Annual Report. Annual Report 2009 Albania

Transcription

1 Annual Report 2009 Albania Annual Report 2009

2 2 Annual Report 2009 Key Figures EUR 000 ALL 000 Change ALL Balance Sheet Data Total Assets 298, ,417 41,231,390 30,135, % Gross Loan Portfolio 152, ,041 21,096,735 16,594, % Business Loan Portfolio 118,689 96,375 16,374,326 11,931, % EUR < 10,000 34,651 39,890 4,780,440 4,938, % EUR > 10,000 < 50,000 34,788 30,550 4,799,343 3,782, % EUR > 50,000 < 150,000 19,127 14,088 2,638,805 1,744, % EUR > 150,000 30,123 11,848 4,155,738 1,466, % Agricultural Loan Portfolio 10,643 11,907 1,468,244 1,474, % Housing Improvement Loan Portfolio 14,317 13,505 1,975,225 1,671, % Other 9,270 12,253 1,278,941 1,516, % Allowance for Impairment on Loans (3,768) (4,603) (519,881) (569,816) -8.8% Net Loan Portfolio 149, ,438 20,576,854 16,024, % Liabilities to Customers 244, ,825 33,781,272 25,233, % Liabilities to Banks and Financial Institutions (excluding PCH) 21,826 8,137 3,011,114 1,007, % Shareholders Equity 22,051 22,845 3,042,140 2,828, % Income Statement Operating Income 19,006 20,258 2,509,542 2,487, % Operating Expenses 17,440 17,229 2,302,756 2,115, % Operating Profit Before Tax 1,567 3, , , % Net Profit 1,491 2, , , % Key Ratios Cost/Income Ratio 88.5% 82.8% ROE 6.6% 12.5% Capital Ratio 15.0% 15.6% Operational Statistics Number of Loans Outstanding 39,443 40, % Number of Loans Disbursed within the Year 21,058 26, % Number of Business and Agricultural Loans Outstanding 25,894 26, % Number of Deposit Accounts 192, , % Number of Staff % Number of Branches and Outlets % Exchange rate as of December 31: 2009: EUR 1 = ALL : EUR 1 = ALL Average exchange rate for the period: 2009: EUR 1 = ALL : EUR 1 = ALL

3 Contents 3 Mission Statement 4 Letter from Board of Directors 5 The Bank and its Shareholders 6 Special Feature 8 Management Business Review 10 Risk Management 20 Branch Network 24 Organisation, Staff and Staff Development 26 Business Ethics and Environmental Standards 29 The ProCredit Group: Responsible Banks for Small Businesses and Ordinary People 30 ProCredit in Eastern Europe 34 Our Clients 38 Financial Statements 42 Contact Addresses 76

4 4 Annual Report 2009 Mission Statement ProCredit Bank Albania is a development-oriented full-service bank. We offer excellent customer service and a wide range of banking products. In our credit operations, we focus on lending to very small, small and medium-sized enterprises, as we are convinced that these businesses create the largest number of jobs and make a vital contribution to the economies in which they operate. Unlike other banks, our bank does not promote consumer loans. Instead we focus on responsible banking, by building a savings culture and long-term partnerships with our customers. Our shareholders expect a sustainable return on investment, but are not primarily interested in short-term profit maximisation. We invest extensively in the training of our staff in order to create an enjoyable and efficient working atmosphere, and to provide the friendliest and most competent service possible for our customers.

5 Letter from the Board of Directors 5 Letter from Board of Directors 2009 was a very significant year for ProCredit Bank Albania. In September we celebrated the tenth anniversary of the award of our banking licence in our newly opened head office building together with clients and staff. This important event highlighted our impressive track record in the Albanian banking sector and our long-term commitment to the country. The bank achieved record annual deposit growth of 33.9% - to a total of ALL 33.8 billion (EUR 245 million) despite falling deposit levels overall in Albania. In addition, the gross loan portfolio increased by 27.1%, to ALL 21.1 billion (EUR 153 million). Our persistence in the search for optimal ways of supporting small and very small enterprises helped us to maintain a high level of customer satisfaction and loyalty among our business clients. Moreover, in 2009 we were still the only bank in Albania to provide financing to the agricultural sector on a significant scale. We opened eight new offices, bringing our total number of branches and agencies to 42. Given our countrywide outreach, we are confident that in 2010 ProCredit Bank will further enhance its reputation as a true neighbourhood bank that serves its clients where they live and work. At year-end, loans to businesses accounted for 77.6% of the total loan portfolio, which had increased by ALL 4.4 billion (EUR 22.3 million) compared with Growth was particularly strong in the small and medium segments, which increased by 34.6% and 183%, respectively. In 2009 ProCredit Bank was again at the forefront of innovation, and in July, after months of intense preparation, we introduced our new Eko product a housing improvement loan to finance investments in energy-efficiency measures by private individuals. By year-end, the Eko portfolio already amounted to ALL 93.8 million (EUR 0.68 million). During the first quarter of 2010 we also plan to introduce energy-efficiency loans for small businesses as well as loans to support the emerging, but crucially important, renewable energy sector. We recognise that in 2010 we will have to make an even stronger commitment to the professional development of our staff, who constitute our greatest strength and our single most important asset. We will continue to make significant investments in personnel development: the bank has selected a record number of six key managers to begin the course at the ProCredit Academy in Germany in 2010, and in the coming year a large number of our middle managers will attend the Regional Academy for Eastern Europe in Macedonia. In addition, our in-house training department will further intensify its activities, building on its successful work in 2009, when it conducted many vitally important courses in areas such as junior management training, sales and negotiation and customer care. Members of the Board of Directors as of December 31, 2009: Claus-Peter Zeitinger, Chairman Anja Lepp Roland Siller Stephan Boven Rainer Ottenstein In 2010 we will continue to focus on providing loans and other services to viable businesses both in urban areas and in the agricultural sector, especially those that generate jobs and develop successful export products, as well as to enterprises that invest in energy-efficiency measures. ProCredit Bank is a bank that works closely with the communities it serves. It is a socially responsible bank, and a bank that actively supports Albania s economic development, and our unwavering commitment to this corporate mission has been the key to our success over the years. I would like to thank everyone who helped to make 2009 a particularly successful year for the bank, and especially our employees. Now more than ever, our staff can be proud of their invaluable contribution to the bank s unique achievements. Members of the Management Board as of December 31, 2009: Borislav Kostadinov Anila Denaj Mimoza Godanci Claus-Peter Zeitinger Chairman of the Board of Directors

6 6 Annual Report 2009 The Bank and its Shareholders ProCredit Bank Albania is a member of the ProCredit group, which is led by its Frankfurtbased parent company, ProCredit Holding. ProCredit Holding is the majority owner of ProCredit Bank Albania and now holds 80% of the shares. ProCredit Bank Albania was founded in October 1998 as FEFAD Bank by an alliance of international development-oriented investors. 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. The founding shareholders of ProCredit Bank Albania were FEFAD Foundation, the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC). 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 Albania is outlined below. Its current share capital is EUR 15.8 million. Shareholder (as of Dec. 31, 2009) ProCredit Holding Commerzbank AG Sector Headquarters Share Paid-in Capital (in EUR) 12,659, ,164, Investment Banking Germany Germany 80.0% 20.0% Total Capital 100% 15,823, ProCredit Holding is the parent company of a global group of 22 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 groupwide 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). ProCredit Holding has an investment grade rating (BBB-) from Fitch Ratings Agency. As of the end of 2009, the equity base of the ProCredit group is EUR 388 million. The total assets of the ProCredit group are EUR 4.9 billion.

