Banca Intesa - Annual Report Content

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3 Annual Report 2013

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5 Banca Intesa - Annual Report 2013 Content Key financial indicators 05 Letter from the Chairman of the Board of Directors 06 Foreword by the President of the Executive Board 08 Macroeconomic environment and the banking sector 11 Retail banking 19 Corporate banking 27 Asset management and investment banking 33 Corporate social responsibility 37 Financial statements 45 Organisational structure 149 Business network 153 3

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7 Banca Intesa - Annual Report 2013 Key financial indicators in thousand RSD Banca Intesa Beograd INCOME STATEMENT Net interest income 19,989,839 19,550,920 19,437,755 Net fee and commission income 5,527,340 5,598,639 5,435,066 Profit before tax 9,217,740 10,304,582 10,689,733 Income tax 623, ,548 1,113,156 Net profit from deferred tax assets and liabilities 12,882 18,924 14,263 Profit after tax 8,607,525 9,492,958 9,590,840 BALANCE SHEET Cash and cash equivalents 21,421,677 35,013,575 16,222,561 Revocable deposits and loans 69,453,952 56,757,728 83,162,819 Loans and deposits 265,535, ,550, ,337,725 Securities (excluding own shares) 41,324,022 35,081,730 17,784,587 Other placements and equity investments 14,707,491 13,437,692 15,469,738 Fixed, intangible assets and non-current assets held for sale and discontinued operations 8,615,930 8,645,140 7,239,340 Other assets 6,182,509 4,843,225 3,105,919 Total assets 427,241, ,329, ,322,689 Transaction deposits 110,309,862 99,338,201 84,678,429 Other deposits 163,425, ,199, ,686,366 Borrowings 46,736,931 53,565,421 57,106,462 Provisions 1,531,606 1,922,334 2,229,010 Other liabilities 6,350,620 6,251,990 17,208,097 Total liabilities 328,354, ,277, ,908,364 Equity 98,887,188 90,051,831 80,414,325 Total liabilities and equity 427,241, ,329, ,322,689 INDICATORS Profit before tax / Total assets 2.16% 2.49% 2.72% Profit before tax / Total equity 9.32% 11.44% 13.29% Interest income / Total assets 6.93% 7.58% 7.92% Interest expenses / Total liabilities 2.25% 2.85% 2.97% Capital adequacy ratio 19.91% 19.79% 16.86% Net assets per employee 140, , ,601 Number of employees 3,039 3,134 3,200 5

8 Letter from the Chairman of the Board of Directors the decline, reverting to the projected target range of 4±1.5 percent and hitting a 40-year low towards the end of the year. On the positive side too, the domestic currency remained generally stable throughout the year, depreciating a mere 0.8 percent against the euro, while foreign direct investments tripled against the year before hitting 756 million euros. However, the unemployment rate remained high and Serbia continued to struggle with considerable fiscal challenges evident in a growing public debt. Ladies and gentlemen, It is a great honour for me to present you with Banca Intesa accomplishments achieved in Even though the tightening of the economic and business environment imposed serious challenges for the banking sector during the year under review, Banca Intesa maintained stable and successful performance across all key segments, once again confirming its leadership in the Serbian banking market while attaining solid profitability. The positive trend in operations has been derived from a disciplined and committed execution of a strategy that mainly focuses on preserving business stability. Maintaining adequate asset quality and a below-market-average NPL level were vital contributors, while sustainment of firm and efficient performance was enabled by a stable revenue stream and favourable cost-to-income ratio. By attaching particular importance to solidity and sustainability we remained firmly committed to further advancing our business model that revolves around customers, fully contributing to the economic, social and environmental advancement of community while fostering stable and lasting relationships with all our stakeholders. Looking from a broad macroeconomic perspective, the entire region started recovering from recession, with the economy in South Eastern Europe expanding by an average of 2.2 percent. Positive growth rates were posted in all countries, including Serbia, due to increased performance in agriculture and industrial production, as well as stronger exports. Serbia's inflation rate was on The banking sector continued to experience the negative impact of the uncertain economic situation reflected in contracting credit demand, reduced debt servicing capacity and a rising NPL level, particularly in the corporate segment whose financial soundness remained a key source of vulnerability for the banks. This, coupled with consequently tightening underwriting standards and more cautious risk management resulted in a credit activity drop, with total loans declining 4.5 percent against 2012 to RSD 1.8 trillion. On the other hand, total deposits hit nearly RSD 1.6 trillion, growing 3.4 percent year-on-year, mainly underpinned by a strong increase in retail deposits. With a total NPL ratio at 21.4 percent, driven by the slow economic recovery and the difficult situation in the real economy, asset quality continued to be a major source of risk. Faced with such challenges, it is no wonder that the banking sector ended the year in the red, for the first time in the past decade. Nevertheless, it remained well regulated and supervised with ample capitalization (20.9 percent), among the highest in the region, providing the potential to support expected developments and future customer financial needs. Operating in such an unfavourable economic environment, Banca Intesa succeeded in recording a stable operating performance reflected in a pre-tax profit of RSD 9.2 billion, while disciplined cost management and efforts to boost operational efficiency helped us improve average cost to income to 42.5 percent. Knowing that product innovation is essential for staying ahead of the curve, we continued to improve customer experience and service quality while deepening our knowledge of our customers in order to tailor our product offering to the specific needs of each client segment. Strong orientation towards customers, supported by our comfortable capital and liquidity positions, enabled us to maintain a stable lending activity and further grow our loan market share to almost 17 percent. Simultaneously we recorded a strong inflow of deposits as a reflection of customer trust and confidence, which enabled us to win more market share and end 6

