Risk and Capital Management Basel II - Pillar 3 Disclosures

Transcription

1 Risk and Capital Management Basel II - Pillar 3 Disclosures Year 2011

2 Table of Contents Page 1. GENERAL INFORMATION Basic information about the Vojvodjanska bank Member of NBG Group 3 2. INTRODUCTION Pillar Pillar Pillar OVERALL RISK AND CAPITAL MANAGEMENT Risk management strategy Risk management framework Risk governance structure Capital management Risk types Monitoring and reporting 9 4. CAPITAL STRUCTURE AND CAPITAL ADEQUACY RATIO Capital structure and adequacy ICAAP considerations CREDIT RISK Introduction Credit risk management Capital requirements for credit risk Quantitative information on credit risk Gross and net credit exposure towards to asset classes Credit exposure by geography Credit exposure by industry Credit exposure by maturity Distribution of exposures according to classification category, by types of counterparty, as well as calculated specific and needed reserves Large exposures Impaired facilities and past due exposures Credit risk mitigation Related party and intra-group transactions Equity investments held in banking book 26 MARKET RISK Introduction Foreign exchange risk management Market risk management Capital requirements for market risk OPERATIONAL RISK Introduction Operational risk management Capital requirements for operational risk OTHER TYPES OF RISK Introduction Liquidity risk Interest rate risk in the banking book Concentration risk Counterparty credit risk Reputational risk Other risks 41 2

3 The NBS Basel II guidelines became effective on 31 December 2011 as the common framework for the implementation of Basel II standards for banks incorporated in the Serbia. The Basel II Pillar 3 Disclosures report has been prepared in accordance with the NBS requirements outlined in the Decision on disclosure of data and information by banks (RS Official Gazette 45/2011). This Basel II Pillar 3 Disclosures report contains a description of the Bank s risk management and capital adequacy practices and processes. The disclosures in this report are in addition to or in some cases, serve to clarify the disclosures set out in the financial statements for the year ended 31 December 2011, presented in accordance with the Financial Accounting Standards (FAS) and International Financial Reporting Standards (IFRS). 1. General information 1.1. Basic information about the Vojvodjanska bank Member of NBG Group Vojvodjanska banka a.d., Novi Sad (the Bank ) was established on 1 January 1990 by the transformation of Vojvodjanska banka - Associated Bank, Novi Sad. On 30 December 2001, in accordance with its Articles of Incorporation and the Decision of the Bank s General Assembly, the Bank merged with Srpska razvojna banka a.d. Beograd and Uzicka banka a.d., Uzice. In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece became the major owner of the Bank s share capital, by acquiring an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House, on 12 December On 25 October 2007, the National Bank of Greece, Athens, conducted the mandatory purchase of the remaining 1,727 shares and became the sole owner of the Bank. On 7 December 2007, Vojvodjanska banka a.d., Novi Sad was excluded from the Belex list on its own request. The Bank is registered in the Republic of Serbia a closed joint stock company to provide a wide range of banking services associated with payment transfers, credit and deposit activities in the country and abroad, and it operates in accordance with the Republic of Serbia s Law on Banks. In accordance with the Decision brought by the Bank s Assembly on 3 January 2008, Vojvodjanska banka a.d., Novi Sad merged with the National Bank of Greece a.d. Beograd, with the date of merger being 31 December The aforementioned status change of merger by absorption of the National Bank of Greece a.d., Beograd was inscribed in the registry maintained by the Serbian Business Registers Agency on 14 February 2008 under the number BD 6190/2008 (removal of the business entity the National Bank of Greece a.d., Beograd as the acquired bank) and the change in equity structure of Vojvodjanska banka a.d., Novi Sad was inscribed (Decision number BD 6210/2008). The National Bank of Greece a.d., Beograd was entirely in the ownership of the National Bank of Greece Athens, Greece. The Bank continued its operations under the name of Vojvodjanska banka a.d., Novi Sad. The Bank s Head Office is located in Novi Sad, 7, Trg Slobode. As of 31 December 2011, the Bank operated through its Central Office located in Novi Sad, 60 branches, excluding the inactive braches in Pristina and Podgorica, 58 sub-branch offices (31 December 2010: 67 branches, 67 sub-branches and 8 counters). As of 31 December 2011, the Bank had employees (31 December 2010: employees). The Bank s registration number is Its tax identification number is

