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

Transcription

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

2 CONTENT General information...i Consolidated management report on the operations of Societe Generale Expressbank AD for ii Independent auditors report to the shareholders of Societe Generale Expressbank AD...1 Income statement...3 Statement of comprehensive income...4 Balance sheet...5 Statement of changes in equity...6 Statement of cash flows...7 Notes to financial statements 1. Corporate information Basis of preparation Changes in accounting policies and disclosures Significant accounting judgements, estimates and assumptions Summary of significant accounting policies Future changes in accounting policies Interest income Interest expense Fees and commissions income Fees and commissions expense Gains on financial assets available for sale, financial assets at fair value to profit or loss and derivative financial instruments, net Dividends income Other operating income Loss from impairment of loans to clients and other assets Administrative expenses Components of other comprehensive income Cash and balances with the Central Bank Due from banks Derivative financial instruments Financial assets at fair value through profit or loss Loans to clients and receivables on finance leases Financial assets available for sale Investments in associates Property and equipment Intangible assets Other assets Due to banks Deposits from clients Subordinated term debt Income tax Share-based payment plans Other liabilities Equity and reserves Fair values of financial instruments Additional information on cash and cash equivalents reported in the cash flow statement Maturity analysis of assets and liabilities and off-balance sheet commitments Commitments and contingent liabilities Related party transactions Credit risk Liquidity risk Market risk Capital management Events after the balance sheet date...71

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

4 CONSOLIDATED MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK 1. Group s business development 2009 was another year of significant achievement for the Group. Despite of the challenges faced by the global economy and financial services sphere, the efforts of the Management Board of all employees of the Group have lead to a stable growth achieving significant yield and effectiveness, thus confirming for one more time the Group s focus on a sustainable growth following a stringent risk policy. The net profit of the Group for 2009 reached BGN 19.6 million. The net income was increased by 18% up to BGN million, with a simultaneous increase in both net interest income and net fees and commission income. Consolidated operating income statement in BGN thousands Growth (%) Growth (amount) Net interest income 104,840 90, % 14,399 Fees and commissions income 30,382 26, % 4,109 Gain on securities and derivative financial instruments, net 6,792 3, % 3,712 Dividend income % -533 Other operating income 2,195 1, % 633 Gross operating income 144, , % 22,320 Net movement in loan loss provisions -40,889-9, % -31,052 Net operating income 103, , % -8,732 The total net interest income was the main earning contributor for the Group at 31 December 2009, with 73% of gross operating income or almost the same as that in 2008 when it was 74%. For 2009 the Group has generated interest income of BGN million (BGN million in 2008) and thus achieved a yearly growth of 7%. Interest expenses decreased by 6% year-to-year basis up to BGN 60.5 million, which is mainly due to the lower levels of interest expenses on deposits from other banks (-35%, BGN 8.4 million). At the same time, there is a significant increase of interest expenses on deposits from clients (+29%, BGN 8.1 million). At the end of the year interest expenses on deposits from clients amount to BGN 36.2 million compared to BGN 28.0 million for the previous year. The increase reflects the widening of the Group s position in the market and also the growth of the deposit base and the increasing interest levels in the market. The interest expenses on deposits from clients continued dominating the total interest expenses with an increasing share of 60% of total (in 2008 their share was 43%). The net fee and commissions income was up by 16% to BGN 30.4 million, accounting for 21% of gross operating income (almost the same share of 22% for December 2008). The net income from securities and derivative financial instruments amounts to BGN 6.8 million which is 121% annual increase compared to the 2008 level. Their share in the total gross income from bank operations is 5% at the end of 2009 (3% at 2008). Operating expenses grew by 11.60% on year-to-year basis, reaching BGN 81.2 million. The increase results mainly from the extending of the Group s activity and the enlargement of the branch network. Cost-to-Income Ratio remained good (56.3%) as a result of strong activity development, optimization and tight control over operating costs. In a much more competitive environment prevailing in the Bulgarian market, the Group s assets have increased by more than 14% and reached BGN 3,003 million at the end of the year. Due to the active lending activity of the Bank, the net credit portfolio increased by BGN 229 million (12%). Thanks to the trust of our clients, the volume of deposits registered a stable annual growth of 13% to BGN 1,389 million. ii

