SOCIETE GENERALE EXPRESSBANK AD ANNUAL MANAGEMENT REPORT AND SEPARATE ANNUAL FINANCIAL STATEMENTS. as at 31 December 2008

Transcription

1 SOCIETE GENERALE EXPRESSBANK AD ANNUAL MANAGEMENT REPORT AND SEPARATE ANNUAL FINANCIAL STATEMENTS as at 31 December 2008

2 CONTENT General information...i Management report on the operations of Societe Generale Expressbank AD for ii Independent auditors report to the shareholders of Societe Generale Expressbank AD...1 Income statement...2 Balance sheet...3 Statement of changes in equity...4 Statement of cash flows...5 Notes to the financial statements 1. Corporate information for the Bank Basis of preparation Changes in accounting policy and disclosures Significant accounting judgements, estimates and assumptions Summary of significant accounting policies Future changes in accounting policies Interest income Interest expense Fees and commissions income Fees and commissions expense Gain on securities and derivative financial instruments, net Dividend income Other operating income Administrative expenses Cash and balances with the Central Bank Due from banks Derivative financial instruments Financial assets at fair value through profit or loss Loans to clients Financial assets available for sale Investments in subsidiaries and associates Property and equipment Intangible assets Other assets Due to banks Deposits from clients Payables on lease contracts the Bank as a Lessee Subordinated term debt Income tax Provisions Share-based payment plans Other liabilities Equity and reserves Fair values of financial instruments Additional information on cash and cash equivalents reported in the Cash flow statement Assets and liabilities maturity analysis Commitments and contingent liabilities Related party transactions Credit risk Liquidity risk Market risk Capital management Events after the balance sheet date...56

3 GENERAL INFORMATION Management Board Philipe Charles Lhotte (Chief Executive Officer) Philip Ives Victor Lammet Ivan Victorov Miroshnikov Zhivka Stoyanova Sarachinova Elenka Petrova Bakalova Martin Mihaylov Zaimov Secretary Daniela Hristova Address Varna 92, Vladislav Varnenchik blvd. Legal Advisors Ivelina Manolova Auditors Ernst & Young Audit OOD 1766 Sofia Mladost 4, Business Park Sofia Building 10, floor 2 i

4 MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK AD 1. Business development 2008 was a year of significant achievement for Societe Generale Expressbank. In a much more competitive environment and despite the impact of the major crisis of confidence on financial markets in the second half of the year, SGEB continue to keep the good positions accrued on the market and to achieve excellent results. The bank reported a net profit of BGN 36.6 million in 2008 (13% up comared to the result of 2007). The gross operating income increased by 18,3% to BGN million, with a simultaneous increase in both net interest income and net fees and commissions income. The net operating income was up 16,5% to BGN million. Societe Generale Expressbank reported a consolidated net profit of BGN 35.7 million in 2008 (9,9% growth compared to the level reached in BGN 32.5 million). Operating income statement Societe Generale Expressbank in BGN thousands Growth (%) Growth (amount) Net interest income 87,571 75, % 11,647 Fees and commissions income 25,795 19, % 6,589 Gain on securities and derivative financial instruments, net 3,085 3, % -670 Dividend income > 100% 531 Other operating income 1,279 1, % 162 Gross operating income 118, , % 18,259 Net movement in loan loss provisions -7,679-5, % -2,597 Net operating income 110,585 94, % 15,662 Net interest income was the main earning contributor with 74% of gross operating income. For 2008 the Bank has generated net interest income of BGN 87.6 million (BGN 75.9 million in 2007) and thus achieves a yearly growth of 15.3% mainly as a result of the lending activity, good portfolio quality and the optimum management of deposits and the Bank s long-term borrowings. Fee and commissions income was up by 34.3% to BGN 25.8 million, accounting for 22% of gross operating income. On the cost side the operating expenses grew by 19.7% on yearly basis, reaching BGN 69.8 million. The increase results mainly from the extending of the bank activity and the enlargement of the branch network. The staff costs grow by BGN 4.3 million (21.1%). Cost-to-Income Ratio remained low (59%) as result of strong activity development, optimization and tight control over operating costs. As at the end of 2008 the SGEB has one of the most effective working branch networks with 142 sales points. During the year the Bank continued to improve its network structure with 13 new points of sale (after 14 in 2007 and 12 in 2006). The ATM fleet increased by 20 new devices which significantly expanded the territorial coverage of banking operations. Local marketing activities were reinforced trough celebration of new anniversaries and birthday of offices. In 2008 continued the implementation of new office concept based on modular approach which gives more trust, safety and comfort to both clients and employees. The expansion of the branch network translates the increase of the staff during the year by 15%. In 2008 the number of the staff of the bank reached people. In December 2008 the Group has incorporated a subsidiary company Societe Generale Factoring, which is 100% owned by the Group. The business activity of Societe Generale Factoring will be developed in 2009.