4 As of 31 December 2011, the Bank had controlling interest in the following legal entity, which is not consolidated in the accompanying financial statement: Imos a.d. Šid (51.55% of interest in capital). 2. Introduction The new Basel II based framework, which has been implemented in Serbia by 31 December 2011, provides a more risk sensitive approach to assessment of risk and the calculation of regulatory capital. The new framework intends to strengthen the risk and capital management practices and processes within financial institutions. Given the NBS s requirements the Bank has accordingly taken steps to comply with these requirements. The NBS s risk and capital management framework, consistent with the Basel II framework, is built on three pillars: Pillar 1: calculation of the risk weighted amounts and capital requirement. Pillar 2: the supervisory review process, including the Internal Capital Adequacy Assessment Process. Pillar 3: rules for the disclosure of risk management and capital adequacy information. 2.1 Pillar 1 Pillar 1 prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar 1 defines the regulatory minimum capital requirements for each bank to cover the credit risk, market risk and operational risk. It also defines the methodology for measurement of these risks and the various elements of qualifying capital. The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs). The resultant ratio is to be maintained above a predetermined and communicated level by NBS. Under Basel II standards, the minimum capital adequacy ratio for banks incorporated in Serbia is set on 12% compared to the Basel Committee s minimum ratio of 8 per cent. The NBS also requires banks incorporated in Serbia to maintain a capital buffer of 2.5 per cent above the minimum capital adequacy ratio. In the event that the capital adequacy ratio (CAR) is higher for less than 2.5% of prescribed 12% or it would be higher after redistribution of retained profit for less than 2.5% of prescribed 12%, it means that the Bank is restricted to perform redistribution of profit only into elements/items of the Core Capital. Under the NBS s Basel II capital adequacy framework, the RWAs are calculated using more sophisticated and risk sensitive methods than under the previous Basel I regulations. The table below summarizes the Pillar 1 risks and the approaches used by the Bank to calculating the RWAs in accordance with the NBS s Basel II capital adequacy framework. RISK TYPE Credit risk Market Risk Operational Risk APPROACH USED BY THE BANK Standardized Approach Standardized Approach Basic Indicator Approach 2.2 Pillar 2 Pillar 2 deals with the Supervisory Review and Evaluation Process (SREP). It also addresses the Internal Capital Adequacy Assessment Process (ICAAP) to be followed by banks to assess the overall capital requirements to cover all relevant risks (including those covered under Pillar 1). 4

5 Under the NBS s rules and Pillar 2 guidelines, each bank is to be individually assessed by the NBS and an individual minimum capital adequacy ratio could be prescribed as higher if the NBS assesses it is necessarily and is in interest of bank. The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the bank is exposed. The Bank has developed an ICAAP process which involves identification and measurement of risks to maintain an appropriate level of internal capital in alignment to the Bank s overall risk profile and business plan. An ICAAP Policy has been developed to address major components of the Bank s risk management, including risk types which are not covered under Pillar 1 and they are liquidity risk, interest rate risk in the banking book, concentration risk, reputational risk and other risks. Given the current capital resources and position of the Bank, no additional capital is being allocated to these risk components. However, the responsible functions and governance bodies of the Bank permanently monitor and report on these risks to the Board of Directors on a quarterly basis. 2.3 Pillar 3 In the NBS s Basel II framework, the Pillar 3 prescribes how, when, and at what level information should be publicly disclosed about an institution s risk management, governance and capital adequacy practices. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar 3 disclosure requirements is to complement the first two Pillars and the associated supervisory review process. The disclosures are designed to enable stakeholders and market participants to assess an institution s risk appetite and risk exposures and to encourage all banks, via market pressures, to move towards more advanced forms of risk management. In 2011, the NBS prescribed basic guidelines to cover the detailed disclosure requirements to be followed by licensed banks in Serbia to be in compliance with Pillar 3 of Basel II. 3 Overall risk and capital management 3.1 Risk management strategy The Bank perceives strong risk management capabilities to be the foundation in delivering results to customers, investors and NBG Group. The Bank will continue to endeavor to adopt international best practices of risk management, superior corporate governance and the highest level of market discipline. The primary objectives of the Risk strategy of the Bank are to: Manage risks inherent in the Bank s activities in line with the risk appetite of the Bank; Strengthen the Bank s risk management practices to reflect the industry best practices; and Align internal capital requirements with risk materiality. The risk strategy is articulated through the limit structures for individual risks. These limits are based on the Bank s business plans and guided by regulatory requirements and guidance in this regard. By setting the risk appetite, the Bank links its individual risks to its strategy. The risk limits reflects the level of risk that the Bank is prepared to take in order to achieve its objectives. The Bank reviews and realigns its risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios. The Bank will also assess its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines the Bank s risk exposures and defines its tolerance levels towards accepting or avoiding these risks. Tolerance levels are reflected in the limits defined by the Bank for each risk area. 5

6 On the basis of the Risk Strategy, the Bank has developed a set of policies referring to individual risks which, inter alia, specify the procedures of identifying, assessing, measuring, monitoring, reporting and controlling risks; the manner of organising the risk management process in respect of the given risks; as well as roles and responsibilities of the competent organisational units and bodies with respect to each risk type. The risk mitigation techniques and the manners of ensuring and monitoring risk mitigation efficiency have also been defined in the above-mentioned policies. 3.2 Risk management framework The Bank has established a comprehensive and reliable system of risk management, integrated in all its business activities, which ensures that the Bank s risk profile is always in line with already established propensity to risks. Risk management system is proportionate to the nature, volume and complexity of the Bank s operations and/or its risk profile. The Bank s risk management system encompasses: Risk management strategy and policies, as well as procedures for risk identification and measurement and assessment and for managing risks Adequate internal organizational structure Effective and efficient process of management of all risk Adequate internal controls system Appropriate information system The risk management framework of the Bank encapsulates the spirit of the following key principles for Risk Management as articulated by Basel II standards: Management oversight and control Risk culture and ownership Risk recognition and assessment Control activities and segregation of duties Information and communication Monitoring risk management activities and correcting deficiencies 3.3 Risk governance structure The Bank s Board of Directors has overall responsibility for establishing risk culture and ensuring that an effective risk management framework is in place. The Board of Directors adopts and periodically reviews the Bank s risk management policies and strategies. The Board Risk Management Committee is responsible to control the Risk Management Division in terms of independence, adequacy and effectiveness, as well as to ensure development and ongoing effectiveness of the Bank s internal risk management system and its integration into the business decision making process as regards to any type of risk. The Executive Board is responsible for monitoring and implementation of the policies adopted by the Board of Directors. The key element of risk management philosophy is for the Risk Management Department ( RMD ) to provide independent monitoring and control while working closely with the business units which ultimately own the risks. The Risk Governance structure of the Bank is depicted by the following diagram. 6