5 CONSOLIDATED MANAGEMENT REPORT OF SOCIETE GENERALE EXPRESSBANK As at the end of 2009 the Group has one of the most effective working branch networks with 153 sales points. During the year the Group continued to improve its network structure with 5 new points of sale (after 13 in 2008 and 14 in 2007). The ATM fleet increased by 5 new devices which expanded the territorial coverage of Group s operations. The expansion of the branch network translates the increase of the staff during the year by 6.5% on year-to-year basis. At the end of 2009 the number of the staff of the Group reached people. Business development highlights in 2009: Corporate clients: Opening of a Financial Markets department aiming at providing the corporate clients and financial institutions with hedging solutions and access to the foreign exchange and government securities market. The offer of Societe Generale Expressbank combines the unique knowledge of the local market with the global expertise of Société Générale Group, France. New contract for cooperation with the Bulgarian Development Bank for a new credit line of EUR 25 million for on-lending to local small and medium-sized enterprises (SMEs). Expansion of the package of direct banking services to include a new innovative service for mobile phones BankOn SMS Business which enables companies to register each non-transactional service and provides multi-user access for instantaneous automatic or on demand messages (incoming operations, current balance.). The net exposure of the loans to corporate clients increased by 14% reaching the amount of BGN 1,456 million. Funds attracted from corporate clients increased by 21% on year-to-year basis up to the level of BGN 551 million. The share of the term deposits marked significant increase reaching the level of 41% of the total volume (31% in 2008). During 2009 as well the Bank continued to adapt the services offered to suit the needs of its corporate clients. At the end of 2009, one corporate customer uses 2.46 products against 2.15 used for the previous year. Individual clients: Enlargement of the deposit offers to individual clients with the introduction of new time deposits, SG Garant and deposit Tactica, as also an attractive savings account offer; Launch of Expresso retail loans in Euro, aimed at the affluent segment of retail clients - individuals; Introduction of a new offer for students and youngsters - TI package including daily banking and student loan. As a result, the net exposure to retail loans increased by 7%. The net exposure of mortgage loans reached the amount of BGN 143 million, or 27% yearly increase, while the net exposure related to retail loans grew up to BGN 616 million, or 4% yearly growth. In 2009 funds attracted from individual clients increased on year-to-year basis by 8% to BGN 838 million (60% of total deposits from clients), which is due mainly to the 42% growth in the savings accounts. At the end of 2009, one individual customer used 3.37 products vs used in the previous year due to the active commercial policy and subscriptions made for newly launched services. Lease activity: The total exposure as regards the lease contracts at the end of 2009 amounts to BGN 110 million. The carrying amount of assets leased out under operating leases reached BGN 11.7 million. In 2009, 515 contracts have been concluded amounting to more than BGN 47 million, of which 55% for financing of motor vehicles and 45% of plant and equipment. In 2009, and especially during the last quarter, the volume of contracts overdue for more than 90 days has increased significantly due to the worsened economic environment in Bulgaria. The amount of provisions ii

