THE EXPORT - IMPORT BANK OF THE SLOVAK REPUBLIC Grösslingová 1, Bratislava, Slovak Republic, tel.: 00421/7/ , fax: 00421/7/

Transcription

1 Annual Report 1998

2 THE EXPORT - IMPORT BANK OF THE SLOVAK REPUBLIC Grösslingová 1, Bratislava, Slovak Republic, tel.: 00421/7/ , fax: 00421/7/

3 CONTENTS Governor s address Present position and future strategic direction of EXIMBANK SR Bank bodies Organizational structure Banking division Division of insurance Division of finance and economy Interaudit Bratislava auditor s report Summary financial statements prepared under Slovak accounting regulations KPMG auditor s report Financial statements prepared under international accounting standards (IAS)

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5 Esteemed business partners, dear clients, I am honoured to present to you the 1998 Annual Report of the activities and economic results of EXIMBANK SR. Although EXIMBANK SR is the youngest of all the financial institutions in the Slovak market, it has passed through several difficult stages in the course of its one-and-a-half year existence represented by material and technical provisioning, establishment of relations with potential clients and indigenous as well as foreign partners, building of the information system and generation of conditions for realisation of individual transactions was the year when implementation of the export-supporting tasks in EXIMBANK SR began. Export was promoted in several forms, including direct funding or refinancing through commercial banks, issuance of bank guarantees and discount of bills. We have participated in the support of export by insurance activities in the field of political and commercial risk insurance and reinsurance, with the purpose to increase the competitive capabilities of Slovak products in foreign markets. The results of our 1998 activities show that in the past year EXIMBANK SR has been unable to fully develop all activities derived from its statute. There were weaknesses not only in banking and insurance activities but also in the area of economic management of the funding of the Bank. This situation resulted not only from efforts to complete the institution but also from inadequacies in the field of its management. had substantial effects on its activities. We have taken over the affairs of EXIMBANK SR in a situation requiring immediate changes of its organisational structure, rationalisation of its activities and identification of strategic priorities harmonising with the economic intents of the state. Amendment of the necessary legislative framework and introduction of a stricter economic regimen in the activities of EXIMBANK SR were the main points among these priorities. Materialisation of these changes is visualised as the unavoidable condition necessary for the Bank to be able to meet the function for which it has been established, i.e. to fulfil the requirements of Slovak exporters. By way of conclusion I would like to express my sincere thanks to our business partners and clients for their valuable co-operation and confidence, and my belief that appointment of the new management of EXIMBANK SR will herald the essential turning point in its prosperity. Ľudomír Šlahor Governor Personal changes in management as well as in official bodies of EXIMBANK SR at the end of

6 PRESENT POSITION AND FUTURE STRATEGIC DIRECTION OF EXIMBANK SR Economic policies of advanced industrial countries are generally characterised by strong export orientation, of which support of export of indigenous goods and services is a significant part. The common point of this support is primarily a comprehensive system of legislative and economic conditions established by political decisions in cases of national interest. Slovakia as yet lacks a comprehensive export-oriented strategy, and there is no adequate legislative environment for its establishment. Recent enactments fail to offer conceptual solutions supporting export. Thus, legislative transformation is expected to be the first step enabling EXIMBANK SR to become the base institution to aid realisation of export - oriented economic state policies. Accurate and transparent legislative arrangements are necessary as unequivocally signal to potential investors and creditors, not only indigenous but international as well. The management operating in the first year of existence of EXIMBANK SR had been unable to prepare an integrated strategy and concept of activities of the Bank. Clearly defined export - supporting financial schemes as well as detailed procedures to implement such schemes had been absent. Overstaffing and abundance of administrative agenda were matched with lack of adequate efforts in the field of risk management. As a result of insufficient controlling mechanisms, funds were used primarily in the money markets and only marginally for export promotion purposes. The strategic concept of EXIMBANK SR is based on the framework of measures toward increased efficiency and substantially improved quality of its activities, along with application of new principles within the legal system of the Slovak Republic as well as those in internationally standard usage. The highest ambition of the new management remains to raise EXIM- BANK SR into a modern financial institution providing state export support to Slovak producers and investors by suitable forms of financing and insurance, enabling it to minimise risks involved in preliminary financing of export, in the collection of export credits and in export of investment units. Assistance will be given to Slovak importers as well, by mediation of credits extended by international banks to finance imports by interbank contacts. The essential strategic approach of the top management of EXIMBANK SR to reach the outlined goals consists of the following: - Increased transparency of commercial and non-commercial operations; - Rationalisation of the organisational structures of the Bank, increased labour productivity, reduction of time spent on the administrative agenda; - Completion of the information system of EXIMBANK SR; - Acquisition of highest possible rating and level of confidence home and abroad; - Systematic improvement of our image by targeted activities of all employees; - Establishment of satisfactory relations with the S.R. Government, the National Bank of Slovakia and with domestic and foreign banks, improvement of mutual communications in the generation and realisation of the state economic policy; - Co-ordination of activities of the Bank with 6

