UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER'S THESIS PETER ŠINKOVEC

Transcription

1 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER'S THESIS PETER ŠINKOVEC

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3 UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER'S THESIS VALUATION OF A NON-PUBLIC REGIONAL RETAIL BANK FOR A MINORITY SHAREHOLDER THE CASE OF GORENJSKA BANKA Ljubljana, May 2013 PETER ŠINKOVEC

4 AUTHORSHIP STATEMENT The undersigned Peter Šinkovec, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), declare that I am the author of the master s thesis entitled Valuation of a non-public regional retail bank for a minority shareholder the case of Gorenjska banka, written under supervision of doc. dr. Igor Lončarski. In accordance with the Copyright and Related Rights Act (Official Gazette of the Republic of Slovenia, Nr. 21/1995 with changes and amendments) I allow the text of my master s thesis to be published on the FELU website. I further declare the text of my master s thesis to be based on the results of my own research; the text of my master s thesis to be language-edited and technically in adherence with the FELU s Technical Guidelines for Written Works which means that I - cited and / or quoted works and opinions of other authors in my master s thesis in accordance with the FELU s Technical Guidelines for Written Works and - obtained (and referred to in my master s thesis) all the necessary permits to use the works of other authors which are entirely (in written or graphical form) used in my text; to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Copyright and Related Rights Act (Official Gazette of the Republic of Slovenia, Nr. 55/2008 with changes and amendments); to be aware of the consequences a proven plagiarism charge based on the submitted master s thesis could have for my status at the FELU in accordance with the relevant FELU Rules on Master s Thesis. Ljubljana, May 16 th, 2013 Author s signature:

5 TABLE OF CONTENTS INTRODUCTION THE VALUATION BASELINE Price vs. value Who needs the valuation and why? The valuation approach VALUATION METHODOLOGIES Market approach Income approach Defining a plausible discount rate Modeling plausible future cash-flows Dividend discounting model (DDM) Discounted cash-flows (DCF) model Residual income (RI) model Adjusting the value The value of control The value of marketability Other adjustments of market value of equity SPECIFICS OF BANK VALUATION Specifics related to operations Law and regulation Basel III and capital adequacy requirements Value drivers VALUATION OF GORENJSKA BANKA Defining the valuation predispositions Gorenjska banka s stock price through time Scope of work Bank overview Presentation of the bank Macroeconomic environment analysis European macroeconomic influences Slovenian macroeconomic influences Industry analysis European banking industry analysis Slovenian banking industry analysis Financial analysis of the bank Income statement Statement of financial position Determining the value estimate Levels of value Income approach i

6 4.6.3 Market approach Adjustments Sensitivity analysis Impact of a potential merger on the value Interpreting the results CONCLUSION REFERENCE LIST LIST OF TABLES Table 1. Main advantages and disadvantages of income and market approach... 8 Table 2. The summary of the scope of work Table 3. Bank s general information Table 4. SWOT analysis for Gorenjska banka Table 5. Macroeconomic data and forecasts for Slovenia Table 6. The most important indicators for Slovenian banking industry, FY06-FY Table 7. Levels of underlying value Table 8. Sensitivity analysis determined based on the DCFE model Table 9. Sensitivity analysis determined based on the RI model Table 10. Normalization of earnings Table 11. Comparable companies method estimate Table 12. Comparable transaction method value estimate Table 13. Estimating the value created by merger with Abanka LIST OF FIGURES Figure 1. The top-down, three-step approach to the bank valuation process... 5 Figure 2. Appropriateness of approaches throughout the company s life cycle... 7 Figure 3. The market approach process... 9 Figure 4. The income approach process Figure 5. Equity risk premium in time Figure 6. Basel III framework Figure 7. Generic value driver tree for retail banking: DCFE version Figure 8. Generic value driver tree for retail banking: RI version Figure 9. Book value and share price of Gorenjska banka, Figure 10. Ownership structure of Gorenjska banka as at December 31 st, 2011 (in %) Figure 11. Commodity prices, Figure 12. Real GDP growth for Slovenia, EU-27 and World, Figure 13. Consumer price index for Slovenia, EU-27 and World, Figure 14. European banking industry value, Figure 15. Overview of Slovenian banking industry developments, Figure 16. Largest Slovenian banks by total equity as at December 31 st, 2011 (in %) Figure 17. Profitability map for selected Slovenian banks, FY ii