6 accrued for 2009 is BGN 5 million being the main reason for the negative financial result at the end of the year a loss of BGN 2,539 million. Funding of the Group s activities and capital increase Two loans from Bulgarian Bank for Development AD for a total of 25 million BGN were concluded by the Group. Those loans responded to specific conditions of use in order to promote the economic development of Bulgaria. At the end of December 2009, the Group perfectly fulfilled its obligation for credit lines allocation and reported regularly to BBD AD regarding the funds utilised. The Group had increased its capital in the first half of 2009 with BGN 50 million which not only improved its capital base but enabled the Group to follow its ambitious strategy for bank activity development, strictly respecting the regulatory requirements. The capital increase is financed in its full amount by Societe Generale, France, now being an owner of more than 99.6% of the shares of Societe Generale Expressbank. The capital increase contributed to the improvement of the normative capital adequacy and raised our financial stability in the more competitive bank environment, where the influence of the crisis of trust in financial markets reflects on every financial institution. 10 years of successful partnership between Societe Generale and the Group Launching of a special internal and external communication on the occasion of the 10 years successful partnership between Societe Generale, France, and the Group. The campaign was reinforced with 2 special events in Varna and in Sofia for clients, partners, media, and key opinion makers an evening cocktail in Varna and a concert of Sylvie Vartan, followed by a cocktail in the presence of the artist in Sofia. Implementation of a Merchandising concept in all offices of Societe Generale Expressbank aiming at facilitating communications with clients using specialised marketing materials such as: commercial documentation with commercial offers, product representing materials and promotions of the bank as also information signs guiding clients in the office premises. Corporate Social Responsibility Continuation of the successful partnership programs with the National Academy of Art, New Symphony Orchestra and the International Ballet Competition in Varna; High growth in terms of national and regional activities, sponsorships and donation activities supporting several events in the field of culture, education, sports and music and modern dance. Ratings The global rating agency Fitch Ratings confirmed a 'BBB+ (long-term issuer default rating - IDR) to the Bulgarian subsidiary of Societe Generale - Societe Generale Expressbank with a negative outlook. Currently, this is the highest rating Fitch could assign to a bank in Bulgaria. 2. Business development planned for 2010 The main goal of the Group for 2010 will be to follow closely the established policy of consistent and profitable development with good risk management. In order to increase the gained market positions the Group is planning to enlarge its commercial offers and to implement innovative products and financial services adapted to the changes in the environment and aiming at the expansion of both the corporate and individual segments. The Group also plans to restructure its branch network and rationalise its back office operations to increase its efficiency. In general, the main expectations of the Group are related to the targets for increasing the portfolio of financial services and their quality, better standard of service to clients and long-term customer relationships. The most important priorities to face the challenges are the stable liquidity position, reliable risk management and reinforcement of the capital base in order to pursue the development with a sound financial structure. 3. Events after the balance sheet date No events have occurred after the balance sheet date which might impact the consolidated annual financial statements. ii

7 4. Dividends In accordance with decision of the General Assembly of the Shareholders no dividends have been distributed from the 2009 profit. 5. Group s exposure to the price, credit, liquidity and cash flow risks Credit risk The Group 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 in payment. Liquidity risk The Group 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 Group 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 Group 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 Group manages its foreign currency positions by placing short-term foreign currency deposits within the Group, by concluding FX swaps with Société Générale, Paris, and by concluding FX spots deals with Bulgarian National Bank. The Group analyses the movements in financial instruments value arising as a result of changes in market prices. Interest rate risk The exposure of the Group to the interest rate risk is monitored through analyses of the mismatch of all interestbearing exposures, including derivatives. All loans of the Group 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 Group s management in response to changes in market conditions in the country. ii

8 On a letterhead of Ernst & Young TO THE SHAREHOLDERS OF SOCIETE GENERALE EXPRESSBANK AD Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying consolidated financial statements of SOCIETE GENERALE EXPRESSBANK AD and its subsidiaries, which comprise the consolidated balance sheet as of 31 December 2009, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as endorsed by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2009, and of its financial performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards as endorsed by the European Union. Report on Other Legal Requirements Pursuant to the requirements of the Bulgarian Accountancy Act, article 38, paragraph 4, we read the Annual Management Report accompanying the consolidated financial statements for the year ended In our opinion, the information given in the Annual Management Report is consistent with the accompanying annual consolidated financial statements as of 31 December signature /illegible/ Nikolay Garnev, CPA Registered auditor Managing Director Ernst & Young Audit OOD 31 March 2009 Sofia, Bulgaria Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108