5 Business development highlights in 2008: Corporate clients: Reinforcing the synergy with the affiliates of the Bank in order to augment the quality of service and offer their products through the Bank network; Developing an innovative life insurance product for the companies segment; Extending the Agreement with the European Bank for Reconstruction and Development (EBRD) for financing SMEs with EUR 5 million which have been disbursed to the business in two months; Utilizing a financing from EIB for solutions for smaller projects of SMEs and municipalities in Bulgaria totaling at EUR 20 million that has been provided to Societe Generale Expressbank and to Sogelease Bulgaria OOD. Individual clients: Expansion of the offer of direct banking services to include a new innovative service for mobile phone BankOn SMS which permits to clients not only to receive information about their account movements but to make transactions between own accounts within the Bank with one single SMS message. The other direct banking offers changed their names respectively to BankOn Phone and BankOn Web; For the convenience and security of the clients, a campaign was launched for replacing all existing magneticstripe cards with new chip cards by the date of expiring of the validity without special involvement of the client; Commercialisation of the first saving insurance product of Sogelife - unique formula on the Bulgarian market, Utre (Tomorrow) allows a quiet establishment of capital for clients children s; Enlargement of the deposit offers to individual clients with the introduction of Horizonti saving account offer; Enlargement of the condition of the consumer credit Fortissimo from 1 till 10 years; In the end of the year, strong increase of the market share, regarding consumer and housing loans. New positioning in term of communication Launching a new external and marketing communication campaign based on the message We succeed together and using the faces of 3 very loved Bulgarian celebrities; Repartition of images of the celebrities in the product campaigns and increasing of its volumes in terms of TV, print, billboard advertising, aiming to achieve better awareness for the bank and its products on the Bulgarian bank market; Launching of the the new internet site of the bank that aims to create a proactive sales channel and to allow easy navigation thanks to a clearly defined structure; Strong growth in the brand awareness of Societe Generale Expressbank on the Bulgarian bank market. Corporate Social Responsibility Growth in term of sponsorship and event activities supporting several events in the field of culture, education, sport and music, as well as such on a local level. To support and developed the contemporary art in Bulgaria, SGEB together with the SocGen group organized an exposition of the Contemporary Art collection of the group in Bulgaria; Continuation of a successful partnership programs with the National Academy of Art, New Symphony Orchestra and the International Ballet Competition in Varna; Started new partnership program with Karin Dom Varna Centre for Rehabilitation and Social Integration of Children with Special Needs and their Families, Training and Resource Centre. Ratings The rating agency Fitch assigned to Societe Generale Expressbank one of the best Long Term Issuer Default Rating (IDR) in Bulgaria at ' BBB+ ', which reflects SGEB capital stability, high profitability and the ability of an entity to meet financial commitments on a timely basis. 2. Corporate banking development In 2008 the Bank enlarged its position in the area of corporate lending in Bulgaria. As a result the number of corporate customers increased with 9% and the average outstanding of credits to companies was marked with considerable increase