7 other institutions supporting export of Slovak producers; - Development of complex marketing activities in the domestic and international markets; - Unequivocal definition of the relation between EXIMBANK SR and the national budget in respect of increase of funds and capital of the Bank and guarantee of its activities; Implementation of these and other strategic approaches remains the highest priority of the EXIMBANK SR top management in the near future. Our ambition is to acquire an adequate position in domestic and international markets by a portfolio of financial instruments, enabling coverage of risks in all stages of Slovak exports. - Development of human resources and adequate corporate culture in the Bank; - Acquisition of full membership in domestic and international professional structures, mainly in the Union of Berne. 7

8 BANK BODIES The Bank s Council is the supreme decision making and managing body of EXIMBANK SR. The Board of Directors is the supreme executive body of EXIMBANK SR. The members of the Bank s Council are: Chairman: Ľudomír Šlahor * Members: Milan Milko * Martin Petríček * Michal Borguľa * Zsolt Nytrai * Igor Trebatický * Anna Joštiaková Zoltán Černák The members of the Board of Directors are: Chairman: Milan Milko * Peter Nagy Ján Pastucha Mária Kováčová Denisa Petríková Jiří Horvát Stanislav Krcho Pavol Gerula The Supervisory Board is the control body of EXIMBANK SR. The members of the Supervisory Board are: Chairman: Juraj Sipko * Members: Milan Orešanský Jaroslava Zányiová * Ján Ježo * Vojtech Mozgay * Oľga Najšlová Imrich Šulák Štefan Galbáč The Governor is the statutory and executive body of EXIMBANK SR and the Chairman of the Bank s Council. The Governor of EXIMBANK SR is Ľudomír Šlahor. Representation: The Governor together with one Vice-governor or two Vice-governors together act and sign on behalf of the bank. * November 1998 Milan Milko, Vice Governor, Michal Borguľa, Vice Governor, Ľudomír Šlahor, Governor, Martin Petríček, Vice Governor (from the left) 8

9 ORGANIZATIONAL STRUCTURE Bank s Council Governor Supervisory Board Chief Executive Director Section of Governor Secretariat Human Resources Organizational - Legal of International Relations Public Relations Internal Audit Board of Directors of Governor s Cabinet Governor s Advisor Vice Governor Banking Division Vice Governor Insurance Division Vice Governor Financial - - Economic Division Secretariat Secretariat Secretariat Separate Commercial - - Legal Vice Governor s Legal Advisor Chief Executive Director Banking Section Secretariat Chief Executive Director Section of Analyses and Informatics Chief Executive Director Section of Insurance Activities Chief Executive Director Section of Insurance Claims and Reinsurance Chief Executive Director Section of Internal Economy Chief Executive Director Section of Financial Management Secretariat Secretariat Secretariat Secretariat Secretariat Credit Products of Territorial and Strategic Analyses of Short-term Risk Insurance Reinsurance of Accounting and Statistics of Financial Position and Risk Management Financial Derivatives of Banking Analyses of Medium & Long-term Risk of Insurance Events and Requires of Internal Administration and Investments of Controlling and Tax Management of Bank Guarantees Separate of New Bank Products of Non Banking Enterprise Analyses of Informatics Separate of New Insurance Products Separate of Foreign Enterprise Analyses for Short-term Risk of Treasury of Operations 9

10 BANKING DIVISION banka a.s., AG Banka a.s., Bank Austria Creditanstalt, a.s., and Slovenská kreditná banka, a.s., in the total value of SK The value of time deposits reached SK , the difference representing temporarily withheld parts of time deposits. Export credit: (SK in thousands) Martin Petríček Vice Governor The year 1998 introduced the actual commencement of activities of the Banking Division in the field of active support of exporters, and established the conditions of continuing development in the future. The banking division concentrated its efforts in 1998 to support export activities of exporters mainly by extending short-term refinancing credits, direct credits, discount of bills and at the end of the year started to issue bank guarantees. Direct and refinancing credits Direct and refinancing credits represented the main activity of the Banking Division in the year Credits in the total value of SK were granted to support export in the form of refinancing credits extended by EXIMBANK SR to commercial banks with the condition to use these sources for export promotion and direct funding purposes. The expediency of funds provided for bank refinancing purposes has been verified, and identified cases of disagreement resolved with the respective commercial banks. Short-term refinancing export credits derived from time deposits were extended to exporters through Poľnobanka a.s, Komerční banka a.s., Prvá komunálna banka a.s., Priemyselná - Refinancing Direct financing, medium termed Direct financing, long termed Import credit, medium termed The 1998 totals of refinancing and direct credits itemised by territories and branches are shown in Graphs No. 1 and 2. Trade with bills and repo trade The 1998 business activities of the Banking Division included trade with bills, one of the main forms of active support of exporters. This comprised discount of made bills issued by commercial 2% 9% 22% 4% Countries EÚ - SK Other - SK Eastern Europe - SK Czech Republic - SK U.S.A., Canada - SK % Graph No. 1 10

