OTP banka Srbija a.d. Novi Sad DISCLOSURE OF DATA AND INFORMATION. December 31, 2017

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1 DISCLOSURE OF DATA AND INFORMATION December 31, 2017 Novi Sad, May 2018

2 1. INTRODUCTION CAPITAL MANAGEMENT STRATEGY AND PLAN RISK MANAGEMENT STRATEGY CREDIT RISK MANAGEMENT POLICY LIQUIDITY RISK MANAGEMENT OPERATIONAL RISK MANAGEMENT POLICY COUNTRY RISK MANAGEMENT POLICY MARKET RISK MANAGEMENT POLICY OUTSOURCING RISK MANAGEMENT POLICY INTEREST RATE RISK MANAGEMENT POLICY COMPLIANCE AND SECURITY POLICY RISK MANAGEMENT MANNER OF ORGANIZATION BANK S CAPITAL CAPITAL BUFFERS LEVERAGE RATIO CAPITAL ADEQUACY INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS BANK RISK EXPOSURE AND APPROACHES FOR RISK MEASUREMENT AND/OR RISK ASSESSMENT CREDIT RISK COUNTERPARTY RISK INTEREST RATE RISK BANK EXPOSURE BASED ON PROPRIETARY SHARES IN THE BANKING BOOK INFORMATION ON BANKING GROUP AND RELATION BETWEEN THE PARENT COMPANY AND SUBSIDIARIES Disclosure of Data and Information 2

3 1. INTRODUCTION Pursuant to Article 51a of the Law on Banks, Article 24 of the Decision on Disclosure of Data and Information by Banks,, Bulevar oslobodjenja 80 (hereinafter: the Bank) hereby discloses the following data and information, as at December 31, 2017, related to the following: Capital Management Strategy and Plan Risk Management Strategy Internal Capital Adequacy Assessment Strategy Credit Risk Management Policy Assets and Liabilities Management Policy with its integral part Liquidity Risk Management Policy Operational Risk Management Policy Country Risk Management Policy Market Risk Management Policy Outsourcing Risk Management Policy Interest Rate Risk Management Policy Compliance and Security risk Risk Management Manner of Organization Risk Mitigation Techniques and Manners for Enabling and Monitoring of Risk Mitigation Efficiency Bank s Capital Bank s Capital requirements and Capital Adequacy Capital s Buffers Internal Capital Adequacy Assessment Process Bank Risk Exposure and Approaches for Risk Measurement and/or Risk Assessment Bank Exposure Based on Proprietary Shares in the Banking Book Leverage ratio Banking Group and Relation Between the Parent Company and Subsidiaries Pursuant to Article 22 of the Decision, the Bank, as an ultimate parent company discloses the information and data on Capital, Capital requirements and Capital Adequacy, Capital buffers and Leverage ratio on the stand-alone and consolidated level. The Bank does not apply the internal model approach for the calculation of the market risk capital requirements hence it does not disclose data related to the approaches for measurement and/or assessment of market risk. The Bank does not apply an advance approach for the calculation of the operational risk capital requirements hence it does not disclose data related to the exposures to such risks and approaches for measurement and/or assessment of such risk. This document is published on the official web site of the Bank Disclosure of Data and Information 3

4 Data and information not disclosed according to the stipulated Decision on Disclosure of Data and Information of the Bank, have been disclosed within the Independent Auditor s Report which is published on the Bank s web site, in compliance with Item 61 of the Law on Banks: 2. CAPITAL MANAGEMENT STRATEGY AND PLAN The capital shows a risk assumption capacity and depends on quantitative factors such as management, control and risk management. Due to regulatory requirements and internal capital objectives, the Bank s capitalization is monitored continuously in order to secure a favorable level of the same. Capital planning is an integral part of the annual strategic planning process at the Bank. The capital plan for the next three years encompasses the capital required to absorb losses, both realized and non-realized, while the Bank remains a strongly capitalized institution. It is focused both on the quality and quantity of capital and, within the legal structure, is set up to support business needs The basic objective of the Capital Management Strategy is to provide an adequate level and optimal capital structure, as well as a level and structure of the internal capital that may support an expected growth in placements, future sources of funds and their utilization, dividend policy and any other changes in the minimum amount of capital stipulated under the decision governing the capital adequacy. The capital management plan is comprised of the following: Strategic goals and their time horizon, considering the impact of macroeconomic environment and business cycle phases, Organization of the internal capital management process and planning procedures for an adequate internal capital level, Manner of reaching and maintaining an adequate internal capital level, Action plan in case of unforeseen events that might affect the internal capital amount. 3. RISK MANAGEMENT STRATEGY With the Risk Management Strategy, the Bank shall define a strategic approach to risks, determine a risk management system, define risk it is exposed to, risk management principles, show risk tendency, etc. This strategy is closely related to other strategic documents of the Bank (i.e. Capital Management Strategy of the Bank). The Risk Management Strategy should provide continuous reconciliation of the Bank s risk profile with its risk tendency, as well as the further risk management development toward the increase of sensitivity to risks in the future. In the process of risk management, the Bank relies on the quality and experience of its employees, organizational division of tasks and utilization of sophisticated analytical tools and technologies. Disclosure of Data and Information 4