6 by 58%. This significant growth is mainly due to the increased activeness of Corporate and Investment Banking sector. The Bank achieved significant results also at the corporate lending market for small and medium-sized enterprises. In 2008 the net loan portfolio to corporate customers increased by 48,2% to BGN 1,279 million accounting for 64% of the total portfolio. Attracted funds from companies increased by 13,4% to BGN million at the end of 2008, 37% of the total. Current accounts decreased their share from 70% in 2007 to 60% in 2008 of total, while the share of term deposits increased from 22% to 31%. The improvement of terms and conditions on corporate loans, the realised active marketing activities and the improvement in the quality of service contributed for the positive results achieved in Retail banking activity development Societe Generale Expressbank kept the favourable growth rate in 2008, with the number of customers individuals increasing by 9%. In 2008, the Bank continued to conduct a very dynamic commercial policy and enlarged the individual customers credit portfolio. As a result the net exposure to retail loans increased by 38,9%. As at 31 December 2008 the market share of Societe Generale Expressbank in consumer loans was 6.7%, which ranked it fourth amongst other commercial banks. In 2008, despite aggressive competition from most of commercial banks, attracted funds from individual customers increased on yearly basis by 5,5% to BGN million (63% of total), which is due mainly to 11% increase in term deposits and 4,7% increase in current accounts, respectively. Retail business was supported by active commercial campains, aligned advertising, focused on specific products, the improvement of terms and conditions on products intended to individuals, the improvement in the quality of service and the development of the branch network. 4. Business development plan for 2009 In order to maintain the gained market positions in the condition of crisis of confidence in financial markets in 2009 Societe Generale Expressbank is planning to implement innovations products and services (market services, cash management etc) aiming at the expansion in to corporate and individual market. SGEB also plans to restructure its branch network and rationalise its back office operations to increase its efficiency. After the successful implementation of the new information system, one of the main objectives of the Bank is its enhancement, which will optimize the working process and will improve the quality of banking. In addition, investments are envisaged in projects related to the development of the operations of Sogelease Bulgaria and SG Factoring. 5. Events after the balance sheet date No events have occurred after the balance sheet date which might impact the separate annual financial statements. 6. Dividends In accordance with decision of the General Assembly of the Shareholders no dividends have been distributed from the 2008 profit. 7. Bank exposure to the price, credit, liquidity and cash flow risks Credit risk The Bank manages its credit risk of non-repayment by the borrowers of the total loan amount and interest due by the means of implemented lending activity internal rules. These rules have been developed for the purpose of providing for the Group s requirements for extending loans, classification of risk exposures, loan loss provisions and credit committee activity. For the purpose of risk control related to the loan portfolio of corporate customers, review of the financial position of the borrowers, the quality of their management, the development of the economic sector and condition of the collateral is carried out at least once a year. Management of loans to individuals is carried out on loan portfolio base. Risk Control Directorate monitors the positions of non-performing loans by risk groups and products and analyses the reasons for delays

7 in payment. Liquidity risk Societe Generale Expressbank manages its liquidity risk in accordance with the requirements of the effective local regulatory framework. Liquidity control is carried out through asset management (securing liquid assets to meet the current resource needs) and liabilities management (attraction of secondary market resources aimed to compensate the deficit in inflows). The Bank manages its liquidity risk to match the maturity structure of assets and liabilities by virtue of Liquidity Committee. The Group's management takes ongoing measures for the proper allocation of liquid assets and current liabilities and exercises daily control on liquidity at various levels aimed at effective liquidity management. Market risk The Bank manages its market risk by means of analyses of the movements in exchange rate and interest rate levels, the mismatch in the maturity structure of assets and liabilities and analyses of profitability ratios. Current thresholds of open currency positions are fixed and their compliance is monitored centrally. The Bank manages its foreign currency positions by placing short-term foreign currency deposits within the Group and by concluding FX swaps with Société Générale, Paris. The Bank analyses the movements in financial instruments value arising as a result of changes in market prices. Interest rate risk The exposure of the Bank to the interest rate risk is monitored through analyses of the mismatch of all interest-bearing exposures, including derivatives. All loans of the Bank are with floating interest rate formed as a base floating interest rate plus fixed points under the respective agreements. The base interest rate is set by the management of the Bank in response to changes in market conditions in the country.

8 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF SOCIETE GENERALE EXPRESSBANK AD Report on the Financial Statements We have audited the accompanying separate financial statements of SOCIETE GENERALE EXPRESSBANK AD, which comprise the balance sheet as of 31 December 2008, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with International Financial Reporting Standards as endorsed by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these separate financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the separate financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the separate financial statements give a true and fair view of the financial position of the Bank as of 31 December 2008, and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards as endorsed by the European Union. Report on Other Legal Requirements Pursuant to the requirements of the Bulgarian Accountancy Act, article 38, paragraph 4, we read the Annual Management Report accompanying the separate financial statements for the year ended In our opinion, the information given in the Annual Management Report is consistent with the accompanying annual separate financial statements as of 31 December Ioannis Mystakidis Managing Director Nikolay Garnev, CPA Registered auditor 25 March 2009 Sofia, Bulgaria

9 INCOME STATEMENT for the year ended 31 December 2008 Notes Interest income 3 146, ,899 Interest expense 4 (59,214) (31,975) Net interest income 87,571 75,924 Fees and commissions income 5 29,893 22,940 Fees and commissions expense 6 (4,098) (3,734) Net fees and commissions income 25,795 19,206 Gain on securities and derivative financial instruments, net 7 3,085 3,755 Dividend income Other operating income 9 1,279 1,117 Operating income 118, ,005 Loan loss provisions 15 (7,679) (5,082) Net operating income 110,585 94,923 Administrative expenses 10 (71,069) (58,449) Release of other provisions 26 1, Operating expenses (69,792) (58,318) Profit before tax 40,793 36,605 Income tax expense 25 (4,159) (4,176) Profit for the year 36,634 32,429 Philippe Charles Lhotte Executive Director Mrckael Poulain Procurator Svetlana Obreshkova Chief Accountant These financial statements were prepared on 1 March 2009 and have been approved for issue by virtue of decision of the Management Board dated 12 March The accompanying notes on pages 7 to 56 are integral part of these financial statements. 2

