loans and receivables and available-for-sale financial assets. The bank holds no held-to-maturity instruments. Management determines the classification of financial assets at initial recognition. Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) re-measurements in other comprehensive income. (a) Loans and receivables from customers Loans and receivables from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the bank provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans and receivables from customers are recorded when the bank advances money to purchase or originate an unquoted non-deriva-

56 56 ANNUAL REPORT 2011 tive receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and receivables to customers are carried at amortized cost using the effective interest method. At each balance sheet date and whenever there is evidence of potential impairment, the bank assesses the value of its loans and receivables. Their carrying amount may be reduced as a consequence through the use of an allowance account (see note (10) for the accounting policy for impairment of credit exposures, and notes (26), (37), and (53) for details regarding impairment of credit exposures). If the amount of the impairment loss decreases, the impairment allowance is reduced accordingly, and the amount of the reduction is recognised in the income statement. The upper limit on the reduction of the impairment is equal to the amortised costs which would have been incurred as of the valuation date if there had not been any impairment. Loans are recognised when the principal is advanced to the borrowers. Loans and receivables are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. (b) Available-for-sale financial assets Available-for-sale assets are those intended to be held for an indefinite amount of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. At initial recognition, available-for-sale financial assets are recorded at fair value, which is the cash consideration including transaction costs. Subsequently they are carried at fair value. The fair values reported are either observable market prices in active markets or values calculated with a valuation technique based on currently observable market data. For very short-term financial assets it is assumed that the fair value is best reflected by the transaction price itself. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognised directly in equity in other comprehensive income in the position Revaluation reserve from available-for-sale financial assets, until the financial asset is derecognised or impaired (for details on impairment, see note (10)). At this time, the cumulative gain or loss previously recognised in equity in other comprehensive income is recognised in profit or loss as Gains and losses from available-for-sale financial assets. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the entity s right to receive the payment is established. Purchases and sales of available-for-sale financial assets are recorded on the trade date. The available-for-sale financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. in foreign currencies are recognised in the income statement (trading result). Monetary items denominated in foreign currency are translated with the closing rate as of the reporting date. In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available for sale, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, while other changes in the carrying amount are recognised in equity. Non-monetary items measured at historical cost denominated in foreign currency are translated with the exchange rate as of the date of initial recognition. The reporting exchange rates and average rates for the period used in the balance sheet and the income statement are listed in section (61) of these notes. 8. Cash and cash equivalents For the purposes of the balance sheet, cash and cash equivalents comprise cash, balances with less than three months maturity from the date of acquisition from the NBRM, treasury bills and other money market instruments that are highly liquid and readily convertible to known amounts of cash with insignificant risk of changes in value and bills of exchange. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including: cash and non-restricted balances with central banks (minimum reserve balances are included under restricted balances), non-pledged treasury bills and other bills eligible for refinancing with central banks and loans and advances to banks and amounts due from other banks. 9. Loans and advances to banks The amounts reported under Loans and advances to banks consist mainly of loans and advances issued. In addition to overnight and term deposits, the amounts reported under receivables from banks include current account balances. All loans and advances to banks are carried at amortised cost, using the effective interest method. Amortised premiums and discounts are accounted for over the respective terms in the income statement under Net interest income. Impairment of loans and receivables to banks is recognised on separate allowance accounts. For the purposes of the cash flow statement, claims to banks with a remaining maturity of less than three months from the date of acquisition are recognised under Cash and cash equivalents (see note (33). 7. Foreign currency translation (a) Functional and presentation currency Items included in these financial statements are measured in Macedonian denars (MKD), which is the functional currency of the bank. 10. Allowance for losses on loans and advances and impairment of available-for-sale financial assets (a) Assets carried at amortised cost loans and advances (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated Impairment of loans and advances The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If there is objective evidence that impairment of a credit exposure or a portfolio of credit exposures has occurred, as a result of one or more events that occurred after the initial rec-

57 FINANCIAL STATEMENTS 57 ognition of the asset (a loss event ), which influences the future cash flow of the financial asset(s), the respective losses, that can be reliably estimated, are immediately recognised. Depending on the size of the credit exposure, such losses are either calculated on an individual credit exposure basis or are collectively assessed for a portfolio of credit exposures. The carrying amount of the loan is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. (i) Individually assessed loans and advances Credit exposures are considered individually significant if they exceed EUR 10,000. For such credit exposures, it is assessed whether objective evidence of impairment exists, i.e. any factors which might influence the customer s ability to fulfil his or her contractual payment obligations towards the bank: delinquencies in contractual payments of interest or principal; breach of covenants or conditions; initiation of bankruptcy proceedings; any specific information on the customer s business (e.g. reflected by cash flow difficulties experienced by the client); changes in the customer s market environment; the general economic situation; the value of collateral significantly decreases as a result of deteriorating market conditions. For the purposes of the evaluation of impairment of individually insignificant credit exposures, the credit exposures are grouped on the basis of similar credit risk characteristics, i.e. according to the number of days they are in arrears. Arrears of 30 or more days are considered to be a sign of impairment. This characteristic is relevant for the estimation of future cash flows for the so defined groups of such assets, based on historical loss experiences with loans that showed similar characteristics. The collective assessment of impairment for individually insignificant credit exposures (lump-sum impairment) and for unimpaired credit exposures (portfolio-based impairment) belonging to a group of financial assets is based on a quantitative analysis of historical default rates for loan portfolios with similar risk characteristics in the individual subsidiaries of ProCredit group (migration analysis). After a qualitative analysis of this statistical data, the ProCredit Holding management prescribed appropriate rates to the banks of the ProCredit group as the basis for their portfoliobased impairment allowances. Deviations from this guideline were allowed, if necessitated by the specific situation of a ProCredit institution. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the group to reduce any differences between loss estimates and actual loss experience. If the bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether individually significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment (impairment for collectively assessed credit exposures). In exceptional cases, an individual assessment can also be carried out in cases of loans below EUR 10,000 if they show signs of impairment despite being below 30 days in arrears. Additionally, the aggregate exposure to the client and the realisable value of collateral held are taken into account when deciding on the allowance for impairment. If there is objective evidence that an impairment loss has been incurred (specific impairment),, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of its estimated future cash flows discounted at the financial asset s original effective interest rate (specific impairment). If a credit exposure has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. (ii) Collectively assessed loans and advances: There are two cases in which credit exposures are collectively assessed for impairment: individually insignificant credit exposures that show objective evidence of impairment; the group of credit exposures which do not show signs of impairment, in order to cover all losses which have already been incurred but not detected on an individual credit exposure basis. Reversal of impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Writing off loans and advances When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the allowance for loan impairment in the income statement. Restructured credit exposures Restructured credit exposures which show signs of impairment and which are considered to be individually significant are provisioned on an individual basis. The amount of the loss is measured as the difference between the restructured loan s carrying amount and the present value of its estimated future cash flows discounted at the loan s original effective interest rate (specific impairment). Restructured loans with arrears more than 30 days and which are individually insignificant are collectively assessed for impairment (lump-sum). Assets acquired in exchange for loans (repossessed property) Non-financial assets acquired in exchange for loans as part of an orderly realisation are reported in Other assets. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan at the date of exchange. No depreciation is charged for assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is recognised in the income statement in Net other operating income. Any subsequent increase in the fair value less costs to sell, to the extent that it does not exceed the cumulative write-down, is also recognised in Net other operating income, together with any realised gains or losses on disposal.

58 58 ANNUAL REPORT 2011 b) Assets classified as available-for-sale The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. In determining whether an available-for-sale financial asset is impaired the following criteria are considered: deterioration of the ability or willingness of the debtor to service the obligation; a political situation which may significantly impact the debtor s ability to repay the asset; additional events that make it unlikely that the carrying amount may be recovered. The cumulative impairment loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement at any point thereafter and any subsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. The bank primarily invests in government securities with fixed or variable interest rates (e.g. Eurobonds issued by the Macedonian government). Impairments on these investments are recognised when objective evidence exists that the government is unable or unwilling to service these obligations. 11. Intangible assets (a) Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Computer software is amortised on a straight line basis over expected useful lives of five years. Main banking software - CustomWare.NET is depreciated over a period of 10 years. 12. Property, plant and equipment Buildings 40 years Leasehold improvements shorter of rental contract life or useful life Computers 4 years Furniture 4 10 years Motor vehicles 4 years Other fixed assets 7 years The assets residual carrying values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount exceeds its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. The bank does not hold investment property. 13. Impairment of non-financial assets Assets that are subject to amortisation are reviewed for indications of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying value exceeds its recoverable amount. For the purpose of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 14. Leases (a) ProCredit is the lessee The leases disclosed by the bank are divided into finance lease and operating lease. Classification of the leases as finance or operating is performed according to the conditions in the lease agreement. Land and buildings comprise mainly branches and offices. All property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Component parts of an asset are recognised separately if they have different useful lives or provide benefits to the enterprise in a different pattern. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Finance lease Agreements which transfer to the lessee substantially all the risks and rewards incidental to the ownership of assets, but not necessarily a legal title, are classified as finance leases. The Bank has leased copy machines for the needs of branches and Head Office on finance lease. Operating lease Operating leases are all lease agreements which do not qualify as finance leases. The total payments made under operating leases are charged to the income statement under administrative expenses on a straight-line basis over the period of the lease. The leases entered by the bank as operating leases are recognized for the rent of the branches and Head Office premises. (b) ProCredit is the lessor The bank is not engaged in finance leases. In operating leases the bank acts only as lessee.

59 FINANCIAL STATEMENTS Income tax Current income tax Income tax payable on profits is calculated on the basis of the applicable tax law and is recognised as an expense in the period in which profits arise. Beginning on 1 January 2009, the Republic of Macedonia introduced a new concept in the taxation of profits. According to these changes the profit tax rate of 10% shall be calculated and paid at the moment of distribution of the profit in the form of dividends and the basis for calculating of profit tax is non-deductible expenses incurred during the fiscal year. Subsequently, as long as the undistributed profits are retained within the bank, the profit tax would not be applied. If the bank pays the net profit earned in 2011 in full in the form of dividends, the potential current income tax excluded from the impact of the non-deductible expenses would be MKD 5,177,555. The tax authorities may at any time inspect the documents and accounting evidence within five years subsequent to the reported tax year and may impose additional tax assessments and penalties. The bank s management is not aware of any circumstances, which may give rise to a potential material liability in this respect. Deferred income tax Due to the changes in the Macedonian tax legislation effective from 1 January 2009, and additional changes during 2010 and 2011, the tax rate for undistributed profits was effectively reduced to zero, as tax is only payable when profits are distributed. According IAS 12.52A, deferred tax assets and liabilities should be measured using the undistributed rate. Deferred tax assets and liabilities as at 31 December 2010 were recognized to the extent that, and only to the extent that, it was probable that the temporary difference will reverse in the future and items will be available against which the temporary difference can be utilized. The additional changes in Macedonian tax legislation during 2010 and 2011 resulted in a reversal of all deferred tax assets and liabilities as of 31 December are measured at the present value of the expenditures, if the outflow will not be earlier than in one year s time. The increase in the present value of the obligation due to the passage of time is recognised as an interest expense. Contingent liabilities, which mainly consist of certain guarantees and letters of credit issued for customers, as well as unused amounts of approved limits for certain loan products are possible obligations that arise from past events. As their occurrence, or nonoccurrence, depends on uncertain future events not wholly within the control of the bank, they are not recognised in the financial statements but are disclosed on the off-balance sheet unless the probability of settlement is remote (see note (57)). 18. Post-employment benefits and other employee benefits (a) Employee benefits Employee benefits comprise all kinds of benefits provided for the Bank s employees. This item includes salaries and wages as well as social contribution and fringe benefits. The Bank, in the normal course of business, makes payments on behalf of its employees for pensions, health care, employment and personnel tax that are calculated on the basis of gross salaries and wages and food and transportation allowances according to the legislation requirements. The Bank makes these contributions to the Government s health and retirement funds, at the statutory rates in force during the year, based on gross salary payments. The Bank pays contributions to public pension insurance fund on a mandatory basis. Once the contributions have been paid, the Bank has no further payment obligations. The regular contributions constitute costs for the year in which they are due and as such are included in personnel expenses. The cost of these payments is charged to the income statement in the same period as the related salary cost. The Bank does not operate any other pension scheme or post retirement benefits plan and consequently, has no obligation in respect of pensions to the employees. In addition, the Bank does not operate shared based compensation plan in exchange to the employee services provided. 16. Borrowings Borrowings comprise of liabilities to banks, liabilities to customers, liabilities to international financial institutions, subordinated debt and hybrid capital. Interest-bearing borrowings are recognised initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method. All financial liabilities are derecognised when they are extinguished that is, when the obligation is discharged, cancelled or expires. 17. Provisions (b) Other post-employment obligations It is mandatory to pay employees a certain amount of post-employment benefits which are calculated according to several factors such as the number of years of service and the amount of compensation. The liability recognised in the balance sheet is the present value of the defined post-employment benefit obligation at the balance sheet date, together with adjustments for past service costs. The present value of the obligation is determined by discounting the estimated future cash outflows (e.g. taking into account mortality tables and salary increases) using interest rates of high-quality corporate bonds that are denominated in the currency in which the obligation will be paid, and that have terms to maturity approximating to the terms of the related pension liability, where applicable, or comparable similar interest rates which were estimated by the banks. Provisions are recognised if there is a present legal or constructive obligation resulting from past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow of resources will be required in a settlement is determined by considering the class of obligations as a whole. Provisions for which the timing of the outflow of resources is known 19. Subordinated debt Subordinated debt consists mainly of liabilities to shareholders and other international financial institutions which in the event of insolvency or liquidation are not repaid until all non-subordinated creditors have been satisfied. There is no obligation to repay early. Following initial recognition at acquisition cost, the subordinated debt is recognised at amortised cost. Premiums and discounts are accounted for over the respective terms in the income statement under Net interest income.