5 The rules defined by the Strategy are binding for all the Bank s employees and have to be respected in all processes and activities of the Bank. Risk management in the Bank includes the following areas: establishing of adequate principles, internal rules, procedures and limits in risk management, actions in line with the risk management principles, timely efficient reporting, proactive risk identification, monitoring of such risks, risk management, allocation of required resources, know-how, management and supervision processes, creating and keeping adequate reserves related to assumed risks, accepting only acceptable risks, adjustment with external and internal requirements related to capital, observing legal and regulatory requirements. The principles defined by this Strategy are described in detail in the internal regulation. Risk management comprises the following risk categories: Credit risk Country risk Concentration risk Residual risk Investment risk Counterparty risk and settlement risk Risk of decrease in receivables Market risks Foreign-exchange risk Interest-rate risk Operational risks Information system risk Externalization risk Innovation risk (risk relating to new products and services) Liquidity risk Other risks (reputation risk, strategic risk, model risk...) NPL management The above risks are described in detail in the Internal Capital Adequacy Assessment Process Strategy and policies and procedures referring to each individual risk as well as NPL management. In case relevant legal and regulatory requirements are changed or in case of significant changes in the market conditions, all the documents are updated. 3.1 Credit Risk Management Policy The Credit Risk Management Policy defines in detail the credit risk management process which includes the credit risk management process organization, identification and Disclosure of Data and Information 5

6 measurement, mitigation and monitoring. The policy also includes the concentration risk management process and the internal control system for the credit risk management process. Risk management and loan decisions are based on the Risk Management Rulebooks/Manuals and the Credit Policy adopted once a year which, in particular: Define risk assumption possibilities, considering business opportunities, Define directives for a prudent portfolio growth approach, Define risk assessment per industrial branches, Determine cooperation framework between the Business and Risk Management Divisions, Define favorable client segments, Determine short-term goals aimed to favorable portfolio structure and direct the business line in the active sale process, Define key principles in the approval and control processes, portfolio limits and the like. In order to manage the credit risk adequately, the Bank has established a credit process that includes the exposure approval process and the credit risk management process. The exposure approval process is comprised of the following steps: exposure initiation, credit exposure, client segmentation, client rating, collateral assessment, exposure approval and placement realization. The credit risk management process is a four-phase process: credit risk identification, credit risk measurement, mitigation process and credit risk monitoring. In order to establish an efficient risk management process, the Bank has defined key responsibilities in the credit risk management process for the Board of Directors, the Executive Board, the Audit Committee, the Credit Committee, the Monitoring Committee and the Workout Committee. For the purpose of the credit risk management, the Bank identifies and measures the concentration risk which is the result of exposure to the similar source or the same or similar type of risk. It is regulated by Credit Policy which establishes sector limits on an annual level as well by Concentration Risk Management Procedure which defines responsibilities and control limits regarding this matter. The bank reports to the competent boards on a monthly level, whereas on a quarterly level, it reports to them on the concentration risk (review of great exposures and exposure to Bankrelated persons), as well as on investment risk, which is defined in more detail in Bank s internal acts. The Portfolio Report comprises data on portfolio level, its structure by business lines, control of limits set, provision coverage, sectorial division of the portfolio etc. With regard to the credit risk, Rules on Assessment of Collateral Instruments prescribe types, manner of obtaining, contracting and liquidating collaterals accepted by the Bank in its operations. Collaterals acceptable by the Bank in the adjustment of the calculation of risk-weighted assets through credit risk mitigation techniques are defined in accordance with the relevant part of NBS capital adequacy decision. In this context, they are defined as instruments of financial collateral and debt securities adjusting Bank risk-weighted assets in accordance with the regulations. Disclosure of Data and Information 6

7 Financial instruments of credit protection the Bank may use for the above stated purposes are the following: cash and cash equivalents deposited with the Bank, debt securities of governments or central banks with the available credit rating assigned by an export credit agency corresponding to level 4 credit quality or higher, in accordance with the applicable regulations; gold. Non-financial instruments of credit protection the Bank may use for the purpose of riskweighted asset calculation are the following: guarantees; other forms of securities; counter guarantees under conditions prescribed by the applicable regulations. 3.2 Liquidity Risk Management Liquidity is viewed as Bank s ability to cover its obligations coming due - timely and in the full scope. Liquidity risk is the possibility of occurrence of adverse effects on the financial result and capital of the bank caused by the bank s inability to meet its due obligations as a result of: withdrawal of existing sources of funding and/or impossibility to secure new sources of funding (funding liquidity risk), or difficulties in converting assets into liquid funds due to market disturbances (market liquidity risk); The liquidity risk management is an important element of prudent and secure business operations of the Bank. In line with goals defined in Risk Management Strategy, Bank has developed adequate system for liquidity risk management with. The Assets and Liabilities Management Policy defines the framework, principles and metrics applied for the liquidity risk management, with the aim that the Bank at all times successfully meet its liquidity needs. The basic goal of the liquidity management is reduction of the liquidity risk to the minimum possible level through planning of cash inflows and outflows, liquidity monitoring and implementing adequate measures for prevention and removal of the causes for illiquidity, and/or avoidance of possible adverse effects to the financial result and the capital of the Bank due to the Bank s inability to meet its due obligations. The Bank s tendency to this risk is low and the Bank strives to reduce it to a minimum through adequate risk management. Liquidity management is performed in all major currencies in a way that ensures stability of funding sources, in accordance with the regulations of the NBS, as well as the parent bank. Foreign currency liquidity is managed applying the concept of liquidity pool concept, in line with OTP Group. The ALM Unit performs the GAP analysis to forecast cash flows per predefined time interval buckets and major currencies, in order to manage this risk and reports thereupon on a monthly basis. Aiming to mitigate the liquidity risk, the Bank uses the limit system (internal limits for primary and operational liquidity and other limits in compliance with the NBS Decision), as well as a set of early warning indicators, which are monitored daily/weekly. Disclosure of Data and Information 7