7 The Bank and its Shareholders 7 Commerzbank is one of Germany s leading banks for private and corporate customers. Following the merger of Dresdner Bank and Commerzbank in May 2009, its customers will in future have access to around 1,200 branches, the largest branch network of any German private bank. The new Commerzbank has approximately 15 million private and corporate customers worldwide, who can now enjoy an even broader and more attractive range of Commerzbank products and advisory services. The new Commerzbank promises to be an even stronger and more reliable partner for corporate customers, particularly export-dependent small and medium-sized firms (SMEs). It also manages major corporate customers and institutions in Europe as well as multinational enterprises. In addition, the new Commerzbank is also strengthening its position as a leading export financier, supporting its customers in Germany and around the world. Commerzbank AG is the parent company of a global financial services group. The group s operating business is organised into six segments providing each other with mutually beneficial synergies: Private Customers, Mittelstandsbank (SME bank), Central & Eastern Europe, Corporates & Markets, Asset Based Finance and Portfolio Restructuring Unit. Today some 30% of German foreign trade is channelled through the new Commerzbank, the leading export financier for the German industry. The bank is directly represented in 46 countries as well as through a network of more than 6,000 banking relationships worldwide. Commerzbank is well positioned in Central and Eastern Europe, serving more than 3.7 million customers in the region. In Poland the bank holds a 70% stake in BRE Bank, Poland s third-largest financial institution. In Ukraine it is the majority shareholder of Bank Forum a universal bank with a nationwide network. Currently Commerzbank operates in more than ten countries in the region.

8 8 Annual Report 2009 Special Feature Promoting Energy Efficiency in Albania We would all like to save money by reducing our expenses, and in many countries there is also a growing understanding of the need to reduce energy consumption both in homes and in the workplace. But in Albania, most people do not use energy efficiently. In line with worldwide efforts to conserve energy, ProCredit Bank Albania promotes increased public awareness of energy issues and offers loans to finance energy-efficiency measures. ProCredit Bank was the first financial institution in Albania to introduce energy efficiency loans, which it began offering in July The European Fund for Southeast Europe provided a EUR 2 million credit line to finance housing improvement loans to boost the efficiency of energy use. This funding enabled ProCredit Bank to launch its Eko energy efficiency loans for private households. Using its own funds, the bank also issues Eko loans to businesses. Thus, our energy efficiency loans help both families and enterprises lower their utility bills and save energy, which in turn helps the environment. The loans may be used to carry out improvements that raise energy efficiency, such as the installation of insulation, double-glazed windows, modern central heating systems, efficient water heaters and low-energy lighting. ProCredit Bank also provides financing to businesses and households for investments in renewable energy technologies and related equipment.

9 Special Feature 9 In parallel with the introduction of the Eko loans, we undertook several initiatives to raise awareness of energy efficiency issues among both our staff and the broader public. We held special meetings to make employees more aware of the need to reduce energy consumption and gave presentations on the new loans for all staff; provided focused training to lending staff; published articles on energy efficiency in our employee newsletter; conducted internal surveys and quizzes on energy use; and displayed educational posters in all our offices. Our communication strategy also targeted the general public: we promoted increased awareness of energy efficiency issues through advertisements and articles and various other educational activities; through the publication of flyers and brochures; by carrying out direct promotions for the Eko loans and setting up a special telephone line for inquiries regarding energy efficiency; and by allowing clients whose products increase energy efficiency to set up displays in our branches. Due to the success of these activities, by year-end we had disbursed 386 energy efficiency loans and the volume of the Eko portfolio already stood at over EUR 0.68 million. This new product is a perfect fit for ProCredit, given our commitment to providing responsible banking services which promote sustainable, long-term development. It is estimated that at present around 40% 1 of the energy consumed in a typical dwelling in Albania is used for heating. Thus, in the residential sector alone, there is great potential for energy savings, and households are a key target group for our Eko loans. We are convinced that by enabling them to greatly reduce their heating expenses and overall energy use, we can also make a significant contribution to the twin goals of reducing Albania s national energy consumption and promoting environmental protection. 1 Albanian Institute of Statistics (INSTAT)

10 10 Annual Report 2009 Management Business Review Management from left to right: Anila Denaj Deputy Chief Executive Officer Borislav Kostadinov Chief Executive Officer Mimoza Godanci Deputy Chief Executive Officer Flutura Veipi Deputy Chief Executive Officer* * The Central Bank of Albania approved Flutura Veipi s appointment as Deputy Chief Executive Officer on January 6, 2010

11 Management Business Review 11 Political and Economic Environment During 2009 Albania s overall macroeconomic position remained positive. The effects of the global financial and economic crisis manifested themselves in Albania in lower external demand and decreased remittance volumes, higher risk premiums, higher borrowing costs and a depreciation of the lek vis-à-vis the euro and the dollar. Nonetheless, even though the global downturn adversely affected economic activity, its impact in Albania was less severe than in other countries in the region. Strong domestic demand and the limited exposure of financial institutions and businesses to international financial markets, together with macroeconomic stimuli, both delayed and smoothed the effects of the global crisis in Albania. According to an initial estimate by the national Institute of Statistics (INSTAT), the real GDP growth rate of 2009 was 3.3% 1, down from the annual rate of 8.0% in In 2009, growth was driven by the expansion in the telecommunications and transport sectors. The strong growth in these two sectors offset the negative annual growth rates registered in the industrial and construction sectors. During the first half of the year the construction sector registered positive growth due to the infrastructure projects undertaken by the government. anchored in the vicinity of the central bank s targets. Due to the central government expansionary policies, the 2009 budget deficit, which was initially forecast at 4.2%of GDP 6, had widened to 6.9% 7 of GDP by year-end. In political terms, the year 2009 was an eventful one. In April, Albania became a member of NATO. Also in April, the Stabilisation and Association Agreement with the EU came into force and Albania submitted its application for EU membership. General elections were held on June 28 and the new parliament was convened in September. The new government s main economic objectives are to create a sustainable basis for economic growth, to maintain strong FDI inflows, and to continue the fight against poverty. At year-end, the political situation was tense, as some of the opposition parties were refusing to participate in the new parliament due to alleged irregularities in the vote-counting process. Financial Sector Developments 8 At the end of 2009, 16 banks, nine non-bank financial institutions (three of which were licensed in 2009), and two unions of savings and loans associations were operating in Albania. 9 The financial market continued to be dominated by banks, and within the banking system there was a high External demand declined considerably during 2009 due to the sharp economic contraction in Italy, Greece and Germany, Albania s main trading partners. In 2009 the total volume of exports declined by 14.82% 2 compared to Nevertheless, due to a gradual decline in imports, the annual trade deficit increased by just 0.33% 3. Net inflows for the year reached EUR 1.0 billion, down by 35.6% from 2008, with net FDI inflows amounting to EUR 664 million, an increase of 7.1% 4. The limited growth of domestic economic activity and low global inflationary pressures weakened local inflationary pressures. During 2009 inflation rates hovered around the lower end of the Bank of Albania s tolerance band of 3% ±1 percentage point. The inflation rate for 2009, i.e. the average monthly year-on-year rate, was 2.2% 5 and inflation expectations remained well 1 INSTAT, quarterly Gross Domestic Product statistics 2 INSTAT, external trade statistics 3 INSTAT, external trade statistics 4 Source for all figures: Bank of Albania, balance of payments statistics 5 INSTAT, Consumer Price Index 6 Ministry of Finance, fiscal statistics, General Government Budget Normative Act of the Government, no. 10, date: , Official Gazette no. 187, December 31, At the time of writing, the most recent figures available for some financial sector data were for the third quarter of Wherever figures are cited, we have specified the period to which they refer. 9 All figures in this section are from the Bank of Albania, Web database, Quarterly Banking Statistics, March Web link: < Statistika_Hyrje_230_1.php?evn=agregate_parent_sel &evb=agregate&cgroups=17&periudha_id=3>