7 Board of Directors Strategic level Risk Management Committee Audit Committee Executive Board ALCO Credit Committee Tactical level RISK MANAGEMENT Portfolio and classificaton management Market risk management Credit risk models Operational risk management Basel II CREDIT RISK MANAGEMENT Corporate Credit Risk Retail Credit Initiation Retail policies, procedures and credit portfolio management IT Back office functions Finance Compliance Other specialized units Business Processes HR Marketing Legal Internal Audit Operational level Business units 1st line of defence 2nd line of defence 3rd line of defence The RMD plays a pivotal role in monitoring the risks associated with all the activities of the Bank. The principal responsibilities of the Division are: Determining the Bank s appetite for risk and submitting the same to the RMC and Board of Directors for approval. Developing and reviewing risk management policies in accordance with the risk management guidelines issued by the NBS, NBG Group and international best practices. Reviewing operating policy manuals and ensuring that such policy manuals are in accordance with the risk management policies and appropriately addresses all the key risks embedded in the related processes/ products. Acting as the principal coordinator in Basel II implementation as required by the NBS and facilitating the performance of key Basel II activities. Identifying and recommending risk analysis tools and techniques as required under Basel II, guidelines issued by the NBS and NBG Group. Reviewing the adequacy of the risk limits and providing feed back to the relevant approving authorities. Preparing MIS Reports for review by the RMC and the Board of Directors. Developing systems and resources to review the key risk exposures of the Bank and communicating the planned/ executed corrective actions to the Risk Management Committee. 7

8 Within the Bank, Risk Management broadly takes place at the following levels: Strategic level It encompasses risk management functions performed by the Board of Directors. These include the adoption of risk and capital strategies and policies, ascertaining the Bank s risk definitions, profile and appetite, as well as, the risk reward profile. Tactical level It encompasses risk management functions performed by Executive Board and Directors of Divisions. These include the approval of risk policies and procedure manuals for managing risks and establishing adequate systems and controls to ensure that the overall risk and reward relation remains within acceptable levels. Operational (business line) level It involves management of risks at the point where they are actually created. The relevant activities are performed by individuals who undertake risk on the Bank s behalf. Risk management at this level is implemented by means of appropriate controls incorporated into the relevant operational procedures and guidelines set by the Executive Board. 3.4 Capital management The Bank s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (NBS), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders return is also recognized and the Bank recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank s capital management policy seeks to maximize return on risk adjusted capital while satisfying all the regulatory requirements. The Bank ensures that the capital adequacy requirements are met and comply with regulatory capital requirements at all times. A prior approval of the NBG Group is obtained by the Bank before submitting a proposal for distribution of profits (i.e. dividend) for shareholders approval. 3.5 Risk types The Bank is exposed to various types of risk. Risks in Pillar 1 Risks in Pillar 2 Credit risk Market risk Operational risk Liquidity risk Concentration risk Interest rate risk in banking book Reputational risk Other risks The details of components of risks and how they are managed are discussed in the following sections of this document. 8

9 3.6 Monitoring and reporting The Risk Management Division provides independent assurance that all types of risk are being measured and managed in accordance with the policies and guidelines set by the Board of Directors. The RMD submits a quarterly Risk Review report to the Executive Board, Board Risk Management Committee and Audit Committee. 4 Capital structure and capital adequacy ratio 4.1 Capital structure and adequacy The Bank s regulator, the NBS, sets and monitors capital requirements for the Bank. In implementing current capital requirements the NBS requires the Bank to maintain a prescribed ratio of 12% of total regulatory capital to total risk-weighted assets. Banking operations are categorized as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The NBS also requires banks incorporated in Serbia to maintain a buffer of 2.5 per cent above the minimum capital adequacy ratio. The Bank's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The Bank is required to comply with the provisions of the Decision on Capital Adequacy by Bank (which is based on the Basel II standards) in respect of regulatory capital. The Bank has adopted the standardized approach to credit and market risk and basic indicator approach for operational risk management under the revised framework. The Bank has complied with the capital requirements set by the regulator throughout the year. The capital adequacy ratio of the Bank as at 31 December 2011 was above to the minimum regulatory capital requirement of 12%, and it was on level of 23%. The Bank further plans to maintain strong capital position. The Bank s regulatory capital is analyzed into two tiers: Core Capital (Tier 1 capital) includes: Paid up shares (excluding preference cumulative shares PCS), Premium on issued shares; Reserves allocated from profit; and Profit of the Bank; reduced for Losses from earlier years; Current year losses; Intangible investments; Acquired own common and preference shares (excluding PCS) pledged with the Bank; and Regulatory value adjustments. Supplementary Capital (Tier 2 capital) includes: Paid up PCS; Premium on issued PCS; Part of positive revaluation reserves; Hybrid instruments; Subordinated debt; reduced for Own PCS; PCS pledged with the Bank; and Claims covered by hybrid instruments and subordinated debts of the Bank. Deduction items from Capital in case of the Bank include: Amount of which is exceeded qualified participation of the Bank in non-financial entities; and Amount of Needed reserves for estimated losses on balance sheet and off-balance items. 9