10 BALANCE SHEET as at 31 December 2008 Notes ASSETS Cash and balances with the Central bank , ,630 Due from banks 12 27, Derivative financial instruments Financial assets at fair value through profit or loss 14-24,428 Loans to clients 15 1,986,374 1,372,291 Financial assets available for sale 16 60,733 41,082 Investments in subsidiaries and associates 17 5,878 4,328 Property and equipment 18 83,320 67,910 Intangible assets 19 13,624 14,597 Income tax receivable 25 1, Other assets 20 3,874 4,721 TOTAL ASSETS 2,522,403 1,799,286 LIABILITIES AND EQUITY LIABILITIES Due to banks , ,645 Deposits from customers 22 1,236,601 1,141,998 Payables on lease contracts 23 2,319 2,012 Derivative financial instruments ,973 Subordinated debt 24 88,340 31,315 Deferred tax liabilities 25 3,927 2,319 Other liabilities 28 24,760 17,712 Provisions 26-1,277 Total liabilities 2,245,004 1,567,251 EQUITY Issued capital 29 28, Treasury shares 29 (22) (22) Share premium Retained earnings 195, ,451 Revaluation reserves 33,315 24,585 Other reserves 29 20,469 20,469 Total equity 277, ,035 TOTAL LIABILITIES AND EQUITY 2,522,403 1,799,286 Philippe Charles Lhotte Executive Director Mrckael Poulain Procurator Svetlana Obreshkova Chief Accountant These financial statements were prepared on 1 March 2009 and have been approved for issue by virtue of decision of the Management Board dated 12 March The accompanying notes on pages 7 to 56 are integral part of these financial statements. 3

11 STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2008 Share Treasury Share Retained Other capital shares premium earnings reserves (note 29) (note 29) (note 29) (note 29) Revalua tion reserve As at 1 January ,530 (22) ,451 20,469 24, ,035 Profit for the year , ,634 Revaluation of property ,004 10,004 Revaluation of securities held for sale, net of deferred tax (274) (274) Deferred tax on revaluation reserve (1,000) (1,000) As at 31 December ,530 (22) ,085 20,469 33, ,399 As at 1 January ,530 (22) ,883 15,219 25, ,663 Profit distribution (5,250) 5, Profit for the year , ,429 Deferred tax on revaluation reserve Total Revaluation of securities held for sale, net of deferred tax (95) (95) Sale of non-current assets (389) - As at 31 December ,530 (22) ,451 20,469 24, ,035 Philippe Charles Lhotte Executive Director Mrckael Poulain Procurator Svetlana Obreshkova Chief Accountant These financial statements were prepared on 1 March 2009 and have been approved for issue by virtue of decision of the Management Board dated 12 March The accompanying notes on pages 7 to 56 are integral part of these financial statements. 4

12 CASH FLOW STATEMENT for the year ended 31 December 2008 Notes OPERATING ACTIVITIES Profit before tax 40,793 36,605 Adjustments to reconcile profit before tax to net cash flows Non-monetary: Depreciation and amortisation 10 9,440 7,824 Gain on available-for-sale securities (868) (153) Received non-monetary dividends (203) - Profit from sales of property, plant and equipment (502) Provisions accrued Release of other provisions 26 (1,277) - Impairment loss on loans granted to clients 15 14,215 5,720 Proceeds from deferred fees on loans and off-balance sheet commitments - (9,805) (6,821) Movement in the employee retirement benefits obligations provision Revaluation of financial assets at fair value through profit or loss Revaluation of derivative financial instruments (60) Other movements - 45 Adjustments in assets and liabilities Change in the minimum statutory reserve and balances on blocked accounts with the Central Bank 11 (152,151) (61,950) Change in derivative financial instruments 13 (1,973) 126 Change in due from banks Change in financial assets at fair value through profit or loss 14 17,783 9,206 Change in loans granted to clients 15 (623,868) (496,524) Change in other assets ,824 Change in due to banks , ,099 Change in deposits from clients 22 94, ,216 Change in other payables and provisions 26,28 12,320 5,439 Income taxes paid 25 (4,280) (6,795) Net cash flows (used in) operating activities (103,199) (513) (continued on page 6) Philippe Charles Lhotte Executive Director Mrckael Poulain Procurator Svetlana Obreshkova Chief Accountant These financial statements were prepared on 1 March 2009 and have been approved for issue by virtue of decision of the Management Board dated 12 March The accompanying notes on pages 7 to 56 are integral part of these financial statements. 5