12 12 Annual Report 2009 degree of concentration. At year-end, the three largest banks accounted for 55.7% of total banking assets, up slightly from their year-end share in 2008 (55.3%). At the end of 2009, total banking assets stood at ALL billion (EUR 6.4 billion), representing an annual growth rate of 6.3%, down significantly from the previous year. At year-end the loan portfolio stood at ALL 446 billion (EUR 3.2 billion), representing an increase of 13.2% (2008: +35.6%). Lending to the private sector, which increased by 12.4%, continued to be the main driver of credit growth. However, starting in mid-2008, and particularly in the period April - December 2009, lending to public-sector entities increased markedly. In 2009 it grew by 312.3%, but the share of lending to the public sector in the total loan portfolio remained very low, amounting to only 1.7% at the end of The overall level of banking activity decreased due to the slowdown in lending growth as well as a sharp rise in arrears and provisioning. Lending continued to be financed by local deposits. By year-end, the deposit base had recovered from the strong outflows experienced in late 2008 and early 2009 as a result of panic withdrawals. At year-end, total deposits stood at ALL billion (EUR 4.9 billion), or 1.5 times the loan portfolio volume. This represented an increase of 7.9% from Credit portfolio quality continued to be an issue of concern. The share of problem loans 10 in the total portfolio increased from 6.5% at the end of 2008 to 10.3% at the end of Due to the increasing share of problem loans, banks provisioning expenses increased, thus reducing profitability. The average return on equity at the end of 2009 was 4.6%, down considerably from the year-end level for 2008 (11.4%). However, the banks remained well capitalised: at year-end, the capital adequacy ratio for the system as a whole stood at 16.2%. In 2009 the Bank of Albania (BoA) actively responded to market developments. It lowered its base rate by half a point in January, and again by half a point in October, bringing the final yearend rate to 5.25%. In addition, the BoA extended the maturity horizon of its liquidity facilities and broadened the range of assets which banks may use as collateral. As a result of these measures, short-term interest rates for new loans and deposits had decreased slightly by the end of the year. ProCredit Performance Given the effects of the worldwide economic crisis, our expectations in early 2009 were for a year of much reduced lending, increased withdrawals, and higher arrears. In late 2008 the entire Albanian banking sector experienced large-scale withdrawals, which continued into 2009, and with capital and liquidity becoming increasingly scarce, banks significantly reduced their lending activities. The decline in the external value of the lek also posed problems, as a large percentage of the aggregate loan portfolio was denominated in foreign currencies. We took steps early in the year to respond to the changed environment. Specifically, we provided increased training to our staff to make sure they knew what to expect; we altered our organisational structure, creating separate units for credit risk assessment, credit control and portfolio management; we modified our products; and we adjusted our risk management approach. However, our liquidity was excellent, the balance sheet was stable, sufficient capital was available, and our arrears rate was significantly lower than the market average. 11 Thus, although some banks stopped lending, ProCredit continued to issue loans, processing applications both quickly and efficiently. Moreover, we acted rapidly to assist 10 Problem loans comprise loans without instalment repayment plans on which borrowers are in arrears by more than 30 days on the payment of either interest or principal, instalment loans which are in arrears by more than 90 days, and credit lines for which there have not been any transactions on the borrower s account for more than 60 days (according to the Regulation on Credit Risk Administration, approved by order no. 52 of the Supervision Council, Bank of Albania) 11 Bank of Albania, Web database, Quarterly Banking Statistics, March 2010, vb=agregate&cgroups=17&periudha_id=3

13 Management Business Review 13 borrowers facing financial problems, offering various options including loan restructuring. In 2009, what enterprises needed most was working capital, but we were also both willing and able to issue long-term investment loans. Demand for housing improvement loans our credit product for private individuals was down. Nonetheless, our business in this segment did not decline significantly thanks to the introduction of a new energy-efficiency home improvement loan which was very well received. While total sector deposits declined, we were able to attract a substantial number of new retail customers and increase our deposit volume. This was a reflection of our clients high level of trust in the bank and in the quality of the advice provided by our staff. In June we moved into our new head office building, and since then we have seen a rise in efficiency through improved co-ordination and communication among the various departments. The year 2009 also saw a sizeable expansion of our branch network in response to the continu-

14 14 Annual Report 2009 ing strong demand for our services. The growth of the network also further bolstered our image as a stable, responsible financial institution with a long-term commitment to Albania. Despite the turbulence in the global economy, which certainly affected Albania, the bank achieved strong, sustainable growth in We actively responded to the challenges we faced, demonstrating once again that we are in the market to stay and will continue to serve our target groups for a very long time. Lending In 2009 the financial sector s gross loan portfolio increased by 13.2%; 12 by contrast, our gross portfolio rose by 27.1%, reaching ALL 21.1 billion (EUR 153 million). The number of loans outstanding decreased by 2.9% to 39,400. We disbursed 21,000 loans totalling ALL 17.1 billion (EUR 124 million), and the average disbursed amount was ALL 811,000 (EUR 5,879). The business portfolio grew by 37.2%, reaching ALL 16.4 billion (EUR million), which was 77.6% of the total loan portfolio. Loans to very small businesses (below EUR 10,000) contributed 16.8% of the total disbursed volume. In 2009 this segment which was most affected by the crisis and rising levels of overindebtedness decreased by 3.2%, to ALL 4.78 billion (EUR 34.7 million), which was 22.7% of the total portfolio. Small business loans (EUR 10,000 to EUR 150,000) increased by 34.6% to almost ALL 7.4 billion (EUR 53.9 million), or 34.6% of the total portfolio. We issued more than 1,500 loans in this segment, as well as overdrafts with a combined volume of ALL 6.7 billion (EUR 48.5 million). Growth in the medium-loan segment (above EUR 150,000) was particularly strong: the outstanding volume rose by 183% to ALL 4.2 billion (EUR 30.1 million), or 19.7% of the total portfolio. We also issued ALL 1.39 billion (EUR 10.1 million) in overdrafts to larger businesses, as well as guarantees and documentary credit totalling ALL 4.56 billion (EUR 33 million). Rural households account for 51% 13 of Albania s total population and are also an important target group for the bank. We disbursed nearly 3,000 agricultural loans and had 5,918 clients in this segment at year-end. The agricultural portfolio decreased by 0.39% to ALL 1.47 billion (EUR 10.6 million), or 6.95% of the total portfolio. We also offer home improvement loans to clients with a steady income. The outstanding volume in this segment was ALL 1.98 billion (EUR 14.3 mil- Loan Portfolio Development Number of Loans Outstanding Breakdown by Loan Size* Volume (in EUR million) Number (in 000) % 0.6% 0.2% % 47.1% Jun 05 Dec Jun 06 Dec Jun 07 Dec Jun 08 Dec Jun 09 Dec 0 < EUR 10,000 > EUR 150,000 EUR 10,001 EUR 50,000 Total number outstanding EUR 50,001 EUR 150,000 < EUR 1,000 EUR 50,001 EUR 150,000 EUR 1,001 EUR 10,000 > EUR 150,000 EUR 10,001 EUR 50,000 * 31 Dec 2009

15 Management Business Review 15 lion), or 9.4% of the total portfolio. In 2009 the portfolio at risk, defined as the volume of loans in arrears by more than 90 days (PAR >90 days) as a percentage of the total outstanding volume, never exceeded 1.76% for home improvement loans, underscoring the prudence of our approach to lending to private individuals. In July we launched a special housing improvement loan for investments in energy-efficiency measures. By yearend the portfolio for this new product already amounted to ALL 93.8 billion (EUR 0.67 million). Very small loans (below EUR 10,000) had the highest arrears rate: the PAR >90 days for this segment amounted to 2.91% (2008: 0.96%). This deterioration was due primarily to the effect of the crisis on this target group and the ready availability of consumer loans in the market, which led to widespread over-indebtedness among very small borrowers. The share of problem loans 14 in our total portfolio rose from 3.95% to 4.80% a very small increase compared to the rise from 6.5% to 10.3% Bank of Albania, Web database, Quarterly Banking Statistics, March INSTAT, social statistics; population. The figure refers to the rural population as of January 1, For definition, please see footnote 10 on page Bank of Albania, Web database, Quarterly Banking Statistics, March Business Loan Portfolio Breakdown by Maturity Loan Portfolio Quality (arrears >30 days) in % in % of loan portfolio Jun 05 Dec Jun 06 Dec Jun 07 Dec Jun 08 Dec Jun 09 Dec Jun 05 Dec Jun 06 Dec Jun 07 Dec Jun 08 Dec Jun 09 Dec < 12 months months > 24 months Net write-offs: in 2006: EUR 780,441 in 2008: EUR 1,293,362 in 2005: EUR 202,606 in 2007: EUR 854,253 in 2009: EUR 1,247,601