60 60 ANNUAL REPORT Equity capital Equity capital comprises of ordinary shares. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds as (negative) capital reserve. Dividends on ordinary shares are recognised in equity in the period in which they are approved by the company s shareholders. 21. Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in the income statement the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and 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. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. For loans where there is objective evidence that an impairment loss has been incurred, booking of interest income is terminated not later than 90 days after the last payment. Payments received with respect to written-off loans are not recognised in net interest income. 23. Fee and commission income and expenses Fee and commission income and expenses are recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate of the loan. 22. Interest income and expense 24. Dividend income Interest income and expenses for all interest-bearing financial instruments are recognised within Interest income and Interest expense in the income statement using the effective interest rate method. Interest income and expenses are recognised in the income statement in the period in which they arise. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected Dividends are recognised in the income statement when the entity s right to receive payment is established. Due to their insignificance, the amounts are recognised in Net other operating income. C. Changes in presentation Where necessary, corresponding figures have been adjusted to conform to the presentation of the current year amounts. The effect of reclassifications for presentation purposes was as follows on amounts at 31 December 2010: in 000 MKD As originally presented Reclassification As reclassified at 31 December 2010 at 31 December 2010 Cash and balances with the Central Bank 1,480, ,136 2,189,464 Treasury bills 709,136 (709,136) Loans and advances to customers 8,954, ,412 9,187,500 Allowance for losses on loans and advances to customers (233,412) (233,412) Liabilities to banks 717,508 (714,216) 3,292 Liabilities to customers 7,907, ,216 8,621,818 Other liabilities 33,033 (8,706) 24,327 Provisions 8,706 8,706 The third statement of financial position as of 1 January 2010 is presented in these financial statements as a result of the above described changes in presentation. This requirement to present the additional opening statement of financial position, when the Bank has made a restatement or reclassification, extends to the information in the related notes. Management considered materiality and concluded that it is sufficient for an entity to present such information only in those notes that have been impacted by the reclassification, and state in the financial statements that the other notes have not been impacted by the restatement or reclassification. The omission of the notes to the additional opening statement of financial position is, therefore, in management s view, not material. The reclassifications had an impact on information in notes (33, 36, 37, 43, 44, 46, 47) and had no impact on any other captions in the financial statements and related note disclosures. The changes in presentation adopted in 2011 did not have any impact on the statement of financial position and the Bank, therefore, does not present in the notes information as of 1 January 2010.

61 FINANCIAL STATEMENTS 61 D. Notes to the Income Statement 25. Net interest income Included within Net interest income are interest income and expenses and, in addition, the unwinding of premiums and discounts on financial instruments at amortised cost. The item other fee and commission income consists of transactions carried out on behalf of third parties, e.g. Western Union. Other fee and commission expenses consists primarily of fee expenses related to the card business. 28. Result from foreign exchange transactions Net interest income Interest and similar income Interest income from cash and cash equivalents and loans and advances to banks 27,386 85,330 Interest income from available-for-sale assets 3,655 7,332 Interest income from loans and advances to customers 1,197,430 1,263,088 Total interest income 1,228,471 1,355,750 Result from foreign exchange transactions refers to the results of foreign exchange dealings with and for customers. The bank does not engage in any foreign currency trading on its own account. In addition, this position includes unrealised foreign currency revaluation effects. The bank does not apply hedge accounting as defined by IAS 39. Currency transactions 33,046 61,418 Revaluation general 621 (30,956) Total 33,667 30,462 Interest and similar expenses Interest expenses on liabilities to banks (69,496) (69,197) Interest expenses on liabilities to customers (315,141) (375,919) Interest expenses on liabilities to international financial institutions (35,856) (36,681) Interest expenses on subordinated debt (76,329) (72,583) Interest expenses on debt securities (25,130) Other interest expenses Total interest expenses (496,822) (579,510) Net interest income 731, ,240 Interest income on impaired financial assets is MKD 5,124,000 (2010: MKD 5,135,000). 29. Net result from available-for-sale financial assets This item includes the gains or losses from the disposal of available-for-sale financial assets as well as impairment losses and gains from reversal of impairment. Net result from disposal of available-for-sale financial assets 3,907 Total 3, Net other operating income/ (expense) Other operating income 22,555 19,401 Other operating expenses (77,271) (81,514) Total (54,716) (62,113) 26. Allowance for impairment losses on loans and advances Risk provisioning on loans and advances to customers is reflected in the income statement as follows: Other operating income includes as its main positions - the return of VAT, recovery of written-off loans and income from the sale of fixed assets. Other operating expenses includes as its main position premium charges for deposit insurance. Increase of impairment charge (113,512) (73,503) Total (113,512) (73,503) 31. Personnel and other administrative expenses Personnel expenses can be broken down as follows: 27. Net fee and commission income Fee and commission income Payment transfers and transactions 113,661 67,453 Account maintenance fee 28,072 56,862 Letters of credit and guarantees 15,838 13,031 Debit/ credit cards 19,724 20,728 Other fee and commission income 12,395 12,580 Total fee and commission income 189, ,654 Salary expenses (174,531) (195,658) Social security expenses (83,907) (94,353) Other personnel expenses (33,776) (20,560) Total (292,214) (310,571) Social security contributions in 2011 include MKD 45,832 thousand (2010: MKD 51,996 thousand) as contributions to employees pension funds provided by third parties (defined contribution plans). Fee and commission expenses Payment transfers and transactions (37,015) (50,311) Other fee and commission expenses (9,637) Total fee and commission expenses (46,652) (50,311) Net fee and commission income 143, ,343

62 62 ANNUAL REPORT 2011 Administrative expenses include the following items: Office rent (74,732) (79,948) Communication and IT expenses (30,244) (32,605) Transport (12,878) (13,286) Office supplies (8,042) (9,842) Security service (21,047) (23,225) Marketing, advertising and entertainment (21,965) (22,798) Construction, repairs and maintenance (40,973) (33,612) Depreciation fixed and intangible assets incl. leasehold improvement (82,435) (90,611) Other administrative expenses (94,989) (106,815) Recruitment and other personnel-related expenses Total (387,305) (412,742) The following cash equivalents have been considered as cash for the cash flow statements: Cash equivalents recognised in the cash flow statements Loans and advances to banks with a maturity up to three months, which qualify as cash for the cash flow 702, ,570 Minimum reserve with the NBRM, which does not qualify as cash for the cash flow (681,739) (609,467) Total cash equivalents for cash flow statement 20,561 (41,897) Cash and cash equivalents for cash flow statement 2,172,276 2,147,567 Of the total administrative expenses, expenses of MKD 23,476 thousand were incurred for staff training. 34. Loans and advances to banks Loans and advances to banks are as follows: 32. Other tax expenses This item includes all taxes on income. Income tax expenses were as follows: Current tax (1,668) (2,095) Deferred tax (350) 11,673 Total (2,018) 9,578 Loans and advances to banks in OECD countries 693, ,752 Loans and advances to banks in non-oecd countries 15,864 2,766 Total 709, ,518 Current 702, ,571 Non-current 7,130 6,947 In calculating both current taxes on income and earnings and the deferred income tax the currently valid local tax rate is applied. For further details see note (41). E. Notes to the Balance Sheet 33. Cash and cash equivalents In note cash and cash equivalent are included treasury bills. Treasury bills are debt securities issued by the National Bank of the Republic of Macedonia with maturity due of 28 days. The Bank receives interest at the rate of 4% (2010: 4%). Cash and cash equivalents comprise the following items: in 000 MKD Cash in hand 438, ,556 Balances at central banks excluding mandatory reserves 562, ,304 Treasury bills 469, ,136 Mandatory reserve deposits 681, ,468 Total cash and cash equivalents 2,151,715 2,189, Available-for-sale financial assets All securities which are not designated as financial assets at fair value through profit or loss are qualified as available-for-sale financial assets. This balance sheet item primarily includes securities with fixed interest rates. Eurobond issued by the Ministry of Finance of the Republic of Macedonia represents investment of the Bank in financial assets. Investment in Eurobond in amount of EUR 1,000,000 is placed with initial maturity of 2,211 days and interest rate of 7.178%. The Eurobond that the bank possesses is quoted on Bloomberg and the bank is making regular revaluation of the Fair Value of the Eurobond according to the value changes announced on Bloomberg. In 2011 the bank sold the investment in capital of ProCredit Regional Academy to ProCredit Holding, which bought the shares of all shareholders. The amount of capital paid in Regional Procredit Academy was EUR 1,000,000 which correspond to 8.33% of the total capital of the ProCredit Regional Academy Eastern Europe. The carrying value of investment in point of sales amounted to EUR 100,000, and sales was realized profits amounting to EUR 65,518. in 000 MKD Available-for-sale financial assets Fixed interest rate securities (bank and corporate bonds) 56,548 58,263 Shares in companies situated in non-oecd countries 6,120 Total available-for-sale financial assets 56,548 64,383 Current Non-current 56,548 64,383

63 FINANCIAL STATEMENTS 63 The revaluation reserve for available-for-sale financial assets in equity in other comprehensive income shows the following changes: Movements in revaluation reserves (AFS) As at January 1 3,040 (2,488) Additions 6,142 Realisation (2,545) Deferred taxes 338 (614) As at December , Loans and advances to customers Loans and advances to customers are as follows: in 000 MKD Gross Allowance for Net Share of Number of Share of amount impairment amount total outstanding total As at December 31, 2011 portfolio loans number Business loans 8,590, ,355 8,342, % 14, % loan size up to 10 KEUR/KUSD 1,508, ,733 1,358, % 10, % loan size 10 to 30 KEUR/KUSD 1,858,053-40,008 1,818, % 2, % loan size 30 to 150 KEUR/KUSD 3,570,976-45,895 3,525, % 1, % loan size more than 150 KEUR/KUSD 1,653,134-11,719 1,641, % % Agricultural loans 891,981-35, , % 4, % loan size up to 10 KEUR/KUSD 584,562-26, , % 4, % loan size 10 to 30 KEUR/KUSD 191,831-2, , % % loan size 30 to 150 KEUR/KUSD 92, , % % loan size more than 150 KEUR/KUSD 23,094-6,021 17, % 2 0.0% Housing improvement loans 458,949-5, , % 1, % loan size up to 10 KEUR/KUSD 164,440-4, , % 1, % loan size 10 to 30 KEUR/KUSD 196, , % % loan size 30 to 150 KEUR/KUSD 97, , % % loan size more than 150 KEUR/KUSD 0.0% 0.0% Consumer loans * 88,083-1,632 86, % 1, % loan size up to 10 KEUR/KUSD 58,918-1,448 57, % 1, % loan size 10 to 30 KEUR/KUSD 21, , % % loan size 30 to 150 KEUR/KUSD 8, , % 3 0.0% loan size more than 150 KEUR/KUSD 0.0% 0.0% Other loans 113,702-6, , % 1, % loan size up to 10 KEUR/KUSD 65,957-6,118 59, % % loan size 10 to 30 KEUR/KUSD 19, , % % loan size 30 to 150 KEUR/KUSD 27, , % % loan size more than 150 KEUR/KUSD 0.0% 0.0% Total 10,143, ,690 9,845, % 23, % * consumer loans also include overdrafts to private individuals Current 4,709,522 Non-Current 5,434,129