9 Banca Intesa - Annual Report 2013 the year with more than 16 percent. As a result, we continued to strengthen and expand our customer base, exceeding 1.67 million at the end of the year. An important determinant of our stability is also the high quality of our loan portfolio and a below average NPL rate achieved through the prudent approach that prioritizes cautious risk management and efficient collection. The success of our Bank in 2013 and our expected achievements in the future mainly rest on the commitment and devotion of our managers and employees, who are striving towards excellence in fulfilling their tasks, always keeping in mind our clients needs and satisfaction. On behalf of the Board of Directors, I would like to take this opportunity to thank you all for the efforts invested in keeping our Bank at the forefront of the domestic banking sector. With overall economic and business conditions poised to remain challenging in the period ahead, our strategy will continue to prioritize an agile and prudent risk management system while making our business processes simpler, leaner and more efficient, and further advancing our relentless focus on customers. I am certain that our hard work and consistency in implementing this strategic agenda, combined with support from our parent group Intesa Sanpaolo, will continue to ensure that we are aligned to the changing economic and social landscape and well positioned to meet the needs of our customers while laying foundations for healthy and sustainable growth in the future. Sincerely, Massimo Malagoli Chairman of the Board of Directors 7

10 Foreword by the President of the Executive Board to the previous year, was still below desired levels. Still, Serbia continued to face large fiscal challenges reflected in the wider budget deficit and public debt, which is why their reduction must remain the main objective of the fiscal consolidation programme in order to create conditions for sustainable economic growth in coming years. Dear shareholders, Banca Intesa s operating results in 2013 confirm that the efficient implementation of a strategy resting on the principles of sustainability and responsibility, as well as on the full observance of the standards of good corporate governance is the way to success even in particularly adverse market conditions. Against a background of increased risk, as well as a complex economic and social environment, our primary focus was to respond to customer needs, maintain stability and strengthen overall efficiency. Striving to fully integrate goals in these three areas into our daily operation, we managed to once again confirm the continuity of our stable results from the previous years and maintain our leading position in the market, creating value for citizens and businesses, protecting the interests of our shareholders and contributing to the long-term sustainability of the Bank. The domestic economy encountered numerous challenges and difficult business conditions last year. Owing to industrial production growth, a better agricultural season, as well as a significant increase in exports, economic activity headed towards mild recovery in An important determinant of the macroeconomic environment in the past year was the relatively low rate of inflation, which, together with the dinar exchange rate stability enabled the National Bank of Serbia to take steps towards gradual relaxation of monetary policy. A significant boost to the local economy certainly came from the increase in the foreign direct investment inflow, which, although stronger compared Despite a partial recovery of economic activity and macroeconomic stabilisation, banking market conditions continued to tighten. Due to a number of adverse factors, both on the supply as well as on the demand side, the banking sector posted a decrease in credit activity. The reasons for this primarily lay in the reduced creditworthiness of customers and a further increase in non-performing loans amidst modest economic growth and illiquidity of businesses, as well as a high unemployment rate and low living standards. In these circumstances the banks revised their lending policies, implementing a more conservative approach to risk management. Under the pressure from write-offs of non-performing loans and provisions, the banking sector recorded a negative operating result, but still maintained a high level of liquidity and capitalisation, while non-performing loans were adequately covered by loan loss provisions. At the same time, customer trust was preserved, which was reflected in a further increase in total deposits despite lower interest rates. Even in such an unfavourable setting Banca Intesa continued to provide significant financial support to its customers, reinforcing its partner role by improving existing products and services and developing new ones. Responding to the needs of citizens amidst uncertainty regarding the regularity of personal income payments, as well as negative trends in the labour market, we developed a cash loan whose unique features meet the real needs of customers, enabling them to skip the payment of instalment when needed. In addition, we further improved the borrowing conditions for retired people, taking into account the specific needs of this population segment, while in depository operations we offered a new term savings product to our customers. We also kept our leading position in the payment card market in terms of both the number of issued payment cards and the volume of performed transactions. At the same time, subsidised loans from the Serbian Government s programme were once again an important element of our strategy of financing the economy, especially in the small business segment, while in cooperation with international financial institutions we provided our customers with access to the most affordable funding for investment projects and working assets, but also for energy efficiency. 8