10 The Bank s capital structure, capital requirements and risk weighted assets at 31 December 2011 was as follows: In RSD thousand No. CAPITAL STRUCTURE I CAPITAL 10,380, CORE CAPITAL 18,064,319 Paid-up shares (excluding CPS) 16,337,430 Premium on the issue shares (excluding CPS) 120 Reserves allocated form profit 3,188,768 Portion of retained profit from earlier years 133,295 Losses from earlier years 0 Current year losses (1,172,647) Intangible investment (367,935) Regulatory value adjustments unrealized losses (54,712) Needed reserve for estimated losses 0 2. SUPPLEMENTARY CAPITAL 1,371,348 Portion of revaluation reserves which refers to fixed assets, securities 1,371,348 and other funds 3. DEDUCTION FROM CORE CAPITAL AND SUPPL.CAPITAL (9,054,754) 3.1. It refers: reduction of core capital (7,683,406) 3.2. It refers: reduction of supplementary capital (1,371,348) Amount for which is exceeded qualified participation of bank in (157,442) entities which are not financial sector entities Needed reserve for estimated losses on balance sheet and off balance (8,897,312) sheet items; in accordance with article 427. Paragraph 1 of Decision on capital adequacy by bank 4. TOTAL CORE CAPITAL 10,380, TOTAL SUPPLEMENTARY CAPITAL 0 No. CAPITAL REQUIREMENTS I CAPITAL 10,380, TOTAL CORE CAPITAL 10,380, TOTAL SUPPLEMENTARY CAPITAL 0 II CAPITAL REQUIREMENTS 5,415, Credit risk; counterparty risk; delivery/settlement risk for free delivery 4,376, Delivery/settlement risk for unsettled transactions 0 3. Market risk 149, Price risk in respect of debt securities 27, Price risk in respect of equity Foreign exchange risk 122, Commodities risk 0 4. Operational risk 889, COVERAGE OF CAPITAL REQUIREMENTS 5,415,686 III CAPITAL ADEQUACY RATIO 23.00% 10

11 No. RISK WEIGHTED ASSETS STRUCTURE Credit 36,469, Delivery/Settlement risk 0 3. Market risk 1,249, Operational risk 7,411,258 TOTAL RWA 45,130,717 Under the NBS rules the Bank is obliged to maintain capital structure, capital level and capital adequacy ratio in accordance with following regulatory capital requirements and restrictions: - Total Capital at least 10 million Euros. - Core Capital at least 50% of Total Capital. - Capital Adequacy Ratio (CAR) minimum 12%. - Total amount of hybrid instruments may be maximum 50% of the Core Capital. - Total amount of hybrid instruments excluding convertible instruments in the case of balance sheet deterioration (except cumulative preference shares) may be maximum 35% of the Core Capital. - Subordinated debt included in Supplementary Capital is restricted to 50% of Core Capital. - Bank with CAR higher for less than 2.5% of prescribed 12% or it would be higher after redistribution of retained profit for less than 2.5% of prescribed 12%, is restricted to perform redistribution of profit only into elements/items of the Core Capital. - The sum of Capital deduction items is subtracted 50% from Core Capital and 50% from Supplementary Capital. If 50% of total amount of deduction items is greater than the disposable amount of Supplementary Capital the difference above the amount of disposable Supplementary Capital is subtracted form the Core Capital. - Bank is allowed to treat a part of Needed Reserves as deductable item from the Total Capital, instead treating same as deductible item from the Core Capital on the following way: until the end of % of that amount; until the end of % of that amount; and until the end of % of that amount. - During the last five years to maturity, a discount factor of 20% per year will be applied to subordinated obligations eligible for inclusion in bank s supplementary capital, so in the last year prior to that date subordinated debt are not included in Supplementary Capital. - Bank is obliged to exclude hybrid instruments with maturity below 12 months from calculation of Supplementary Capital. Capital adequacy ratio of the Bank is equal to the ratio of the Bank s capital and the sum of the credit RWA, capital requirement in relation to market risk multiplied with the reciprocal value of the capital adequacy ratio, and capital requirement in relation to operational risk multiplied with the reciprocal value of the capital adequacy ratio. 11