8 Liquidity management is a continuous process of analyzing liquidity needs in different scenarios, as well as adequate planning in critical and stressful conditions. The Bank document Recovery Plan and Contingency funding plan, where are defined the key events and the criteria for their activation. Stress testing is performed from time to time. Stress scenarios are used to model impacts of unexpected outflows to the Bank s liquidity at least twice a year. The management and organization of the liquidity risk management process primarily includes the following: Board of Directors of the Bank Executive Board of the Bank ALCO Committee ALM and Middle Office Directorate/ALM Unit Treasury Directorate and other relevant organizational units 3.3 Operational Risk Management Policy Operational risk (OR) is a risk of adverse effects to the financial result and capital of the Bank due to (unintentional and intentional) mistakes by employees, inadequate internal procedures and processes, inadequate management of IT and other systems in the Bank as well as due to occurrence of unforeseen external events. The operational risk also includes the legal risk. Legal risk is the risk of adverse effects on the bank s financial result and capital arising from court or out-of-court proceedings relating to the bank s operation (contracts and torts, labor relations, etc.). Operational risk includes conduct risk. Information system risk - a possibility of occurrence of adverse effects to the financial result and capital of the Bank, realization of operating results, operating in compliance with the law and to reputation due to inadequate management of information system and other system weaknesses that have an adverse effect on functionality and security of the system and/or put at risk continuity of operations of the Bank. In area of operational risk, outsourcing risk and risk of introducing of new products are monitors. Based on the adopted Policy, the goal of the operational risk is to enable that the operational risk exposure level is in compliance with the Risk Management Strategy and polities of the Bank and/or to minimize losses based on operational risks, taking into account costs and expenses of such minimization. Operational risk management is entirely integrated in the risk management system and information system of the Bank. Operational risk management system encompasses all Bank inherent activities. Operational risk event base supports operational risk management control and identification of an operational risk on the Bank level. The operational risk management methodology is consisted of the following levels: Strategy for general approach to the Bank s operational risk management, objectives, necessary organizational structure and the Bank s risk profile; Disclosure of Data and Information 8

9 Process comprised of daily activities and decisions related to operational risk management in compliance with the selected strategy; Infrastructure for system identification, data and other necessary tools for the operational risk management process; Environment necessary for successful management of operational risks that create a behavioral pattern referring to the operational risk exposure and external factors that significantly impact on the potential effects of operational risk realization. Quarterly and annual reports on operational risk exposures are presented to Risk Management Committee, Executive Board, Committee for monitoring the bank s operations and Management Board.. Content of reports are as follows: Detailed quarterly report on operational risks contains: o Report about operational risk loss events o Report about key risk indicators o Report about measures for operational risk mitigation o Comparison of gross losses with operational risk capital requirements o Report about internal capital adequacy assessment process (ICAAP) o Report about outsourcing with newly outsourced activities, assessment of already outsourced activities made by organizational unit which outsourced activity o Report on introduction of new products o Report on model risk exposure o Report on scenario analyses o Report on testing of business continuity plan o Other 3.4 Country Risk Management Policy Country risk is the risk that relates to the country of origin of a person to which the Bank is exposed and poses a risk of occurrence of adverse effects to the financial result and capital of the Bank due to its inability to collect a receivable from that person for reasons being a consequence of political, economic or social circumstances in the country of origin of that person: Political and economic risk which implies the possibility of loss due to the Bank s inability to collect its receivables because of limitations stipulated by acts of government and other bodies, origin of the debtor as well as the overall and system circumstances in such country; Transfer risk which implies the possibility of loss due to the Bank s inability to collect its receivables in a foreign currency which is not the official currency of the debtor s country of origin, due to limitations in payment of obligations to other creditors from other countries in a certain currency which are determined by acts of government and other bodies. Disclosure of Data and Information 9