64 64 ANNUAL REPORT 2011 in 000 MKD Gross Allowance for Net Share of Number of Share of amount impairment amount total outstanding total As at December 31, 2010 portfolio loans number Business loans 7,266, ,109 7,101, % 12, % loan size up to 10 KEUR/KUSD 1,358, ,295 1,248, % 9, % loan size 10 to 30 KEUR/KUSD 1,623,252-28,041 1,595, % 2, % loan size 30 to 150 KEUR/KUSD 2,831,049-21,641 2,809, % % loan size more than 150 KEUR/KUSD 1,453,379-5,132 1,448, % % Agricultural loans 772,765-21, , % 5, % loan size up to 10 KEUR/KUSD 589,273-19, , % 5, % loan size 10 to 30 KEUR/KUSD 138,741-1, , % % loan size 30 to 150 KEUR/KUSD 33, , % % loan size more than 150 KEUR/KUSD 10, , % 1 0.0% Housing improvement loans 977,429-40, , % 4, % loan size up to 10 KEUR/KUSD 527,705-36, , % 4, % loan size 10 to 30 KEUR/KUSD 322,563-3, , % % loan size 30 to 150 KEUR/KUSD 127, , % % loan size more than 150 KEUR/KUSD 0.0% 0.0% Consumer loans * 34, , % 1, % loan size up to 10 KEUR/KUSD 30, , % 1, % loan size 10 to 30 KEUR/KUSD % 1 0.0% loan size 30 to 150 KEUR/KUSD 2, , % 1 0.0% loan size more than 150 KEUR/KUSD 0.0% 0.0% Other loans 136,978-6, , % 1, % loan size up to 10 KEUR/KUSD 85,813-5,719 80, % 1, % loan size 10 to 30 KEUR/KUSD 25, , % % loan size 30 to 150 KEUR/KUSD 25, , % % loan size more than 150 KEUR/KUSD 0.0% 0.0% Total 9,187, ,412 8,954, % 26, % * consumer loans also include overdrafts to private individuals Current 4,709,522 Non-Current 5,434, Allowance for losses on loans and advances Allowance for impairment losses on loans and advances cover the risks which arise from the category Loans and receivables (see also note (10) ). In addition to the allowance for specific impairment losses for receivables for which there is objective evidence of impairment, lump-sum specific provisions and a general allowance were formed to cover impairment loss relating to the customer loan portfolio as a whole: The following tables shows the development of allowances for impairment losses for loans and advances to customers over time and type of loans: As at January 1 (233,412) (192,522) Additions (317,402) (243,034) Used 48,564 33,241 Releases 203, ,530 Effect of interest 669 Exchange rate adjustments (627) As at December 31 (297,690) (233,412) Allowance for impairment on loans and advances to customers Specific impairment (56,351) (116,378) Allowance for individually insignificant impaired loans (72,041) (82,495) Allowance for collectively assessed loans (169,298) (34,539) Total (297,690) (233,412)

65 FINANCIAL STATEMENTS 65 in 000 MKD Net charge to Loans As at December 31, 2011 income statement written off Business loans 165, ,105 (39,859) 248,355 Agricultural loans 21,072 19,340 (4,846) 35,566 Housing improvement loans 40,380 (34,233) (393) 5,754 Consumer loans 675 1,128 (172) 1,632 Other loans 6,176 3,502 (3,294) 6,383 Total 233, ,842 (48,564) 297,690 in 000 MKD Net charge to Loans As at December 31, 2010 income statement written off Business loans 140,534 54,428 (29,851) 165,111 Agricultural loans 16,254 6,030 (1,213) 21,071 Housing improvement loans 25,769 14,617 (6) 40,380 Consumer loans 891 (201) (15) 675 Other loans 9,074 (741) (2,158) 6,175 Total 192,522 74,133 (33,243) 233, Intangible assets The development of the intangible assets is shown in the following tables: Software Net book value at January 1 55,213 56,798 Total acquisition costs at January 1 108,569 96,774 Transfers (254) (34) Additions 16,987 11,829 Total acquisition costs at December , ,569 Accumulated depreciation January 1 (53,356) (39,976) Amortisation (14,913) (13,380) Accumulated depreciation at December 31 (68,269) (53,356) Other intangible assets Net book value at January 1 11,464 16,931 Total acquisition costs at January 1 42,286 41,171 Transfers Additions 3,895 1,081 Total acquisition costs at December 31 46,435 42,286 Accumulated depreciation January 1 (30,822) (24,240) Amortisation (5,553) (6,582) Accumulated depreciation at December 31 (36,375) (30,822) Net book value at December 31 10,060 11, Property, plant and equipment Net book value at December 31 57,033 55,213 The development of property, plant and equipment was as follows: in 000 MKD Land and Leasehold Assets under Furniture and IT and other Total As at December 31, 2011 buildings improvements construction fixtures equipment Net book value at January 1, ,001 29,934 16, , ,805 Total acquisition costs at January 1, ,161 54,724 39, , ,930 Transfers Additions 2,797 18,893 9,772 24,617 56,079 Disposals (1,515) (3,028) (4,427) (8,970) Total acquisition costs at December 31, ,958 72,102 46, , ,039 Accumulated depreciation January 1, 2011 (8,160) (24,790) (23,262) (265,913) (322,125) Depreciation (3,748) (7,002) (2,702) (48,517) (61,969) Accumulated depreciation at December 31, 2011 (11,908) (31,792) (25,964) (314,430) (384,094) Net book value at December 31, ,050 40,310 20, , ,945

66 66 ANNUAL REPORT 2011 in 000 MKD Land and Leasehold Assets under Furniture and IT and other Total As at December 31, 2010 buildings improvements construction fixtures equipment Net book value at January 1, ,843 43,992 18,831 17, , ,429 Total acquisition costs at January 1, ,983 62,253 18,831 37, , ,905 Transfers 35,743 (7,368) (38,198) 9,823 Additions 435 5,712 19,367 3,485 26,999 55,998 Disposals (5,873) (1,628) (1,472) (8,973) Total acquisition costs at December 31, ,161 54,724 39, , ,930 Accumulated depreciation January 1, 2010 (5,140) (18,262) (20,822) (207,252) (251,476) Depreciation (3,020) (6,528) (2,440) (58,661) (70,649) Accumulated depreciation at December 31, 2010 (8,160) (24,790) (23,262) (265,913) (322,125) Net book value at December 31, ,001 29,934 16, , , Leasing Operating lease commitments Operating lease commitments no later than one year 54,860 56,544 later than one year and no later than five years 176, ,887 later than five years 86,046 93,500 Total 316, ,931 The table below provide information about the underlying business transactions for deferred income tax assets and liabilities: Deferred tax assets / liabilities Temp. differences, Equity reserve afs (338) Other temporary differences 350 Total 12 The two following tables show the business activities to which the profit and loss from deferred taxes is related: Operating lease commitments result from non-cancellable rental agreements for properties; the amounts in the above table are calculated based on current rental agreements. The total amount of expenses recognised in connection with such leases in 2011 is MKD 69,679 thousand (2010: MKD 73,607 thousand). 41. Current and deferred tax assets/liabilities Deferred income tax was recognized on temporary differences between the tax bases of the revaluation of available-for-sale financial assets and provisions for other post-employment benefits and their carrying amounts. Deferred income tax was determined using tax rate that has been enacted on the date of their recognition. The changes in Macedonian tax legislation during 2010 and 2011 resulted in a reversal of all deferred tax assets and liabilities as of 31 December 2011 as explained in note (15). The table below shows the changes in deferred income taxes and the underlying business transactions: Deferred tax charges Other temporary differences (350) Total (350) Deferred tax income Provisions 7,222 Other temporary differences 4,451 Total 11,673 The transition of taxes between the financial statements according to IFRS and local financial statements is shown in the following table: Profit/(loss) before tax 62,496 68,117 - non-tax deductable expenses 1,668 2,095 Income tax expense for the year according to IFRS 1,668 2,095 Deferred taxes At January 1 12 (11,046) Available-for-sale securities: fair value remeasurement 338 (615) Charges to income statement (350) 11,673 Total 12 Changes in deferred tax assets (350) 338 Changes in deferred tax liabilities 11,335 Current taxes (350) 11,673 Tax assets Current tax assets Deferred tax assets 350 Total Tax liabilities Deferred tax liabilities 338 Total 338

67 FINANCIAL STATEMENTS Other assets Other assets are as follows: Other financial assets Accounts receivable 50,628 37,562 Claims on insurances policies Claims from customs and taxes 2 2 Other inventory items 4,194 5,866 Others 2,308 1,672 Total 57,303 45,232 Current 57,303 45,232 Non-current Other non-financial assets Pre-payments 3,879 6,711 Repossessed properties 112,997 77,278 Others 80 Total 116,956 83,989 Current 116,956 83,989 Non-current Repossessed properties as shown in the above table are carried at the lower of the previous carrying amount of the written-off loan and fair value less cost to sell. There were expenses for impairment of MKD 4,099 thousand (2010: MKD 20,487 thousand) and reversals of impairment on repossessed properties amounting to MKD 7,936 thousand (2010: MKD 0.00 thousand). 43. Liabilities to banks Liabilities to Banks in non-oecd countries 4,141 3,292 Total 4,141 3,292 Current 1, Non-current 2,828 2, Liabilities to customers Liabilities to customers consist of deposits due on demand, savings deposits and term deposits. The following table shows a breakdown by customer groups: Current accounts 2,482,931 1,957,233 private individuals 1,219, ,340 legal entities 1,263, ,893 Savings accounts 778, ,737 private individuals 778, ,737 Term deposit accounts 5,658,739 5,910,189 private individuals 4,857,877 4,836,567 legal entities 800,862 1,073,622 Other liabilities to customers 43,352 24,659 Total 8,963,260 8,621,818 Current 7,163,752 7,150,008 Non-current 1,799,508 1,471,810 The category legal entities includes liabilities to non-governmental organisations (NGOs) and public-sector institutions. Term deposits earn a fixed interest rate; all other deposits have variable interest rates. The liabilities to banks consist primarily of short-term loans obtained on the interbank market. 45. Borrowings Borrowings are an important source of financing for the bank. Medium- to long-term loans from international financial institutions are reported under this item. The following table gives a detailed breakdown for this item. in 000 MKD Due Borrowings with fixed interest rates up to 1 year 9, ,157 up to 2 years 923 9,069 up to 3 years 116,265 12,325 up to 4 years 169,835 17,023 more than 4 years 1,044, ,447 Total liabilities with fixed interest rates 1,341, ,021 Borrowings with variable interest rates up to 1 year 4, ,318 up to 2 years 224,992 up to 3 years up to 4 years 306, ,274 later than 4 years 837, ,351 Total liabilities with variable interest rates 1,148,381 1,390,935 Total 2,489,554 1,876,956 Current 13, ,475 Non-current 2,475,733 1,523,481

68 68 ANNUAL REPORT 2011 The most important credit lines during 2011 are credit lines from KfW in amount of EUR 7,000, with fixed interest rate of 3.20% and maturity of 7 years, credit line from CEB in amount of EUR 7,000 thousand with variable interest rate of 3m EURIBOR plus 0.87% rate margin and maturity of 7 years and second credit line from CEB in amount of EUR 5,000 thousand with variable interest rate of 3m EURIBOR plus 0.31% rate margin and maturity of 7 years, the credit line from ProCredit Holding in amount of EUR 10,000 thousand with fixed rate based on EURIBOR for the respective period +3.50% premium for country risk and maturity of 2 years; credit line from MBPR in amount of EUR 4,500 thousand with variable interest rate of 3m EURIBOR plus 1% rate margin and maturity of 4 years, and another credit line from MBPR financed via EIB in amount of EUR 12,084 thousand with fixed Interest rate of 1%. Other non-financial liabilities Deferred income 1,325 Non-income tax liabilities 2,240 8,142 Total 3,565 8,142 Current 3,400 8,142 Non-current 165 Others includes, among other things, deliveries and services not yet invoiced. 47. Provisions 46. Other liabilities Deferred income 1,325 Liabilities for goods and services 6,800 3,607 Non-income tax liabilities 2,240 8,142 Others 8,537 12,578 Total 18,902 24,327 Current 18,737 22,828 Non-current 165 1,499 Aside from provisions for post-employment (see explanation below) the breakdown of the provisions is as follows: Provisions for imminent losses from off-balance sheet items 3,650 4,110 Provisions for imminent losses from pending transactions 60 Provisions for untaken vacation 2,248 Other provisions 2,153 Total 8,111 4,110 Other financial liabilities Liabilities for goods and services 6,800 3,607 Others 8,537 12,578 Total 15,337 16,185 Current 15,337 14,686 Non-current 1,499 Current 5,958 4,110 Non-current 2,153 For the provisions for untaken vacation and for off-balance sheet items the outflow of economic benefits is expected during the next six months. Provisions for imminent losses from pending transactions include provisions for legal cases against the bank. The outflow of economic benefits regarding above disclosed provision happened in February, According to our Labor Law the bank has obligation to make payments to the employees for the retirement in amount of two average salaries in the Republic of Macedonia. As at January 1 4,596 3,504 Additions 1,092 Released (2,445) As at December 31 2,151 4,596 Current 1, Non-current 1,031 4,548 in 000 MKD Additions Amounts Amounts Actuarial Reclassifications* Exchange used released gains rate and losses differences Defined benefit obligation for termination of contracts (4,596) 4,596 for pensions/ retirement (533) 48 3,526 (595) (4,596) (2,151) Total (4,596) (533) 48 3,526 (595) (2,151) * Amount reclassified to line item Liability of discontinued operations held for sale