11 Banca Intesa - Annual Report 2013 As in the previous years, we strove to meet all market expectations by constantly improving the quality and availability of our services, knowing that a satisfied customer is also a loyal customer. Putting customer needs first, we continued our work on improving the customer relationship management model, which enabled us to better understand and recognise their needs. Even though the customers still most often choose the branch as the main point of their interaction with the Bank, we are introducing the most advanced technologies in an effort to provide them with as simple, efficient and comfortable access to services as possible, in line with the habits and increasingly sophisticated demands of the population at large. In line with our strategic commitment to full integration of the concept of sustainability and corporate social responsibility in our daily business activities and decisions, we sought to take great care of the needs of all our stakeholders. In addition to introducing new and improving existing products intended for specific social groups, we launched additional community support projects and continued investing in youth education, promotion of culture and sports, as well as in better conditions in the health care system. Constantly improving our CSR practice, we put an emphasis on strengthening the culture of corporate volunteerism and launched the Intesa from the Heart programme, which brought together all existing projects and included new initiatives. In addition, we implemented standards of the internationally recognised reporting methodology the Global Reporting Initiative, which helped us present and monitor the results of our projects and activities in a more consistent and systematic manner. We ended the year with a stable or moderately increasing volume of business. Our balance sheet total increased to RSD billion, which enabled us to confirm our position of the best ranked bank with a market share of 15.2 percent. With lending to businesses and individuals totalling RSD billion, we also strengthened our leading position in the loan market and increased our share to 16.7 percent, while customer loyalty and their strong trust led to an increase in total deposits to RSD billion and a market share of 16.1 percent. As a result, our customer base continued to grow, topping 1.67 million, with 1.56 million retail and small business customers and around 115,000 corporate clients. These results were achieved owing to the dedication and commitment of our employees, whom I would like to thank for their professional work and efforts they invested in the implementation of our business plans. I also wish to thank all our customers and business partners, as well as the members of the Board of Directors for their trust and the contribution to the successful operation of the Bank. Strengthening system stability and increasing productivity, while identifying new growth areas through focusing on dynamic economic sectors and new retail market segments, remain our priorities in the period ahead. In line with the three-year business plan of our parent Group, employee development and customer relations quality will also be important determinants of our actions. I am convinced that such a strategic framework will enable us to create a solid and sound basis for the sustainable development of our Bank. Sincerely, Draginja Đurić President of the Executive Board 9

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13 Banca Intesa - Annual Report 2013 Macroeconomic environment and the banking sector 11

14 Macroeconomic environment and the banking sector Serbia s macroeconomic environment in 2013 was marked by a mild economic recovery, strong industrial production growth, as well as an increase in exports. In addition, the inflation rate decreased significantly and returned to the target tolerance band of 4±1.5%, while the foreign exchange market saw relatively stable trends. At the same time, Serbia faced major fiscal challenges as a consequence of a modest economic expansion and a failure to curb excess public spending, which led to the budget deficit and public debt growth. Serbia has been the country with the largest fiscal deficit in Central and Eastern Europe for two years now, which resulted in a public debt increase of as much as EUR 5.4 billion during 2012 and Compared to its neighbours, Serbia has the lowest World Economic Forum Global Competitiveness Index and ranks 101st among 148 countries in the world due to poor macroeconomic indicators and the state of its infrastructure. This Index has not shown any trend of improvement since In the World Bank Doing Business Report for 189 countries at the global level, Serbia dropped six places compared to the previous year to the 93rd spot, with Bosnia and Herzegovina being the only neighbouring country ranking lower. While international statistics predict global economic growth and a mild recovery next year for the first time since the outbreak of the global economic and financial crisis six years ago, expectations in Serbia are much more modest. Macroeconomic environment Economic activity The countries of South-Eastern Europe emerged from recession in 2013, primarily due to improved export performance. Serbia recorded one of the highest rates of gross domestic product (GDP) growth in the entire region, standing at 2.5%, which was mainly driven by net exports based on previous investments in the automotive and oil industries, as well as the recovery of agricultural product exports. However, economic slowdown may be expected already in The National Bank of Serbia (NBS) projects modest GDP growth, of around 1%, as a result of exhausted effects on the supply side and expected fiscal consolidation measures. The beginning of the eurozone recovery and the 3.6 Contribution to annual GDP growth rate (%) Agriculture Services Taxes less subsidies Industry and construction FISIM GDP * * Source: NBS projection start of Serbia s European Union (EU) accession negotiations will contribute to investment growth and further net exports strengthening. Going forward, the economic policy will be based on Serbia s comparative advantages, as well as on investment in export-oriented sectors: agriculture, the energy, food, automotive and information technology industries. The aim of the planned stimulation of the competitive sectors is to attract foreign direct investment (FDI) and further increase exports, thus additionally reducing external imbalance. This is in line with the new sustainable economic growth model based on net exports growth. Inflation Year-on-year inflation rate recorded a continuous decline during In September, it returned to the target tolerance band for the first time since July The lowest level of year-on-year inflation in the past 40 years was recorded in November, at 1.6%. Although the low base will cause a slight increase in inflation during 2014, NBS projections forecast that inflation will stay within the target band, with an average annual rate of about 4%. In its monetary policy programme, the central bank committed to targeting a 4% inflation rate in 2014, with a tolerance of 1.5 percentage points, while the medium-term target rate of year-on-year inflation was maintained at the same level both in 2015 and in 2016 due to the fact that the convergence of price levels in Serbia to the EU price level is not complete, especially in administered prices