7 Figure 18. Forces driving competition Figure 19. Gross income by source Figure 20. Average interest rate on categories of interest income Figure 21. Average interest rates for interest income and interest expense, Figure 22. Net gains on fin. assets and liabilities not measured at fair value through P&L Figure 23. Impairment charges of Gorenjska banka, Figure 24. Maturity gap, FY09-FY Figure 25. The cost of equity calculation Figure 26. ROE in CEE Figure 27. Adjusted tangible book value multiples for the Tier I peers Figure 28. Value per share distribution Figure 29. Tornado chart of parameters that critically influence the estimated value Figure 30. Ownership structure of merged bank as at (in %) Figure 31. Comparing the results Figure 32: 90-days volatility of S&P 500 and SBI TOP, Figure 33. The YTW for Slovenian long-term bond, iii

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9 INTRODUCTION Description of the problem Valuing banks is conceptually difficult. Banks differ from non-financial institutions in several ways and these specifics have to be addressed through the process of valuation. Besides being strictly regulated and having tailored financial statements to banking business, banks are also famous for their dependency on the exogenous factors (such as the money, capital or real estate market cycles). For banks, debt is not meant only as a source of financing as for non-financial companies. It is a sort of a raw material. Banks offer debt in the form of financial products further to their clients at a higher price. However, retail banks gain also from gathering deposits, for which they offer bellow the market interest rates. Practitioners therefore prefer using a direct valuation of the equity to indirect (by estimating enterprise value first). In most cases, the maturity of loans and deposits of retail banks differ, which make banks vulnerable to even small changes in interest rates. Things complicate, when a bank being valued is not publicly traded. Financial statements are reported less often than for listed comparable companies and often one has to deal with modest investor relations. Besides that, valuation of a non-publicly traded bank requires consideration of a marketability discount in order to address the loss of an investor to sell the share. Last but not least, size of the share being valued (minority vs. controlling interest) importantly impacts the value estimate, not only through the use of the control premiums/minority discount, but also through the application of the marketability discounts. The main questions arising from the above are how banks are being valued, what adjustments need to be done, what are the specifics of banks and private entities, how the major risks the bank is facing are addressed, how the analysis of the past operations is performed, how laws and regulation are taken into account, how the value creation is recognized and the value drivers are analyzed, how the macroeconomic issues impact the valuations, etc. Motivation and key research questions In order to understand the value (and eventually also the price), one has to be familiar with the valuation process, value drivers, assessment of the major risks a bank is facing, the impact of the laws and regulation etc. 1

10 The purpose of my master s thesis is to present valuation approaches used for valuing banks from the perspective of a minority shareholder and apply them in the case of a bank. Valuing financial institutions in times of radical changes is a demanding task, especially due to the specifics of the banking industry i.e. integration within the global financial system, strict regulation and high leverage. All these factors impact the valuation and as a result demand some modifications within the process of measuring the value. The main goal is to define the value range for an ordinary share of Gorenjska banka, d.d. (hereafter: Gorenjska banka) by using generally accepted valuation approaches for valuing financial institutions. Beside this, I will focus also on presenting the specifics of banking industry in relation to valuation and address the value creation and value drivers of the retail bank. The master s thesis consists of four main sections and several subsections, where more detailed information is given. The focus is on presenting the methods and techniques commonly used for bank valuation and practically applying them. The methodology is based on the methods of applied research. The theoretical part includes a descriptive approach (describing the findings, facts, processes and phenomena) and a compilation approach (summing up various observations and opinions). In this part, mainly main stream foreign literature (Damodaran, Koller, Pratt) is used, with respect to the best foreign and home practices. My master s thesis reflects also my personal views and guidelines developed through my working experience in the Transaction & Restructuring department of a well known audit, tax and advisory services provider, KPMG. Valuation approaches for non-financial firms cannot be simply applied to banks. Some modifications to the existing approaches are needed. The theoretical findings related to the modifications and limitations are therefore used also as a guide for a practical part. In that part applicative approach is used. Guidelines of The Slovenian Institute of Auditors, which is an official member of International Valuation Standards Committee, are taken into account in the process of the case bank valuation. Valuation will be made completely independently and without any internal data. All the data concerning the case valuation will be gathered from the annual reports and semi-annual financial data of Gorenjska banka, from the public data accessed through the company's website, from the financial media and data providers such as Bloomberg, Capital IQ, GVIN, EIU and other sources referred to under the heading Reference list at the end. Structure of the thesis First chapter serves as a valuation baseline. It begins with the general presentation of the terms value and price. After, the valuation process is presented and questions such as 2