69 FINANCIAL STATEMENTS 69 in 000 MKD Additions Amounts Amounts Actuarial Reclassifications Exchange used released gains rate and losses differences Defined benefit obligation for termination of contracts (3,504) (1,092) (4,596) for pensions/ retirement Total (3,504) (1,092) (4,596) The cost account in the income statement for post-employment benefit provisions comprises the following individual items: Current service cost 533 1,092 Past service cost (3,526) Total (2,993) 1, Subordinated debt The subordinated debt can be broken down as follows: in 000 MKD Due Received from SNS Institutional, s-hertogenbosch, The Netherlands , ,023 ProCredit Holding , ,717 ProCredit Holding , ,968 ProCredit Holding ,507 32,507 Total 599, ,215 Current 59,146 31,829 Non-current 540, ,386 The subordinated loan from ProCredit Holding. consists of three loans totalling EUR 5,500,000; one in the amount of EUR 2,500,000 with an interest rate of 9.74% and a maturity of ten years; one in the amount of EUR 2,500,000 with an interest rate of 8.45% and a maturity of fifteen years and one in the amount of EUR 500,000 with an interest rate of 11.62% and a maturity of ten years. The subordinated loan from SNS Institutional Microfinance Fund II amounts to EUR 4,000,000 with an interest rate of 10.47% and maturity of eight years. 49. Hybrid capital The hybrid loan from ProCredit Holding in the amount of EUR 3,000,000 was borrowed with an interest rate of 7.91% and a maturity of five years. Current outstanding balance at December 31, 2011 is in total amount of EUR 3,172, Received from ProCredit Holding 195, ,764 Total 195, ,764 Current 20,766 20,727 Non-current 174, ,037

70 70 ANNUAL REPORT Equity capital As at December 31, 2011 (compared to 2010), the shareholder structure was as follows: in MKD December 31, 2011 December 31, 2010 Shareholder Size of Number Amount Size of Number Amount stake in % of shares stake in % of shares ProCredit Holding Frankfurt am Main, Germany 87.50% 1,750, , % 1,750, ,998 European Bank for Reconstruction and Development 12.50% 250,000 76, % 250,000 76,714 Total Voting Capital 100.0% 2,000, , % 2,000, ,712 The Bank s share capital consists of 2 million ordinary shares. All shares have a par value of 5 EUR. F. Risk Management The risk management function within the Bank is carried out in respect of financial risks, operational risks and legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures, in order to minimise operational and legal risks. 51. Management of the overall bank risk profile capital management 1. Capital management - objectives Overall, neither ProCredit Bank Macedonia, nor the ProCredit group as a whole, is allowed to take on more risk than it is capable of bearing. This rule is put into operation, using different indicators for which target and limit ratios have been established. The indicators for ProCredit Bank Macedonia and the group as a whole include, in addition to local regulatory standards, a Basel II capital adequacy calculation, a Tier 1 leverage ratio and a risk bearing capacity model. The capital management of the bank has the following objectives: Ensuring that the bank is equipped with a sufficient volume and quality of capital at all times to cope with (potential) losses arising from different risks even under extreme circumstances. Full compliance with external capital requirements set by the regulator. Meeting the internally defined minimum capital adequacy requirements. Enabling the bank to implement its plans for continued growth while following its business strategy. 2. Capital management processes and procedures The capital management of ProCredit Bank Macedonia and the group as a whole is governed by the Group Policy on Capital Management and the Group Policy on Risk Bearing Capacity. Regulatory and Basel II capital ratios, the Tier 1 leverage ratio and the risk bearing capacity are monitored on a monthly basis by the bank s Risk Management Committee (Sub-Committee ALCO) and the Pro- Credit Group Risk Management Committee. 3. Capital management compliance with external and internal capital requirements External minimum capital requirements are imposed and monitored by the local banking supervision authority. Capital adequacy is calculated and reported on bank level to the Risk Management Committee (Sub-Committee ALCO) on a monthly basis. These reports include rolling forecasts to ensure not only current but also future compliance. During the reporting period, all regulatory capital requirements were met at all times. Capital adequacy is monitored additionally using a uniform capital adequacy calculation method across the group in accordance with the guidelines of the Basel Committee (Basel II). The following table shows the capital adequacy ratios of the bank: Calculation based on Basel II Tier 1 Capital / Risk Weighted Assets 9.1% 9.3% Tier 1 + Tier 2 Capital / Risk Weighted Assets 16.1% 16.7% Ordinary share capital 613, ,712 Capital + legal reserves 59,727 49,005 Retained earnings 361, ,690 Less other intangibles (67,093) (66,677) Tier I capital 968, ,730 Subordinated loans 484, ,866 Hybrid capital 184, ,515 Collective impairment allowance 72,042 82,495 Tier II capital 740, ,876 Total (regulatory) Basel II capital 1,708,963 1,604,606 * less (proposed) distributed dividend RWA on balance 8,387,171 7,440,602 RWA off balance 653, ,001 RWA from open currency position 54, ,760 RWA from operational risk 1,534,279 1,486,881 Total RWA 10,629,302 9,584,244 The bank use a combination of straight equity and subordinated debt (including Hybrid capital instrument in Tier II), mainly issued by ProCredit Holding for capital management. With respect to the leverage of the bank, a lower limit for the ratio of Tier 1 capital to on and adjusted off-balance sheet exposures is being applied, according to which the Tier 1 leverage ratio of the bank should not fall below 5%. At the end of 2011 it was at 6.8%.

71 FINANCIAL STATEMENTS 71 Risk bearing capacity In addition to regulatory capital ratios, the bank assesses its capital adequacy by using the concept of risk bearing capacity to reflect the specific risk profile of the bank, i.e. comparing the potential losses arising from its operation with the bank s capacity to bear such losses. The risk bearing capacity of the bank is defined as the bank s equity (net of intangibles) plus subordinated debt, which amounted to EUR 29.3 million as of the end of December 2011 (2010: EUR 28.3 million). The Resources Available to Cover Risk were set at 60% of the risk-taking potential, i.e. EUR 17.6 million (60% of 29.3 million). For calculating potential losses in the different risk categories the following concepts were used: Credit risk (clients): Based on a regularly updated migration analysis on the loan portfolio, the historical loss rates and their statistical distribution is calculated. The historical loss rates in different arrears categories (at a 99% confidence level) are applied to current loan portfolio to calculate potential loan losses. Counterparty risk: The calculation of potential losses due to counterparty risk is based on the probability of default arising from the respective international rating of the counterparty or its respective country of operation (after adjustment). Market risks: Whereas historical currency fluctuations are statistically analysed and highest variances (99% confidence level) are applied to current currency positions, interest rate risk is calculated by determining the economic value impact of a standard interest rate shocks for EUR/USD (2 percentage points, Basel interest rate shock) and higher (historical) shock levels for local currency. Operational risk: The Basel II Standard approach is used to calculate the respective value. Other risks have been assessed as not sufficiently relevant for the bank or as relevant, but not quantifiable, e.g. liquidity risk. The table below shows the distribution of the RAtCR among the different risk categories as determined by the Risk Management Committee and the level of utilisation as of the end of December Risk Factor Risk Detail Limit Limit Actual Limit Used (in %) (in 000 MKD) (in 000 MKD) (in % of limit) Credit Risk (Clients) 25.0% 450, , % Counterparty Risk Commercial Banks 1.0% 18,006 1, % Central Banks 9.0% 162,051 31, % Market Risk Interest Rate Risk 10.0% 180,057 72, % Currency Risk 2.5% 45,014 1, % Operational Risk 12.5% 225, , % Resources Available to Cover Risk 60.0% 1,080, , % As the above table indicates, the bank showed a modest level of utilisation of its RAtCR as of December 31, As a result to the deterioration in loan portfolio quality experienced during 2011, the utilisation level in terms of credit risk increased slightly compared to Counterparty and market risk limit utilisation are again low, reflecting the conservative risk management approach which guides the bank s treasury operations. The economic capital required to cover operational risk is calculated according to the Basel II standard approach, and thus does not reflect the individual risk profile of the bank in this area. Data collected during 2011 in the Risk Event Database (RED), which captures risk event data on a bank and group-wide scale, indicates a significantly lower level of operational risk. All risks combined, as quantified by the methods established in the group s policies, are considerably below 60% of the bank s total risk bearing capacity as defined. The bank places special emphasis on a general understanding of the factors driving risk and an on-going analysis and company-wide discussion of possible developments/scenarios and their potential adverse impacts. The objectives of risk management include ensuring that all material risks are recognised in a timely manner, understood completely, and described appropriately. This includes, for example, ensuring that no products or services are offered unless they are thoroughly understood by all parties and can be handled. The ProCredit group uses uniform limits for individual risks within which the individual banks position their own risk strategies. Limit deviations are only allowed for stricter limits (e.g. in cases where such limits are stipulated by local law) or if approved by the Group Risk Management Committee. 53. Credit risk 52. Management of individual risks In 2011, the management and reporting of individual risks on a group level and accordingly in ProCredit Bank Macedonia have been further developed and refined in order to further enhance the risk management of the bank in accordance with the German MaRisk regulations and Basel II requirements. In particular, additional processes were introduced for the management of credit risk counterparty risk liquidity risk operational risk and anti-money laundering activities. Interest rate risk Capital Management and Risk Bearing Capacity Credit risk is defined as the danger that the party to a credit transaction will not be able, or will only partially be able, to meet its contractually agreed obligations towards the bank. Credit risk arises from customer credit exposures (classic credit risk), credit exposure from interbank placements and issuer risk. It is further divided into credit default risk and credit portfolio risk in order to facilitate focused risk management. Credit risk is the single largest risk faced by the bank. Maximum exposure of all financial assets to credit risk is analysed by their net carrying amount as presented in the statement of financial position.

72 72 ANNUAL REPORT 2011 Credit risk measurement (a) Loans and advances In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Bank reflects three components (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derive the exposure at default ; and (iii) the likely recovery ratio on the defaulted obligations (the loss given default ). These credit risk measurements, which reflect expected loss (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 statement of financial position date (the incurred loss model ) rather than expected losses (Note 3.1.3). The Bank assesses the probability of default of individual client or counterparty using internal tools as migration analysis. The migration analysis represents a historical development of the credit portfolio. If we assume that the historical development is representative for future movements as well, we can create a migration matrix that will show the probabilities for any credit of moving from one arrears bucket to another within a defined time frame. Internal tools are kept under review and upgraded on annual basis. (ii) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur. (iii) Loss given default or loss severity represents the Bank s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure. (b) Debt securities and other bills For debt securities and other bills, risk management department for managing of the credit risk exposures uses ratings depending on of the issuer: Central bank of the Republic of Macedonia and Republic of Macedonia. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position and is limited and monitored from the Assets and Liabilities Management Committee. Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified in particular, to individual counterparties and groups. The Banks concentration of credit risk to industries, loan segments and countries is regularly reviewed as well. 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. Such risks are monitored on monthly basis. Limits on the level of credit risk are approved by the Managing Board or Supervisory Board depending on the size of the exposure. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Some other specific control and mitigation measures are outlined below. (a) Collateral The Bank has a range of policies and practices to mitigate credit risk. The collateralisation of credit exposures serves as an important risk mitigation factor and enhances the incentives for borrowers to repay their financial obligations. Collateral is defined as assets which are pledged by a borrower to secure a credit exposure. The Bank has implemented Collateral Valuation Policy, where guidelines on the acceptability of specific types of collateral are defined.in general, the bank accepts all types of collateral that are permitted by the law. Credit exposures granted to enterprises and private individuals are generally covered with collateral (real estate, movable items or bills of exchange). Requirement for collateral coverage depends from maturity of the credit exposure, quality of documentation as well as credit history. Align, in order to minimize the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Debt securities, treasury and other eligible bills are generally unsecured. (b) Credit-related contingencies The primary purpose of 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 and are secured with same collateral as loans. The following table shows the maximum exposure to credit risk: Cash and cash equivalents 2,151,715 2,189,464 Loans and advances to banks 709, ,518 Available-for-sale financial assets 56,548 58,262 Fixed interest rate securities (bank and corporate bonds) 56,548 58,262 Loans and advances to customers 9,845,961 8,954,088 Loans and advances to customers 10,143,651 9,187,500 Allowance for impairment (297,690) (233,412) Financial investments 6,121 Other Assets 174, ,221 Maximum exposure to credit risk Off balance Guarantees 744, ,339 Letters of credit 41,658 12,066 Commitments to extend credit (loan commitment) 648, , Credit default risk from customer credit exposures Credit default risk from customer credit exposures is defined as the risk of losses due to a potential non-fulfilment of the contractual payment obligations associated with a customer credit exposure. The management of credit default risk from customer credit exposures is based on a thorough implementation of the bank s lending principles: intensive analysis of the debt capacity of the banks clients careful documentation of the credit risk assessments, assuring that the analysis performed can be understood by knowledgeable third parties