15 Banca Intesa - Annual Report 2013 Year-on-year inflation and key policy rate trends (%) Dinar exchange rate trend USD/RSD EUR/RSD Year-on-year inflation Key policy rate Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 2013 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 2013 Monetary policy Reduced inflationary pressures allowed the central bank to pursue relaxed monetary policy despite the high fiscal risk in The average key policy rate was 11%, and it decreased by 225 bps from May (11.75%) to December (9.5%). In 2014, the NBS will have room to ease the restrictiveness of its monetary policy, but this will be under the impact of the intensity of potential negative effects of Fed tapering on the exchange rate and country risk premium, as well as of the speed and consistency of the implementation of fiscal consolidation measures. Dinar exchange rate In 2013, the dinar exchange rate depreciated in nominal terms against the euro by 0.8% and appreciated against the dollar by 3.7%, and the NBS intervened in the foreign exchange market by buying EUR 615 million and selling EUR 435 million. The slight strengthening of the dinar in the first five months of 2013 was caused by increasingly restrictive monetary policy, a rising interest of nonresidents in investing in government securities, as well as a decreasing current account deficit of the balance of payments. 4.9 Monthly exchange rate changes 3.6 USD/RSD EUR/RSD Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec 2013 External debt and current account deficit Economic recovery led by growth in agriculture and industry, as well as an increase in net exports was accompanied by a slight reduction in external and internal imbalances. At the end of 2013, Serbia s external debt was EUR 25.8 billion, and it remained almost unchanged yearon-year, growing around EUR 100 million. However, the share of external debt in GDP is still above the 80% debt ceiling prescribed by the World Bank. However, the end of the first half of the year brought depreciation pressures caused by uncertainty about the future policy of Fed tapering and an unfavourable assessment of the state of public finance. After short-term instability, foreign exchange market trends calmed down and the appreciation pressures in the fourth quarter of the year were a result of falling risk premium and increased investment of non-residents in dinar-denominated securities, as well as stronger FDI inflow and favourable foreign trade trends. When it comes to predictions for 2014, the exchange rate is not expected to be under major pressures, given the projected low inflation rate External debt External debt (EUR million) External debt/gdp (%)

16 The current account deficit of the balance of payment was halved year-on-year to EUR 2.1 billion or around 6,5% of GDP, and its sharp decline was caused by a trade deficit reduction and an exports increase by as much as 25.8%. The largest contribution to the reduction in the current account deficit came from the chemical, automotive and oil industries, while the largest individual contribution came from exports made by FIAT. According to NBS projections, the share of the current account deficit is expected to remain at a similar level in 2014 given that exports increase will slow down year-on-year, while low domestic demand will prevent faster imports growth FDI (EUR million) Current account deficit (% of GDP) * * NBS projection FDI by country (EUR million) Netherlands Croatia Romania Denmark Switzerland Foreign direct investment In 2013, FDI recorded a net inflow of EUR 769 million, which was three times the level in 2012, but still below the value from the previous years. The FDI recovery in 2013 was a result of the implementation of projects in the manufacturing and construction industries, as well as in the financial sector. The bulk of the investment in the manufacturing industry was focused on exportoriented activities, which is why twelve of the fifteen largest exporters in 2013 are majority-owned by foreign companies. Serbia made significant progress in improving the investment and business climate, but further structural reforms need to be implemented in the areas that are the subject of the announced amendments to four systemic laws: on bankruptcy, planning and construction, labour and privatisation. According to the central bank's projections, a further FDI recovery is expected in 2014, with an anticipated net inflow of around EUR 1 billion based on the announced investments in the energy sector, the manufacturing industry, trade and agriculture. The construction of the South Stream natural gas pipeline and the bilateral arrangement with the United Arab Emirates will provide an important contribution to FDI growth Foreign trade Serbia s total foreign trade stood at EUR billion in 2013, up 12.8% year-on-year. Exports of goods were worth EUR billion, while imports were at a level of EUR billion, resulting in a deficit of about EUR 4.47 billion. Major foreign trade partners in exports were Italy (EUR 1.79 billion), Germany (EUR 1.31 billion) and Bosnia and Herzegovina (EUR 888 million), while largest imports came from Italy (EUR 1.78 billion), Germany (EUR 1.69 billion) and the Russian Federation (EUR 1.43 billion). Exports growth was driven by new FDI-based export capacities, but the sustainability of this high growth is uncertain, given the narrow export base and competitiveness issues. Nevertheless, exports are expected to continue to grow at a double-digit rate in Real downside risks may appear due to recession and declining demand in the EU and the neighbouring countries, as well as through a drop in the prices of primary products and commodities