11 what is the meaning of value, for which purposes might business valuation be needed, who performs business valuation and what approaches are used in the valuation process, are addressed. In the second chapter, valuation approaches are presented. The focus is on those commonly used and applicable for valuing banks. Not only the theory, but also the best practices are presented in this context. When valuing banks, their specifics play a significant role. Therefore also the specifics of banking are briefly discussed. These mostly concern financing, risk-taking, laws and regulations as well as value drivers. The fourth chapter relate to the practical application of the bank valuation. The valuation process starts with the scope of work, where the basis of value, valuation date, purpose and other important variables are agreed. Afterwards, the analysis of the macroeconomic environment and the industry takes place. Following this the analysis of the case bank and the application of the valuation approaches are implemented. In the end of the chapter, the sensitivity analysis and the final value estimate conclusion is presented. Appendices serve as a support to the findings presented in the content. Please note, that also all the calculations are presented there. In the conclusion, I sum-up my final thoughts and give recommendations for potential improvements related to the practical application of the valuation. 1 THE VALUATION BASELINE 1.1 PRICE VS. VALUE International Valuation Standards Framework (International Valuation Standards Council, 2011, p. 3, paragraph 7-9) defines price as: the amount asked, offered or paid for an asset, while value is: not a fact but an opinion of either: (a) the most probable price to be paid for an asset in an exchange, or (b) the economic benefits of owning an asset. Price could differ from the value of the asset due to the financial capabilities, motivation or special interests of a buyer or seller. In perfect worlds with perfect markets, prices would equal values. One of the biggest supporters of this view, philosopher and economist, Friedrich A. Hayek, saw prices with the help of the forces of supply and demand as the essence of all knowledge embodied in the market (Hayek in Beckert & Aspers, 2011, p. 225). Critics of Hayek point out that prices can reflect underlying values only in idealized markets where preconditions such as complete information, no barriers to entry, a sufficient number of market participants, and no externalities are present. Besides these, the prices also influence the value and not only reflect it (Victor in Beckert & Aspers, 2011, p ). 3

12 Nowadays one has to be able to evaluate prices - whether they are too high, too low, or just right - and for that one needs to refer back to something more fundamental than price itself (Beckert & Aspers, 2011, p. 225). Value is not one. According to the International Valuation Standards Framework (International Valuation Standards Council, 2011, p. 6-12, paragraph 26-55) the value of an asset depends on the basis of value used. It includes fundamental measurement assumption such as the nature of the transaction, purpose of the valuation, parties involved in the hypothetical exchange etc. We divide it into three principal categories: Most probable price that would be achieved in a hypothetical exchange in a free and open market (i.e. Market value). The value reflecting the benefits from ownership of an asset specific to a particular person or an entity (i.e. Special value) The reasonably agreed price between two specific parties for the exchange of an asset. The price agreed reflects the benefits of the parties involved rather than the market at large. 1.2 WHO NEEDS THE VALUATION AND WHY? To determine the value in order to judge the price is not always an easy task, especially due to the broad and complex dimensions of the valuation process that we sometimes face. Complexity of value and valuation resulted in a growing industry of professionals, consultants, and professors who are developing various techniques to measure the value and its creation. Decades ago the practitioners of business valuations were mainly from external group (i.e. investors and analysts), but nowadays an internal group (i.e. managers) is also becoming aware of the importance of business valuation and especially value based management. The roots of this tremendous turnaround are tensions towards the alignment of interests of the executives and other employees with the interests of the owners better known as the agentprincipal problem. The purpose for valuation partially depends on the group. Common valuation purposes for the internal group are: value based management, business planning, goodwill impairment, reorganizations and bankruptcies, recapitalizations, damages litigation, initial public offerings, compensation schemes, employee stock ownership plan etc. In contrast to these, the external group s purpose relates to: options and stocks ownership and its changes, exercising stock options or warrants, tax (estate, gift, and income), giving stocks as a gift, mergers and acquisitions, shareholder oppression cases etc. 4