73 FINANCIAL STATEMENTS 73 rigorous avoidance of over indebting the bank s clients building a personal and long-term relationship with the client and maintaining regular contact strict monitoring of loan repayment practising tight arrears management exercising strict collateral collection in the event of default investing in well-trained and highly motivated staff implementing carefully designed and well-documented processes rigorous application of the four-eyes principle The differentiation between individually significant and insignificant credit exposures leads to distinct processes in lending for the different types of credit exposures processes that have been demonstrated in the past to ensure an effective management of credit default risk. The processes are distinguished mainly in terms of segregation of duties, which is fully implemented for individually significant credit exposures that are risk-relevant; the information collected from the clients, ranging from audited financial statements to selfdeclarations; the key criteria for credit exposure decisions based on the financial situation of the client; in particular for individually insignificant credit exposures, the liquid funds and creditworthiness of the client; and the collateral requirements. As a general rule, the lower the amount of the credit exposure, the stronger the documentation provided by the client, the shorter the term of the credit exposure, the longer the client s history with the bank and the higher the turnover of the client with the bank, the lower will be the collateral requirements. The decision-making process ensures that all credit decisions on each credit is taken by a credit committee. As a general principle, the bank considers it very important to ensure that its lending business is conducted on the basis of organisational guidelines that provide for appropriate rules governing organisational structures and operating procedures; job descriptions that define the respective tasks; a clear allocation of decision-making authority; and a clear definition of responsibilities. Credit exposures in arrears are defined as credit exposures for which contractual interest and/or principal payments are overdue. The comparatively high quality of the loan portfolio reflects the application of the above lending principles and the results of the application of early warning indicators and appropriate monitoring, in particular of the individually significant credit exposures. This is a crucial element of the bank s strategy for managing arrears in the current economic crisis that is affecting a large number of its clients. Once arrears occur, the bank rigorously follows up on the nonrepayment of the credit exposures, and by so doing typically identifies any potential for default on a credit exposure. Strict rules are applied regarding credit exposures for which, in the bank s view, there is no realistic prospect that the credit exposure will be repaid and where typically the realisation of collateral has either been completed or the outcome of the realisation process is uncertain. The bank s recovery and collection efforts are mainly performed by specialised employees, typically with either a lending or legal background. Additionally, specialized companies and external lawyers are engaged in the recovery and collection process. The effectiveness of this tight credit risk management is reflected in the comparably low arrears rate exhibited by the loan portfolio. Breakdown of loan portfolio by days in arrears in 000 MKD 0 1 to to to to 180 > 180 Other Total As at December 31, 2011 days days days days days days signs of impairment Loans to customers Business 7,754, ,497 50,765 11,517 11, ,710 8,590,936 Agricultural 832,553 26,723 3,854 1,364 2,667 24, ,981 Housing 432,893 21, ,061 2, ,949 Finance leases Consumer 85,955 1, ,083 Other 106,292 3, , ,702 9,212, ,533 55,785 14,307 16, ,526 10,143,651 in 000 MKD 0 1 to to to to 180 > 180 Other Total As at December 31, 2010 days days days days days days signs of impairment Loans to customers Business 6,803, ,042 22,623 14,950 23, ,590 7,266,157 Agricultural 730,289 20,444 3,742 1,557 3,284 13, ,765 Housing 880,017 48,886 4,755 2,990 7,955 32, ,428 Finance leases Consumer 32, ,171 Other 125,779 3, , ,979 8,572, ,508 32,204 19,840 35, ,168 9,187,500 The quality of the loan portfolio is monitored on an on-going basis. The measure for loan portfolio quality is the portfolio at risk (PAR), which the bank defines as all credit exposures outstanding with one or more payment of interest and/or principal in delay by more than 30 days. This measure was chosen because the vast majority of all credit exposures have fixed instalments with monthly payment of principal and interest. Exceptions are seasonal agricultural loans and investment loans, which typically have irregular repayment schedules. No collateral is deducted and no other exposurereducing measures are applied when determining PAR. Additionally, the quality of credit operations is assured by credit control unit which is responsible for monitoring the bank s credit operations and compliance with its procedures. The unit, made up of experienced lending staff, ensures compliance, in form and substance, with the lending policy and procedures through on-site checks and system screening.

74 74 ANNUAL REPORT 2011 in 000 MKD Loan Allowance PAR PAR as % of Net Net write-offs portfolio for impairment (> 30 days) loan portfolio write-offs as % of As at December 31, 2011 loan portfolio Total 10,143, , , % 37, % in 000 MKD Loan Allowance PAR PAR as % of Net Net write-offs portfolio for impairment (> 30 days) loan portfolio write-offs as % of As at December 31, 2010 loan portfolio Total 9,187, , , % 22, % The primary sign for impairment of a credit exposure are arrears of more than 30 days. There is no de-minimis threshold for arrears. This means that any principal and/or interest payment from a client that is overdue by more than 30 days is viewed as evidence for impairment. The banks view a credit exposure as being impaired in case it obtains objective evidence for impairment even if the credit exposure is not in arrears of more than 30 days. The conclusion that a credit exposure is impaired derives from the following list of factors which might influence the client s ability to fulfill his contractual payment obligations towards the bank include: Delinquencies in contractual payments of interest or principal of more than 30 days; Breach of covenants or conditions; Initiation of bankruptcy proceedings; Any specific information on the client s business (e.g. reflected by cash flow difficulties experienced by the client); Changes in the client s market environment; The general macro-economic situation. Furthermore, the bank may assume that a cluster of credit exposures are impaired when certain events occurred which impact the ability or willingness of some of our clients to service their obligations to the bank. Such events include: Political unrest Significant economic downturn Natural disasters Other external events The bank decide whether such events do in fact lead to a deterioration of loan portfolio quality which makes additional provisioning necessary The bank determines loan loss provisions according to the allocation of credit exposures into three different categories: Portfolio-based provisions in this category, the bank provision all credit exposures (individually significant and individually insignificant) that show no objective signs of impairment. Lump-sum specific provisions loan loss provisions are determined for individually insignificant credit exposures that are impaired based on the number of days in arrears (more than 30 days in arrears) and that are not considered as specific individual impairment. Specific individual impairment provisioning levels are based on the difference of the net present value of a specific individual impairment of future cash-flows on a credit exposure and the current book value of that credit exposure. This approach is chosen for individually significant credit exposures that are impaired and for individually insignificant credit exposures that are impaired based on the number of days in arrears (more than 30 days in arrears) Loans and Impairment Loans and Impairment advances (%) provision (%) advances (%) provision (%) Portfolio-based provisions 96.77% 0.74% 96.99% 0.93% Lump-sum specific provisions 1.84% 91.10% 0.37% 72.10% Specific individual impairment 1.39% 40.21% 2.64% 48.36% Allowance for impairment on loans and advances % 2.95% % 2.45% Loans and advances are summarized as follows: As at December 2011 Neither past due nor impaired 9,212,330 8,572,720 Past due bur not impaired 714, ,551 Impaired 216, ,229 Gross 10,143,651 9,187,500 Allowance for impairment (297,690) (233,412) Net 9,845,961 8,954,088 The total impairment provision for loans and advances is MKD 297,690,000 (2010: MKD 233,412,000). During the year ended 31 December 2010, the Bank s total loans and advances to customers and banks increased by 11.18% (2010: decrease by 9.45%). (a) 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 internal rating system adopted by the Bank: Business loans 7,754,637 6,803,910 Agricultural loans 832, ,289 Housing improvement loans 432, ,017 Consumer loans 85,955 32,725 Other loans 106, ,779 Total 9,212,330 8,572,720

75 FINANCIAL STATEMENTS 75 (b) Loans and advances past due but not impaired Gross amount of loans and advances by class to customers that were past due but not impaired were as follows: in 000 MKD As at December 2011 Past due up Past due Past due Total to 30 days days days Business loans 591,497 50,765 11, ,779 Agricultural loans 26,723 3,854 1,364 31,941 Housing improvement loans 21, ,870 Consumer loans 1, ,537 Other loans 3, ,498 Total 644,532 55,785 14, ,625 in 000 MKD As at December 2010 Past due up Past due Past due Total to 30 days days days Business loans 275,042 22,623 14, ,616 Agricultural loans 20,444 3,741 1,557 25,742 Housing improvement loans 48,886 4,755 2,990 56,631 Consumer loans Other loans 3, ,623 Total 348,507 32,203 19, ,551 (c) Loans and advances individually impaired The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is MKD: 216,696,000 (2010: MKD 214,229,000). The breakdown of the gross amount of individually impaired loans and advances by class, are as follows: Impaired Business loans 182, ,632 Agricultural loans 27,487 16,734 Housing improvement loans 3,185 40,780 Consumer loans Other loans 2,913 6,576 Total 216, ,229 Restructuring of a credit exposure is generally necessitated by economic problems encountered by the client that adversely affect the payment capacity, mostly caused by the significantly changed macro-economic environment in which the bank s clients currently operate. Restructurings follow a thorough, careful and individual analysis of the client s changed payment capacity. The decision to restructure a credit exposure is always taken by a credit committee or arrears committee and aims at full recovery of the credit exposure. If a credit exposure is restructured, amendments are made to the parameters of the loan. Otherwise, these credit exposures for which the terms have been renegotiated would be past due or impaired. According to group policy, only very small credit exposures and/ or short-term credit exposures may be issued without being fully collateralised. The threshold for very small credit exposures in ProCredit Bank Macedonia is 10,000 EUR. Credit exposures with a higher risk profile are always covered with solid collateral, typically through mortgages. As the majority of credit exposures are fixed instalment loans of rather short maturity, the fair value of collateral usually decreases substantially more slowly than the outstanding loan amount, and therefore is not monitored. The collateral can be classified into the following categories: Mortgage 63.3% 63.4% Guarantees 1.1% 4.5% Inventories 30.8% 26.2% Other 4.8% 5.9% Group policy on the treatment of repossessed property requires that all goods obtained due to customers defaults be sold to third parties in order to avoid any conflict of interest arising from the belowmarket valuation of collateral. Also, repossessed property is sold at the highest possible price, typically via public auction, and any remaining balance after the payment of principal, interest and penalty is credited to the customer s account. Most repossessed property consists of land and buildings. A smaller part is composed of inventory and of vehicles and consumer durables (TVs, fridges etc.). The following table presents the value of repossessed property: Real estate 81,614 35,422 Equipment 8,071 14,303 Land 20,088 19,674 Others 3,224 7,879 Total 112,997 77, Credit portfolio risk from customer lending The granularity of the credit exposure portfolio is a highly effective credit risk mitigating factor. The core business of the bank, lending to very small and small enterprises, necessitated a high degree of standardisation in lending processes and ultimately led to a high degree of diversification of these exposures in terms of geographic distribution and economic sectors. Nevertheless, lending to medium-sized enterprises, i.e. larger credit exposures exceeding the threshold of EUR/USD 150,000 constitutes a supplementary area of the bank s business in terms of its overall strategic focus. Most of these clients are dynamically growing enterprises that have been working with the bank for many years. Nonetheless, the higher complexity of these businesses requires an appropriate analysis of the business, the project that is to be financed and any