10 Management of the risk of a the debtor s country of origin (country risk) at the Bank is based on the principles for risk management in general, and in particular, based on the following principles: Principle of responsibility of the Bank s Executive Board to implement all business strategies of the Bank out of which the risk management and country risk management strategies stem out; Principle to accept definitions and criteria provisioned under laws and by-laws of the NBS; Principle of management assets and off-balance sheet items of the Bank from the aspect of the debtor s origin and maintenance of the country risk exposure not jeopardizing business stability and adjustment of the Bank s business indicators with the regulatory limits and OTP Group limits for this and other risk the Bank is exposed to; Principle of implementation of approaches and methodologies of OTP Group for identification, measurement/assessment, monitoring, limiting and reporting which are not in collision with the provisions under laws and by-laws of the NBS in the field of the country risk. In order to identify, measure, assess and monitor country risk exposure, the Bank applies methodologies and uses experiences of OTP Group, its own assessments, analyses and experiences gained in best banking practice that are not in contravention of the provisions of the legal and subordinate regulations of the NBS in the area of country risk. Bank objectives with regard to an acceptable country risk exposure are related to the limits set, which are defined by the Bank as a maximum exposure to certain countries, individually by the borrower s country of origin and on regional basis. The Country Risk Reports contain information on the limit level, limit utilization level, and limit violations (if any), a proposal of measures to return the limits within provisioned and the like. Internal reporting about the Bank`s exposure toward country risk are performed on daily basis and contains fullifilment of limits. Additionaly, the Country Risk Reports are drafted monthly, quarterly and annually and are adopted by competent boards/committees defined by internal acts, containing an overview of exposures per countries and a control of set limits Market Risk Management Policy Market risks are the possibility of adverse effects on the financial result and capital arising from changes in the value of balance sheet items and off-balance sheet items of the Bank arising from movements in market prices. Market risks include foreign exchange currency risk, price risk based on debt securities, price risk on equity securities and and commodity risk. The Bank s tendency to these risks is generally low and the Bank strives to reduce it to a minimum. Setting up the market risk limits aims to preventive risk management, and/or minimizing of risks that can have adverse effects to the Bank's business result. The Bank establishes limits for transactions that are contracted at the market, providing that none of the limits is outside the legal framework stipulated by the Law on Banks and the Risk Management Decision by the National Bank of Serbia. Disclosure of Data and Information 10

11 Foreign exchange risk FX risk is the risk from negative effects on the financial result and capital of the Bank based on changes in the value of balance positions and off-balance items of the Bank which occur due to price movements on the market i.e. due to changes in the exchange rates and mutual relations of different currencies. The adjustment of assets and liabilities per currencies is conducted continuously by following the FX positions in each currency in order to keep them in line with the preset limits per currencies. At the end of 2014, Bank opened the trading book in order to improve market recognition and achieve profit through increasing volume of foreign exchange trading. During 2017, the Bank had FX swaps in trading book. Management of FX open positions of the Bank is in the responsibility of Treasury directorate which manages the FX risk of the Bank in internally set limits. ALM unit is responsible for timely transfer of FX risk exposure related to banking book positions to Treasury directorate. Units for management of operational and other risk are responsible for monitoring and controlling FX exposures on daily level and reporting on monthly level. The foreign exchange risk limits are established on the level which is in line of Banks needs and where the Bank will not sustain significant losses due to exchange rate volatility in comparison to dinar. The Bank uses the following limits: FX position limit in each currency (overnight and daily) Total FX position limit (overnight and daily) FX risk indicator limit VaR limit Stop-loss limit P&L limit Price risk Price risk is the risk from negative effects on the financial result and capital of the Bank based on changes in the prices of debt securities and equity securities. Debt securities are bonds and other debt securities and derivatives whose subject is interest rate or debt security, while equity securities include shares, depository receipts, stock indices, convertible bonds if they meet the conditions set in Decision on the adequacy of capital and derivatives related to shares or stock exchange indices. The price risk consists of general and specific price risk. Commodities risk appears due to changes in price of goods which are traded or can be traded on organized secondary market. Goods are physical products that can be traded on the secondary market: agricultural products, minerals (including oil) and precious metals (excluding gold) and derivative financial instruments relating to these products. The Bank applies generally accepted techniques for measuring exposure to market risks, mainly exposure to FX risk. The Bank doesn t have exposure to commodities risk. Disclosure of Data and Information 11