16 16 Annual Report 2009 reported for the banking sector s total portfolio; these figures also show that our year-end PAR >90 days was significantly lower than the banking industry average. Deposits, which offer a higher rate of interest for larger deposit balances. In August, we launched the Season Deposit, a new type of TDA for which the interest rate increases every three months. Through loan restructuring, we supported delinquent borrowers efforts to meet their repayment obligations. Restructured loans accounted for 0.65% of the total number of loans outstanding, and 2.56% of the total portfolio volume, at year-end; exposures below USD 10,000 constituted the bulk of the restructured portfolio. Net write-offs totalled ALL 172 million (EUR 1.25 million), or 0.81% of the total portfolio. Loanloss provisions were equal to 2.46% of the total portfolio and covered the PAR >90 days by a comfortable margin of 151%. Deposits and Other Banking Services The year 2009 was a very successful one for our banking services business, especially in view of the difficult market environment. The bank s main focus in this area of operations was on increasing term deposit accounts (TDAs), which had been affected most by the uncertainty created by the global crisis. We launched new term deposit products and also improved our existing TDAs: In March we made changes to increase the attractiveness of our term deposits, such as broadening the range of maturities, and introduced Escalated Standard By year-end, the volume of TDAs had increased by ALL 7.1 billion (EUR 36.9 million), of which ALL 4.6 billion (EUR 33.6 million) represented inflows from private individuals, many of whom had re-deposited funds withdrawn in late We were able to achieve this sizeable increase thanks to targeted promotional campaigns and intensive training to enhance our staff s customer care skills. Total customer deposits grew to ALL 33.8 billion (EUR 245 million), a 33.9% increase over 2008 (vs. 3.1% for the sector as a whole). At year-end, the total volume of current accounts stood at ALL 5.3 billion (EUR 38.5 million), an increase of 8.9%; for savings accounts, the figure was ALL 2.2 billion (EUR 16.2 million), representing growth of 1.73%; and the volume of TDAs came to ALL 25.5 billion (EUR 185 million), an increase of 25%. During 2009 the total number of deposit customers rose to 148,000, an increase of 5.3%. The number of businesses making use of our deposit facilities and other non-credit services for their operations also increased, by 6.8% to 3,500. In January we introduced Pro E-banking, and by December 31 this new service already had 1,200 registered users. Moreover, by year-end our cli- Customer Deposits Number of Customer Deposits Breakdown by Size* Volume (in EUR million) Number (in 000) % 0.2% % o.1% % 70.9% Jun 05 Dec Jun 06 Dec Jun 07 Dec Jun 08 Dec Jun 09 Dec 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 2009

17 Management Business Review 17 ents were executing an average of 720 e-banking transactions per month with a combined volume of ALL 58.8 million (EUR 425,000). Our money transfer business grew steadily in 2009: the volume of domestic transfers increased by 4.45% to ALL 14.1 billion (EUR 102 million), while international transfers were up by 10.6% to ALL 34.8 billion (EUR 252 million). In May we launched a new VISA Electron card service which allows our customers to make purchases on the Internet using this debit card. At year-end we had around 41,000 debit cards and 1,200 credit cards in circulation, which was 7.3% of the total number of payment cards in circulation in Albania. During 2009, we added new ATM services. For example, the machines now provide account statement printouts and customers can also define their own PIN numbers. We installed 31 more ATMs, boosting the total number in our countrywide network to 82. In 2009 we expanded our POS network from 73 to 279 terminals. POS merchant transactions were up: the average number per month rose to 870 and the average monthly transaction volume increased to ALL 50.9 million (EUR Domestic Money Transfers International Money Transfers Volume (in EUR million) Jan Jun 05 Jul Dec Jan Jun 06 Jul Dec Jan Jun 07 Jul Dec Jan Jun 08 Incoming Outgoing Number Jul Dec Number (in 000) Jan Jun 09 Jul Dec Volume (in EUR million) Jan Jun 05 Jul Dec Jan Jun 06 Jul Dec Jan Jun 07 Jul Dec Jan Jun 08 Incoming Outgoing Number Jul Dec Number (in 000) Jan Jun 09 Jul Dec

18 18 Annual Report ,000), compared with 370 and ALL 38 million (EUR 300,000), respectively, in Financial Results In 2009, ProCredit Bank continued its solid financial performance, making further progress along its path of sustainable growth. Total assets increased by 36.8% to reach ALL 41.2 billion (EUR million). In 2009 the gross loan portfolio rose by 27.1% to ALL 21.1 billion (EUR 153 million). Our asset growth was driven primarily by the increase in the loan portfolio. We had a good liquidity position throughout the year and at the end of 2009 the ratio of liquid assets to total assets stood at 26.3%. ProCredit Bank s deposit base grew by 33.9% to ALL 33.8 billion (EUR million). Over 77.6% of the deposit base came from stable term deposits, and 42% of the total deposit volume was denominated in foreign currencies. This structure put us in a favourable position in terms of expanding lending to small and medium-sized enterprises. The ratio of net loans to deposits was 63.0% in 2009 (2008: 65.8%). Although deposits continued to be

19 Management Business Review 19 our main source of onlending funds, loans from international financial institutions constituted 10.2% of our funding base at year-end. Total operating income amounted to ALL 2.5 billion (EUR 19.0 million). Net interest income stood at ALL 1.9 billion (EUR 14.8 million) and provided 78.0% of total operating income. The loan portfolio generated the bulk of interest income, 85.4%. Net fee and commission income grew by 5.1% to ALL million (EUR 1.9 million). Reflecting the increase in the loan portfolio, loan loss provisions rose by 8.76% to ALL 520 million (EUR 3.8 million). Interest expenses on deposits rose to ALL 1.4 billion (EUR 10.4 million). ProCredit Bank made sizeable investments in fixed assets during 2009 to support the development of its branch network, opening eight new facilities and renovating four of its existing offices. Total operating expenses rose by 8.9% to ALL 2.3 billion (EUR 17.4 million). However, given the costs involved in network expansion and the associated rise in the number of employees, which pushed up personnel costs, the cost-income ratio rose from 82.8% in 2008 to 88.5%. Thanks to its continued adherence to an overall strategy focusing on sound, balanced growth, in 2009 ProCredit Bank Albania was once again able to report a positive operating result: despite the rise in costs, it posted a net profit for the year of ALL million (EUR 1.5 million). The return on equity decreased, but, at 6.6%, the figure was still satisfactory (2008: 12.5%). At year-end, the bank s capital adequacy ratio stood at 15.0%, 300 percentage points above the local regulatory requirement. Outlook Albania s economy should grow in 2010, but it is not expected to be an easy year, as the political situation will continue to be difficult. The state debt will likely increase, and fiscal policy-makers will focus on increasing formalisation in the economy whilst also watching both tax revenues and the exchange rate very closely. Much is expected of the banking sector, which has traditionally been one of the main factors in economic development. Most commercial banks in Albania are foreign-owned and, with the exception of ProCredit, they have so far focused on the larger corporate clients. We anticipate that competition among these banks will increase and that they will be under pressure to boost lending despite substantial arrears problems. However, our focus will continue to be on improving our service quality and on gaining more SMEs as customers while also expanding the range of services used by such businesses. Our key priorities will be expanding our branch network, raising the quality of our staff, strengthening our head office and further enhancing efficiency. Important steps are planned for 2010 to support future growth, including the centralisation of our database and investments in advanced technology to improve the quality of customer service and of internal controls. Having launched energy-efficiency loans for both households and businesses in 2009, we will seek to further expand lending in this area. We will continue to give a very high priority to agricultural lending, not just because ProCredit is the only bank in Albania that serves agricultural clients in rural areas; we also recognise the crucial role of agriculture in the country s overall development process. To achieve our goal of providing even better service to our clients, we will modify our product range and our internal structures at all levels in line with the bank s increasing focus on specific target groups rather than products. This will require a considerable investment in training and enhanced internal communication, a thorough review of the efficiency of our processes, as well as a renewed commitment to quality in every area of our activities.

20 20 Annual Report 2009 Risk Management In Albania, as in other countries, the year 2009 subjected many banks to a prolonged stress test, underscoring the importance of prudent risk management. At ProCredit Bank, however, our operations have always been based on responsible banking practices supported by proven risk management systems. In line with our simple business model, we offer reliable, transparent products, and this also facilitates sound risk management. Working in close co-operation with the management, the Risk Management Department ensures that the bank does not exceed its risk-bearing capacity. The department is responsible for identifying and analysing all risk exposures, and reports its findings every month to the executive management, which bears ultimate responsibility for risk. Through its various units and committees, the department also acts to eliminate or mitigate risks.