76 76 ANNUAL REPORT 2011 related parties. A strict division of front and back office functions is applied and requirements for both documentation and collateral are typically more stringent. Overall, the loan portfolio of the group includes 1,931 credit exposures of more than EUR/USD 150,000 and the loan portfolio of the ProCredit Macedonia includes 85 outstanding credit exposures of more then EUR 150,000. in 000 MKD As at December 31, 2011 Business Agricultural Housing Consumer Finance Other leases < 10,000 EUR/USD 1,508, , ,440 58,918 65,957 10,000 to 30,000 EUR/USD 1,858, , ,612 21,057 19,916 30,000 to 150,000 EUR/USD 3,570,976 92,494 97,897 8,108 27,829 >150,000 EUR/USD 1,653,134 23,094 Total 8,590, , ,949 88, ,702 in 000 MKD As at December 31, 2010 Business Agricultural Housing Consumer Finance Other leases < 10,000 EUR/USD 1,358, , ,704 30,693 85,814 10,000 to 30,000 EUR/USD 1,623, , , ,759 30,000 to 150,000 EUR/USD 2,831,049 33, ,161 2,816 25,406 >150,000 EUR/USD 1,453,379 10,965 Total 7,266, , ,428 34, ,979 The structure of the loan portfolio is regularly reviewed by Credit Risk Management Committee in order to identify potential events which could have an impact on large areas of the loan portfolio (common risk factors) and, if necessary, limit the exposure towards certain sectors of the economy. The bank follows a guideline that limits concentration risk in its loan portfolio by ensuring that large credit exposures (those exceeding 10% of regulatory capital) require the approval by the Group Risk Management Committee. No single large credit exposure may exceed 25% of the bank s regulatory capital. Larger credit exposures are particularly well analysed and monitored, both by the responsible employees through regular monitoring activities enabling early detection of risks, and through the regular reviews carried out by the Credit Risk Management Committee of the bank. Full information about any related parties is typically collected prior to lending. All in all, this results in a high portfolio quality and comparatively little need for allowance for individual impairment. Individually significant credit exposures are closely monitored by the Credit Risk Management Committee. For such credit exposures, the committee assesses whether objective evidence of impairment exists, i.e: more than 30 days in arrears delinquencies in contractual payments of interest or principal breach of covenants or conditions initiation of bankruptcy proceedings any specific information on the customer s business (e.g. reflected by cash flow difficulties experienced by the client) changes in the customer s market environment the general economic situation Additionally, the realisable net value of collateral held is taken into account when deciding on the allowance for impairment. For the calculation of the individual impairment a discounted cash flow approach is applied. The individual impairment of credit exposures to customers is as follows: in 000 MKD Gross outstanding Allowance for Net outstanding amount specific impairment amount As at December 2011 Business 125,359 (47,188) 78,171 Agricultural 12,711 (9,013) 3,698 Housing improvement 1,344 (4) 1,340 Other 150 (146) 4 Total 139,564 (56,351) 83,213 in 000 MKD Gross outstanding Allowance for Net outstanding amount specific impairment amount As at December 2010 Business 165,571 (75,180) 90,391 Agricultural 20,778 (10,764) 10,014 Housing improvement 43,698 (25,507) 18,191 Consumer 634 (320) 314 Other 7,608 (4,607) 3,001 Total 238,289 (116,378) 121,911

77 FINANCIAL STATEMENTS 77 Individually significant credit exposures for which there is no need for an individual impairment allowance are covered by portfoliobased impairment allowances. For individually insignificant credit exposures which show objective evidence of impairment, i.e. which are in arrears for more than 30 days, generally a lump-sum approach is applied; the impairment is determined depending on the number of days in arrears. In addition, individual credit exposures which are regarded as insignificant, or groups of individually insignificant credit exposures, may be classified as impaired if events, such as political unrest, a significant economic downturn, a natural disaster or other external events occur in the country. For all unimpaired credit exposures a portfolio-based impairment is calculated (see also note (10)). Credit risk arising from loans and advances to customers and investment securities is concentrated in Macedonia. Standard & Poor s Ratings Services assigned its sovereign foreign and local currency rating of BB to the Republic of Macedonia. Loans and advances to banks are summarized as follows: As at December 2011 Neither past due nor impaired 709, ,518 Past due bur not impaired Impaired Gross 709, ,518 Allowance for impairment Net 709, ,518 The counterparty and issuer risks are managed according to the ProCredit group s Counterparty Risk Management Policy (incl. Issuer Risk), which describes the counterparty/issuer selection and the limit setting process, as well as by the Group Treasury Policy, which specifies the set of permissible transactions and rules for their processing. As a matter of principle, only large international banks of systemic importance and, for local currency business, local banks with a good reputation and financial standing are eligible counterparties. As a general rule, the bank applies limits of up to 10% of its regulatory capital on exposures to banking groups in non-oecd countries and up to 25% on those in OECD countries. Higher limits are subject to approval by the Group ALCO. The bank ensures through its ALCO that every counterpart is approved, including a limit for the maximum exposure, based on a thorough analysis, typically performed by the risk management department in collaboration with the treasury department. Group policy forbids the bank to conduct any speculative trading activities. However, for the purpose of investing its liquidity reserve, the bank is allowed to buy and hold securities (T-bills and State bonds). The inherent issuer risk is managed by the provisions of the bank s conservative Treasury Policy, which is compliant to the ProCredit Group Treasury Policy. Among other requirements, the policy stipulates that the securities should preferably be issued by the government or central bank of the country of operation, or by sovereigns or international and/or multinational institutions with very high credit ratings (international rating of AA- or better). Facts and figures concerning counterparty and issuer risk 54. Financial risks 1. Counterparty and issuer risk Conceptual risk management framework The objective of counterparty and issuer risk management is to prevent the bank from incurring losses caused by the unwillingness or inability of a financial counterparty (e.g. a commercial bank) or issuer to fulfil its obligations towards the bank. This type of risk is further divided into: principal risk: the risk of losing the amount invested due to the counterparty s failure to repay the principal in full on time replacement risk: the risk of loss of an amount equal to the incurred cost of replacing an outstanding deal with an equivalent one on the market settlement risk: the risk of loss due to the failure of a counterparty to honour its obligation to deliver assets as contractually agreed issuer risk: the probability of loss resulting from the default and insolvency of the issuer of a security The bank incurs counterparty and issuer risk for the following reasons: The main reason for incurring counterparty and issuer risk is to keep liquid assets for liquidity risk management purposes, i.e. as a reserve for times of potential stress. These funds are held as cash in commercial banks or central bank accounts, as interbank placements, and as securities. As mentioned above, a substantial part of the bank s exposure consists of the mandatory reserve required by the central bank and held in a specific central bank account. Central bank balances, including the mandatory reserve, are not subject to limits. Finally, financial markets provide instruments to manage different types of risks such as currency, interest rate and liquidity risk. The bank is solely allowed to use these instruments for risk management purposes. A precondition for interest rate swaps is furthermore approval and close monitoring by the risk management bodies of the ProCredit group. As a general principle, ProCredit banks are not allowed to use these instruments for speculative purposes. The following table provides an overview of the types of counterparts and issuers with whom the bank concludes transactions. Counterparty and issuer risks evolve especially from the bank s need to invest liquidity reserve, to conclude foreign exchange transactions, or to buy protection on specific risk positions. The liquidity is placed in the interbank market with short maturities, typically up to three months. Foreign exchange transactions are also concluded with short maturities, typically up to two days.. Furthermore, as a result of the bank s strong efforts to finance its lending activities with retail and wholesale deposits, there is also an significant exposure towards the central bank. This is because the central bank requires banks operating in its territory to hold a mandatory reserve in a central bank account, the size of which depends on the amount of deposits taken from customers or other funds used to fund the bank s operations.

78 78 ANNUAL REPORT 2011 in 000 MKD in % in % Banking groups 709, , OECD banks 685, , Non-OECD banks 23, , Central banks 1,713, ,801, Mandatory reserve 1,243, ,092, Other exposures 469, , Governments 56, , Total 2,479, ,434, Interbank placements, interbank loans, FX transactions and derivative transactions are transactions with banks which are subdivided into those based in OECD countries and those in non-oecd countries. The total exposure to banks increased in 2011 by EUR 2.2 m and amounted to 28.6% of the total counterparty and issuer risk exposure. The exposure is distributed across 8 OECD and 8 non- OECD domestic banks and ProCredit Group banks. The exposure to the central bank is primarily related to the mandatory reserve requirement and makes up the largest share of the bank s counterparty and issuer exposure. The other exposure to the central bank relates to cash accounts and T-bills/deposits issued by the central bank. 2.3% of the bank s counterparty and issuer exposure is accounted for by investments in the domestic government s securities, while 18.9% is related to investments in T-bills issued by the Central Bank. As governments may also have political influence on their central banks, which are responsible for providing local currency, the risk that a government will default on local currency debt is perceived to be lower than the risk of default on foreign currency debt. The distribution of the central bank and government exposures across currencies can be seen from following table: in 000 MKD LOC EUR USD Other Total Central banks 1,031, ,739 1,713,225 Mandatory reserve 562, ,739 1,243,986 Other exposures 469, ,239 Governments 56,548 56,548 The following table provides an overview of how the bank s counterparty and issuer risk is broken down by product. in 000 MKD in % in % Cash Interbank placements 709, , Interbank loan exposure Securities 525, , Mandatory Reserve 1,243, ,092, Derivatives IRS FX swaps Repo-Transactions FX exposure Other Total 2,479, ,434, * incl. guarantees and unused committed credit lines (off-balance sheet items) The table below shows the average weighted maturity of the bank s counterparty and issuer risk exposures, excluding cash, mandatory reserve and similar items which cannot be categorised in this way. The maturity of the counterparty and issuer risk exposure is up to three months for most product types. The longest average maturity for a product type is 48 months and relates to securities - Eurobond. As securities tend to be issued with maturities above two years, the weighted average maturity of these products is higher compared to the other products. in 000 MKD Average* Maturity (in months) Deposits 278, Securities 525, * weighted by exposure ** money-market funds, repo transactions, interbank guarantees Given that the exposure is diversified across 20 counterparties, the average maturity of the bank s counterparty and issuer risks is low, the bank considers its counterparty and issuer risk to be low.

79 FINANCIAL STATEMENTS Foreign currency risk Conceptual risk management framework The assets and liabilities of the bank are denominated in more than one currency. If the assets and liabilities in one currency do not match, the bank has an open currency position (OCP) and is exposed to potentially unfavourable changes in exchange rates. Due to the still developing financial market, a considerable part of private savings in Macedonia is held in foreign currency (mainly EUR). Also, loans in foreign currency available at (nominally) lower interest rates and with longer maturities still play an important role in the financing of many of the country s businesses. As a result, foreign currencies play a major role for the bank. Currency risk management is guided by the Group Foreign Currency Risk Management Policy. This policy was first implemented at the bank in 2009 and updated in Its adherence to this policy is constantly monitored by a market risk unit at group level, and amendments as well as exceptions to this policy are decided by the Group ALCO or Risk Management Committee. The bank s treasury department is responsible for continuously monitoring the developments of exchange rates and foreign currency markets. The treasury department also manages the currency positions of the bank on a daily basis. As a general principle, all currency positions should be closed at end-of-day; long or short positions for speculative purposes are not permitted.. The bank s foreign currency exposure is monitored and controlled on a daily basis by the bank s Risk management. Developments in the foreign exchange markets and the currency positions are regularly reported to the bank s ALCO, which is authorised to take strategic decisions with regard to treasury activities. In cases where exceptions to group policy may be needed or violations to group limits may have occurred, the bank s risk management department reports to the Group ALCO or Risk Management Committee and proposes appropriate measures. The bank aims to close currency positions and ensures that an open currency position remains within the limits at all times. For the purpose of currency risk management the bank has established two levels of control: early warning indicators and limits. In cases where the positions cannot be brought back below 5% of the regulatory capital for a single currency, or 7.5% for the aggregate of all currencies, the bank s ALCO and the Group ALCO have to be informed and appropriate measures taken. This mechanism helps to ensure that the bank s total OCP does not exceed 10% of regulatory capital. Exceptions from the limit or strategic positions are subject to approval by the Group ALCO or Risk Management Committee. Facts and figures concerning foreign currency risk As can be seen from the graph, the bank s OCPs were within the aforementioned limits at all times during 2011, except once by 0.98% or by EUR 0.3 million. The reporting trigger was exceeded 4 times max by EUR 1.2 million. The following table shows the distribution of the bank s balance sheet items across its material operating currencies, which are USD and EUR. Indexed loans and deposits are treated as foreign currency items for this purpose. in 000 MKD EUR USD MKD Other Total As at December 31, 2011 currencies Assets Cash and cash equivalents 780,223 18,175 1,324,380 28,937 2,151,715 Loans and advances to banks 291, , , ,430 Available-for-sale financial assets 56,548 56,548 Loans and advances to customers 6,289,067 49,100 3,507,794 9,845,961 of which: indexed to EUR / USD 889, ,059 Intangible assets 67,093 67,093 Property, plant and equipment 374, ,945 Tax assets Other assets 8, , ,259 Total assets 7,425, ,676 5,440, ,125 13,380,260 Open forward position (assets) Liabilities Liabilities to banks 2, ,527 4,141 Liabilities to customers 5,043, ,434 3,423,028 92,870 8,963,260 of which: indexed to EUR / USD 70,202 70,202 Borrowings 2,235, ,998 2,489,554 Provisions 1, ,109 10,262 Other liabilities 3,479 15,423 18,902 Subordinated debt 601,340 (1,779) 599,561 Hybrid capital 195, ,149 Total liabilities 8,083, ,095 3,700,306 92,870 12,280,829 Open forward position (liabilities) Net position (657,831) 581 1,740,426 16,255 1,099,431 Credit commitments 350,441 65,432 1,018,831 1,434,704