12 The Bank manages the foreign exchange risk daily, monthly and quarterly. The Bank performs stress tests regularly by simulating impacts of different scenarios of currency rates movements to the financial result and capital of the Bank. 3.6 Outsourcing Risk Management Policy The Outsourcing Risk Management Policy represents a document which stipulates the terms and conditions for outsourcing and defines principles for the outsourcing risks management in the Bank. The Outsourcing Risk Management Policy is approved by Board of Directors of the Bank. Externalization risk management policy is a responsibility of the Bank Management Board. The Executive Board of the Bank is obliged to set up an appropriate system of managing risks relating to outsourcing, which is in accordance with the Law on Banks, Decision on Minimum Standards of Financial Institution s Information System Management and Decision on Risk Management by banks. Externalization risk is a risk that arises from Bank activities in connection with its operations assigned to a third party, which are pursued as its core activity. Bank risk management system comprises all risks arising from activities relating to its operations assigned to a third person, conducting such activities as its core activity, i.e. has certain experience in performing such activities. The primary objective of outsourcing risk management is an assessment and possibility of risk control prior to the conclusion of an agreement / annex to the agreement and during the period of the agreement with third persons, i.e. service providers, and taking necessary measures aimed at protection from adverse impacts on Bank operations and reputation. The Bank has defined criteria and procedures related to the outsourcing process by its procedures and internal acts. Furthermore, the Bank has defined required elements of contracts between the Bank and service provider within the meaning that the contract clearly defines all relevant terms, conditions, rights and obligations as well as responsibilities of contracting parties. The Bank will take into consideration all legal circumstances relating to externalization activities, which include storage, processing and/or transfer of data on entity. 3.7 Interest Rate Risk Management Policy The interest rate risk is a risk from occurrence of adverse effects to the financial result and capital of the Bank based on positions from the Banking Book due to changes in interest rates. The Assets and Liabilities Management Policy defines the framework, principles and metrics applied for the interest rate risk management in the banking book, in accordance with the accepted level of risk exposure and the target risk profile, as well as with the general and specific risk management principles described in the Risk Management Strategy. The Bank Disclosure of Data and Information 12

13 assumes exposure to the interest rate risk in line with all legal regulations and internal rules. Acceptable exposure to the interest rate risk is defined by the level of individual limits which the Bank determines based on the Bank s ability and willingness to assume such risk. The Bank strives to balance the interest-sensitive assets and liabilities ratios in particular time intervals. The Bank manages the interest rate risk on the level of individual currencies. The basis for measuring the interest rate risk exposure is the analysis of mismatch in repeated determining of the interest rate between the interest-bearing assets and liabilities. Such mismatches comprise a part of the Interest Rate Gap Report which distributes assets and liabilities according to tenors based on the following date of repeated determining of the price of instruments or due date for instruments with fixed interest rate. The Interest Rate Gap Report serves as the basic technique for the interest rate risk measurement. The Bank uses following sensitivity measures of interest rate risk exposure: (EVE - economic value of equity figure) Success perspective (EaR earning at risk). 3.8 Compliance and Security Policy Compliance and Security Directorate is an independent organizational unit, responsible for setting up and supervising the process of identification and monitoring of compliance and security risk as well as managing these risks. OTP banka Srbija a.d. adopted the Compliance and Security Policy with main principles and requirements on the basis of which financial service providers shall establish and operate internal lines of defense which facilitate: the prudent operation of the Bank compliant with legislation and internal regulations; protection of the Bank s assets, owners, clients, interests related to the financial service provider and social purposes; the uninterrupted and efficient operation of the Bank and the sustainment of the trust of clients and that of society. The main areas of compliance and to it closely related security are: i.) secret and data protection in line with the regulation relating to the internal data protection officer and institutional practice (business, bank and securities secret, protection of personal data); ii.) managing conflicts of interest and conflicting interests; iii.) formulating and causing to observe ethics norms and rules; iv.) corporate governance (responsible governance, competition rules, cartel prohibition) and social responsibility; v.) segregation of financial and investment services; vi.) personal transactions of the institution and the employees; vii.) enforcing the requirement of the best execution of orders in serving clients as well as provision of preliminary information to and collection of information from clients and provision of post-trade information to clients according to the Law on Capital Market (and its bylaws) and the MiFID; viii.) prevention of market abuse (insider dealing, abusive price manipulation); Disclosure of Data and Information 13

14 ix.) x.) xi.) xii.) xiii.) xiv.) xv.) xvi.) enforcing the fair and equal treatment of clients, providing services responding to the clients needs and possibilities; liaising with authorities (NBS, Arbitration board of Chamber of Commerce, Ministry of Finance, Ministry of Economy, Commissioner for Protection of Personal Data, The Police, Public Prosecutor s office, Courts, Administration for Prevention of Money Laundering, Chamber of Commerce Forum for Prevention of Credit Frauds etc.); control of conduct risk; compliance with international tax agreements (FATCA, CRS, DAC2); consumer protection; causing to observe restrictions relating to information flow, preventing and revealing insider transaction not related to investment services; preventing and revealing external and internal fraud and corruption; anti-money laundering and counter-financing of terrorism combating activities, enforcing the Know Your Customer (KYC) principles;. Oversight, evaluation and management of risk belonging in the scope of responsibility shall be especially and consistently enforced with regard to the following activities: i.) identification and knowing of clients as stipulated by laws and internal regulations and also in order to manage banking risk, and the related data transfer and reporting obligation; ii.) protection of the compliance, reputation and interests of the Bank, furthermore, appropriate ensuring of information exchange necessary for the transparency of financial markets; iii.) protection of clients and consumers interests; iv.) the security of the Bank s assets, premises, clients and employees and business activities; v.) the continuous provision of the information infrastructure ensuring the modern conditions of the business and operative activities of the Bank; vi.) the management of operational risk; vii.) observance of and causing to observe the ethics norms undertaken and announced by the Bank; viii.) enforcement of the conflict of interest rules, which is a general requirement for the Bank s employees; ix.) complete oversight of the requirements defined as compliance obligation by the regulation defining capital markets and investment services, prevention and elimination of the occurred irregularities and market manipulation activities and events. 3.9 Risk Management Manner of Organization Organizational units of the Bank in charge of the risk management process are as follows: Disclosure of Data and Information 14