13 CASH FLOW STATEMENT for the year ended 31 December (continued from page. 7) Notes INVESTING ACTIVITIES Purchases of property, plant and equipment and intangible assets 18,19 (14,656) (19,529) Proceeds from sales of property, plant and equipment 18 1,090 1,187 Purchases of financial assets available for sale 16 (25,301) (42,186) Proceeds from available-for-sale assets 5,958 9,381 Investments in subsidiary 17 (1,550) (3,528) Net cash flows used in investing activities (34,459) (54,675) FINANCING ACTIVITIES Payments on finance lease contracts 23 (573) (390) Issue of subordinated debt 24 57, Loans received 21 19,558 11,800 Net cash flows from financing activities 76,010 11,432 Net (decrease)/increase in cash and cash equivalents (61,648) (43,756) Cash and cash equivalents on 1 January , ,795 Cash and cash equivalents on 31 December 31 89, ,039 Operating cash flows related to interest and dividends: Interest paid 56,484 30,808 Interest received 144, ,633 Dividends received Philippe Charles Lhotte Executive Director Mrckael Poulain Procurator Svetlana Obreshkova Chief Accountant These financial statements were prepared on 1 March 2009 and have been approved for issue by virtue of decision of the Management Board dated 12 March The accompanying notes on pages 7 to 56 are integral part of these financial statements. 6

14 1. Corporate information for the Bank Societe Generale Expressbank AD ( the Bank ) is a joint-stock bank established in Bulgaria in June 1993 as a result of a merger of twelve commercial banks. It is registered in the Commercial Entities Register at Varna District Court by virtue of decision No 4024 dated 26 June As of 30 November 1999 major shareholder of the Bank is Societe Generale Paris, holding % of the capital. In compliance with the full license issued to Societe Generale Expressbank by the Bulgarian National Bank the Bank functions as a universal bank offering the full package of banking services and products on the banking market. In 2005 the name of the Bank was changed by virtue of a decision of the shareholders from the former SG Expressbank AD to Societe Generale Expressbank AD. The seat and address of management of the Bank are in Varna, at 92, Vladislav Varnenchik Blvd. The Bank performs its operations in Bulgaria through a headquarters office, 20 branches and 142 offices, the total number of personnel at 31 December 2007 being 1,391 (2007 1,198). In 2005 the Bank incorporated a subsidiary Sogelease-Bulgaria EOOD, which is 100% owned by the Bank. Sogelease-Bulgaria EOOD specialises in the fields of finance and operating leases, and offers its services to all business and industry segments, except for the real estate segment. In 2008 the participation of thebank in the share capital of the insurance joint stock company Sogelife Bulgaria AD decreased from 49% to 41.55%. The subject of the company s business activity includes the following types of insurances: Life and Rent insurance, Endowment insurance, related to an investment fund, additional insurance, and Accident insurance. In 2008 the Bank has established a subsidiary "Societe General Factoring" EOOD, 100% owned by the Bank. The object of the business activity of this company is factoring. The Bank has a two-tier management system Management and Supervisory Boards. Two of the Management Board members are Executive Directors of the Bank Basis of preparation The Bank s financial statements have been prepared on the basis of historical cost with the exception of financial assets at fair value through profit or loss, derivative financial instruments and financial assets available for sale and the Bank s properties, which are stated at fair value. The Bank s financial statements have been prepared in Bulgarian levs and all amounts have been rounded to the nearest thousand of Bulgarian levs (BGN 000), unless otherwise stated. The accompanying financial statements are the separate financial statements of the Bank. The Bank also prepares consolidated financial statements for the Group, comprising the Bank and its subsidiaries Sogelease Bulgaria EOOD and Societe Generale Factoring EOOD. The consolidated financial statements are issued and published simultaneously with the separate accounts. Statement of compliance The financial statements of the Bank have been prepared in accordance with the International Financial Reporting Standards, as endorsed by the European Union (IFRS as endorsed by the EU). 7