80 80 ANNUAL REPORT 2011 in 000 MKD EUR USD MKD Other Total As at December 31, 2010 currencies Assets Cash and cash equivalents 705,863 20,549 1,437,711 25,341 2,189,464 Loans and advances to banks 200, ,869 1,092 97, ,518 Available-for-sale financial assets 64,413 (30) 64,383 Loans and advances to customers 6,545,220 53,027 2,355,841 8,954,088 of which: indexed to EUR / USD 2,786,405 2,786,405 Intangible assets 66,677 66,677 Property, plant and equipment 389, ,805 Tax assets Other assets 8, , ,221 Total assets 7,524, ,795 4,371, ,393 12,368,558 Open forward position (assets) Liabilities Liabilities to banks 1, ,263 3,292 Liabilities to customers 4,733, ,353 3,436, ,382 8,621,818 of which: indexed to EUR / USD 101, ,403 Borrowings 1,725, ,836 1,876,956 Tax liabilities Provisions 1,366 7,340 8,706 Other liabilities 1,809 22, ,327 Subordinated debt 599, ,215 Hybrid capital 194, ,764 Total liabilities 7,257, ,508 3,619, ,384 11,329,416 Open forward position (liabilities) Net position 266, ,986 20,009 1,039,142 Credit commitments 182,544 31, ,333 1,008,615 To assess the bank s currency risk for risk-bearing capacity, a Value at Risk (VaR) analysis is performed on a monthly basis. The holding period is determined to be one year and the look-back period is five years. Correlation effects are included in the analysis by taking into account the historical parallel movements of each currency in which the bank has significant currency positions. The results are shown in the following table: in 000 MKD As of December 31, % confidence Maximum loss (VaR) (1,507) Average loss in case confidence interval is exceeded (1,727) Overall, in 2011 currency risk was low as the bank managed its currency positions very closely and kept them as closed as possible. The long EUR position incurred in the first half of 2011 was in order to lowering excess liquidity in local currency and at the same time, achieving compliance with the liquidity indicator in foreign currency requested by Central Bank. 3. Interest rate risk Conceptual risk management framework Interest rate risk arises from structural differences between the maturities of assets and those of liabilities, e.g. if a four-year fixed interest rate loan is funded with a six-month term deposit. This would expose the bank to the risk that the funding costs will increase before the maturity date of the loan, thus reducing the bank s margin on the loan. Most of the bank s loans are offered at fixed interest rates. The average maturity of loans typically exceeds that of customer deposits, thus exposing the bank to interest rate risk as described above. Given that financial instruments to mitigate interest rate risks (hedges) are only available for hard currencies such as EUR and USD; this requires the bank to closely monitor the interest rate risks. The bank s approach to measuring and managing interest rate risk is guided by the Group Interest Rate Risk Management Policy. The main indicator for managing interest rate risk measures the potential impact on the economic value of all assets and liabilities. The indicator analyses the potential loss that the bank would incur in the event of very unfavourable movements (shocks) of the interest rates on assets and liabilities. For EUR or USD, a parallel shift of the interest rate curve by +/- 200 bps is assumed. For the local currency, the definition of a shock is derived from historic interest rate volatilities over the last five years. The potential economic impact on the bank s balance sheet must not exceed 10% of its regulatory capital for all currencies. A reporting trigger is set at 5% per currency, providing an early warning signal. The impact on the interest earnings in the next three months is also measured and a reporting trigger of 1% of the regulatory capital is set. With the above mentioned shocks as of the potential impact was 0.6% meaning if the interest rates fell with the mentioned percentages the decline of the interest earnings would amount MKD thousands. Also regularly analysed is the potential impact of interest rate risk on the bank s expected earnings over the next three months. This measure indicates how the income statement may be influenced by interest rate risk under a short-term perspective. Deviations from the Group Interest Rate Risk Policy and violations of interest rate limits are subject to approval by the Group Risk Management Committee.

81 FINANCIAL STATEMENTS 81 Interest rate risk is regularly discussed by the bank s Risk Management Committee (ALCO). The indicators are also reported to the Group Risk Management Committee. In order to limit interest rate risk, the bank aims to align the maturities of its balance sheet items which generate interest earnings and interest expenses. This is done by increasingly offering variable interest rate loans and contracting fixed-rate long-term funding. Facts and figures concerning interest rate risk The ProCredit group s main interest rate risk indicator is the economic value impact indicator. It measures the impact of interest rate changes on all interest rate-sensitive on- and off-balance sheet items and quantifies the loss in value of the bank given certain changes of interest rates. As described above, the calculation of the economic value impact indicator is based on different parallel shifts of the interest rate curves. For EUR and USD a shift of +/- 200 bps is applied; for the local currency the shift is defined in terms of a historical worst case (+/- 454 bps). In addition to the long-term analysis of the economic value impact indicator, the bank analyses the short-term interest rate risk. The measure shown in the graph below quantifies the potential decline of interest rate earnings within the next three months. A reporting trigger has been set for this measure which assumes that the interest earnings impact within the next three months should not exceed 1% of the bank s regulatory capital. As the following graph shows, short-term interest rate risk was always below the reporting trigger during Overall the bank considers the short-term interest rate risk to be low. Overall, the bank s interest rate risk is assessed to be low. in 000 MKD 31 December 2011 Up to More than Non-interest Total month months months months years 5 years bearing Assets Cash and cash equivalents 1,004, , ,642 2,151,7154 Loans and advances to banks 210, ,138 3,875 6, , ,430 Financial assets at fair value through profit or loss Available-for-sale financial assets 56, ,548 Loans and advances to customers 600, ,241 1,478,371 2,050,805 4,361, ,185 19,591 10,143,651 Allowance for losses on loans and advances to customers (297,690) (297,690) Property, plant and equipment 374, ,945 Intangible assets 67,093 67,093 Current tax assets Other assets 174, ,259 Total assets 1,815,324 1,176,379 1,482,246 2,057,263 4,418,163 1,327,924 1,102,961 13,380,260 Liabilities Liabilities to banks 4,141 4,141 Financial liabilities at fair value through profit or loss Liabilities to customers 2,449, , ,989 2,150,186 1,422,468 8,017 1,368,651 8,963,260 Borrowings 288, , , ,744 1,236, ,069 13,852 2,489,554 Debt securities Other liabilities 18,902 18,902 Provisions 10,262 10,262 Current Tax liabilities Subordinated debt 246, ,278 15, ,561 Hybrid capital 184,515 10, ,149 Total liabilities 2,738,337 1,147,101 1,059,605 2,519,445 2,905, ,364 1,441,705 12,280,829 Interest sensitivity gap (923,013) 29, ,641 (462,182) 1,512, ,560 (338,744) 1,099,431 Off statement of financial position 34, , , ,035 30, ,455 1,434,704 in 000 MKD 31 December 2010 Total assets 2,015,228 1,022,505 1,796,308 1,845,476 3,950, , ,314 12,368,558 Total liabilities 1,754,798 1,509, ,659 2,875,019 1,657, ,875 2,156,604 11,329,416 Interest sensitivity gap 260,430 (487,177) 1,026,649 (1,029,543) 2,292, ,664 (1,202,290) 1,039,142 Off statement of financial position 22,686 87, , ,403 13, ,405 1,008,616

82 82 ANNUAL REPORT Liquidity risk Conceptual risk management framework The bank s liquidity risk management (LRM) system is tailored to the specific characteristics of the bank. On the one hand, the bank was founded as a lending institution and financial intermediary for ordinary people. Consequently, its loan portfolio is the largest single component on the asset side, and is primarily funded through locally mobilised deposits. On the other hand, the loan portfolio is characterised by a large number of exposures to small businesses and is therefore highly diversified. The majority of loans are disbursed as instalment term loans and the default rate is low. Therefore cash flows are highly predictable. Since deposits are the primary source of financing for loan portfolio growth, the bank s dependency on capital market instruments is low. All of these factors justify the use of a relatively simple and straightforward LRM system. Liquidity risk in the narrowest sense (risk of insolvency) is the danger that the bank will no longer be able to meet its current and future payment obligations in full, or in a timely manner. Liquidity risk in a broader sense (funding risk) is the danger that additional funding can no longer be obtained, or can only be obtained at increased market interest rates. The bank s ALCO determines the liquidity strategy of the bank and sets the liquidity risk limits. The treasury department manages the bank s liquidity on a daily basis and is responsible for the execution of the ALCO s decisions. Compliance with strategies, policies and limits are constantly monitored by the treasury back office and risk management department. In addition to the requirements set by the local regulatory authorities, the standards that the bank applies in this area are guided by the Group Liquidity Risk Management Policy and the Group Treasury Policy. Both policies were first implemented by the bank in 2009 and updated in Limit breaches and exceptions to these group policies are subject to decisions of the Group ALCO or Risk Management Committee. Treasury manages liquidity on a daily level using a cash flow. This tool is designed to provide a realistic picture of the future liquidity situation. It includes assumptions about deposit and loan developments and helps to forecast liquidity risk indicators. The key tool for measuring liquidity risk is a forward-looking liquidity gap analysis, which shows the contractual maturity structure of the assets and liabilities and estimates future funding needs based on certain assumptions. Starting with the estimation of the future liquidity in a normal financial environment, the assumptions are increasingly tightened in order to analyse the bank s liquidity situation in a worst-case scenario (stress test). Based on the gap analysis, a set of key liquidity risk indicators and early warning indicators are calculated on at least a monthly basis and are closely monitored. The main indicator of short-term liquidity is the sufficient liquidity indicator (SLI), which compares the amounts of assets available and liabilities assumed to be due within the next 30 days. It must not fall below 1. This implies that the bank always has sufficient funds to be able to repay the liabilities simulated to be due within the next 30 days. This is complemented by the early warning indicators, foremost the highly liquid assets indicator, which relates highly liquid assets to customer deposits. The bank also analyses its liquidity situation from a more structural perspective, taking into account the liquidity gaps of the later time buckets and additional sources of potential liquidity. The liquidity position also takes into account credit lines which can be drawn by the bank with some time delay, and other assets which take some time to liquidate. In addition to prescribing the close monitoring of these early warning indicators, the Group Liquidity Risk Management Policy also defines reporting triggers. If the highly liquid asset indicator drops below 20%, if the short-term liquidity position becomes negative, or if the depositor concentration rises above 20%, the bank s ALCO and the Group ALCO or Group Risk Management Committee must be involved in decisions on appropriate measures. In order to safeguard the liquidity of the bank even in stress situations, the potential liquidity needs in different scenarios are determined. The result is analysed and on this basis the bank s liquidity reserve target is determined by the ALCO. The results of these stress tests are also used to determine liquidity standby lines provided by ProCredit Holding to the bank if necessary. The bank also aims to diversify its funding sources. Depositor concentrations are monitored in order to avoid dependencies on a few large depositors. According to the bank s internal guidelines a significant depositor concentration exists if the 10 largest depositors exceed 20% of total customer deposits. This serves as an early warning signal and requires the reasons and mitigating measures to be reported to the bank s ALCO and the Group Risk Management Committee. The bank also minimises its dependency on the interbank market. The ProCredit group s policies stipulate that the total amount of interbank liabilities may not exceed 40% of its available lines and overnight funding may not exceed 4% of total liabilities. Higher limits need to be approved by Group ALCO. Facts and figures concerning liquidity risk The following table shows the liquidity gap analysis, i.e. the (undiscounted) cash flows of the financial assets and financial liabilities of the bank according to their remaining contractual maturities. The remaining contractual maturity is defined as the period between the balance sheet date and the contractually agreed due date of the asset or liability, or the due date of a partial payment under the contract for an asset or liability.