15 The Board of Directors has the ultimate authorization and responsibility related to the risk management function - it approves policies and principles related to risk management and it adopts quarterly reports on current risk management. In particular, the Board of Directors is responsible for the following: defining the general terms and conditions as well as updating thereof, establishing limits for loans in the competence of the Executive Board, providing prior approval related to the exposure of a client or a group of related entities exceeding 10% and 20% of the Bank s capital, establishing the internal control system, also including the risk management and risk monitoring, adopting of strategies, policies and major rulebooks in the field of risk management, other activities stipulated under the NBS regulations and the Law on Banks. The Board of Directors of the Bank is responsible for the accuracy of all reports on business operations, financial position and the Bank s operational results sent to the shareholders of the Bank, the general public and the National Bank of Serbia. The Executive Board is responsible for the organization of the Bank s business operations, as well as for day-to-day management of the employees activities. Furthermore, the Executive Board is responsible for the identification and measurement of risks and the implementation of principles defined by the Board of Directors. In particular, the Executive Board is responsible for the following: decision-making on clients' placements within the limits set up by the Board of Directors, decision-making on each exposure increase of a client which is related to the Bank and reporting to the Board of Directors thereof, establishing the Bank s organizational structure in compliance with the Bank s strategy, quarterly reporting to the Board of Directors on risk management, adopting and implementing liquidity policies that include planning of cash inflows and outflows, liquidity monitoring. Asset/Liability Committee (ALCO) is responsible for managing market risks, interest-rate risk and liquidity risk. The Committee monitors Bank exposure to market risks and liquidity risks which arise from the structure of its on-balance liabilities and receivables and off-balance sheet items, adopts monthly reports, proposes measures to manage foreign-exchange risk, interest-rate risk and liquidity risk and conducts other activities defined by Bank deeds and NBS regulations. ALCO submits to the Management and Executive Boards of the Bank reports on asset and liability account and movements and proposes measures and activities for maturity structure matching, liquidity maintenance, risk management, increase in profitability and other reports in accordance with Bank general deeds. ALCO bears full responsibility for planning and control of Bank capital adequacy. The Audit Committee is responsible for the analysis and adoption of proposed policies and strategies related to the credit risk management and the internal control system, sent to the Board of Directors for discussion and approval. In particular, the Audit Committee is responsible for the following: analysis of annual statements and other financial reports of the Bank, analysis and control of implementation of the adopted strategies and policies for the risk management and for the internal control system, reporting to the Board of Directors on undertaken activities and identified irregularities. Disclosure of Data and Information 15

16 The Credit Committee is responsible for the following: establishing the terms and conditions related to the placement approval risk, all pursuant to the Bank's acts, adoption of the credit policy, approval of limits to corporate clients and adoption of decisions for the management of such limits, other activities in line with the instructions of the Executive Board and the NBS regulations. The Monitoring Committee is responsible for the following: analysis of the Bank s portfolio and decision-making on activities protecting the Bank s interests, implementation of other activities defined by the general acts of the Bank. The Workout Committee is responsible for the following: decision-making referring to the issues in the field of the non-performing loan portfolio management in compliance with the general acts of the Bank, analysis of the non-performing loan portfolio and providing instructions to competent organizational units of the Bank aiming to maintain an acceptable level of the non-performing loan portfolio, supervision of receivables collection results, performing other activities defined by the general acts of the Bank. The Operational Risk Management Committee is an advisory body established by Executive Board. On the Committee's meetings, issues of managing operational risks in the Bank are discussed. Besides the said boards/committees, the risk management process is also conducted through the activities of the Risk Management Division and the Finance Division (ALM and Middle Office Directorate). The Risk Management Division is responsible for development of methodologies and procedures for the management of the credit risks, operational risks and other risks (market risk management), analysis of loan applications and providing opinions on the risk assumption justifiability, control of documentation completeness and accuracy, monitoring, portfolio and NPL management, creation of placement impairments, calculation of capital requirements for the credit and operational risks, reporting on the credit risk, collections and back-testing. The Risk Management Division is comprised of the following: Portfolio, Risk Management and Retail Collection Directorate, Credit Approval Directorate and the Corporate and SME Collection Directorate. The Business Division Treasury Directorate is responsible for conclusion of transactions aiming to maintain liquidity and FX position within set limits i.e. for the management of liquidity and FX risk on a daily level. Finance Division - ALM and Middle Office Directorate It develops methodologies and procedures for interest-rate risk, foreign-exchange risk of banking book and liquidity risk management, as well as annual and quarterly liquidity and financing plans with an aim of minimizing such risks. The ALM and Middle Office calculates capital requirements, internal capital requirements, conducts stress testing, monitors utilization of limits and reports to ALCO on interest-rate risk, liquidity risk and timely transfer of FX risk exposure related to banking book positions to Treasury directorate. Disclosure of Data and Information 16