15 2.2 Changes in accounting policy and disclosures New and amended standards and interpretations effective for reporting periods ended 31 December 2008 The accounting policies adopted are consistent with those of the previous financial year except as follows: The Bank has adopted the following IFRIC interpretations as of 1 January Adoption of these interpretations did not have any effect on the financial performance or position of the Bank. IFRIC 11 IFRS 2 Group and Treasury Share Transactions IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction IAS 39 and IFRS 7, Reclassification of Financial Assets (Amended) The principal effect of these changes is as follows: IFRIC 11 IFRS 2 Group and Treasury Share Transactions This interpretation requires arrangements whereby an employee is granted rights to an entity s equity instruments to be accounted for as an equity-settled scheme, even if the entity buys the instruments from another party, or the shareholders provide the equity instruments needed. The Bank has not issued, bought or been provided by shareholders with instruments caught by this interpretation. IFRIC 14 IAS 19 The limit on a Defined Benefit Asset, Minimum funding requirements and their Interaction IFRIC Interpretation 14 provides guidance on how to assess the limit on the amount of surplus in a defined benefit scheme that can be recognised as an asset under IAS 19 Employee Benefits. As the retirement benefit plan of the Bank is unfunded, this interpretation has no impact on it. IAS 39 and IFRS 7, Reclassification of Financial Assets (Amended) The amendments were issued in October 2008 and become effective from 1 July The amendment to IAS 39 permits reclassification of non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss category as well as transfer from the available-for-sale category to loans and receivables, in particular circumstances. In relation to reclassification of the financial assets classified as held for trading to available for sale, the Bank has disclosed the changes as per the requirements of these two standards in Note Significant accounting judgements, estimates and assumptions The preparation of financial statements requires the management to apply judgement in making accounting estimates and assumptions, which have effect on the amount of reported assets and liabilities, the disclosure of the contingent liabilities at the date of the balance sheet, as well as on the income and expenses reported for the period. Actual results in the future could differ from such estimates and the differences may be material to the financial statements. These estimates are reviewed on a regular basis and if a change is needed, it is accounted in the period the changes become known. The most significant judgements and estimates are as follows: Useful life of property, plant and equipment, and intangible assets Financial reporting of property, plant and equipment, and intangible assets involves the use of estimates for their expected useful life and residual values, which are based on judgments of the Bank s management. 8

16 2.3 Significant accounting judgements, estimates and assumptions (continued) Fair value of financial instruments Where the fair values of financial assets and liabilities on the balance sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets, where possible, but where this is not feasible, a degree of judgement is required by the Management in establishing fair values. For the reliable measurement of the fair value of the financial instrument is used a comparison to the current market price of a similar financial instrument or alternative valuation technique e.g. determining the discounted cash flows that are expected from the financial instrument applying discount rates equal to the prevailing rate of return on the financial instrument. The judgement includes considerations of comparativeness of financial instruments, estimation of future cash flows, liquidity and model inputs such as correlation and sensitivity of longer dated derivative financial instruments. For determining an impairment of debt securities classified as available for sale the Bank performs financial data analyses of the company. The government bonds are not being assessed of counterparty risk default by the Bank as the Bank considers the issuer as one with good and stable credit rating. Allowance for impairment losses and uncollectability The Bank reviews its problematic loans at each reporting date to assess whether an allowance for impairment should be recorded in the income statement. In particular, judgement by management is required for the analysis on financial performance of the borrowers and availability of sources of the borrower to repay its loans when determining the risk category in which the borrower should be classified and the level of allowance required respectively. In addition to individually classified and provided loans, the Bank also conducts an analysis on portfolio basis to determine allowance against individually insignificant exposures which have a greater concentration of risk that the loans existing at the balance sheet date may not be recovered. This analysis takes into consideration factors such as analysis of historical losses and risks determined on portfolio basis. Impairment of equity investments The Bank treats its equity investments classified as available-for-sale financial assets, as impaired when there has been a significant or prolonged decline in the fair value below their carrying amount or where other objective evidence of impairment exist. The determination of what is significant or prolonged requires judgement in evaluating all significant factors, such as the share price volatility, etc. Employee benefit liabilities The cost of retirement benefit plan is determined using actuarial valuation. The actuarial valuation involves making assumptions about discount rates, future salary increases, personnel turnover rates and mortality rates. Due to the longterm nature of the plan, such estimates are subject to significant uncertainty. 9