12 The table below summarizes the structure of the Bank s capital and risk weighted assets as of 31 December 2011 and 2010, as well as the capital adequacy ratio: In RSD thousand Regulatory capital Core Capital 18,064,319 19,544,157 Supplementary Capital 1,371,348 1,602,837 Total Tier 1 and Tier 2 capital 19, ,146,994 Deductible items: Needed reserves for estimated losses (8, ) (8,810,015) Exceeded qualified invest. in non-financial entities ( ) - Total Capital (1) 10,380,913 12,336,979 Risk weighted assets Balance sheet assets 33,946,693 51,069,329 Off balance sheet items 2,395,336 4,127,418 Non-trading derivatives 127,813 87,232 Operational risk exposure 7,411,258 - Foreign currency risk exposure 1,024,325 1,215,653 Price risk exposure 225, ,767 Total RWA (2) 45,130,717 56,754,399 Capital adequacy (1/2 x 100) 23.00% 21.74% 4.2 ICAAP considerations The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the Bank is exposed. The Bank has developed its own ICAAP framework (which implementation is addressed for 2012) which involves identification and measurement of all material risks to maintain an appropriate level of internal capital in alignment to the Bank s overall risk profile and business plan. An ICAAP document has been developed in order to primarily meet regulatory requirements, and secondary to complement its ongoing improvement of risk (including risk types which are not covered under Pillar 1 including liquidity risk, interest rate risk in the banking book, concentration risk, reputational risk and other risks) and capital management approaches. 5 Credit risk 5.1 Introduction Credit risk is the risk of suffering financial loss, should any of the Bank s customers or market counterparty fail to fulfill their contractual obligations, and arises mainly from the Bank s placements to corporate and retail customers. These placements arise in the ordinary course of its commercial banking activities and are usually transacted with collateral or other credit risk mitigants. 5.2 Credit risk management The Bank has an established internal process for assessing credit risk through Credit Policies. Corporate Credit Policy The Corporate Credit Policy for the corporate portfolio aims at providing the Bank s personnel with the fundamental policies for the control (identification, measurement, approval, monitoring and reporting) of the credit risk related to the Corporate Portfolio. The Credit Policy has been designed to meet the 12

13 organizational requirements and the regulatory framework in the best possible way, as well as to allow the Bank to maintain and improve its position in the market. Credit risk control should always be performed according to the prescribed policies, to be implemented taking into consideration Credit Procedures and all relevant circulars. The Credit Policy is approved and can be amended or revised only by the Board of Directors and is subject to periodical revision. The same body ratifies any exception from the Credit Policy initially approved by the Chief Credit Officer. All exceptions (and their rationale) should be recorded and have either an expiry date or a review date. Retail Credit Policy The Retail Credit Policy sets the policies & risk acceptance criteria, which determine the framework for managing and minimizing the credit risks undertaken by the Retail Banking Division. Its main scope is to enhance, guide and regulate the effective and adequate management of credit risk, thus achieving a viable balance between risk and reward. The Policy is orientated to serve three basic objectives: - Set the framework for the establishment of the basic credit criteria, policies and procedures, - Assures compliance with NBG Group policy, - Establish a common approach for managing Retail Credit risks. The Retail Policies/Procedures and Credit Portfolio Management Unit of the Credit Risk Department is responsible for developing and submitting for approval to the Board of Directors, the Retail Credit Policy. The Unit reports to the Chief Credit Officer and its main task is to evaluate, design and approve the credit policy that governs the retail banking products. The evaluation and monitoring of the credit risk, of new as well as existing products, is managed through the application of the Credit Policy. The Retail Credit Policy is subject to an annual review. During the review, all of the approved policy changes that occurred since the last review are incorporated in the Policy Manual. Any deviation from the approved policies requires prior approval from the NBG Group Retail Credit Division. 5.3 Capital requirements for credit risk To assess its capital adequacy requirements for credit risk in accordance with the NBS capital adequacy requirements, the Bank adopts the standardized approach. According to the standardized approach, on and off balance sheet credit exposures are assigned to predefined exposure classes based on type of counterparty or basic exposure. Main exposure classes are claims on banks, claims on corporate, claims on retail, mortgage loans, and other assets. Risk Weighted Assets (RWAs) are calculated based on prescribed credit risk weights by NBS Decision on Capital Adequacy by bank. Rating of exposures and risk weighting For 2011 the Bank did not use the ratings of external rating agencies. The Bank uses rating weights prescribed by NBS for the purpose of capital adequacy computations. For claims where the remaining maturity of these claims are more than three months and there is no available credit rating of the selected rating agency, the Bank has assigned the risk weight of the state in which the bank-borrower is located, or risk weight of 50%, depending on which is higher risk weight. For claims where the remaining maturity of these claims are three months or and there is no available credit rating of the selected rating agency, the Bank has assigned the risk weight of the state in which the bank-borrower is located, or risk weight of 20%, depending on which is higher risk weight. 13

14 For Corporate exposures for which there is no available credit rating of the selected rating agency the Bank has assigned the risk weight of 100%. Following is the analysis for credit risk as computed for regulatory capital adequacy purposes as at 31 December The following table represents risk weighted assets and capital requirements per exposure classes as at 31 December 2011: In RSD thousands Exposure classes RWA Capital adequacy ratio Capital requirements Governments and central banks 0 12% 0 Territorial autonomies and local government entities 42,458 12% 5,095 Public administrative bodies 4,342 12% 521 International development banks 0 12% 0 International institutions 0 12% 0 Banks 1,209,433 12% 145,132 Corporate 13,128,010 12% 1,575,361 Private individuals 12,980,793 12% 1,557,696 Exposures secured by mortgages 1,992,479 12% 239,097 Maturities 375,963 12% 45,115 High risk exposures 0 12% 0 Exposures to covered bonds 0 12% 0 Exposures to investments in open investment funds 0 12% 0 Other exposures 6,736,364 12% 808,364 Total 36,469,842 4,376, Quantitative information on credit risk Gross and net credit exposure towards asset classes Gross exposures in all following tables exclude off-balance sheet items which are not classified in accordance with the NBS Decision on classification of balance sheet assets and off-balance sheet items, and for financial derivates, the value of exposure after implementation of credit conversion factor is represented. The following table represents gross credit risk exposures prior implementation of credit risk mitigation techniques, i.e. credit protection by change of risk weight, impairments and provisions, needed reserves and net exposure as at 31 December 2011: 14