13 1.3 THE VALUATION APPROACH The most logical and empirically best founded approach to value a business is the top-down, three-step approach. It assumes that the performance of the individual company depends on the economic environment and the industry performance. The approach teaches us to begin the valuation by examining the influence of the general economy on companies and equity markets, continue with the analysis of the economic environment and industry and finally perform the individual company analysis and value estimate (Grier, 2005, p. 9-11). Figure 1. The top-down, three-step approach to the bank valuation process Source: W. A. Grier, Valuing a Bank. Under IAS/IFRS and Basel II, 2005, p. 10. The approach should consider at least the following indicators (Grier, 2005, p. 9-11): Macroeconomic influences - The GDP growth rate shows the change in the total value of goods and services produced by labour and property in a country over a particular period of time. It indicates the health of the economy. - Inflation is the increase in prices over time. Moderate inflation is a consequence of economic growth, while hyperinflation causes individuals and companies to lose confidence in the national currency and to either switch to another currency or invest into tangible assets (real estate or gold). - Monetary policy is the policy ran by the central banks in order to regulate the economic change. The impact on the general business condition is most often addressed through changes in the supply of monetary funds and/or interest rates. A restrictive monetary policy 5

14 either reduces the supply of monetary funds or increases interest rates, which all lead into more expensive financing of consumption and often decreases bank profit margins. - Fiscal policy is the policy ran by the government, which impacts general economy mostly through changes in government spending and taxes. Industry influences Few companies in poor industries perform well and even the best performing ones are not necessarily the best investment opportunities. Industry specifics can vary from market to market, therefore factors that must be considered are: - Competitive pressures. - Barriers to entry and exit. - The borrowers and depositors degree of influence. - Industry life-cycle characteristics. Company analysis and valuation Company analysis is the prerequisite to determining its value. It requires review of its historical performance, its present condition and its future prospects through both qualitative and quantitative data analysis and value creation, which helps to overcome some significant analytical challenges that make valuation so complicated. Different businesses require separate analysis and valuation of their key business segments even though most of the time separate accounts for the different businesses are difficult to assess or even not available. Normally the process of valuation can be performed using different methods, techniques and models. While there are hundreds of valuation models and metrics being used, there are only three valuation approaches according to the International Valuation Standards Framework (International Valuation Standards Council, 2011, p , paragraph 56-64). They all are based on the economic principles of price equilibrium, anticipation of benefits or substitution. Namely they are: Income approach, which provides an indication of value by converting future cashflows to the present value. Market approach, which provides an indication of value by comparing the subject asset with identical or similar assets for which price information is available. Cost approach, which provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an asset of equal utility, whether by purchase or by construction. 6