83 FINANCIAL STATEMENTS 83 in 000 MKD Up to More than Total As at December 31, 2011 month months months months years 5 years Liabilities Liabilities to banks 4,141 4,141 Liabilities to customers 3,712, , ,991 2,199,288 1,481,026 14,200 8,982,612 Borrowings 126,479 29, , ,641 1,744, ,584 2,496,938 Debt securities Other liabilities 18,902 18,902 Provisions 10,262 10,262 Subordinated debt 15, , ,561 Hybrid capital 10, , ,149 Total liabilities (contractual maturity dates) 3,854, , ,856 2,542,929 3,410, ,082 12,307,565 Total assets (contractual maturity dates) 2,588,473 1,100,700 1,159,778 2,246,571 4,705,470 1,512,457 13,313,449 Net liquidity gap (1,265,702) 219, ,922 (296,357) 1,295, ,375 1,005,884 in 000 MKD Up to More than Total As at December 31, 2010 month months months months years 5 years Liabilities Liabilities to banks 3,293 3,293 Liabilities to customers 3,282, , ,954 2,131,917 1,502,746 17,229 8,657,987 Borrowings 258, ,130 11, , ,775 65,936 1,877,485 Debt securities Other liabilities 3, , ,327 Provisions 8,706 8,706 Deferred tax liabilities Subordinated debt 9,003 5, , ,215 Hybrid capital 10, , ,764 Total liabilities (contractual maturity dates) 3,547,253 1,107, ,981 2,873,487 2,364, ,463 11,366,115 Total assets (contractual maturity dates) 2,533, ,383 1,007,002 2,006,999 4,594,805 1,269,691 12,202,641 Net liquidity gap (1,013,492) (317,118) 201,021 (866,488) 2,230, , ,526 Off balance sheet items in 000 MKD up to 1 year 1-5 year Total As at December 31, 2011 Guarantees 528, , ,798 Letters of credit 41,658 41,658 Commitments to extend credit (loan commitment) 648, ,248 Total 1,218, ,437 1,434,704 in 000 MKD up to 1 year 1-5 year Total As at December 31, 2010 Guarantees 344, , ,339 Letters of credit 12,066 12,066 Commitments to extend credit (loan commitment) 488, ,210 Total 844, ,882 1,008,615 Due to the fact that not all cash flows will occur in the future as specified within the contracts, the bank applies assumptions, especially regarding deposit withdrawals. These assumptions are very conservative. The core assumptions used for the purposes of calculating the liquidity indicator are as follows: 50% of interbank liabilities contractually due at sight will be withdrawn in the next month, another 50% will be withdrawn within the following three months; 20% of customer deposits contractually due at sight will be withdrawn within the next month, 80% will be withdrawn later; 5% of exposures guaranteed by the bank will require a payment within the next month; 20% of credit lines which the bank has committed to its customers, but which are currently undrawn, will be drawn within the next month.

84 84 ANNUAL REPORT 2011 The goal is to always have sufficient liquidity in order to serve all expected liabilities within the next month. From a technical point of view this implies that the bank s available assets should always exceed the expected liabilities, as calculated by applying the above assumptions. The following table summarises the results of this approach to measuring liquidity risk and shows the distribution of liquidityrelevant positions across certain time buckets. in 000 MKD Up to More than Total As at December 31, 2011 month months months months 1 year Assets Cash 438, ,490 Mandatory reserves with central bank 1,217,411 1,217,411 Other central bank balances (excl. MR) 26,575 26,575 Nostro accounts 423, ,254 Unused irrevocable and unconditional credit commitments 615, ,050 T-bills & marketable securities 469,239 56, ,550 Placements with PC banks (incl. PCH) 49,204 49,204 Placements with external banks 71, ,139 3,875 13,588 7, ,034 Loans and advances to customers 539, ,828 1,147,262 2,095,359 5,442,696 10,074,856 Total Assets 3,801,032 1,039,967 1,151,137 2,108,947 5,555,341 13,656,424 Liabilities Current liabilities to banks (due daily) 2,097 2,097 4,194 Current liabilities to customers (due daily) 636, , , ,028 2,067,366 3,180,563 Contingent liabilities from guarantees 38,306 38,306 Unused irrevocable credit commitments 129, ,687 Liabilities to PC banks (incl. PCH) 76,294 76,294 Liabilities to external banks 114, , , ,409 1,357,179 Liabilities to IFIs 1,097 27, , ,589 1,124,002 Liabilities to customers (TDAs) 380, , ,640 2,095,916 1,552,811 5,574,340 Subordinated debt 768, ,813 Total Liabilities 1,378, ,457 1,026,142 2,559,445 6,308,988 12,253,378 Expected liquidity gap 2,422,686 2,482,196 2,607,191 2,156,693 1,403,046 Excess from previous band 2,422,686 2,482,196 2,607,191 2,156,693 Sufficient Liquidity Indicator 2.8 The expected liquidity gap quantifies the potential liquidity needs within a certain time period if it has a negative value, and it shows a potential excess liquidity if it has a positive one. This calculation includes positive excess values from the previous time buckets. On an operational level, the gap report is broken down into the most important currencies (Hard - foreign and the local currency). In order to ensure that the bank has a sufficient level of funds in the event that its customers suddenly wish to withdraw their deposits, the bank monitors the relation of highly liquid assets to customer deposits. As a general rule the bank is always prepared to pay out at least 20% of all customer deposits. These amounts are held in highly liquid assets, which can quickly be converted into cash. As mentioned above, the bank also performs stress test calculations in order to safeguard the liquidity of the bank. The result is analysed and the bank s liquidity reserve target is determined by the bank s ALCO. The results of the stress tests are also used to determine liquidity standby lines provided by ProCredit Holding to the bank if necessary. As of December 31, 2011 the bank had no liquidity gap in the first time bucket according to the internal worstcase stress test calculation. The bank aims to rely primarily on customer deposits for its funding. This source is supplemented by funding received from international financial institutions (IFIs), such as the EFSE, MDBP, KfW, CEB, SNS which provide earmarked funds under targeted financing programmes (e.g. for lending to SMEs). In order to further diversify its sources of funds, the bank also maintains relationships with other banks, especially for short-term liquidity lines. In addition, ProCredit Holding provides short- and long-term funding. In order to maintain a high level of diversification among its customer deposits, the bank has implemented a concentration trigger, which aims at ensuring that the ten largest customer deposits do not exceed 20% of total deposits. The concentration of the bank s deposit base remained below this reporting trigger during Overall the bank considers its funding sources to be sufficiently diversified, especially given that the bulk of the bank s funds are provided by a large number of customer deposits. The figures also reveal that because of the excess liquidity in 2011, exposures to IFIs and banks have been reduced during the year.

85 FINANCIAL STATEMENTS 85 G. Additional Notes 55. Fair value of financial instruments The following table gives an overview of the carrying amounts and fair values of the financial assets and liabilities according to the classes of financial instruments, defined in accordance with the business of the bank. in 000 MKD 31 December December 2010 Carrying value Fair value Carrying value Fair value Financial assets Cash 2,151,715 2,151,715 2,189,464 2,189,464 Loans and advances to banks 709, , , ,439 Available-for-sale financial assets 56,548 56,548 64,383 64,383 Loans and advances to customers (net of allowance) 9,845,961 9,878,336 8,954,088 8,950,587 Total 12,763,654 12,795,851 11,782,453 11,778,873 Financial liabilities Liabilities to banks 4,141 4,141 3,292 3,292 Liabilities to customers 8,963,260 8,711,094 8,621,818 8,435,351 Borrowings 2,489,554 2,320,275 1,876,956 1,714,586 Subordinated debt 599, , , ,443 Hybrid capital 195, , , ,576 Total 12,251,665 11,762,414 11,296,045 10,922,248 The fair value of claims and term deposits at variable rates of interest is identical to their carrying amounts. The fair value of claims and liabilities at fixed rates of interest was determined using the discounted cash flow method, using money market interest rates for financial instruments with similar default risks and similar remaining terms to maturity. The estimated fair value of the receivables corresponds to the discounted amount of the estimated expected future cash flows, i.e. net of allowance for impairment. The expected cash flows are discounted to fair value at the current market interest rates of the respective markets. The fair values of financial instruments which are carried at fair value are observable market prices in active markets (see also note (6)). The following table shows the distribution of fair values over the different fair value hierarchies: in 000 MKD of which Total fair value Level 1 Level 2 Level 3 Financial assets Available-for-sale financial assets 56,548 56,548 Total 56,548 56,548 Financial liabilities Financial liabilities at fair value through profit or loss Total 56. Pledged assets in 000 MKD Pledged asset Related liability Pledged asset Related liability Loans and advances to banks 701, ,143 Available-for-sale financial assets 56,548 58,263 Loans and advances to customers 423,196 10,092,892 79,188 9,076,393 Others 163, ,576 Total 423,196 11,014,989 79,188 9,809,375 The major part of this item consists of assets which were pledged on a portfolio basis against funds which the bankobtained at market rates from international financial institutions. The pledges would be exercised in case of default of interest or principal payment on the respective loans; the maturities of the pledges are the same as the maturities of the respective related liabilities.

86 86 ANNUAL REPORT Contingent liabilities and commitments Guarantees and stand-by letters of credit 751, ,286 Documentary and commercial letters of credit 34,528 5,119 Credit commitments (irrevocable loan commitments) 648, ,210 Total 1,434,704 1,008,615 The above table discloses the nominal principal amounts of contingent liabilities, commitments and guarantees, i.e. the amounts at risk, should contracts be fully drawn upon and clients default. It is expected that a significant portion of guarantees and commitments will expire without being drawn upon; therefore the total of the contractual amounts is not representative of future liquidity requirements. An estimate of amount and timing of outflow is not practicable. 58. Related party transactions The ultimate parent company of the bank is ProCredit Holding AG & Co. KGaA.The bank s related parties include the parent, fellow subsidiaries, key management personnel, close family members of key management personnel and entities which are controlled or significantly influenced by key management personnel or their close family members. Transactions of bank with ProCredit group companies According to the group s strategy, the holding company acts as an additional provider of funds (including subordinated debt) for its subsidiaries. All transactions with group companies are performed substantially on the same terms, including interest rates and security, as for transactions of a similar nature with third party counterparts. Net income of the bank from transactions with ProCredit group companies Transactions with key management personnel, their close family members and entities which are controlled by them Net income of the bank from transactions with Key management Income Expense (74) (59) Net income Outstanding balances of the to key management personnel, and their close family members in 000 MKD (as at year-end) Liabilities Liabilities to customers 2,459 2,234 Other liabilities The transactions leading to the above balances were made in the ordinary course of business and on substantially the same terms as for comparable transactions with entities or persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of payment defaults nor did they comprise other unfavourable features. 59. Management compensation During the reporting period, total compensation paid to the management of the bank amounted to: in 000 MKD (as at year-end) short-term benefits 8,555 6,963 Total 8,555 6,963 The members of the Supervisory Board do not receive any compensation from the bank. Income 4,498 5,090 Expense (142,618) (106,998) Net income (138,120) (101,908) Outstanding balances of the bank with ProCredit group companies in 000 MKD (as at year-end) Assets Loans and advances to banks 58,392 77,797 Other Assets 6,641 Liabilities Liabilities to customers 73,208 59,354 Other liabilities 1, Borrowings 9, ,149 Subordinated debt 344, ,192 Hybrid debt 195, , Significant post-balance sheet events The new emission of shares in total value of EUR was approved on the General Assembly of Shareholders held on According the decision, it is stipulated that it will be enforced within 6 months of its adoption. The shares were paid in full by the shareholders in March 2012 meaning that although the decision is adopted in 2011, it will not have effect in Out of the total value of new shares, PCH purchases 87.5% and EBRD 12.5% meaning that the shareholders proportion in the Bank s core capital remains the same. Off-balance sheet positions Guarantees 615,050

87 FINANCIAL STATEMENTS Exchange rates For the balance sheet and the income statement the following exchange rates were applied: (amount of foreign currency for 1 MKD) Currency code Country At balance Average for At balance Average for sheet date the year sheet date the year MKD Macedonia Address and general information ProCredit Bank A.D.,Skopje has been registered as a Stock Company domiciled in Republic of Macedonia. The address of its registered office is as follows: Bul Jane Sandanski 109a 1000 Skopje Republic of Macedonia The names of the members of Managing Board of the Bank serving during the financial year and to the date of this report are as follows: Jovanka Joleska Popovska Valentina Trajceva-Nikovska Emilija Spirovska Ilir Aliu General Manager Chief Financial Officer Chief Risk Management Officer Chief Operating Officer