21 Risk Management 21 Several bodies are responsible for defining riskbearing capacity and risk-mitigation strategies in individual areas; these include the Credit Risk Committee, the Assets and Liabilities Committee (ALCO) and the Operational Risk Committee. These committees meet regularly, and participation in their meetings by the bank s senior management, as well as one of the management board members, is obligatory. The bank complies with the best-practice standards for risk management and reporting defined by the Group Risk Management Policy. All significant risks are presented to the Group Risk Management Department of ProCredit Holding and our Board of Directors in quarterly reports. We report more frequently on key risk indicators to enable the bank to benefit from the holding company s guidance in its operations. Like all ProCredit institutions, we comply with the risk management standards of the German Federal Financial Supervisory Authority (BaFin). Our assets and liabilities are highly diversified across thousands of small enterprises and lowerand middle-income savers. This minimises the risk that a default by a single borrower or group of borrowers could substantially affect portfolio quality, or that withdrawals by individual depositors could impair our liquidity position. Our approach to risk management is based on the implementation of our clearly defined processes and procedures by professionally competent staff. Accordingly, we invest heavily in training to enable our employees to recognise and address risks in their respective areas. Credit Risk We lend to four main target groups: very small, small and medium-sized businesses and private individuals. Procedures differ somewhat depending on the specific target group and credit risk involved, but lending decisions are always taken by an independent credit committee on the basis of accurate financial analyses, thorough cross-checking, and a good understanding of applicants businesses. Together with a sophisticated lending methodology and simple, straightforward credit products, this approach enables us to make sound lending decisions. As a matter of principle, loans are not approved if they would cause borrowers to become over-indebted. A new Group Credit Risk Policy was introduced in 2009, and we ensured that all lending staff were thoroughly familiar with its provisions. In lending to small and very small enterprises and to private individuals, there is no segregation of duties between front- and back-office staff: the loan officer is responsible for both customer care and credit analysis. But in lending to mediumsized enterprises (>EUR 150,000), these functions are rigorously separated: credit analysts from the Credit Risk Department conduct the financial analysis and decide whether applications should be forwarded to the credit committee. All contracts for medium loans are signed by representatives of both the Legal and Credit Risk Departments, who verify compliance with the requirements defined by the credit committee. Disbursements for larger loans are also handled at head office level: funds are disbursed by the Credit Operations Department after receipt of a signed authorisation from the Credit Risk Department. At year-end, very small loans (up to EUR 30,000) accounted for 56.5% of the total portfolio volume, and medium loans (>EUR 150,000) contributed 22.3%. The average amount outstanding was EUR 3,881. Overall loan portfolio quality is monitored on a monthly basis by a separate committee which ensures that there are no significant risk concentrations. This facilitates timely recognition of potential problems so as to prevent an increase in the portfolio at risk (PAR loans in arrears by more than 30 days). Despite this approach, the PAR rose during 2009 due to the impact of the global financial and economic crisis on many of our clients businesses. At year-end it stood at 2.25%. Net write-offs amounted to EUR 1.25 million, or 0.81% of the total loan portfolio. Reserves were always sufficient to cover our credit risk exposure, and at year-end the allowance for loan impairment was equal to 109% of the PAR and to 2.46% of the total loan portfolio.

22 22 Annual Report 2009 Loan officers and credit analysts closely monitor outstanding loans. Our emphasis on long-term relationships with our clients, which includes working with them to address repayment problems, is another key aspect of our risk management strategy. Market Risk We do not engage in any speculative lines of business, and thus have a low exposure to market risk. Management of market risk focuses on reducing the impact of exchange- and interest-rate movements on the bank s performance. About 60% of the loan portfolio is denominated in ALL. The ALCO monitors exchange rates and ensures that the open currency position does not exceed the central bank s limit. At the end of August, our economy experienced an unexpected shock in the form of a major devaluation of the local currency. But unlike most banks in Albania, we were not significantly affected by this event thanks to our loan portfolio structure. Based on stress tests, we were able to take timely measures to ensure good portfolio quality and continued to comply with all internal and external requirements. As regards interest rate risk, in 2009 several reports and stress test scenarios were prepared by the Risk Management Department to facilitate assessments of the maturity structure of our assets and liabilities as well as the measurement of risk exposure using duration gap and sensitivity analysis. As stipulated by the Board of Directors, the modified duration gap was kept within +/-1 for all currencies during Management of interest rate risk is also facilitated by the high proportion of shorter-term loans in the portfolio: at yearend, only 7.2% of the outstanding loan volume had a remaining maturity of more than five years. Liquidity Risk The ALCO monitors all aspects of the liquidity position on a weekly basis, and since June 2009 a monthly Liquidity Risk Report prepared by the Risk Management Department has further enhanced liquidity management. Our loan portfolio provides a continuous inflow of cash from thousands of monthly instalments, and we had sufficient liquidity even during the initial months of the year, which saw large withdrawals. At year-end, highly liquid assets covered customer deposits by 41.2% and the ratio of liquid assets to total assets was 33.8%. Total deposits were equivalent to 160% of the gross loan portfolio (2008: 152%). Deposits from private individuals and legal entities accounted for 82% of our liabilities and remained highly diversified. As a member of a global group, the bank can readily obtain both short-term liquidity and long-term funding if necessary, and in 2009 our shareholders provided us with additional funds in the form of subordinated debt amounting to ALL 1,311 million (EUR 9.5 million). Operational Risk Operational risk includes the risk of losses due to inadequate or failed systems and processes or through human actions and external events. We manage such risks by applying control standards reflecting international best practices; by providing targeted training in this area to staff at all levels; and by ensuring that senior management are actively involved in the identification and mitigation of key operational risks. Wherever possible, relevant staff duties are segregated between units and departments; the four eyes principle is already being applied for various key operations and we plan to introduce it in other critical areas as well. In 2009, our efforts in operational risk management focused on meeting the following challenges: reducing losses arising from operational risk; improving performance measurement; improving operational controls and obtaining timely indications of deficiencies in control systems; and raising operational risk awareness throughout the bank. A Risk Event Database ensures that all risk events and losses are systematically recorded and dealt with. We maintain a strict segregation of functions between internal and external auditors, and the audit process is kept separate from risk management to promote transparency.

23 Risk Management 23 The Compliance Department was established as a separate department within the Risk Division in January One of its key responsibilities is to ensure that new products and both new and existing policies, procedures and processes comply with internal standards and the applicable legal requirements. of our risk-weighted assets. The group requires maintenance of a minimum capital adequacy ratio (CAR) of 12%, which is in line with both Basel II and local standards. At year-end, we had a comfortable CAR of 15.0% (2008: 15.6%), reflecting our shareholders strong support and commitment to ensuring the availability of sufficient funding at all times to support our operations. Capital Adequacy Throughout the year, we had sufficient capital (Tiers I and II) to provide the necessary coverage

24 24 Annual Report 2009 Branch Network ProCredit Bank Albania continued to expand its branch network in Eight new facilities were opened in various parts of the country, bringing the total to 42. In order to bring its services closer to its target groups in the areas where they live and work, and to support retail operations at some branches, the bank has also established a number of agencies small outlets providing only non-credit services. By year-end we had 23 of these smaller facilities in addition to our 19 fullservice branches. As in 2008, one of our priorities was to increase the bank s presence in cities where we have identified significant potential for further growth. In line with this strategy, we established five new branches in Tirana, a second branch in Elbasan, and a branch in Shkozet, a town near Durrës which we had previously not served. In addition to expanding the network by opening new offices, we renovated four of our existing branches in order to provide a more attractive environment in which to cater for our clients banking needs. The renovation projects included the expansion of our main branches in the four largest cities we serve Fier, Tirana, Korça and Vlora a move which further bolstered ProCredit s image in the Albanian market as a sound, modern financial institution. The ATM network also grew significantly in As part of a major investment programme that was launched in 2008 to make it easier for our Serbia Montenegro Kosovo Koplik Shkodra Lezha Kukës Albania Macedonia Lac Durrës (5) Tirana (13) Adriatic Sea Kavaja Divjaka Lushnja Fier (2) Elbasan (2) Pogradec (2) Kuçova Korça (2) Berat (2) Bilisht Vlora (2) taly Gjirokastra Greece Ionian Sea Saranda

25 Branch Network 25 customers to access key retail banking services, we installed 18 more off-site ATMs. This increased the number of off-site locations in the network to 38 and the total number of ATMs to 82. Finally, construction of the bank s new head office building was completed in By moving to this larger, more modern facility, we have been able to enhance the capabilities of our head office team. It is now better able to support branch-level operations and also to guide the institution s overall development. Our plans for 2010 include further expansion of both the branch and ATM networks, particularly in Tirana and the northern part of Albania.