15 Exposure classes Gross exposures prior implementation of credit protection by change of credit risk weight Impairments and provisions Needed reserve Decrease based on implementation of credit protection instruments Increase based on implementation of credit protection instruments In RSD thousands Net exposure after implementation of credit protection by change of credit risk weight Governments and central banks 28,537,540 10, ,526,791 Territorial autonomies and local government entities 42, ,458 Public administrative bodies 6, ,435 Banks 5,734, ,128 5, ,450,557 Corporate 27,981, ,930 2,147,449 2,385, ,206,579 Private individuals 21,047,048 57,654 1,505,778 1,030, ,453,566 Exposures secured by mortgages 6,037,402 9, , ,708,354 Maturities 15,377,053 10,160,254 4,841, ,712 Other exposures 17,622,812 4,714,600 78, ,415,192 16,245,324 Total 122,386,346 15,473,258 8,897,312 3,415,192 3,415,192 98,015,776 The following table represents gross credit risk exposures after implementation of credit risk mitigation techniques, i.e. credit protection by change of risk weight, impairments and provisions, needed reserves and net exposure as at 31 December 2011: In RSD thousands Exposure classes Gross exposures after implementation of credit protection by change of credit risk weight Impairments and provisions Needed reserve Net exposure after implementation of credit protection by change of credit risk weight Governments and central banks Territorial autonomies and local government entities Public administrative bodies Banks Corporate Private individuals Exposures secured by mortgages 28,537,540 10, ,526,791 42, ,458 6, ,435 5,734, ,128 5,585 5,450,557 25,595, ,930 2,147,449 23,206,579 20,016,998 57,654 1,505,778 18,453,566 6,037,402 9, ,102 5,708,354 Maturities 15,377,053 10,160,254 4,841, ,712 Other exposures 21,038,004 4,714,600 78,080 16,245,324 Total 122,386,346 15,473,258 8,897,312 98,015,776 15

16 5.4.2 Credit exposure by geography Gross exposure geographic distribution after implementation of credit risk mitigation techniques, per exposure classes, per materially significant areas as at 31 December 2011 was as follows: In RSD thousands Exposure classes Credit risk gross exposure Governments and central banks 28,537,540 Serbia 28,537,540 Territorial autonomies and local government entities 42,458 Serbia 42,458 Public administrative bodies Serbia 6,663 Banks 5,734,270 Serbia 271,373 Central Europe (Balkans and other) 64,503 West European countries 6,663 5,398,394 Corporate 25,595,958 Serbia 25,585,503 Central Europe (Balkans and other) 11 West European countries Private individuals 10,444 20,016,998 Serbia 20,006,835 Central Europe (Balkans and other) 10,163 Exposures secured by mortgages 6,037,402 Serbia 6,037,402 Maturities 15,377,053 Serbia 14,548,389 Central Europe (Balkans and other) 79,253 West European countries 749,411 Other exposures 21,038,004 Serbia 21,038,004 Total 122,386,346 16

17 5.4.3 Credit exposure by sectors Gross exposure distribution after implementation of credit risk mitigation techniques, per exposure classes, per sectors as at 31 December 2011 was as follows: In RSD thousands Exposure classes Credit risk gross exposure Governments and central banks 28,537,540 Finance and insurance 21,724,983 Public sector 6,812,557 Territorial autonomies and local government entities 42,458 Public sector 42,458 Public administrative bodies 6,663 Public sector 6,663 Banks 5,734,270 Finance and insurance 266,308 Foreign persons 5,462,898 Other clients 5,064 Corporate 25,595,958 Finance and insurance 209,441 Public companies 2,744,781 Corporate 22,412,415 Foreign persons 10,455 Other clients 218,866 Private individuals 20,016,998 Entrepreneurs 685,412 Retail 19,303,227 Foreign persons 10,163 Private households with employed individuals and registered agriculturists 18,196 Exposures secured by mortgages 6,037,402 Entrepreneurs 51,627 Corporate 226,457 Retail 5,757,278 Private households with employed individuals and registered agriculturists 2,040 Maturities 15,377,053 Finance and insurance 94,335 Public companies 9,118 Corporate 7,270,707 Entrepreneurs 480,339 Public sector 22,858 Retail 2,612,704 Private households with employed individuals and registered agriculturists 20,123 Foreign persons 828,663 Other clients 4,038,206 Other exposures 21,038,004 Corporate 2,385,202 Entrepreneurs 18,949 Retail 1,010,920 Private households with employed individuals and registered agriculturists 181 Other 17,622,752 Total 122,386,346 17