11 In addition, the Banking Division purchased 14% 10% 3% short-term securities for 30-day resale (repo trade) in the total volume of SK as at December 31, % 32% Preparation of new banking products 28% 3% The Banking Division commenced in 1998 preparations to offer a new product in the form of bank guarantees. Food Industry - SK % Electrical Industry - SK Woodworking Industry - SK Building Industry - SK Engeneering Industry - SK Light Industry - SK Chemical Industry - SK ,6% 101,8% Graph No. 2 banks to the sum of the export promotion credit extended to the exporting producer, with the latter acting as the acceptor in the relationship. In all, 15 contracts involving bills in support of export were prepared and approved as at December 31, 1998 in the total (discounted) value of SK ; the total value of the nominal bills were SK % Building Industry Timber Industry Textile Industry Engeneering Industry Metallurgy Industry 20,2% Graph No. 4 Pursuant to the Act No. 80:1997 (Coll.) on 20% the Export - Import Bank of the Slovak Republic, as amended by the Act No. 336:1998 (Coll.) the Division elaborated the General terms and conditions of bank guarantees. Approval of the 15% 49% terms represented the essential condition of practical implementation of these activities. 1% 1% 14% Germany Czech Republic Austria France RF Italy One bank guarantee valued USD (with the date of expiry January 31, 2000) was issued in 1998 as a counter-security for guarantee on due execution of a contract, where a commercial bank was acting as beneficiary. The contract involved mintage and export of coins to India. Graph No. 3 11

12 Analytical activities of the Banking Division The Section of Banking Analyses prepared financial and non-financial analyses of domestic businesses and banks as well as departmental and strategic analyses in In the second half of 1998 the Section extended its field of activities after a change in the organisational structure of the Bank to include territorial analyses and analyses of foreign subjects in medium-termed and long-termed risk assessments. In this period the Section, renamed the Analytical and Informatics Section has also adopted the information technology agenda of the Bank. The latter comprised a continuing implementation of the new EximData information system and the implementation of the EXIMBANK SR economic-financial system (in the SAP R/3 environment), accepted in routine operation on June 15, Other activities included implementation of automation modules for operations in the Banking Division, completed August 2, 1998 by commencement of routine operation of the modules, selected in correspondence with applicable legislation. Preparations for implementation of the insurance information system modules were in the final prototype testing stage by the end of Implementation of the information system, i.e. full finalisation of all prepared modules, completion of internal inter-modular integration and integration of external sources is planned to continue next year. Type of Analysis Analyses Completed Analysis of business subjects 127 Analysis of banking subjects 165 Territorial, branch and strategic analysies 66 Total 358 The number of analyses prepared in 1998 is show in this table. 12

13 DIVISION OF INSURANCE additionally insured against political risks. Shortterm political risks insurance has also been used to eliminate risks involved in contracts concluded with state enterprises. Substantial growth of interest appeared in the reported period in the short-term export credit insurance. Requests for such insurance involving deferrals of payments up to one year were processed in the total value of SK 6.9 billion. Short-term insurance Milan Milko Vice Governor EXIMBANK SR insured in 1998 commercial and political risks in a total declared export value of SK million. This insurance involved short-term export contracts with deferment of payments until up to one year, supporting Slovak exports in the total volume exceeding SK 2.5 billion. Slovak exporters were mainly interested in insurance of commercial risks in their exports to EU and CEFTA member countries; exports to coun-tries with transforming economies were Territorial structure of insured exports The territorial breakdown of short-term export risks insurance in 1998 shows increasing interest among companies exporting goods and services to Italy (growth by 79 %), Poland (by 26 %) and Austria, and decreasing interest in such insurance among exporters to the Czech Republic and Germany. From territorial structure viewpoints of exports the largest volume of realised export went to the EU countries and to the U.S. (52 %), followed with CEFTA member countries (30 %). Export Ratio Country (SK in thousands) of total 1-12/1998 export in % Italy % Czech Republic % Poland % Iran % Germany % U.S.A % Austria % France % Greece % Others % Total % Territorial itemisation of declared exports is reviewed in this table. 13

14 4% 4% 3% 6% 22% 7% 6% 5% 30% 8% 7% 11% 17% 9% 12% 13% 11% 25% Italy Czech Republic Poland Iran Germany U.S.A. Austria France Greece Other Countries Declared exports in January - December 1998, according to countries Structure of insured export itemised by commodities The commodity-based breakdown of the declared export volume shows an increased proportion of high value-added products and reduced export of raw materials in comparison with the previous period. Increased export of final products was realised in the fields of the mechanical engineering industry, paper industry (graphic, Machines and instruments Wood pulp, paper Non-precious metals and products thereof Wood, charcoal and wood products Footwear Stoneware, glass and glass articles Vehicles, aircraft, ships, transport means Other products Declared exports in January - December 1998, according to commodities specialty and hygienic papers) and the wood processing industry (with the latter predominantly represented by value-added products, i.e. sawn timber and furniture). Highest percentages of insured exports were noted in exports of machinery and instruments, paper, metals, wood and wood products. Export Ratio Commodity (SK in thousands) of total 1-12/1998 export in % Machines and instruments % Wood pulp, paper % Non-precious metals and products thereof % Wood, charcoal and wood products % Footwear % Stoneware, glass and glass articles % Vehicles, aircraft, ships, transport means % Other products % Total % A review of declared exports itemised by commodities is shown in this table. 14