17 2.4 Summary of significant accounting policies Foreign currency translation The financial statements are presented in Bulgarian levs the functional and presentational currency of the Bank. Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated in the functional currency at the closing rate of exchange set by the Bulgarian National Bank at the end of each day. All exchange differences are taken to the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost on acquisition in foreign currency are translated in the functional currency using the exchange rate as at the date of the initial transaction (acquisition). The main rates of exchange to the Bulgarian lev are as follows: 31 December December EUR BGN 1 EUR BGN 1 USD BGN 1 USD BGN Financial instruments (i) Date of recognition Regular way purchases or sales of financial assets are recognised on the settlement date, i.e. the date that the Bank commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require the delivery of the asset within the time frame generally established by regulation or convention in the marketplace. (ii) Initial recognition of financial instruments The classification of financial assets at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. Financial assets within the scope of IAS 39 Financial Instruments: Recognition and Measurement are classified as financial assets at fair value through profit or loss, or as loans and receivables, or as investments held to maturity or as financial assets available for sale, whichever is more appropriate. Financial assets are initially recognised at their fair value plus, in case of financial assets not at fair value through profit or loss, any directly attributable incremental costs of acquisition. (iii) Derivative financial instruments Derivative financial instruments include forwards, swaps, options and other instruments and are initially recognised at cost (including acquisition costs) when the Bank becomes party under the contract and are subsequently measured at fair value. The fair value is determined based on quoted market prices or in the absence of such fair values are calculated using other techniques for reliable definition of the fair value. Derivatives are recorded as assets when their fair value is positive and as liability when their fair value is negative. Differences arising from changes in the fair value of derivatives are reported as gain on securities and derivative financial instruments, net. The Bank assesses whether a contract contains an embedded derivative when the Bank first becomes party under the contract. Embedded derivatives are split from the host contract, which is not measured at fair value through profit or loss, when analysis indicates that the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract. 10

18 2.4 Summary of significant accounting policies (continued) Financial instruments (continued) (iv) Financial assets at fair value through profit or loss The Bank classifies its financial assets as financial assets at fair value through profit or loss when they are acquired in order to gain profit from the short-term price fluctuations, as well as financial assets, which on initial recognition are classified to be financial assets at fair value through profit and loss. Financial assets and liabilities are classified in this category by the Management when the following criteria are met: their classification in this category eliminates or significantly reduced inconsistence accounting, which may otherwise arise in the recognition of assets and liabilities on different bases or income and expenses arising on their trade; or assets and liabilities are part of group of financial assets, financial liabilities or both, which are carried at fair value, as well as the result of trading with them, in accordance with the Bank's documented risk management policy or investment strategy; or the financial instrument contains an imbedded derivative, unless the imbedded derivative changes significantly the cash flows or it is readily observable that the imbedded derivative will not be reported separately from the financial instrument. Following initial recognition the Bank measures financial assets at fair value through profit or loss at their fair value. Fair values are determined using published price quotations at an active market, if any, or bid quotations by actively trading Bulgarian banks. All gains and losses resulting from the changes in the fair values of financial assets are included in the net operating income of the Bank. In the absence of quotes other techniques are used for the reliable measurement of the fair value of the financial instrument through: comparison to the current market price of a similar financial instrument or determining the discounted cash flows that are expected from the financial instrument applying discount rates equal to the prevailing rate of return on the financial instrument. (v) Receivables from banks The Bank s receivables on current accounts and term deposits placed with other banks are classified as loans and receivables and are measured at their amortised cost calculated based on the effective yield on the asset, less impairment loss provisions. Receivables on current accounts without an agreed term and interest rate are reported at nominal amounts. (vi) Loans to clients Loans and advances granted by the Bank are classified as loans and receivables and are measured at amortised cost, less a provision for impairment and uncollectabilitiy loss. The amortised amount is calculated by applying the effective interest rate. Loans provided to clients, together with the impairment accrued thereon, are written off (derecognised) if their future repayment is not longer probable and all respective collaterals thereon have been either utilised or transferred to the Bank. (vii) Financial assets available for sale Financial assets available for sale are classified as such if they cannot be included in "Financial assets at fair value through profit or loss, Financial assets held to maturity or Loans and receivables. Such assets can be sold in response to changes in market risks or liquidity requirements and include shares and interests in local and foreign commercial entities, shares in other financial institutions and government securities. Subsequent measurement of financial assets available for sale is at fair value, unless their fair value cannot be measured reliably. In this case they are presented in the balance sheet at cost. Unrealised gains and losses are taken directly to revaluation reserves in the equity section. 11