17 Banca Intesa - Annual Report Foreign trade (EUR million) Exports Imports Trade balance two sets of measures, consolidated budget deficit will be around 7% of GDP in 2014, which will also be the highest rate in the region. Therefore, immediate fiscal consolidation measures must be undertaken that would lead to savings of around EUR 500 million per year in order for the deficit to decrease to sustainable 2%-3% of GDP by Fiscal consolidation is a necessary condition for any economic growth in the coming years, but in itself is not sufficient. Reforms aimed at improving the business environment are also important for increasing the potential for economic growth in the future Budget deficit (% of GDP) Foreign trade with major partners (EUR million) Exports Imports Trade balance China Kazakhstan Russian Federation -527 Poland -459 Hungary Fiscal policy When it comes to fiscal policy, consolidated budget deficit reached the level of around 4.8% of GDP in 2013 compared to the 3.6% projected by the original budget for 2013, as a result of an extreme revenue underperformance. The deficit would have been at an even lower level if the expenditure had not been dynamically reduced during the year. Consolidated budget deficit will continue to increase in 2014 despite the implementation of two sets of fiscal consolidation measures. In September 2012, the Serbian Government adopted a set of measures that included abolishing 130 parafiscal levies, raising VAT rate from 18% to 20%, increasing the dividend and interest revenue tax from 10% to 15%, as well as hiking excise duty on cigarettes. In addition, in October 2013 the Government adopted a set of measures aimed at enabling economic recovery that included cutting the public sector wages exceeding RSD 60,000, increasing the lower VAT rate from 8% to 10%, restructuring public enterprises and reducing subsidies, making savings in the area of goods and services, enabling cheaper borrowing, as well as improving the business environment. Regardless of these The unsustainability of the previous fiscal policy is also confirmed by the fact that public debt increased by EUR 5.4 billion during the previous two years and that its level doubled against Public debt reached 63.8% of GDP at the end of 2013, which was well above the 45% ceiling set by the Budget System Law, as well as the 60% ceiling prescribed for EU countries Public debt (% of GDP)

18 The current public debt is a result of excessive government spending. Depending on Serbia s GDP growth in the next three years, as well as the fiscal measures that will be implemented by the Government, a slowdown of the public debt growth is expected, to be followed by a gradual decrease in the public debt-to-gdp ratio in the medium term. As regards expectations for 2014, the short-term outlook for Serbia is uncertain, taking into account the global turmoil and a weak recovery capacity of the eurozone. The main goals of the Serbian economic policy in the future must be the stabilisation of public debt, the promotion of economic growth based on investment and exports, as well as an increase in employment. Their achievement would require a strong fiscal adjustment to reduce public spending and the implementation of structural reforms. Necessary reforms include the continuation of the privatisation process, the completion of the restructuring of state-owned enterprises, the reduction of regional disparities, as well as the acceleration of public sector reforms in order to establish a business environment that will enable foreign and local investment growth and lead to an increase in the productivity and competitiveness of the economy. Banking sector At the end of 2013, the Serbian banking sector numbered 30 banks with total assets of RSD 3,151 billion (EUR 27.5 billion). The previous year was marked by a slower credit activity as a result of adverse factors on both the demand and the supply side. On one hand, the uncertain economic situation led to a weak credit demand and had a significant impact on its quality. On the other hand, supply was limited by the tightening underwriting standards and a more cautious risk management due to a decrease in customer creditworthiness and a high level of nonperforming loans (NPL). Despite the reduced availability of foreign funding, banks in Serbia are very liquid and well capitalized, which gives them the potential to finance credit growth. The loan and deposit trend was predominantly caused by foreign exchange rate movements due to a very high degree of eurisation of the Serbian economy. At the end of 2013, 73.2% of loans were indexed to a foreign currency (61.9% of retail loans and 79.4% of corporate loans), while foreign currency deposits accounted for 77.3% of total deposits (89.4% in the retail segment and 47.3% in the corporate segment). Despite the high NPL rate, of 21.4%, the capital adequacy ratio of 20.9% at the end of 2013 is a strong indicator of the stability of the domestic banking sector. The capital adequacy level is well above the regulatory minimum of 12% and is among the highest in the region. At the same time, NPLs are fully covered by loan loss provisions (113.8%). Given that modest GDP growth is forecast in the future, it is expected that both loans and deposits will follow a slow upward path. In addition, intensifying competition is anticipated, primarily in the segment of blue chips, but the focus will also be on small and medium-sized enterprises recognised as the main drivers of economic recovery, as well as on the retail segment. Banca Intesa holds the leading position in the local market by all key banking performance indicators. According to the data as of December 2013, the Bank ranks first in total assets (with a 15.2% market share), loans (16.7%) and customer deposits (16.1%). In addition, Banca Intesa is the leader in the card business and payment operations, with a base of more than 1.5 million retail and about 115,000 corporate customers. The Bank operates through 192 branches, which are supported by the largest network of ATMs and POS terminals in the market. As part of the measures aimed at promoting economic growth, the Serbian Government reintroduced the programme of subsidised loans in the first quarter of 2013, with banks lending a total of RSD 316 billion. Loan balance at the end of the year was RSD 1,828 billion (EUR 15.9 billion), 4.5% lower year-on-year, mostly as a result of a significant, 8.4% decrease in corporate lending, while retail loans increased by 3.2% in nominal terms. In December 2013, total deposits in the Serbian banking sector amounted to RSD 1,565 billion (EUR 13.7 billion). The deposits recorded a nominal increase of 3.4% yearon-year, which was mostly a result of 5.6% growth in retail deposits, while corporate deposits fell 0.7%. 16