15 Reinsurance EXIMBANK SR distributed commercial risks from short-term export credits insurance by reinsurance through reputable international reinsurance institutions in accordance with conditions of the 1998 reinsurance contracts concluded by the Bank. In cases requiring coverage in excess of the framework of special conditions of such contracts our main reinsurers were consulted on extension options. Medium-termed and long-termed insurance In 1998, EXIMBANK SR accepted insurance risks valued at SK 561 million and approved risks valued at SK 135 million in the field of mediumtermed and long-termed export credit insurance of political and commercial risks. These exports included mechanical engineering products to Cuba, Romania and to the Federative Republic of Yugoslavia. Certain export insurance activities prepared in 1998 did not materialise due to the financial crisis in the Russian Federation and the resulting attitude of commercial banks, as the result of failure to accommodate financing conditions required by the foreign buyer and of failure of foreign buyer banks to submit the required credit documentation. Medium-termed and long-termed risks insurance involved major export projects whose preparation and financing required close co-operation of all participating parties, including the exporter, the foreign buyer, the financing bank, the bank of the foreign buyer, and EXIMBANK SR. As the processing of such projects was increasingly time demanding, several of the prepared projects were continued in The most important among them include exports to the People s Republic of China and to the Federative Republic of Yugoslavia. Preventive activities In addition to active insurance, EXIMBANK SR has been executing activities in the field of prevention by reducing and/or denying credit lines in the total value of SK 564 million in cases where unfavourable results of the complex analysis of the respective foreign buyers and their countries had to be considered. In such cases other payment and guaranty instruments were recommended to the insured Slovak exporters who decided to realise the export contracts even when adverse conclusions were reached in the analyses prepared by the Bank. Insured loss and collection of claims Insured customers reported losses covered by insurance in the total value of SK million in The cases related to insured short-term commercial risks and a documented or undocumented insolvency, or unwillingness to pay, of the respective foreign debtors. One insured loss valued at SK 9.6 million was processed so as to continue in 1999 whereas all other cases were settled (or settlement denied) in Insured loss threats in the total value of SK 5.4 million exclusively in connection with shortterm commercial risks were reported as potential undocumented insolvency or unwillingness of debtors to meet their financial obligations. However, no insured loss actually resulted from these threats. Activities continued in the reported period in respect of collection on claims assigned to EXIM- BANK SR during the preceding periods as the result of insured loss cases with subsequent indemnification. These insurance cases involved only short-term commercial risks, with claims totaling SK thousand. Co-operation with commercial banks Intense contacts with commercial banks resulted in the conclusion of eight new co-operation contracts in the field of export credit insurance. Negotiations with other institutions will continue in the following year. Linkage of fi- 15

16 nancing and insurance, along with application of the system whereby indemnification is blocked to the benefit of the financing bank alleviated the access of exporters to sources in support of exports. Acquisition and marketing activities EXIMBANK SR emphasised in the reported period displays of its activities to the professional public. Client seminars, as well as presentations of insurance activities were organised in co-operation with regional offices of the Slovak Chamber of Commerce and Industry, including articles published in the professional press, contacts with persons interested in insurance, and the organisation of hundreds of negotiations with exporters at fairs and exhibitions. New products Conditions were prepared to introduce the new product of international capital investment insurance for Slovak business subjects. Such insurance will provide for investor protection from political and other non-commercial risks, including cases involving exclusion of payment transfers to Slovakia, foreclosure and acts of political violence. This new insurance product is expected to reach the market in Insurance of confirmed irrevocable documentary letters of credit in export is another new product of EXIMBANK SR. It enables insurance of confirmed letters of credit (maturing within one year) by the bank of the exporting company against loss caused by partial or full default by the bank issuing the L/C, thus eliminating the potential negative impact of the default upon the economic results of the exporter. 16

17 DIVISION OF FINANCE AND ECONOMICS other capital funds, reserve fund, other own sources, profit) and by financing resources committed to the Bank. The main part of own financing sources of EXIMBANK SR was represented by its registered capital in the volume of SK million, and capital funds amounting to SK million. The reserve fund valued SK 210 million was designed to cover potential economic fluctuations. Michal Borguľa Vice Governor The division focused its activities in 1998 on two basic areas. The first included tasks in the field of qualitative enhancement of accountancy, improved processing of statistical reports and management of assets of the Bank. The second main area involved generation and monitoring of the EXIMBANK SR budget and efforts to put all funds to efficient use, with close links to dealing and controlling activities and to the system of payments and settlements operated by the Bank. Success was achieved in respect of acceptance, toward the end of 1998, of EXIMBANK SR in the interbank clearing system. This is expected to increase the flexibility and efficiency of financial operations. Dealing activities of the Bank reported a total turnover of SK million, representing a major contribution to the rate of return on assets. Other own financing sources of the Bank included the guarantee fund as well as the import fund designed to finance import credits and generated by statutory contributions of exporters and importers in the total value of SK 314 million. The value of the insurance fund covering commercial short-term export credit risks was SK 91 million. Other special funds of EXIMBANK SR for insurance coverage of short-term political risks, medium-, and long-term political and commercial risks as well as of exchange rate losses in the insurance of foreign banks and exporter subcontractors remained unchanged in 1998 with a total value of SK million. 27,36% 6,44% The total capital of EXIMBANK SR comprising all funds, registered capital and profit in the sense of the Act No. 80:1997 (Coll.) on the Export-Import Bank of the Slovak Republic, as amended by the Act No. 336:1998 (Coll.) reached the value of SK million in The Bank succeeded to reach this increase (by 8.60 % from 1997) without subsidies from the national budget, but primarily by generation of profit. 48,39% Registered capital Other special funds Other capital funds Other own sources Reserve fund Profit 5,26% 4,29% 8,27% The resources of EXIMBANK SR were represented in 1998 by own sources (registered capital, The structure of capital of EXIMBANK SR in 1998 is shown in this Figure. 17