26 26 Annual Report 2009 Organisation, Staff and Staff Development In 2009, boosting the efficiency of operations was one of the greatest challenges we faced in our efforts to maintain the bank s successful performance in a continuously changing environment. In order to achieve and maintain optimal levels of efficiency and customer service quality, we gave equal emphasis to both recruitment and staff training. The recruitment process was further enhanced through improvements to selection procedures, as well as special training for those responsible for hiring decisions. Our efforts in 2008 to improve managers recruiting skills and refine staff selection criteria paid off in 2009, as we were able to ensure that positions were offered only to candidates who fully met our requirements. We hired 49 people in 2009, and at year-end the bank had a total of 867 employees. Given the importance of fully integrating newly hired staff into our team, all new employees attend an intensive induction course. It not only familiarises them with technical aspects of banking operations and prepares them for the specialised training they receive in their areas of activity. The course also covers topics such as our corporate values and code of business ethics, employee benefits, our staff appraisal process and career development opportunities at the bank. In this context, particular emphasis is given to our transparent salary structure and clearly defined criteria for career advancement. We continued to provide training on an ongoing basis to employees at all levels. In 2009 the overall number of training days came to 1,425 and we invested a total of EUR 563,618 in staff development measures. As part of a group-wide initiative, we plan to introduce mathematics training for all employees in In line with our focus on enhancing efficiency and the quality of customer care, throughout the year we provided intensive training to staff who deal with business clients. The topics covered included optimal communication strategies and client acquisition techniques. The workshops were led by external experts and attended by senior front-office staff and both junior and middle managers.

27 Organisation, Staff and Staff Development 27 Our efforts to ensure that top-quality staff are recruited, and that we fully integrate them into our team, are of crucial importance in the drive to increase efficiency. By themselves, however, these efforts are not enough. They must be supported by open, transparent communication and the active involvement of staff in the process of optimising efficiency. Accordingly, in 2009 the Human Resources Department (which we call a sector ), in co-operation with managers at various levels, concentrated on increasing communication with staff throughout the bank and further enhancing the performance appraisal process for all employees. As in past years, participation by employees in the programmes of the ProCredit Regional Academy for Eastern Europe in Macedonia and the ProCredit Academy in Germany played an important role in building the managerial skills required for our continued successful development. Twelve senior and middle managers took part in the three-year part-time programme at the facility in Germany, and five completed the course there, receiving a ProCredit Banker diploma. In addition, 12 of our mid-level managers completed the six-week part-time programme for middle management staff at the Regional Academy. Targeted junior management training was an important focal point in our in-house training activities, and we conducted a special eight-week soft skills training programme for both current and potential members of our junior management staff. Thirty-four employees took part in the course, which combined classroom instruction and practical training. It was led by our senior managers and other experienced specialists, most of whom were graduates of one of the Academy programmes. In 2009, 22 employees attended international training seminars conducted by ProCredit Holding. Due not least to the importance of English language skills for participation in group-level training measures, a total of 21 junior and middle managers attended the English courses offered by the holding company in Germany and Macedonia.

28 28 Annual Report 2009

29 Business Ethics and Environmental Standards 29 Business Ethics and Environmental Standards 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 adhere to the principle of providing transparent information both to our customers and the general public and to our employees, and our conduct is straightforward and open; 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 advice and assess their economic and financial situation, business potential and repayment capacity so that they can benefit from the most appropriate loan products. Promoting a savings culture is an important part of our mission, 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; A high degree of personal commitment: This goes hand-in-hand with integrity and honesty traits which are required of all employees in the ProCredit group. 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. 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 or other illegal activities such as the financing of terrorist activities. An important focus here is to know your customer, and, in line with this principle, to carry out sound reporting and comply with the applicable regulations. Updated anti-money laundering and fraud prevention policies are being introduced across the group to ensure compliance with German regulatory standards. We also set standards regarding the impact of our lending operations on the environment. ProCredit Bank Albania 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 Albania is also able to raise its clients overall level of environmental awareness. 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.

30 30 Annual Report 2009 The ProCredit Group: Responsible Banks for Small Businesses and Ordinary People The ProCredit group comprises 22 financial institutions whose business focus is on providing responsible banking services in transition economies and developing countries. We aim to provide accessible, reliable services to small businesses and the ordinary people who live and work in the neighbourhoods in which we operate. At the end of 2009 our 19,600 employees, working in more than 830 branches, were serving 3.1 million customers in Eastern Europe, Latin America and Africa. The first ProCredit banks were founded more than a decade ago with the aim of making a significant development impact by promoting the growth of small businesses. We sought to achieve this by providing loans tailored to their requirements and offering attractive deposit facilities that would enable and encourage low-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 development mission and socially responsible approach remain as relevant today as they have always been. Indeed, their importance has been underscored by the widespread macroeconomic decline which most of our countries of operation experienced in The challenges this has created for individual clients as well as for national economies are significant. While the impact has differed from country to country and from region to region, it is clear that our customers need a reliable banking partner now more than ever. Many small businesses have adjusted to the new environment and are beginning to invest again, and ordinary people are regaining their trust in banks. That is why we will continue to apply the principles that have defined the ProCredit group since its foundation. Our mission is to provide credit in a responsible manner to very small, small and medium-sized enterprises, as we are convinced that these businesses create the largest number of jobs and make a vital contribution to the local economy. Unlike most other banks operating in our markets, we avoid aggressive consumer lending and all speculative lines of business. Instead, the ProCredit banks work in close contact with their clients to gain a full understanding of the problems small businesses face and the opportunities that are available to them. Our credit technology, developed over many years with the support of the German consulting company IPC, relies on the careful individual analysis of all credit risks. By making the effort to know our clients well and maintain long-term working relationships based on trust and understanding, we are well positioned to support them not only when the economy is buoyant, but also during a downturn and recovery. In 2009, the ability of our loan officers 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. 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. 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. Furthermore, 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 products and place great emphasis on promoting children s savings accounts and on running financial literacy campaigns in the broader community. In addition to deposit facilities, we offer our clients a full range of standard retail banking services. Despite considerable public nervousness about the safety of banks and intense competition in the deposit market, the ProCredit institutions managed to steadily increase their overall retail deposit base in 2009, increasing the number of deposit

31 The ProCredit Group: Responsible Banks for Small Businesses and Ordinary People 31 accounts by some 300,000 and securing a very comfortable liquidity position for the group. The ProCredit group has a simple business model: providing banking services to a diverse range of enterprises and mobilising deposits from 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 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 2009 with a good liquidity position, comfortable capital adequacy, PAR over 30 days of 2.68%, and a modest profit. Given the very difficult 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, a German-based company that was founded by IPC in ProCredit Holding is a The international group of ProCredit institutions; see also ProCredit Mexico Banco ProCredit Honduras Banco ProCredit El Salvador Banco ProCredit Nicaragua Banco ProCredit Colombia Banco ProCredit Ecuador Banco Los Andes ProCredit Bolivia ProCredit Holding Germany ProCredit Bank Serbia ProCredit Bank Bosnia and Herzegovina ProCredit Bank Kosovo ProCredit Bank Albania ProCredit Bank Macedonia ProCredit Bank Sierra Leone 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

32 32 Annual Report 2009 public-private partnership. The private shareholders include: IPC and IPC Invest, an investment vehicle set up by IPC and 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 16% 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 neighbourhood bank concept is not limited to our target customers and how we reach them; it also concerns the way in which 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 2010 and achieving steady business results. A responsible approach to neighbourhood banking requires a decentralised decision-making process 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-

33 The ProCredit Group: Responsible Banks for Small Businesses and Ordinary People 33 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. This entails not only intensive training in technical and management skills, but also frequent staff exchanges between our member institutions. In this way, we take full advantage of the opportunities for staff development that are created by the existence of a truly international group. A central plank in our approach to training is the ProCredit Academy in Germany, which provides a part-time ProCredit Banker training programme over a period of three years for high-potential staff from each of the ProCredit institutions. The curriculum includes intensive 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 first ProCredit Academy participants graduated in September The group also operates three Regional Academies in Latin America, Africa and Eastern Europe to support the professional development of middle managers at the local level. The group s strategy for 2010 will reflect the prevailing conditions of the countries in which we work. 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. In our lending activities, we will increase the minimum loan size for enterprise clients to EUR/USD 1,000-2,000 in most countries since we have found that below this limit there is broad access to loans from consumer finance providers, a situation which prevents us from maintaining loyal client relationships and keeping arrears levels at a sustainable level in that particular segment. It follows that for these client groups we would rather offer deposit accounts and other banking services. Furthermore, we believe that our development impact can be more significant if we focus on issuing slightly larger loans to businesses with the greatest capacity for job creation. Our other priorities in the coming year will be to focus on loan portfolio quality and on further improving the efficiency of our banking services. Strong investment in our staff will also remain a key priority since it is their skills which enable us to build strong, broad-based relationships with our clients, which are a particularly important factor of success in volatile macroeconomic conditions. As a group of responsible banks for ordinary people with prudent policies and welltrained staff to ensure our steady performance, we look forward to consolidating our position as a house bank for small businesses, their employees, and the ordinary people who live and work in the neighbourhoods around our branches.