18 The following table presents gross exposures after implementation of credit risk mitigation techniques with impairments or provisions per off-balance sheet items per sectors or type of counterparty, per exposure classes as at 31 December 2011: Exposure classes Credit risk gross exposures with impairments or provisions In RSD thousands Impairments or provisions Governments and central banks 11,546 10,746 Public sector 11,546 10,746 Territorial autonomies and local government entities 0 0 Public sector 0 0 Public administrative bodies 0 0 Public sector 0 0 Banks 278, ,128 Finance and insurance 5,603 5,138 Foreign persons 267, ,925 Other clients 5,065 5,065 Corporate 298, ,930 Public companies 1 0 Corporate 221, ,233 Foreign persons 10,441 10,441 Other clients 66,570 66,256 Private individuals 829,127 57,654 Entrepreneurs 14, Retail 806,223 50,180 Foreign persons 6,997 6,786 Private households with employed individuals and registered agriculturists 1, Exposures secured by mortgages 132,195 9,946 Corporate 7,745 2,431 Retail 123,661 6,962 Private households with employed individuals and registered agriculturists Maturities 12,669,564 10,160,254 Finance and insurance 49,259 37,452 Public companies 8,769 8,740 Corporate 5,181,095 4,152,934 Entrepreneurs 331, ,822 Public sector 22,789 4,162 Retail 2,408,658 1,523,014 Private households with employed individuals and registered agriculturists 20,123 13,891 Foreign persons 827, ,731 Other clients 3,819,871 3,393,508 Other exposures 17,624,747 4,714,600 Corporate 1, Other 17,622,752 4,714,540 Total 31,843,795 15,473,258 18

19 5.4.4 Credit exposure by remaining maturity Gross exposure distribution after implementation of credit risk mitigation techniques per remaining maturity, per exposure classes as at 31 December 2011: In RSD thousands Exposure classes Credit risk gross exposure Governments and central banks 28,537,540 Up to 1 month 21,849,486 3 to 12 months 1,025,439 1 to 5 years 5,662,615 Territorial autonomies and local government entities 42,458 Up to 1 month to 5 years 42,222 Public administrative bodies 6,663 Up to 1 month 3,947 1 to 5 years 2,716 Banks 5,734,270 Up to 1 month 5,453,791 Over 5 years 280,479 Corporate 25,595,958 Up to 1 month 8,682,428 1 to 3 months 636,539 3 to 12 months 9,385,835 1 to 5 years 5,422,749 Over 5 years 1,468,407 Private individuals 20,016,998 Up to 1 month 834,742 1 to 3 months 467,840 3 to 12 months 2,432,275 1 to 5 years 7,778,165 Over 5 years 8,503,976 Exposures secured by mortgages 6,037,402 Up to 1 month 42,886 1 to 3 months 20,120 3 to 12 months 79,696 1 to 5 years 290,507 Over 5 years 5,604,193 Maturities 15,377,053 Up to 1 month 13,778,184 1 to 3 months 5,426 3 to 12 months 62,165 1 to 5 years 454,288 Over 5 years 1,076,990 Other exposures 21,038,004 Up to 1 month 6,561,180 1 to 3 months 2,043,347 3 to 12 months 457,974 1 to 5 years 977,248 Over 5 years 10,998,255 Total 122,386,346 19

20 5.4.5 Distribution of exposures according to classification category, by types of counterparty, as well as calculated specific and needed reserves Credit risk exposures per client type and classification category as at 31 December 2011: Client / Classification Category Gross exposure Impairments and provisions Special reserve In RSD thousands Needed reserve PUBLIC SECTOR 72,321 4,496 23,416 18,920 A 47, B V 1, G D 23,177 4,496 23,177 18,681 BANKS 6,549,578 1,227,569 1,230,432 6,668 A 5,317, V 2,208 2, D 1,230,101 1,225,349 1,230,101 6,667 CORPORATE 39,484,157 7,640,326 13,455,197 5,833,240 A 6,767,845 1, B 13,880, , ,488 V 3,780, , ,362 G 3,122,205 18, , ,836 D 11,933,906 7,619,626 11,920,905 4,307,554 ENTREPRENEURS 1,236, , , ,749 A 532, B 35, V 99, ,910 14,765 G 18,205 2,062 5,396 4,138 D 550, , , ,383 RETAIL 28,734,858 1,601,501 4,238,544 2,662,655 A 21,269,429 1, B 1,762,153 16,839 34,259 27,255 V 576,487 19,286 85,004 67,091 G 1,380,812 59, , ,431 D 3,745,977 1,504,934 3,706,409 2,203,878 Other 82,977 4,897 82,977 78,080 D 82,977 4,897 82,977 78,080 Total 76,160,210 10,753,203 19,601,703 8,897, Large exposures In accordance with NBS regulations, the large exposure of the Bank to a single entity or a group of related entities is the exposure amounting to at least 10% of the Bank s capital, calculated in accordance with the NBS Decision on risk management by banks. The meaning of the related entities is defined in the Law on Banks. The large exposure of the Bank to a single entity or a group of related entities must not exceed 25% of the Bank s capital and the sum of all the Bank s large exposures must not exceed 400% of the Bank s capital. This report encompasses also the Bank s exposures to a related entity. Also, in accordance with NBS regulations, indicator of the Bank s exposure to a single related entity must not exceed 5% of the Bank s capital and the Bank s total exposure to related entities must not exceed 20 % of the Bank s capital. 20