18 EXIMBANK SR expected to acquire not-own capital in the volume of SK 2.0 billion in This plan could not be fulfilled, mainly due to the adverse economic and political developments in the Slovak Republic and the resulting unfavourable rating of the country by individual rating agencies; the consequences were manifest in the unacceptable conditions offered by providers of foreign sources. Economic results The total balanced value of EXIMBANK SR as at December 31, 1998 was SK thousand, growth from 1997 by %. The main assets item represented bank accounts and cash money (financial assets) in the total value of SK thousand. These funds have been valorised mainly in the interbank market in the form of time deposits in the domestic currency in Slovak banks and branches of foreign banks, or used for refinancing of credits through commercial banks. Of the total SK thousand volume of time deposits, SK thousand were used for contractual refinancing purposes through commercial banks. The value of receivables from credits to banks extended in the form of discount of bills of exchange reached SK thousand as at December 31, EXIMBANK SR provided direct financing support of export and import in the total value of SK thousand to clients. Standard receivables from direct insurance and reinsurance of export credits reached SK thousand as at December 31, The total value of the portfolio of securities of EXIMBANK SR comprising Treasury notes, bank notes and corporate debenture bonds (non-negotiable in the capital markets) was SK thousand, including adjustments, as at December 31. The Bank continued in 1998 to build its information system, mainly to introduce information technologies enabling automation and monitoring of employee activities and offering fast and complex information options to management. In link therewith the volume of tangible and intangible fixed assets of the Bank increased by SK thousand, totalling SK thousand as at December 31, Reserves for premium deferrals and settlements were established by the Bank to cover risks derived from direct insurance and reinsurance of export credits in the amount of SK thousand. The main liabilities item of EXIMBANK SR represented general operating expenses in the total value of SK thousand. All operating expenses in 1998 were covered from the operating income of the Bank. Income from financial activities, primarily from interbank operations, dominated in the value of SK thousand. Income from insurance operations (SK thousand) was generated mainly by export credit insurance premiums. The total 1998 income of EXIMBANK SR was higher by 48.7 % and its total costs higher by 17.7 % than the annual budget. EXIMBANK SR exceeded in 1998 its planned profit by SK 170 million, reaching a total disposable profit volume of SK 258 million. 18

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20 SUMMARY FINANCIAL STATEMENTS PREPARED UNDER SLOVAK ACCOUNTING REGULATIONS Balance sheet Assets 000 SKK 1 Cash in hand Bank deposits Time deposits Receivables from other valuables 0 5 Receivables from securities 0 6 Acquired state treasury bills 0 7 Acquired short-term treasury bills and other similar valuables 0 8 Standard receivables from credits extended to clients Classified receivables from extended credit 0 10 Receivables from direct insurance and guarantee of export credits Classified receivables from insurance and guarantee Settlement with state budget 0 13 Shares and deposits 0 14 Intangible investment assets Tangible investment assets Other assets Prepayments, accruals Arrangement accounts Marketable securities Total assets Liabilities 1 Liabilities against banks 10 2 Liabilities from other valuables 0 3 Liabilities from securities 0 4 Insurance payables Reserves Other liabilities Accruals, deffered income Arrangement accounts Trusteed funds Own sources of funding Basic equity and capital funds Funds created from profits and other funds Retained profits Total liabilities Profit and loss account Expenses 1 Expenses from financial operations Expenses from insurance operations General operating costs Creation of reserves and adjusting entries Other operating costs Income tax Profit for the financial period Total expenses Revenues 1 Revenues from financial operations Revenues from insurance operations Use of reserves and adjusting entries Other operating revenues 6 5 Extraordinary income Total revenues

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22 FINANCIAL STATEMENT PREPARED UNDER INTERNATIONAL ACCOUNTING STANDARDS IAS Profit and Loss Account Year ended December 31, months ended December 31, Notes SK 000 SK 000 Interest receivable and similar income arising from debt securities Interest payable (1 164) (582) Net interest income Fees and commissions receivable Insurance premiums Operating income Administrative expenses 3 ( ) (51 856) Depreciation (42 361) (11 442) Other operating expenses (23 300) - Provisions 7 (92 810) (9 924) Operating expenditure ( ) (73 222) Profit before taxation Taxation 4 ( ) (35 311) Profit after taxation The notes on pages 25 to 35 form part of these financial statements. 22

23 Balance Sheet December 31, Notes SK 000 SK 000 Assets Cash in hand Loans and advances to banks Loans and advances to customers Debt securities Tangible fixed assets Other assets Prepayments and accrued income Liabilities Export credit insurance provisions Other liabilities Accruals and deferred income Share Capital and Reserves Share capital Funds Profit and loss account Off balance sheet items The financial statements, which include the notes on pages 25 to 35, were approved by the Bank Council on May 17, 1999 and signed on its behalf by: Doc RNDr Ing Ľudomír Šlahor, CSc. Governor Ing Martin Petríček, CSc. Vice Governor 23