9 CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2009 Notes Interest income 3 165, ,888 Interest expense 4 (60,485) (64,447) Net interest income 104,840 90,441 Fees and commissions income 5 35,617 30,385 Fees and commissions expense 6 (5,235) (4,112) Net fees and commissions income 30,382 26,273 Gains on available-for-sale financial assets at fair value through profit 7 or loss and derivative financial instruments, net 6,792 3,080 Dividend income Other operating income 9 2,195 1,562 Operating income 144, ,890 Net change in loan loss provisions for loans to clients 10 (40,237) (9,648) Net change in loan loss provisions for other assets 10 (652) (189) Net operating income 103, ,053 Administrative expenses 11 (81,248) (72,798) Release of other provisions 27-1,277 Share in profit /(loss) of associated company (169) (637) Profit before tax 21,904 39,895 Income tax expense 26 (2,321) (4,156) Profit for the year 19,583 35,739 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

10 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2009 Notes Profit for the year 19,583 35,739 Other comprehensive income Net (loss) from available-for-sale financial assets (235) (304) Gain on revaluation of properties - 10,004 Income tax related to the components of the other comprehensive income (970) Other comprehensive income for the year, net of taxes 12 (211) 8,730 Total comprehensive income for the year, net of taxes 19,372 44,469 Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. 2

11 CONSOLIDATED BALANCE SHEET as at 31 December 2009 ASSETS Notes Cash and balances with the Central bank , ,701 Due from banks ,670 27,651 Derivative financial instruments 15 6,602 - Financial assets at fair value through profit or loss 16 48,258 - Income tax receivables 26 1,212 1,248 Other assets 6,981 8,215 Undelivered equipment under finance leases 22 1, Receivables under factoring contracts Receivables on finance leases , ,681 Loans to clients 17 2,215,304 1,986,374 Financial assets available for sale 18 49,389 60,733 Deferred tax assets Investments in associates 19 3,211 3,380 Property and equipment 20 95,258 86,132 Intangible assets 21 12,671 13,632 TOTAL ASSETS 3,003,204 2,645,046 LIABILITIES AND EQUITY LIABILITIES Due to banks 23 1,145,907 1,015,627 Derivative financial instruments 15 6, Deposits from customers 24 1,389,154 1,232,910 Deferred tax liabilities 26 4,459 4,422 Other liabilities 29 23,444 27,263 Subordinated debt 25 88,165 88,340 Total liabilities 2,657,683 2,369,110 EQUITY Issued capital 30 33,674 28,530 Treasury shares redeemed - (22) Share premium 45, Retained earnings , ,622 Revaluation reserve 30 33,104 33,315 Other reserves 30 20,469 20,469 Total equity 345, ,936 TOTAL LIABILITIES AND EQUITY 3,003,204 2,645,046 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant 3

12 CONSOLIDATED BALANCE SHEET as at 31 December 2007 These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108

13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2009 Share Treasury Share Retained Other capital shares premium earnings reserves (note 31) (note 31) (note 31) (note 31) Revaluation reserve As at 1 January ,530 (22) ,622 20,469 33, ,936 Total comprehensive income ,583 - (211) 19,372 Increase in issued capital 5,144-44, ,000 Treasury shares redeemed As at 31 December ,674-45, ,205 20,469 33, ,521 Total As at 1 January ,530 (22) ,883 20,469 24,585 Total comprehensive income ,739-8,730 44,469 As at 31 December ,530 (22) ,622 20,469 33, ,936 Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No. 108 signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. 4

14 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2009 Notes OPERATING ACTIVITIES Profit before tax Adjustments to reconcile profit before tax to net cash flows Non-monetary: Depreciation and amortisation 11 12,704 10,163 Gain on available-for-sale securities 402 (868) Received non-monetary dividends - (203) Share in the net profit / (loss) of associated company Loss /(Profit) from sales of property, plant and equipment (87) 274 Impairment losses on loans to clients and other receivables 10 40,889 16,605 Proceeds from deferred fees on loans and off-balance sheet (12,688) (10,143) Movement in the employee retirement benefits obligations Revaluation of financial assets at fair value through profit or loss 7, Provisions released 27 - (1,277) Revaluation of derivative financial instruments 7 (103) 140 Other movements (20) (11) Adjustments in assets and liabilities Change in the minimum statutory reserve and balances on blocked accounts with the Central Bank ,585 (152,151) Change in derivative financial instruments - (1,973) Change in due from banks Change in financial assets at fair value through profit or loss 16 (48,385) 17,783 Change in loans to clients 17 (260,784) (623,868) Change in other assets ,628 Change in undelivered equipment on finance leases (460) 310 Change in receivables on finance leases 4,294 (41,515) Change in due to banks , ,306 Change in deposits from clients ,244 91,225 Change in other payables and provisions 29 3,647 12,903 Income taxes paid 26 (2,625) (4,280) Net cash flows (used in) operating activities 179,341 (140,910) (continued on page 8) signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