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21 Banca Intesa - Annual Report 2013 Retail banking 19

22 Retail banking Even though adverse market conditions, reflected primarily in unemployment growth and lower living standards, as well as increased illiquidity of the economy, had a negative impact on demand volume and quality in the entire domestic banking sector, Banca Intesa continued to record stable results in the retail segment. A strong focus was put on boosting efficiency and improving business processes, while efforts made towards strengthening portfolio quality through prudent credit and risk management policies enabled the Bank to keep its NPL share below the banking sector average. Private individuals Despite the unfavourable environment that resulted in a lower market growth rate and loan demand stagnation in 2013, the private individuals segment posted good results. Loan disbursement remained stable on the back of efforts put into developing new and improving existing products and services, as well as bolstering sales, optimising business network processes and advancing application systems. At the same time, total deposits maintained the growth trajectory despite the continuing downward trend in interest rates, confirming that customers put deposit safety first. As a result, the Bank continued to increase its customer base, which reached 1,557,517. Number of private individual customers Q Q Q Q ,421,861 1,468,604 1,492,447 1,516,978 1,540,496 1,557,517 In addition, pre-approved cash loans with a defined repayment period and loan amount were made available to customers with good credit history and adequate creditworthiness, while in cooperation with several companies selling building materials, carpentry products and heating equipment their buyers were offered favourable loans for improving energy efficiency and living space. Banca Intesa also enriched the range of insurance products in its offer last year and enabled customers to take out travel insurance policies in almost all branches of its retail network. In the affluent customer segment, Banca Intesa remained committed to constantly improving the quality of service provided by its personalised business model Magnifica by expanding its office network, as well as opening a specialised branch that offers the highest standard of service to this customer group. Even though significant growth of cash loan disbursement was recorded, the decreasing standard of living and the uncertainty regarding personal income amount and regularity led to a declining demand for consumer and car loans in the entire banking sector, which was reflected in a slight drop in the Bank s total private individuals loan portfolio at the year-on-year level. Loans to private individuals (EUR million) Dinar loans Foreign currency loans Taking into account uncertainty in the domestic labour market, as well as increasing cost of living, Banca Intesa developed a new cash loan, Intermezzo Cash, whose unique characteristics seek to meet the real needs of customers in the private individuals segment. This innovative loan model allows customers to postpone the payment of their monthly instalments when necessary, while at the same time extending the repayment period and keeping the same instalment amount. In addition, the loan also provides customers with free insurance against unemployment and disability due to accident Acknowledging market conditions and demands when it comes to the population of retired citizens, Banca Intesa moved to further improve its offer of Senior Cash loans with insurance last year. Owing to the increased maximum loan amount and a longer repayment period, Senior Cash loans provided a significant contribution to total new retail lending of the Bank Q1 Q2 Q3 Q

23 Banca Intesa - Annual Report 2013 Market share in loans to private individuals Market share in deposits of private individuals 12.77% 13.22% 13.27% 13.18% 13.15% 12.99% Q1 Q2 Q3 Q Following macro trends in the neighbouring markets and in the EU, as well as the NBS s recommendations, interest rates on private individual deposits decreased during 2013, which resulted in reduced funding costs. Nevertheless, the Bank managed to maintain customer trust mirrored in continued stable growth of total deposits and a further increase in its market share. In addition, in 2013 the Bank addressed the modern habits and needs of its customers with a new deposit product, Savings Plan - a term deposit with regular monthly payments in the amount chosen by the customer in line with his/her current financial capacity. The product is intended for customers who wish to deposit a certain amount of money on their savings account on a monthly basis in order to achieve long-term plans. Deposits of private individuals (EUR million) 1, , Dinar deposits 1, % 1, % % 1, % 1, % % Foreign currency deposits 1, , Q1 Q2 Q3 Q , , , , Q1 Q2 Q3 Q Payment cards In 2013 Banca Intesa kept its leading market position in both the number of issued payment cards and the number and volume of performed transactions. With a total of 1,137,188 payment cards issued 800,917 debit cards to retail customers, 301,120 credit cards to retail customers and 35,151 business cards, the Bank increased its market share in the card business segment from 17.40% to 18.32% at the end of last year. The total value of approved credit card limits was EUR million. Number of payment cards issued Credit cards for retail customers Business credit cards 920,056 22, ,489 7, ,660 1,032,422 22, ,904 8, ,244 1,060,517 23, ,109 8, ,823 Debit cards for retail customers Business debit cards 754,610 8, , Q1 Q2 Q3 Q Significant growth was recorded in the number and transaction volume of Banca Intesa payment cards abroad. The number of transactions increased by 39.09% compared to 2012, to EUR 1.68 million, while transaction volume improved by 21.89%, reaching EUR million at the end of ,091,971 24,383 1,119,808 25, ,968 8, ,623 1,137,188 26, ,917 8, ,120 21