17 4. BANK S CAPITAL Structure of the total capital as at December 31, 2017: N o Form PI-KAP Item Amount on individual base (thousands of RSD) Amount on consolidated base Common Equity Tier 1: elements 1 CET1 capital instruments and the related share premium accounts of which: shares and other capital instruments which fulfil the requirements as laid out in Section 8 of the DCA of which: relevant share premium with the instruments referred to in item 1.1, i.e. the amount paid above par value of those instruments Common Equity Tier 1 capital before regulatory adjustments and deductibles (sum of rows from 1 to 7) Common Equity Tier 1 capital: regulatory adjustments and deductibles 9 Additional value adjustments (-) 34,116,827 34,116,827 31,553,265 31,553,265 2,563,562 2,563,562 34,116,827 34,116,827 17,022 33, Intangible assets, including goodwill (net of deferred tax liabilities) (-) 50, ,996 Deferred tax assets that rely on future profitability of the bank, excluding those 11 arising from temporary differences (net of related deferred tax liability where the conditions referred to in Section 14, paragraph 1 of the DCA are met) 0 192,820 Sum of deferred tax assets and holdings of financial sector entities where the bank 23 has a significant investment referred to in Section 21, paragraph 1 of the DCA in such entities, which exceeds the threshold referred to in Section 21, paragraph of the DCA (-) 14,991,466 0 of which: Direct, indirect and synthetic holdings of the CET1 instruments of financial sector entities where the bank has a significant investment in those entities 14,991, Losses for the current and previous years, and unrealised losses (-) 7,024,484 6,584, Amount of required reserve for estimated losses on balance-sheet assets and offbalance sheet items of the bank Total regulatory adjustments and deductibles from CET1 capital (sum of rows from 9 to 27) 1,409,791 1,409,791 23,493,760 9,029, Common Equity Tier 1 capital (difference between 8 and 28) 10,623,067 25,086,914 Additional Tier 1 capital: elements Section 7, paragraph 1, item 1) and Section 8 Section 7, paragraph 1, item 2) Section 12, paragraph 5 Section 13, paragraph 1, item 2) Section 13, paragraph 1, item 3) Section 21, paragraph 1 Section 21, paragraph 1, item 2) Section 13, paragraph 1, item 1) Section 13, paragraph 1, item 13) 32 Additional Tier 1 capital before deductibles (30+31) 0 0 Additional Tier 1 capital: deductibles 38 Total deductibles from Additional Tier 1 capital (sum of rows from 33 to 37) Additional Tier 1 capital (difference between 32 and 38) Tier 1 capital (sum of rows 29 and 39) 10,623,067 25,086, Tier 2: elements Shares and other Tier 2 capital instruments and subordinated liabilities which fulfil the requirements as laid out in Section 28 of the DCA and related share premium accounts related to instruments 44 Tier 2 capital before deductibles (sum of rows from 41 to 43) Tier 2 capital: deductibles 184, , , ,461 Section 27, paragraph 1, items 1) and 2) Disclosure of Data and Information 17

18 49 Total deductibles from Tier 2 capital (sum of rows from 45 to 48) Tier 2 capital (difference between 44 and 49) 184, , Total capital (sum of rows 40 and 50) 10,807,528 25,271, Total risk-weighted assets 38,509, ,206,207 Capital adequacy ratios and capital buffers 53 Common Equity Tier 1 capital ratio (%) 54 Tier 1 capital ratio (%) 55 Total capital ratio (%) 27.59% 19.72% 27.59% 19.72% Section 3, paragraph 1, item 1) Section 3, paragraph 1, item 2) Section 3, paragraph 1, item 3) 28.06% 19.87% 56 Total requirements for capital buffers (%) 4.16% 4.16% Section Common Equity Tier 1 capital available for capital buffers coverage (%) 19.59% 11.72% Disclosure of Data and Information 18

19 Description of the basic characteristics of all the elements to be included in the calculation of capital: Form PI-FIKAP Data on Main Features of Financial Instruments Included in Calculation of Bank's and Banking group s Capital No Instrument features Description Description Description 1. Issuer ОТP Bаnkа Srbiја АD Nоvi Sаd 1.1. ОТP Bаnkа Srbiја АD Nоvi Sаd OTP Financing Netherlands Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) RSKULBE40207 RSKULBE89816 / Regulatory treatment 2. Treatment in accordance with the Decision on Capital Adequacy of Banks Core capital instrument Supplementary capital instrument Supplementary capital instrument 3. Eligible at solo/(sub-)consolidated/ solo&(sub-) consolidated 4. Instrument type Individual and group level Individual and group level Individual and group level Subordinated debt issued in Cumulative convertible the form of financial Common shares preferred shares instruments 5. Amount recognised in regulatory capital (in RSD thousand, as of most recent reporting date) 6. Nominal amount of instrument 6.1. Issue price 6.2. Redemption price 31,553,265 54, ,917 49,540 49, ,042 At the 25th issue, by decision of the Bank's Assembly from the emission price was set at RSD 168,960 49,540 / At the 25th issue RSD 168,960 49,540 / 7. Accounting classification Share capital Share capital Liabilities amortised value Disclosure of Data and Information 19