15 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2009 Operating cash flows related to interest and dividends: (continued from page. 7) Notes INVESTING ACTIVITIES Purchases of property, plant and equipment and intangible assets 20,21 (20,978) (16,916) Proceeds from sales of property, plant and equipment ,217 Purchases of financial assets available for sale 18 (56,065) (25,301) Sales of financial assets available for sale 76,497 5,958 Investments in subsidiaries 19 - (750) Net cash flows from /(used in) investing activities (344) (35,792) FINANCING ACTIVITIES Utilisation of subordinated debt 25-57,025 Loans repaid (175,318) (136,041) Loans received , ,070 Capital increase 50,213 - Net cash flows from financing activities 67, ,054 Change in cash and cash equivalents 246,715 (61,648) Cash and cash equivalents on 1 January 32 89, ,039 Cash and cash equivalents at 31 December ,106 89,391 Operating cash flows related to interest and dividends Interest paid 57,547 61,471 Interest received 165,423 21,126 Dividends received signature /illegible/ Philippe Lhotte Chief Executive Director Seal of Societe Generale Expressbank AD signature /illegible/ Yvan Mirochnikoff Executive Director signature /illegible/ Svetlana Obreshkova Chief Accountant These financial statements were prepared on 19 March 2010 and have been approved for issue by virtue of decision of the Management Board dated 29 March The accompanying notes No. 1 to No. 40 are integral part of these financial statements. Seal These are financial statements on which we have issued an audit opinion dated 31 March Ernst & Young Audit OOD General Manager: signature /illegible/ Registered auditor: Ernst & Young Seal of Ernst & Young Audit OOD, Specialised Audit Firm, Reg. No

16 1. Corporate information Societe Generale Expressbank AD ( the Bank or the Parent company ) 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 a decision No 4024 dated 26 June As of 30 November 1999 a major shareholder of the Group is Societe Generale Paris, holding % of the capital, which is the ultimate parent company of Societe Generale Expressbank AD. In compliance with the full license issued by the Bulgarian National Bank Societe Generale Expressbank AD functions as a universal bank offering full package of banking services and products on the banking market. In 2005 the name of the Bank was changed with a decision of the shareholders from the former SG Expressbank AD to Societe Generale Expressbank AD. The seat and address of management of the Group are in Varna, at 92, Vladislav Varnenchik Blvd. The Group performs its operations in Bulgaria through a headquarters office, 20 branches and 153 offices, the total number of personnel at 31 December 2009 being 1,489 (2008 1,461). 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 Bank incorporated a subsidiary Societe Generale Factoring EOOD, which is 100% owned by the Bank. Subject of the business activity of the subsidiary is factoring. In 2008 the participation of the Group in the share capital of the insurance joint stock company Sogelife Bulgaria AD decreased from 49 % to %. 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. The Group has a two-tier management system Management and Supervisory Boards. Two of the Management Board members are Executive Directors of the Group. 2.1 Basis of preparation The Group 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, financial assets available for sale and the Group s properties, which are measured at fair value. The Group 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. Statement of compliance The financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union (IFRS as endorsed by the EU). The Group presents its assets and liabilities in the balance sheet by a level of liquidity. Analysis regarding the recovery of assets or settlement of liabilities in the respective intervals by estimated maturity is given in Note 33. Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the income statement, unless so is allowed by a particular accounting standard or interpretation as specifically disclosed in the accounting policies of the Group. 7