19 Upon sale of financial assets available for sale the accumulated gain or loss previously reported in equity is taken to the income statement as Gains on securities and derivative financial instruments, net'. 2.4 Summary of significant accounting policies (continued) Financial instruments (continued) (vii) Financial assets available for sale (continued) Interest income on financial assets available for sale is reported as interest income based on the effective interest rates. Dividends on financial assets available for sale are taken to the income statement as other income when the entitlement to receive these dividends is established. Impairment losses on financial assets available for sale are taken to the income statement as impairment losses on financial investments against the previously set revaluation reserve. (viii) Interest-bearing loans and borrowings Upon initial recognition interest-bearing loans and borrowings are measured at the fair value of the consideration received less the directly related transaction costs. Following initial recognition the Bank measures interest-bearing loans and borrowings at amortised cost using the effective interest rate method. Derecognition of financial assets and liabilities Financial assets A financial asset or, where applicable a part of a financial asset or part of a group of similar financial assets, is derecognised when: the contractual rights to receive cash flows from the asset have expired; the contractual rights to receive cash flows from the financial asset have been retained but an obligation has been assumed to pay them in full without material delay to a third party under a pass through arrangement; or the contractual rights to receive cash flows from the financial assets have been transferred, where (а) the Bank has transferred substantially all risks and rewards of the financial asset; or (b) the Bank has neither transferred, nor retained substantially all risks and rewards of the financial asset, but has transferred control of the asset. Where the Bank has transferred its contractual rights to receive cash flows from a financial asset and has neither transferred nor retained substantially all the risks and rewards of the financial asset, nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash settled option or similar provision) on the transferred asset, the extent of the Bank s continuing involvement is the amount of the transferred asset that the Bank may repurchase. However, in the case of a written put option (including a cash settled option or similar provision) on an asset measured at fair value, the extent of the Bank s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another debt instrument from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original financial liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement. 12

20 2.4 Summary of significant accounting policies (continued) Securities repo deals The Bank concludes transactions for temporary sales of securities with a repurchase provision on a future date at certain price. Securities sold under repo transactions are not derecognised from the Bank s balance sheet and they continue to be reported as financial assets at fair value through profit or loss. The nature of these securities is collateral on financing received by the other party under the transaction. Amounts received under the transaction are reported as liabilities on repo deals. The difference between the agreed selling price and the repo price is accrued in the period of the transaction and is reported as interest expense over the life of the agreement using the effective interest rate. Where the buyer has the right to sell or pledge the securities subject of the transaction, these are stated on a separate line in the Bank s balance sheet as financial assets pledged as collateral. Securities purchased under repo deals (reverse repos) are not recognised in the Bank s balance sheet. Cash (including interest) paid is recognised on a separate line in the Bank s balance sheet. The difference between the purchase price and the resale price is accrued in the period of the transaction and is reported as interest income over the life of the agreement using the effective interest rate. Fair value of financial instruments The fair value is the amount at which a financial instrument may be exchanged or settled in an arm's length transaction between knowledgeable and willing parties, where fair value best evidence is the market price at an active market. Fair values are determined using published price quotations at an active market, if any, or bid quotations by actively trading Bulgarian banks, excluding the direct transaction costs. In the absence of quotations other techniques are used for the reliable measurement of the fair value of the financial instrument through: comparison to the current market price of a similar financial instrument or determining the discounted cash flows that are expected from the financial instrument applying discount rates equal to the prevailing rate of return on the financial instrument. The Bank has estimated the fair value of financial instruments based on available market information, if any, or using other appropriate valuation models. Where the management uses available market information to determine the fair values of financial instruments, the market information may not fully reflect the value at which these instruments may be actually realised. Impairment of financial assets (i) Loans to clients and loan loss impairment Provisions for loss due to impairment represent the difference between the book value of the financial asset and its estimated recoverable amount, which is the present value of future cash flows, discounted using the original effective interest rate on the loan. Cash flows associated with short-term loans are not discounted. The Bank classifies loans granted to clients in several risk groups. In accordance with the Group's policy, which is in accordance with IFRS, for non-performing loans analysis of the expected cash flows is made and their recoverable amounts are calculated following discounting. The present value of the future cash flows is discounted using the original effective interest rate agreed on the loan. If a floating interest rate is agreed for the loan, the current effective interest rate is used to calculate the discount rate. The calculation of the present value of the future cash flows on a secured loan also reflects any cash flows expected from the realisation of the collateral. The difference between the book value and the recoverable amount is the impairment for loss. The Bank determines impairment individually for individually significant loans (based on existing objective evidence of impairment). Assets that are assessed as individually significant and for which impairment is charged, are not included in the assessing impairment on portfolio basis. The impairment loss provision for loans which are not individually significant and are of homogeneous nature, is determined based on analysis of the historical losses and risks on portfolio basis. 13