21 The large exposures and other exposure limits at 31 December 2011 are presented in the following table: No Exposure limits Prescribed Realized 1 Bank s investments Max 60% 54.44% 2 Exposure to persons related to the Bank Max 20% 19.66% 3 Sum of large exposures of the Bank Max 400% 72.53% 4 Exposure to a single person or a group of Max 25% 23.40% related persons 5 Exposure to a person related to the Bank Max 5% 4.59% 6 Bank s investment in an individual not in the financial sector Max 10% 2.88% On 31 December 2011, the Bank has large loans (loans that exceed 10% of the Bank s capital), granted to the companies: Eko Srbija a.d. Beograd (14.76% of the Bank s capital), JP Srbijagas (14.89% of the Bank s capital), Naftna industrija Srbije a.d. (23.40% of the Bank s capital) i NBG Group (19.48% of the Bank s capital). 5.6 Impaired facilities and past due exposures On quarterly basis, the Bank assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if: there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and up to the balance sheet date ( a loss event ); the loss event had an impact on the estimated future cash flows of the financial asset or the group of financial assets and a reliable estimate of the loss amount can be made. Objective evidence that a financial asset or group of assets is impaired includes observable data about the following loss events: (i) Significant financial difficulty of the issuer or obligor. (ii) A breach of contract, such as a default or delinquency in interest or principal payments. (iii) The Bank, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the Bank would not otherwise consider. (iv) It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation. (v) The disappearance of an active market for that financial asset because of financial difficulties; or (vi) Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: i. Adverse changes in the payment status of borrowers in the group, or ii. National or local economic conditions that correlate with defaults on the assets in the group. In addition to the loss events described in the previous section, the following is a more detailed (but nonexhaustive) list of loss events that may lead to impairment: 21

22 Loss events for individuals (i) Legal procedures have been initiated, (ii) Serious illness or disability that affects his/her ability to work (iii) Death (iv) Loss or significant decrease of income (e.g. loss of employment) (v) Conviction for criminal activities or imprisonment (vi) Fraud relating to the granting of the loan (vii) Delinquency over a certain number of days and for amounts above appropriate materiality threshold, (viii) The loan has been renegotiated during the last 12 months, such that the Bank, for economic or legal reasons relating to the borrower s financial difficulty, has granted to the borrower a concession that the Bank would not otherwise consider, (ix) Other loss events that could affect the ability of the obligor to repay all contractual amounts when due. Loss events for legal entities (i) Legal procedures have been initiated, (ii) Obligor has initiated bankruptcy procedures or some form of financial reorganization (e.g. conversion of a loan to shares), (iii) The obligor has negative net asset position, (iv) Significant financial difficulty of the issuer or obligor, (v) Deterioration of the obligor s credit rating (either external or internal), (vi) Loss of significant customer(s), (vii) Damage of property, plant or equipment, used in the obligor s operations or taken as collateral, (viii) Conviction for criminal activities, (ix) Fraud relating to the granting of the loan (x) Delinquency over a certain number of days and for amounts above appropriate materiality threshold, (xi) The loan has been renegotiated during the last 12 months, such that the Bank, for economic or legal reasons relating to the borrower s financial difficulty, has granted to the borrower a concession that the Bank would not otherwise consider, (xii) Obligor operates in an industry sector with financial difficulties, or in a country whose economy is in recession, (xiii) The disappearance of an active market for the loan or other instruments (debt or equity) issued by the obligor because of financial difficulties, (xiv) Other loss events that could affect the ability of the obligor to repay all contractual amounts when due. The Bank first assesses whether objective evidence of impairment exists individually for loans that are individually significant. It then assesses collectively for loans that are not individually significant and loans which are significant but for which there is no objective evidence of impairment under the individual assessment. To allow management to determine whether a loss event has occurred on an individual basis, all significant counterparty relationships are reviewed periodically. If there is evidence of impairment leading to an impairment loss for an individual counterparty relationship, then the amount of the loss is determined as the difference between the carrying amount of the loan(s), including accrued interest, and the present value of expected future cash flows discounted at the loan s original effective interest rate or the effective interest rate established upon reclassification to 22

23 loans, including cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The carrying amount of the loans is reduced by the use of an allowance account and the amount of the loss is recognized in the income statement as a component of the provision for credit losses. On quarterly basis, all impaired loans are reviewed for changes to the present value of expected future cash flows discounted at the loan s original effective interest rate. Any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the income statement as a component of the provision for credit losses. When it is considered that there is no realistic prospect of recovery and all collateral has been realized or transferred to the Bank, the loan and any associated allowance is written off. Subsequent recoveries, if any, are credited to the allowance account and recorded in the income statement. The process to determine the provision for off-balance sheet positions is similar to the methodology used for loans. Any loss amounts are recognized as an allowance in the balance sheet within other liabilities and charged to the income statement as a component of the provision for credit losses. If in a subsequent period the amount of a previously recognized impairment loss decreases and the decrease is due to an event occurring after the impairment was recognized, the impairment loss is reversed by reducing the allowance account accordingly. Such reversal is recognized in profit or loss. 23