17 2.1 Basis of preparation (continued) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries, Sogelease Bulgaria EOOD and Societe Generale Factoring EOOD, prepared as at 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognized in assets, are eliminated in full Changes in accounting policies and disclosures New and amended standards and interpretations effective for reporting periods ended 31 December 2009 The accounting policies adopted are consistent with those of the previous financial year except as follows: The Group has adopted for the first time the following new and amended interpretation during the current reporting period. They did not have any impact on the financial status and/or operating results of the Group. IFRS 1 First-time Adoption of International Financial Reporting Standards - Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) IFRS 2 Share-based Payments Vesting Conditions and Cancellations (Amendment) IFRS 7 Financial Instruments: Disclosures (Amendment) IFRS 8 Operating Segments IAS 1 Presentation of Financial Statements (Revised) IAS 23 Borrowing Costs (Revised) IAS 27 Consolidated and Separate Financial Statements - Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation (Amendment) IFRIC 9 IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (Amendment) IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 18 Transfers of Assets from Customers Improvements to IFRSs (issued in 2008 and 2009) The principal effect of these changes is as follows: IFRS 1 First-time Adoption of International Financial Reporting Standards Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) The amendments to IFRS 1 allow the cost of investments in subsidiaries, jointly controlled entities or associates (in the opening IFRS financial statements) to be determined as either cost in accordance with IAS 27 or deemed cost. As the Group is not a first time adopter of IFRS, these amendments did not have an impact on its financial statements. 8

18 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations effective for reporting periods ended 31 December 2009 (continued) IFRS 2 Share-based Payments Vesting Conditions and Cancellations (Amendment) The standard restricts the definition of vesting condition to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as a cancellation. The share-based payments made by the Group do not bear such rights. This amendment of IFRS 2 did not have an impact on its financial statements. IFRS 7 Financial Instruments: Disclosures (Amendment) The amended standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognised at fair value. In addition, reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. The disclosures of fair value measurement are presented in Note 32. The disclosures of fair value measurement and liquidity risk are not affected by the amendments and are presented in Notes 32 and 38 respectively. IFRS 8 Operating Segments IFRS 8 replaced IAS 14 Segment Reporting. IFRS 8 adopts a management approach to segment reporting. The information reported by the enterprises would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the statement of financial position and income statement and entities will need to provide explanations and reconciliations of the differences. As the Group does not report any operating segments, the new IFRS did not have an impact on its disclosures. IAS 1 Presentation of Financial Statements (Revised) The standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented as a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements. IAS 23 Borrowing Costs (Revised) The revised IAS 23 requires capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The revised IAS did not have an impact on the Group s financial statements. IAS 27 Consolidated and Separate Financial Statements Cost of investments in subsidiaries, jointly controlled entities or associates (Amendment) The amended IAS 27 requires all dividends from subsidiaries, jointly controlled entities or associates to be recognized in profit or loss in separate financial statements. The revision to IAS 27 will have to be applied prospectively. Further, it allows cost of an investment in a subsidiary, in limited reorganizations, to be based on the previous carrying amount of the subsidiary rather than its fair value. The amendments of IAS 27 did not have an impact on the financial statements of the Group. 9

19 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations effective for reporting periods ended 31 December 2009 (continued) IAS 32 Financial Instruments: Presentation and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation (Amendment) The standards have been amended to allow a limited scope exception for puttable financial instruments to be classified as equity if they fulfil a number of specified criteria. The amendments did not have any impact on the financial position or financial performance of the Group. IFRIC 9 IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (Amendment) This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. IAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit or loss. The amendments did not have any impact on the financial statements of the Group. IFRIC 12 Service Concession Arrangements This interpretation regulates the accounting of service concession arrangements by the concession operators (contractors). Тhе interpretation did not have any impact on the financial statements of the Group. IFRIC 13 Customer Loyalty Programmes This Interpretation requires customer loyalty award credits to be accounted for as a separate component of the sales transaction in which they are granted and therefore part of the fair value of the consideration received is allocated to the award credits and deferred over the period that the award credits are fulfilled. The adoption of this Interpretation did not have any impact on the financial statements of the Group as no such schemes currently exist. IFRIC 15 Agreements for the Construction of Real Estate The interpretation is to be applied retrospectively. It clarifies when and how revenue and related expenses from the sale of a real estate unit should be recognised if an agreement between a developer and a buyer is reached before the construction of the real estate is completed. Furthermore, the interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue. This interpretation did not have any impact on the Group s financial statements. IFRIC 16 Hedges of a Net Investment in a Foreign Operation The interpretation is to be applied prospectively. IFRIC 16 provides guidance on the accounting for a hedge of a net investment. As such it provides guidance on identifying the foreign currency risks that qualify for hedge accounting in the hedge of a net investment, where within the group the hedging instruments can be held in the hedge of a net investment and how an entity should determine the amount of foreign currency gain or loss, relating to both the net investment and the hedging instrument, to be recycled on disposal of the net investment. This interpretation did not have any impact on the Group s financial statements as it does not apply hedging accounting. 10