24 Statement of Recognised Gains and Losses Year ended December 31, months ended December 31, SK 000 SK 000 Contributions from importers to the import fund Contributions from exporters to the guarantee fund Total gains not recognised in the profit and loss account Profit after taxation for the year Total recognised gains The notes on pages 25 to 35 form part of these financial statements. Cash Flow Overview December 31, months ended December 31, Notes SK 000 SK 000 Cash Flows from Operating Activities Profit before taxation Depreciation Provisions Increase in loans and advances to banks ( ) Increase in loans and advances to customers ( ) - (Increase)/decrease in other assets ) Increase in prepayments and accrued income (25 764) (30 113) Increase in other liabilities Increase in accruals and deferred income Corporate income tax paid (85 166) (6 674) Net cash from operating activities ( ) Cash Flows from Investing Activities Sale of investment securities Purchase of fixed assets ( ) (50 059) Proceeds from disposal of fixed assets Net cash used in investing activities ( ) (33 184) Cash Flows from Financing Activities Proceeds from issue of share capital Contributions to import and guarantee funds Cash transferred from SPE Net cash from financing activities Net decrease in cash and cash equivalents ( ) Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year The notes on pages 25 to 35 form part of these financial statements. 24

25 NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, General Information The Export-Import Bank of the Slovak Republic ( Eximbank or the Bank ) was established on July 1, 1997 as a corporate entity under Act No. 80/1997. The Bank is wholly owned by the State. The primary role of Eximbank is to support exports and imports in the context of the requirements of government foreign, trade, monetary and industrial policies. The Bank s principal activities are the financing and insuring of export and import credits. 2. Accounting Policies The significant accounting policies adopted by Eximbank are as follows: (a) Basis of preparation The financial statements have been prepared in accordance with International Accounting Standards and under the historical cost basis of accounting. The financial statements are reported in Slovak Crowns (Sk) and all amounts are stated in thousands, except where otherwise stated. (b) Interest, fees and commissions Interest, fees and commissions are recognised in the period in which they are earned or incurred. (c) Foreign currencies Transactions denominated in foreign currencies are translated into Slovak Crowns at the exchange rates ruling on the date of the transaction. Monetary assets and liabilities, and commitments for the purchase and sale of foreign currencies, are translated at the rates of exchange ruling on the balance sheet date. All resulting gains and losses are recorded in the profit and loss account. (d) Provisions for bad and doubtful debts Loans and advances to customers are stated net of provisions for bad and doubtful debts. Specific provisions are made for identified doubtful loans following detailed appraisal of the loan portfolio. In addition, a general provision is made to cover losses which are present in the loan portfolio but which have not yet been specifically identified. (e) Export credit insurance provisions Provisions are made to cover losses arising from insuring commercial risks on short, medium and long term export credits and to cover losses from insuring political risks on short term export credits. (f) Debt securities Debt securities comprise trading securities and investment securities. Trading securities are marketable securities that are acquired and held with the intention of resale in the short term. Trading securities are stated at fair value. Investment securities are acquired for yield or capital growth purposes and are usually held to maturity. Debt securities classified as investment securities, including government securities, are stated at cost. Premiums or discounts on acquisition are amortised on a straight line basis over the period to maturity. Provision is made for any permanent diminution in value. 25

26 (g) Repurchase and reverse repurchase agreements Securities sold under repurchase agreements are retained within either the investment or trading portfolios and accounted for accordingly. The related repurchase obligation is included in liabilities. Securities held under reverse repurchase agreements are included in receivables. The difference between the sale and repurchase price is accrued evenly over the life of the transaction and credited or charged to the profit and loss account as interest receivable or interest payable. (h) Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation. Depreciation is not provided on land. On other fixed assets, it is provided on a straight line basis over the expected remaining useful lives as follows: Years Buildings 40 years Furniture, fittings and equipment 4 to 8 years Motor vehicles 4 years Software 4 years Depreciation commences when assets are first put into use. (i) Leased assets Assets held under finance leases are capitalised at the estimated present value of future minimum lease payments, derived by discounting at the interest rate implicit in each lease. The related liability is stated net of lease rentals and advances already paid. Interest on finance leases is charged to profit and loss account so as to produce a constant periodic rate of charge on the remaining balance of the obligation under each lease. (j) Cash and cash equivalents Cash and cash equivalents comprise cash and loans and advances to banks with original maturity of up to three months. (k) Comparative figures The figures for the previous period are from the date of incorporation, July 1, 1997, to December 31, 1997, and have been reclassified, where necessary, on a basis consistent with those for the current year. 3. Administrative Expenses 6 months ended December 31, SK 000 SK 000 Employee costs Wages and salaries Social insurance Bonuses and other benefits Other operating expenses At December 31, 1998, the number of employees, including members of management, was 173 (1997: 110). 26

27 4. Taxation 6 months ended December 31, SK 000 SK 000 Corporate income tax Taxation has been charged on the Bank s taxable profits for the period at a rate of 40% (1997: 40 %). The reconciliation of the bank s accounting profit to the taxable profit is as follows: SK 000 SK 000 Accounting profit Add - non-deductible provisions non-deductible fund expenses other non-deductible items Less: non-taxable income from bonds (23 422) (8 125) Taxable profit Loans and Advances to Banks SK 000 SK 000 Repayable on demand Other loans and advances by remaining maturity: - 3 months or less year or less but over 3 months years or less but over 1 year Loans and advances to banks includes amounts totalling Sk 1,75 million provided to other banks for the purpose of financing export and import activities of specified clients. 6. Loans and Advances to Customers SK 000 SK 000 Loans and advances to customers by remaining maturity: - 3 months or less year or less but over 3 months years or less but over 1 year over 5 years General and specific bad and doubtful debt provisions (note 7) (8 433) Loans and advances were all made to Slovak resident companies engaged in manufacturing activities. 27