34 34 Annual Report 2009 ProCredit in Eastern Europe ProCredit operates in 11 countries across Eastern Europe. It is a leading provider of banking services to very small, small and medium-sized businesses in the region. It prides itself on the high standard of transparent, professional services it provides to all its clients the ordinary people who live and work in the vicinity of the 539 ProCredit branches across the region proved to be a very challenging year for Eastern Europe. The region had enjoyed several years of sustained economic growth, in part fuelled by the rapid expansion of banking sectors dominated by Western European banks. The effects of the global financial crisis and the ensuing global recession were bound to be felt across the region. In nearly all the countries in which we operate, banking sector growth stalled and there was a strong GDP decline in The nature and severity of the impact differed from country to country. At one extreme was Ukraine, in which GDP is estimated to have declined by more than 15%, whilst other countries such as Kosovo and Albania experienced a less severe recession. As a rule for banking sectors across Eastern Europe, though, 2009 was a year dominated by concerns first about liquidity and then about non-performing loans. The performance of the ProCredit group in Eastern Europe this year as regards liquidity and loan portfolio quality highlights both the important development role that the ProCredit banks play in the region and their relatively low risk profile. The ProCredit banks in Eastern Europe quickly built a comfortable liquidity buffer in 2009, despite the strong withdrawals of customer funds that most of our markets experienced in the last quarter of This reflected the trust and confidence of our retail deposit clients. ProCredit has focused for many years on promoting a savings culture amongst its clients. Setting money aside can help protect savers against the uncertainties of life, and since the ratio of deposits to GDP in Eastern European countries is well below Western European levels, we believe that mobilising savings is an important development priority. Accordingly, ProCredit banks fund most of their lending activities from local savings. The ratio of deposits to loans in the ProCredit banks in the region is close to 90%. Thus, in 2009 we did not have to rely on unpredictable capital markets for funds. And our experience in 2009 confirmed that our clients appreciate the transparent, responsible approach we take. We offer simple and reliable retail banking services, including flexible savings and deposit accounts to accommodate depositors long- and short-term needs. Our belief in transparent, direct communication is particularly important in fostering clients trust in these difficult times. 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. Thanks to the trust that the public has placed in ProCredit, the group reported solid growth in customer deposits in 2009, although we did not participate in the very aggressive pricing campaigns that many other banks undertook to shore up their liquidity positions. All the ProCredit institutions in Eastern Europe ended the year with a comfortable liquidity position, most without a significant increase in the average cost of funds. ProCredit banks were also in a strong position to manage loan portfolio growth and quality. They had never participated in the aggressive consumer and corporate lending in which other banks had engaged, and which is now creating significant loan portfolio problems in the region. We had always maintained that consumer loans have only limited development impact and risk creating overindebtedness if aggressively advertised and disbursed without adequate analysis of clients ability to repay a loan and this is precisely the approach that financial institutions usually took to consumer lending in much of Eastern Europe in recent years. Instead, at ProCredit we focus on providing responsible banking services to small entrepreneurs and family businesses. We aim to be their banking partner of choice, able to understand their needs and offer sound, professional advice. We believe that these businesses are still an important driving force behind economic growth and job creation across Eastern Europe. We continued lending strongly to small businesses throughout 2009, although other banks significantly scaled back their lending activities. The only segment in which we slowed lending was

35 ProCredit in Eastern Europe 35 Belarus Russia Germany Poland Czech Republic Ukraine Slovakia Switzerland Austria Slovenia Hungary Romania Moldova Italy Croatia Bosnia and Herzegovina Serbia Montenegro Kosovo Macedonia Albania Bulgaria Georgia Armenia Azerbaijan Turkey Greece that of very small microenterprise loans with volumes of less than EUR 2,000. In this segment, we found many families to indeed be overindebted due to excessive use of consumer loans, and businesses to be less viable than in the past. Looking ahead, we plan to stop serving this segment of the market and focus above all on small and medium-sized clients taking loans in the size range from EUR 2,000 EUR 150,000. Our approach is to provide business loans based on a careful, individual analysis of each client s ability to meet his or her obligations. We have decentralised decision-making systems in place and a body of highly qualified staff who are able to conduct an efficient and reliable risk assessment even in more volatile economic conditions. ProCredit is guided by a responsible, long-term attitude towards business development. We aim to build lasting relationships with our clients and do not forget that a loan is also a debt. These values are particularly pertinent when managing potential arrears in cases where clients have to adapt to lower-than-expected sales. In anticipation of the difficulties we felt would emerge in 2009, we introduced more conservative lending policies and more intensive arrears management procedures in response to greater credit risk. Our staff focused on working closely with our clients to help them understand and respond to changing conditions. This approach meant that our Eastern European banks ended the year with a PAR (>30 days) of 2.81% and a PAR (>90 days) of 1.93%. Only in our two most difficult markets, Ukraine and Bosnia, did the PAR (>30 days) rise above 5% during the year. Relative to the banking sectors as a whole, this was a significant achievement. Our lending activities aim in particular 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. We also provide housing improvement loans to help families renovate their homes and improve energy efficiency. Given our focus on quality rather than quantity, the group did not increase the number of branches significantly in 2009, and the number of staff was also reduced. In 2010 we expect the macroeconomic situation in Eastern Europe to continue to be difficult. Our focus will still be on the quality of our staff and on deepening our relationships with our clients. Only our newer banks, in Armenia and Moldova, are likely to add branches. In all countries, we aim to consolidate

36 36 Annual Report 2009 our position as the most reliable banking partner for small and medium-sized enterprises. Our staff is the key element in our approach to being a stable, down-to-earth and personal banking partner. The ProCredit group has a strong commitment to staff training, professional development and the cultivation of an open, honest communication culture. Staff exchanges, cross-border training programmes and regional workshops are an important part of our approach. We have an Eastern European Academy, located near Skopje in Macedonia, which is dedicated to the training of ProCredit middle managers. The Academy is an important channel for rapid and consistent communication region-wide and one that helps us adapt quickly to face new challenges: More than 200 managers have already graduated from the six-week intensive course since the facility was founded. A language centre at the Academy also provides residential English courses, maximising the potential for international exchange within the group. Like all prudent banks, we will continue to focus on efficient cost management in 2010 and beyond. Investment in our staff is, however, 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.