24 229,573, Total value of approved limits 240,217, ,613, Q1 Q2 Q3 Q The focus of activities in the payment card business segment was on encouraging card usage to pay for goods and services at POS terminals. In line with this goal, several successful usage campaigns were conducted in 2013, including two campaigns for the users of all card brands American Express, MasterCard and VISA, as well as special campaigns intended for users of payment cards of a particular brand. As a result, the Bank increased the number, as well as the volume of POS transactions. During last year, million transactions were performed at 22,298 Banca Intesa POS terminals, while the total volume reached EUR million. Banca Intesa also continued to pursue its strategy of innovations in card payment methods by expanding the acquirer network for contactless payment to 1,809 terminals. In addition, the Bank enabled the acceptance of American Express cards at online points of sale of local merchants in a move that included all card brands in its offer. Small business and agriculture Despite the challenging economic environment in 2013, Banca Intesa remained a reliable partner to its customers in the small business, entrepreneur and registered agricultural farmer segments. Acknowledging the importance of this customer segment for economic growth, the Bank continued to work on the development and improvement of its products and services, while devising several special offers with favourable loan terms and maintaining active cooperation with international and state institutions. At the same time, customers were provided with adequate support by the business network comprising over 200 specialised advisors. Last year was marked by the growth of the core of the quality, sound customer base, which comprised 105,513 economic entities at the end of ,998, ,725, ,832, Number of small business customers Q Q Q Q , , , , , ,513 Number of registered agricultural farmer customers Q Q Q Q ,292 61,028 65,782 67,409 68,229 68,808 Continuing its longstanding successful cooperation with the Development Fund of the Republic of Serbia, Banca Intesa again provided its small business customers with access to the most favourable sources of funding in the form of loans with subsidised interest rates. The loans from the Government of the Republic of Serbia s programme of measures were intended for financing current liquidity and working assets, as well as for refinancing existing subsidised loans. In addition, the Bank designed its own special offer of liquidity loans to provide its customers with necessary funds under very favourable terms and repayment periods. At the same time, it devised models of pre-approved current account overdrafts and shortterm loans with priority decision-making in a bid to meet customer needs for maintaining liquidity. The Bank again provided small businesses and entrepreneurs with credit support from the European Fund for Southeast Europe (EFSE) credit lines to help them finance both working and fixed assets, while allowing longer repayment periods and lower interest rates. Furthermore, it continued the programme of long-term loans for energy efficiency from the Green for Growth Fund (GGF) credit line, as well as the project of financing women entrepreneurs in cooperation with the Guarantee Fund of Vojvodina. During 2013 Banca Intesa maintained cooperation with the Government of the Republic of Italy, which granted funds for the implementation of a project entitled Private Sector Development Programme Supporting Small and Medium-sized Enterprises through Local Banking System. As a member of Intesa Sanpaolo, the leading banking group in Italy, the Bank thus provided its customers with an opportunity to use the funds from the Italian credit line at a very favourable interest rate. At the same time, an agreement was signed with the NBS on the use of the funds from the Local Economic Development in the Balkans (LEDIB) programme that regulates the implementation of the Kingdom of Denmark grant supporting small business customers and farmers in five districts in Serbia through soft loans. Also, the Bank intensified cooperation with local governments through 25 new arrangements in the form of subsidised interest rate and loan-deposit arrangements, while continuing synergy with corporate customers by concluding 24 new agreements to enable small businesses and farmers to finance the purchase of working and fixed assets. Registered agricultural farmers were also offered a series of specialised loans for investment during spring and autumn 22