20 2.2. Changes in accounting policies and disclosures (continued) New and amended standards and interpretations effective for reporting periods ended 31 December 2009 (continued) IFRIC 18 Transfers of Assets from Customers IFRIC 18 applies to the accounting for transfers of items of property, plant and equipment by entities that receive such transfers from their customers and addresses the following issues: (a) Is the definition of an asset met?; (b) If the definition of an asset is met, how should the transferred item of property, plant and equipment be measured on initial recognition?; (c) If the item of property, plant and equipment is measured at fair value on initial recognition, how should the resulting credit be accounted for?; (d) How should the entity account for a transfer of cash from its customer? This interpretation did not have any impact on the Group s financial position or performance. Improvements to International Financial Reporting Standards (issued in 2008 and 2009) In May 2008 and April 2009, the International Accounting Standards Board ( IASB ) issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group. IAS 16 Property, Plant and Equipment: replaces the term net selling price with fair value less costs to sell. IAS 18 Revenue: Guidance (which accompanies the standard) was added to determine whether an entity is acting as a principal or as an agent. The features to consider are whether the entity: - has primary responsibility for providing the goods or service; - has inventory risk; - has discretion in establishing prices; - bears the credit risk. This improvement did not have any effect on the financial position of the Group. IAS 36 Impairment of Assets: when discounted cash flows are used to estimate fair value less cost to sell additional disclosure is required about the discount rate, consistent with disclosures required when the discounted cash flows are used to estimate value in use. Other amendments resulting from Improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 7 Financial Instruments: Disclosures IAS 1 Presentation of Financial Statements IAS 8 Accounting Policies, Change in Accounting Estimates and Error IAS 10 Events after the Reporting Period IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosures of Government Assistance IAS 23 Borrowing Costs IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 31 Interest in Joint Ventures IAS 34 Interim Financial Reporting IAS 38 Intangible Assets IAS 40 Investment Properties IAS 39 Financial Instruments: Recognition and Measurement IAS 38 Intangible Assets IAS 41 Agriculture 11

21 2.2. Changes in accounting policies and disclosures (continued) Reclassifications In order to achieve better presentation and understanding of the financial statements of the Group, Management is of the opinion that it is necessary to present the net change in the 2008 impairment loss provision related to other assets amounting to BGN 189 thousand on a separate in the income statement. For the purpose, the amount of other operating income for 2008 was reduced by BGN 319 thousand and the amount of administrative expenses for 2008 was increased by BGN 508 thousand Significant accounting judgements, estimates and assumptions The preparation of financial statements requires the management to apply 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 remaining values, which are based on judgments of the Group s management. In assessing the fair values of the buildings Management used estimates based on market data. 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 Group performs financial data analyses of the company issuer in case the securities have been issued by a commercial company. Government bonds issued by the State or by government institutions are not being assessed of counterparty risk default as the Group considers the issuer as one with good and stable credit rating. Allowance for impairment losses and uncollectability The Group reviews its problematic loans, finance lease receivables and factoring contracts 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 and liabilities on finance leases 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 and finance lease receivables, the Group also conducts an analysis on portfolio basis to determine allowance against individually insignificant exposures which have a greater concentration of risk that the loans and finance lease receivables 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. 12