37 ProCredit in Eastern Europe 37 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 Moldova ProCredit Bank Moldova ProCredit Bank Romania ProCredit Bank Serbia ProCredit Bank Ukraine Highlights* Founded in October branches 39,443 loans / EUR million in loans 192,840 deposit accounts / EUR million 867 employees Founded in December branches 3,847 loans / EUR 23.5 million in loans 15,479 deposit accounts / EUR 13.0 million 239 employees Founded in October branches 39,762 loans / EUR million in loans 105,106 deposit accounts / EUR million 662 employees Founded in October branches 55,504 loans / EUR million in loans 227,104 deposit accounts / EUR million 1,797 employees Founded in May branches 63,993 loans / EUR million in loans 400,215 deposit accounts / EUR million 1,680 employees Founded in January branches 99,336 loans / EUR million in loans 399,539 deposit accounts / EUR million 1,177 employees Founded in July branches 31,999 loans / EUR million in loans 134,603 deposit accounts / EUR million 689 employees Founded in December branch 7,108 loans / EUR 13.0 million in loans 85 employees Founded in December branches 6,715 loans / EUR 22.4 million in loans 22,646 deposit accounts / EUR 12.7 million 533 employees Founded in May branches 35,533 loans / EUR million in loans 136,576 deposit accounts / EUR million 1,006 employees Founded in April branches 118,249 loans / EUR million in loans 450,656 deposit accounts / EUR million 1,864 employees Founded in January branches 25,510 loans / EUR million in loans 121,435 deposit accounts / EUR million 1,417 employees Contact Legal address: Sami Frasheri St., Tirana Mailing address: Dritan Hoxha St., Tirana P.O. Box 2395 Tel./Fax: / 276 info@procreditbank.com.al 31/99 Moskovyan St 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 900, Chisinau Tel./Fax: / office@procredit.md 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.

38 38 Annual Report 2009 Our Clients Albert Loka, Furniture Producer Albert Loka, 46, is married with two children. He has a degree in economics and agribusiness and worked for 15 years as an economist in the forestry sector in northern Albania. But like most people in the country, he found himself out of work when the communist regime collapsed and was forced to find other ways to earn his livelihood. In 1994, Albert moved to the capital city, seeking a better life for himself and his family. Over the past 15 years, he has built a successful business making furniture, and his products are now in a great demand in the section of Tirana where he lives and also has his workshop. As Albert recalls: Making furniture had always been a tradition in our family, and I acquired the requisite skills at an early age. But until about fifteen years ago, I never thought that I would one day make my living in this way. The idea came to me in 1994, when I moved to Tirana and made all the furniture for my new house. A lot of people in the neighbourhood were interested in buying furniture of the type that I had made, so I decided to turn my hobby into a business. Albert first became aware of ProCredit Bank in 2002 through a television advertising campaign. He was interested in taking out a loan to upgrade his equipment and decided to visit one of the bank s branches in Tirana. He was favourably impressed by the friendliness and professionalism of the staff and soon took out his first loan, for the equivalent of EUR 1,110, to purchase machinery. We were able to change from doing everything by hand to producing with machines, enabling us to increase both our efficiency and our output, Albert explains. Thanks to his excellent credit history at the bank s Medrese branch, in the Tirana region, he has taken out a total of seven loans with a combined volume of more than EUR 8,900. With financing from ProCredit, he has been able to purchase increasingly large stocks of raw materials and expand his output. Albert s plans for the future include relocating to larger premises in one of Tirana s main streets, and he knows he can rely on ProCredit s continuing support. A loyal customer of the bank, he strongly recommends it to his friends, neighbours and members of his family.

39 Our Clients 39 Elsa Ekonomi, Operator of a Private School Elsa Ekonomi, 58, lives in Durrës with her husband and two children. She graduated from the Faculty of History and Philology of the University of Tirana in 1974 and worked for over 25 years in state schools in Durrës as a teacher of languages and literature. In 2002 Elsa and her husband opened the first independent school in the city Mihal Ekonomi SHPK and since then she has been the executive director of this private secondary school. She has been a customer of ProCredit Bank since 2007, and as she recalls, it did not take her long to decide that she had found the right bank: ProCredit has been my bank for more than two years. It was really a case of love at first sight; given my interest in languages, I was initially attracted by the meaning of the bank s name, and I was even more impressed when I visited one of its branches. I very much appreciated the staff s warm welcome and professional attitude and liked the wide range of products and banking services. There was a friendly atmosphere that I had never found in another bank. I immediately felt at home and knew this was the bank I had been looking for. Since then, Elsa has been a loyal ProCredit customer. In addition to using its credit and account services for her business, she also maintains her personal accounts at the bank. She took out her first loan, for EUR 16,000, in August 2007 to renovate the school and purchase equipment. She took out her next loan in June 2008, this time borrowing EUR 20,000 to expand the school s premises. Today, Mihal Ekonomi has 22 employees and more than 150 pupils and is one of best-known schools in Durrës. Together with two partners, Elsa plans to build a school in Vlora, and she recently received a loan from ProCredit Bank for EUR 150,000 to finance this project. She is very pleased to be a ProCredit client, not least because of the advantages offered by its extensive branch network. As Elsa explains: Thanks to the size of its network in the Durrës region, the bank is close to its clients, and they have easy access to its services.

40 40 Annual Report 2009 Qemal Murrani, Cattle and Dairy Farmer Qemal Murrani, 65, has lived in Gose, a village near the town of Kavaja in north-eastern Albania, since he was three years old. Under the communist regime, he worked for more than 40 years at the local state-owned agricultural enterprise. In 1991, when the regime collapsed, he was unemployed and was given one hectare of land to farm. With so little land, it was very difficult for Qemal to make enough to support his wife Fate and his two sons, Perparim and Edmond, and they both soon moved to Italy, where they were able to find work. In 2004, when Perparim and Edmond returned to Albania, they and their father pooled their savings to invest in a stock farm and purchase 20 cattle. Thanks to Qemal s extensive experience in farming, the business did well, and it has steadily expanded. Today Qemal owns 55 cattle and produces both meat and milk, and he rents a total of 40 hectares of land. He also has two employees who help him and his sons run the farm. It is usually difficult for agricultural producers in Albania to obtain credit, and Qemal had heard that ProCredit was the only bank in the country that lent to farmers. Thus, in 2008, when loan officers from its Kavaja branch visited his village to promote agricultural loans, Qemal was definitely interested. A few days later, he went to the branch to apply for a loan. The bank offered me a loan that was tailored to my specific needs. The loan officer explained all the terms and conditions in detail, and everything was easy to understand, says Qemal. He used his first loan, for EUR 7,430, as working capital, and in 2009 he took out a second one, this time for EUR 3,715 to purchase feed. This financing enabled Qemal to purchase more cattle and increase his output. He also uses ProCredit s retail services, paying his utility bills and taxes through his current accounts at the bank. Today Qemal has a supply contract with one of the country s biggest dairies and also sells meat to a retail outlet in Tirana. He has ambitious plans for the future, including the construction of his own dairy and slaughterhouse. ProCredit Bank was there for me when I needed support to expand my family business, and I know that I can rely on this bank to help me achieve my future goals, he says.

41 Our Clients 41 Gëzim Zhugli, Home Improvement and Energy Efficiency Loan Client Gëzim Zhugli, a 43-year-old construction engineer, lives in Tirana with his wife and two children and his mother. In 1996, the young couple decided to enlarge their house because it was too small to comfortably accommodate the family they hoped to have one day. Using his savings, in 2000 Gëzim began building a new house to ensure that there would be enough space for both his future family and his mother. As he needed external financing to continue the construction work, Gëzim began thinking about applying a loan from a bank. As he recalls: One night, I saw a television commercial for ProCredit Bank. It sounded like the kind of bank that I might want to do business with, so I decided to visit one of their branches in Tirana. He had already contacted a number of banks and had not been particularly impressed with any of them. But when he talked to ProCredit Bank, it became clear to him that this financial institution not only claimed to be different it really was different. ProCredit s loan terms and conditions were transparent and easy to understand, and the application procedures were very simple, Gëzim says. Shortly after discussing his financing needs with a loan officer, he applied for, and received, his first loan. He used the funds EUR 2,500 to continue the construction work on the house. Between 2000 and 2006, Gëzim took out six home improvement loans from ProCredit Bank with a total volume of EUR 20,250, and this financing enabled him to finish building his house and fully furnish it. As a construction engineer, Gëzim is well aware of the savings that can be achieved by reducing energy consumption. Thus, he recently took out an Eko loan in the amount of EUR 5,140 to invest in new, well-insulated windows and other energy-efficiency measures. Gëzim also has a debit card issued by ProCredit and has opened a savings account at the bank for his children. He greatly appreciates its support, which made it possible for him to build a spacious home for his family, and is already planning to apply for a further loan to finance additional improvements to the house. I have been a ProCredit Bank customer for a long time and I find the staff very pleasant and professional. It is a good bank one that you can always rely on, says Gëzim.

42 42 Annual Report 2009 Financial Statements For the year ended 31 December Prepared in accordance with International Financial Reporting Standards.

43 Financial Statements 43

44 44 Annual Report 2009