25 Banca Intesa - Annual Report 2013 works, while long-term lending for purchasing farmland and equipment was made available to farmers from the territory of Vojvodina in cooperation with the Guarantee Fund of Vojvodina. In addition, customers were provided with loans for non-current working assets and investments, as well as loans for energy efficiency improvement from the GGF credit line. Loans to small businesses and RAF (EUR million) Dinar loans Foreign currency loans Q1 Q2 Q3 Q The growth of the small business deposit portfolio recorded in 2013 is another confirmation of the segment s successful performance Deposits of small businesses (EUR million) Dinar deposits Foreign currency deposits Q1 Q2 Q3 Q Business network In an effort to remain recognisable not only for its comprehensive offer of modern banking products and the expertise and commitment of its employees, but also for its highest-standard service, Banca Intesa continued to improve its business network in 2013 by branch allocation and refurbishment. At the end of the year, the Bank was present in 111 cities and towns across Serbia with a network of 192 branches, as well as 8 specialised Intesa Casa housing loan centres. Furthermore, recognising the importance of the Magnifica personalised service model, the Bank also opened a special centre to work with this customer group. Last year Banca Intesa continued to increase the number of branches equipped with the Queue Management System (QMS), which covered nearly 40% of active customers at the end of Besides having a positive impact on customer satisfaction, the QMS upgrade also enabled obtaining data necessary for better analysis and organisation of branch operation. In addition, free Wi-Fi Internet access and daily newspapers were made available to customers in the largest branches. Direct channels When it comes to direct channels, Banca Intesa focused on stabilising existing solutions and applications for mobile and internet banking in 2013, while at the same time preparing for further improvements. Following expansion in 2012, primarily in mobile banking, last year the Bank saw an increase in the volume of its direct channel usage in line with expectations. Mobile banking continued to record growth in the number of users, as well as in the number and amount of transactions, with the number of newly registered customers climbing 105% year-on-year and the number of newly activated customers increasing by more than 115%. The number of transactions surged over 270% against 2012 and their amount rose by more than 220%. At the same time, an increase of over 20% was posted in the number of transactions performed through Banca Intesa s online application, while the amount of performed transactions grew over 13%. The use of Banca Intesa E-banking terminals also continued to expand fast in More than 90,000 transactions were performed at the Bank s E-banking terminals, up more than 150% year-on-year, while the total amount of transactions jumped by over 110%. Customer relationship management In the Customer relationship management (CRM) segment, 2013 was marked by the use of the CR-ISP application, which is the standard at the parent Group level. From January to April 2013, the application was gradually introduced in the branches and has been in use in the entire Banca Intesa business network since May The use of this simple tool helps in achieving sales results while enabling advisors to search the customer portfolio and look for new sales initiatives. CR-ISP also provided the Bank with two new sales channels in CRM: ATM and tellers, who thus became an even more 23

26 important part of the sales process. After the first six months of 2013, Banca Intesa became a best practice example in the Group with respect to the number of sales effected using CR-ISP for retail customers (58%). At the same time, 2.5 million contacts were made in the same period, up 100% against In 2013, 240 CRM campaigns were conducted through all available communication channels. In addition, the successful practice of predicting customer behaviour continued, as well as the development of predictive models that enable Banca Intesa to have smaller target groups of customers in its campaign but a higher probability of sales to the customers chosen in this way. 24

27 Banca Intesa - Annual Report

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29 Banca Intesa - Annual Report 2013 Corporate banking 27

30 Corporate banking Against the backdrop of a modest economic recovery and high illiquidity of the real economy in 2013, corporate banking was marked by a decrease in lending activity, as well as a rise in the level of non-performing loans, reflected in the fact that one in three companies was unable to service its liabilities to banks. In addition, the number of creditworthy customers, as well as those interested in making capital and long-term investments was on the decline, which is why the banks took a more cautious approach to new loans approval and collateralisation requests. Despite the difficult business environment, Banca Intesa confirmed its leading market position in both corporate lending and deposits last year, while further growing its customer base % Market share in corporate loans 15.90% 16.40% 16.80% 16.90% 16.80% Number of corporate customers Q Q Q Q LC SME 8,040 7,492 7,219 7,380 7,639 7,729 Taking into account the adverse market trends, the Bank s business strategy in 2013 was focused on minimising the difficulties and threats stemming from the environment through a prudent lending policy and responsible risk management in order to increase asset quality, which resulted in a significantly lower share of non-performing loans compared to the banking sector average. Even though the corporate lending activity of commercial banks recorded a decline last year, Banca Intesa managed not only to keep its leading market position, but also to boost its market share. Corporate loans (EUR million) Dinar loans Foreign currency loans Q1 Q2 Q3 Q As in previous years, Banca Intesa put efforts into ensuring the most favourable funding possible from the leading international financial institutions in order to provide its customers with more competitive and more affordable commercial terms. Banca Intesa s offer routinely includes lending from the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and German development bank KfW credit lines, which are intended for financing investment projects, including the procurement, reconstruction or extension of fixed assets, non-current working assets and liquidity, infrastructure projects, as well as projects that seek to help boost energy efficiency and improve environmental protection. 1, , , , , , KfW credit lines Banca Intesa continued to provide active support to public enterprises and local governments from the KfW credit line in 2013 in order to help them implement infrastructure projects and other investment initiatives. Since the beginning of cooperation with this international financial institution, the Bank has approved a total of more than EUR 80 million in lending to fund over 350 projects supporting capital investments at the local government level aimed at helping improve living conditions of the local population , , , , , , Q1 Q2 Q3 Q In 2013, the Bank alo signed a new loan agreement with KfW to secure a further EUR 10 million for financing energy efficiency and environmental protection projects of public enterprises and local governments. The loans come with a fixed interest rate, a repayment period of up to nine years and a grace period of up to 28