28 7. Provisions The movements on provisions were as follows: At Jan. 1, Charge At Dec. 31, 1998 for year 1998 SK 000 SK 000 SK 000 Loans to customers (note 6) Export credit insurance Securities (note 8) Insurance and other receivables (note 10) Total The charge for the year includes a provision of Sk 49.9 million in respect of advances paid for the rental of a property in Bratislava. In the opinion of management, based on independent legal advice, the contract for this rental is invalid and, consequently, the recovery of the amounts paid will be vigorously pursued. 8. Debt Securities SK 000 SK 000 Investment securities: Slovak government securities Corporate bonds quoted on the Bratislava Stock Exchange: Bank Non bank Provision for diminution in value (note 7) (7 125) (5 430) The remaining period to maturity is as follows: - 3 months or less year or less but over 3 months years or less but over 1 year over 5 years At December 31, 1998, the market value of investment securities was Sk 128 million (1997: Sk 161 million). 28

29 9. Tangible Fixed Assets Land and Furniture, Motor Assets Buildings Fittings& Equip- Vehicles Software in Progress Total SK 000 ment, SK 000 SK 000 SK 000 SK 000 SK 000 Cost At January 1, Additions Disposals - (1 675) (1 675) At December 31, Depreciation At January 1, Charge for the year Disposals - (1 660) (1 660) At December 31, Net book value: At December 31, At December 31, Furniture, fittings, equipment and motor vehicles include assets held under finance leases with a net book value of Sk 27 million at December 31, 1998 (1997: Sk 29 million). 29

30 10. Other Assets SK 000 SK 000 Insurance and other receivables less: provisions for doubtful debts (note 7) (54 123) (443) Other Liabilities SK 000 SK 000 Obligations under finance leases: Falling due within 1 year Falling due after 1 year Corporate income tax Other liabilities Share Capital At December 31, 1998, the amount of capital contributed and fully paid by the State was Sk 2,370 million (1997: Sk 2,368 million), of which Sk 370 million has not yet been recorded at the Commercial Register. The increase during the year was as a result of the capitalisation of retained profits amounting to Sk 2.1 million (note 14). 13. Funds Jan. 1, Contri- Dec. 31, 1998 butions Transfers 1998 SK 000 SK 000 SK 000 SK 000 (a) Legal reserve fund (note 14) (b) Capital fund (c) Import fund (d) Guarantee fund (e) Commercial risks fund (f) Export fund (g) Foreign transactions equalisation fund (h) Export loans insurance fund (i) Foreign exchange rate equalisation fund The funds have been established in accordance with the requirements of Article 30 of Act No. 80/1997 which outlines their sources and purposes. The Act makes no provision for any distribution from funds to the shareholder. 30

31 13. Funds (continued) (a) The legal reserve fund is to be used to cover any losses or any future adverse financial conditions. The reserve fund is created by an allocation of 5% of the annual net profit until the aggregate amount reaches a level equal to 20% of the registered capital. (b) The capital fund is to be used to cover losses of the Bank when the reserve fund has been fully utilised. The fund is created from external contributions and sources other than from annual net profits. (c) The import fund is designed both to finance import loans provided by Eximbank to importers, importers banks, foreign suppliers and foreign suppliers banks and also to enable the Bank to provide guarantees for imports. The fund is created from allocations from annual net profits, specifically designated amounts provided by the State and contributions by importers amounting to 0.05% of the value of individual imports. (d) The guarantee fund is to be used to guarantee approved exports and to provide counterguarantees for exporters to other banks. The fund is created from allocations from annual net profits, specifically designated amounts provided by the State and contributions from exporters amounting to 0.05% of the value of individual exports. (e) The commercial risks fund is to be used to cover commercial risks arising on insuring short-term export credits. The fund is to be utilised when provisions created for such risks are insufficient to cover claims. (f) The export fund is to be used to finance export loans provided by the Bank to exporters, exporters banks, foreign customers or foreign customers banks. The fund is to be created from specifically designated contributions from the State and allocations from annual net profits. (g) The foreign transactions equalisation fund is to be used to equalise differences arising on capital market foreign exchange transactions. Differences relate primarily to interest rate differentials and include those arising between foreign and domestic interest rates relating to credits provided by exporters. The fund is to be created from specifically designated contributions from the State and allocations from annual net profits. (h) The export loans insurance fund is to be used to cover political risks arising on insuring short term export credits and political and commercial risks arising on insuring medium and long term export credits. The fund is to be utilised when provisions created for such risks are insufficient to cover claims. The fund is created from allocations from annual net profits and specifically designated contributions from the State. (i) The foreign exchange rate equalisation fund is to be used to cover foreign exchange rate losses arising when insuring certain foreign banks or subcontractors. The fund is created from allocations from annual net profits and specifically designated contributions from the State. The fund is created from allocations from annual net profits and specifically designated contributions from the State. 31