20 8. Original date of issuance Perpetual or dated without maturity date without maturity date with maturity date 9.1. Original maturity date without maturity date without maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount Subsequent call dates, if applicable Coupons / dividends 11. Fixed or floating dividend/coupon 12. Coupon rate and any related index 13. Existence of a dividend stopper No No No / / / / / / Variable Variable / / / / / / / Fully discretionary, partially discretionary or mandatory (in terms of timing) Fully discretion right by Bank s assembly Partially discretion right by Bank s assembly / Fully discretionary, partially discretionary or mandatory (in terms of amount) Fully discretion right by Bank s Fully discretion right by Bank s assembly assembly / No No / 15. Existence of step up or other incentive to redeem 16. Noncumulative or cumulative divident/coupon Non-cumulative Cumulative / 17. Convertible or non-convertible Inconvertible Convertible / Disclosure of Data and Information 20

21 18. If convertible, conversion trigger(s) Only if Board of directors on holder s demand made positive decision. The Board of directors can made positive decision about converting cumulative convertible preferred share into common share, only if shareholder, at the time of decision making,by request doesn t have any overdue liabilities on Bank as issuer. / / Completely (under the terms 19. If convertible, fully or partially from Issue decision or Founding act and Bank s / Statute) / 20. If convertible, conversion rate / Ratio 1:1 / 21. If convertible, mandatory or optional conversion / Voluntary under the terms defined in article 18. / 22. If convertible, specify instrument type convertible into / Common shares / 23. If convertible, specify issuer of instrument it converts into 24. Write-down features 25. If write-down, write-down trigger(s) No, according to Issue decision / ОТP Bаnkа Srbiја АD Nоvi Sаd / No, according to Issue decision / / / / 26. If write-down, full or partial / / / 27. If write-down, permanent or temporary / / / 28. If temporary write-down, description of write-up mechanism / / / 29. Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Cumulative preferred shares Subordinated debt / 30. Non-compliant transitioned features No No No 31. If yes, specify non-compliant features / / / Disclosure of Data and Information 21

22 Differences between items in the balance sheet compiled for the needs of supervision on a consolidated basis of the banking group and items in the consolidated balance sheet compiled in accordance with the International Financial Reporting Standards are shown in following table: (in thousands rsd) Consolidate Position name d Balance sheet of the Banking Consolidate d Balance sheet Position mark group А ASSETS A.I Cash and assets at central bank 31,294,266 31,294,266 A.II Pledged financial assets 896, ,888 A.III Financial assets by fair value through Profit and Loss Statement intended for trading 178, ,303 A.V Financial assets available for sale 19,809,266 19,797,937 A.VI Financial assets held to maturity 163, ,944 A.VII Loans and receivables from banks and other financial organization 10,672,789 10,672,880 A.VIII Loans and receivables from clients 108,271, ,731,018 A.XI Investments in associates and join ventures A.XII Investments in subsidiaries 40 29,773 A.XIII Intangible investments 808, ,231 A.XIV Real estates, facilities and equipment 8,527,710 10,800,279 A.XV Investment in real estates 216, ,675 A.XVII Deferred tax assets 331, ,433 A.XVIII Permanent assets intended to sale and assets of operation which is to be terminated 148, ,456 A.XIX Other assets 7,336,306 7,568,910 A.XX TOTAL ASSETS 188,656, ,546,100 P LIABILITIES PO LIABILITIES PO.I Financial liabilities by fair value through Profit and Loss Statement intended for trading 50,687 50,687 PO.IV Deposits and other liabilities toward banks, other financial organizations and central bank 18,815,620 20,024,471 PO.V Deposits and other liabilities toward other clients 132,238, ,640,732 PO.VIII Subordinated liabilities 957, ,022 PO.IX Provisions 1,035,234 1,037,017 PO.XI Current tax liabilities 1,447 1,447 PO.XII Deferred tax liabilities 554, ,813 PO.XIII Other liabilities 1,459,507 1,460,757 PO.XIV TOTAL LIABILITIES 155,112, ,858,946 CAPITAL PO.XV Equity capital 34,172,913 34,172,913 PO.XVII Profit 5,864,949 6,008,001 PO.XVIII Loss 6,582,434 6,582,434 PO.XIX Reserves 91,198 91,198 PO.XX Unrealized losses 2,524 2,524 PO.XXII TOTAL CAPITAL 33,544,102 33,687,154 PO.XXIV TOTAL LIABILITIES 188,656, ,546,100 V.P. OFF BALANCE POSITIONS V.P.А. Off-balance assets 364,695, ,695,708 V.P.P. Off-balance liabilities 364,695, ,695,708 Disclosure of Data and Information 22