32 14. Profit and Loss Account SK 000 SK 000 At January 1, Transfer to share capital (note 12) (2 017) - Transfer to legal reserve fund (note 13) (10 000) - Profit for the year K Decembru 31, Management will propose the following allocation of the profit for the year ended December 31, 1998: SK 000 Transfer to Legal Reserve Fund Other - The balance of profit will be retained. 15. Off Balance Sheet Items SK 000 SK 000 Contingent liabilities: Guarantees issued Commitments and Contingencies Taxation Slovak tax legislation has changed significantly in the last number of years. Many parts of the legislation remain untested and there is uncertainty about the interpretation that the financial authorities may apply in a number of areas. The effect of this uncertainty cannot be quantified and will only be resolved as legislative precedents are set or when the official interpretations of the authorities are available. 17. Cash and Cash Equivalents SK 000 SK 000 Cash in hand Loans and advances to banks With original maturity up to 3 months Related Party Transactions On the basis of information currently available to the members of the Bank Council, the Bank did not enter into any significant transactions during the year with any members of senior management, their close relatives or companies in which they have a substantial interest. 32

33 19. Assets and Liabilities Denominated in Foreign Currencies At December 31, 1998, there were no significant assets or liabilities denominated in foreign currencies. 20. Maturity Analysis The remaining period to maturity of monetary assets and liabilities at December 31, 1998 was as follows: Within 1-5 More than 1 year years 5 years Total SK 000 SK 000 SK 000 SK 000 Monetary assets Cash in hand Loans and advances to banks Loans and advances to customers Debt securities Other assets Prepayments and accrued income Monetary liabilities Other liabilities Accruals and deferred income The remaining period to maturity of monetary assets and liabilities at December 31, 1997 was as follows: Monetary assets Cash in hand Loans and advances to banks Debt securities Other assets Prepayments and accrued income Monetary liabilities Other liabilities Accruals and deferred income Financial Instruments A financial instrument is a contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. Examples include loans, deposits, debt securities and equity shares. Derivatives are also financial instruments which are so called because their value is derived from the value of an underlying instrument, index or reference rate. The principal categories of derivatives are forwards, including futures, options and swaps. The Bank did not use any derivative financial instruments during the year. Risks Associated with Financial Instruments The use of financial instruments generally involves the assumption or transfer of risk. The main types of risks are credit risk, market risk (including interest rate risk and foreign exchange risk) and liquidity risk. The Bank assigns the highest priority to risk management and has established clear and comprehensive risk policies, procedures and control 33

34 systems, which are reviewed regularly by the Bank Council. Credit Risk Credit risk is the risk that a borrower or counterparty will fail to honour their contractual obligations. Credit risk is strictly controlled through a structure involving the credit risk department, the credit committee and the Bank Council. The Bank s procedures for managing credit risk include the establishment of concentration limits by borrower, counterparty, industrial sector and product. Credit appraisal procedures are performed before individual borrower and counterparty limits are approved and collateral is obtained to reduce credit risk. The Bank also continually monitors performance of the portfolio to ensure that prompt action can be taken to minimise potential losses. Interest Rate Risk Interest rate risk is the potential impact on the value of financial assets and liabilities arising from changes in market interest rates. Interest rate risk is monitored by the Bank s treasury department on a daily basis using various tools. Most of the financial instruments used are short and medium term in nature. The average effective interest rates for financial assets and liabilities at year end were: Loans and advances to banks 15.82% Loans and advances to customers 12.24% Debt securities 12.30% The remaining maturity of assets and liabilities at the balance sheet date is set out in note Fair Values Fair value is the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. The estimated fair values of the Bank s financial assets and liabilities at year end were as follows: Loans and Advances to Banks The fair value of current account balances approximates to their carrying amount. As the Bank s term placements generally reprice within relatively short time periods, it is reasonable to use book value as an approximation of fair value. Loans and Advances to Customers Loans and advances are stated net provisions for non-recoverable amounts. Debt Securities Trading securities are stated at fair value. The quoted market prices for investment securities are set out in note 8. Deposits by Banks The fair value of current accounts with other banks approximates to book value. For other amounts owed by banks with a remaining maturity of less than one year, it is also reasonable to use book value as an approximation of fair value. Liquidity Risk Liquidity risk is the risk that there will be insufficient funds to meet normal operating requirements. Liquidity risk is managed as part of the Bank s asset and liability management process. Procedures include the regular monitoring of the timing of future cash flows on a currency-by-currency basis. 34

35 23. Reconciliation to Slovak Statutory Financial Statements The profit after taxation and total assets prepared under Slovak accounting regulations and reported in the statutory financial statements can be reconciled to these financial statements prepared under IAS as follows: Profit after Total taxation assets SK 000 SK 000 Reported under Slovak accounting regulations Adjustments arising on capitalisation of Finance leases, net Reclassification of bonuses and other period expenses recorded in funds (39 000) - Provisions for doubtful debts (49 875) (49 875) Reclassification of general reserve - (10 056) Reported under IAS Subsequent events On February 26, 1999, the Bank Council resolved to initiate a programme of reorganisation and rationalisation of the Bank s operations. As a consequence of this decision, the number of employees will be reduced to