15 The three approaches can result in different values for the same asset, hence knowing when to use each one is a key part of mastering valuation. Generally speaking choosing the appropriate approach depends on the following facts: On which market does the company operate (developed or emerging markets)? What is its legal form (private or publicly traded)? What size it is (small or large)? What are its operations (manufacturing, technology or financial)? What is its current condition (healthy or distressed)? In which part of the life cycle it is (young company, IPO, mature company, declining company)? Figure 2. Appropriateness of approaches throughout the company s life cycle Seed capital Start-up Launch Growth phase I Growth phase II Stable growth Mature Revenue no growth minimal growth rapid growth strong growth strong growth stable growth GDP growth Earnings none loss loss breakeven breakeven profit profit Free Cash Flow none negative negative negative zero positive positive Costumers none none early adopters < 50% of target 50% of target mass market mass market Marketing none market research market research brand building brand building reminding rebranding Product conceptual ready for market awareness popular widely used mainstream commodity Technology unproven testing in use scale upo improve generic obsolete Management founders founders key roles filled key roles filled fully staffed fully staffed fully staffed Back-office living room garage temporary HQ permanent HQ permanent HQ permanent HQ permanent HQ Appropriateness Cost approach Income approach Market approach * Real options Source: S. Shaw, KPMG Corporate finance, Advance valuation reference materials, 2006, p.28. Cost approach is applicable for newly established companies only, where earnings could not be reliably determined and adequate information about the assets is not available. By definition the approach is not appropriate for valuing banks. Option approach is mostly used for valuing companies where the future performance scenarios and their probability of success vary. Normally such companies are start-ups with smart ideas and big potentials. However, real options are also often used for valuing companies with products and innovations in the development and approval process (pharmaceutical industry, biotechnology industry, IT and high-tech industry), project related companies, companies with performance dependant on commodity prices (oil industry, mining industry) etc. Option pricing has many advantages and offers an in-depth understanding of the value development. However, the approach is not in line with the International Valuation Standards

16 2 VALUATION METHODOLOGIES For the valuation of mature companies the income and market approaches are normally chosen. Both have their advantages as well as shortcomings. Table 1. Main advantages and disadvantages of income and market approach Advantages (+) Disadvantages (-) Income approach Understands value as a sum of all cash-flows discounted to the present value at a rate that reflects the riskiness. Offers clear, logical link to the underlying fundamentals and represents a non-market check of market prices. Forces you to think about and understand the underlying characteristics of a company and its business. Reflects the value of intangible assets. Complex, not so easy to use... Dependent on subjective assumptions (cost of equity, return on equity, growth rates etc.) Not necessarily reflects the market values. Market approach Shows value relative to the market prices. Market prices are available for any valuation date. Reflects current market conditions (useful for IPOs or M&As). Based on comparable peers. Very easy to use. Appropriate for use most of the time for mature companies only. Relies on comparison with companies that are different in size, have different product mix, geographic mix, accounting policies and standards etc. Limited scope P/E does not focus on balance sheet items, P/B does not focus on income statement. Market is not always optimal (market bubbles, market inefficiencies) Most often not applicable for undeveloped equity markets Much of the valuation theory has been developed for the developed equity markets. Consequently some features are hard to apply in case where a market faces institutional deficiencies and is simply not effective. These could occur either due to the immatureness of the market (i.e. for emerging or undeveloped markets) or due to the market specifics (issues concerning the system, size, liquidity etc.). In such cases traditional valuation techniques should be carefully scrutinized, revised and adapted. 2.1 MARKET APPROACH The market approach values a company based on the value multiples (the ratio where the enterprise value/market value of equity is the numerator and what one is getting in return is the denominator). Multiples need to be determined based on a representative sample of comparable companies or transactions with necessary adjustments to compensate for the lack of direct comparability. 8

17 Figure 3. The market approach process In the very beginning one needs to analyze the company being valued and its characteristics. Gathering a representative sample of comparable companies is often the most difficult task, especially when the equity markets are not as developed and liquid as we would want them to be, when the comparables are few or perhaps even do not exist. This happens especially in the emerging or small economies where some industries are not represented at all in the equity markets. Slovenia does not have a developed equity market neither for banks nor for any other industry, which makes a market approach relatively trivial. Comparables are thus most often searched for among the peers trading on comparable markets, which does not reflect the specifics of the current distressed macroeconomic environment in Slovenia. In case of Central and Eastern European markets this approach is questionable, due to the lack of liquidity. To overcome this problem, many practitioners typically use comparable multiples from developed economies. The straight application of Western European banks multiples to a Central European market is on one hand misguiding because country risks and investor sentiment play relevant roles in defining company multiples in each economy, but on the other hand it can be much more relevant since the Western European markets are much more liquid and globally interconnected. The process of choosing the appropriate comparables requires us to pay attention on the company s products, industry and financial health. Companies are then sorted by product/asset mix, geographical mix, size and normalized based on the last available financial data. One has to account for unusual and non-recurring items (such as foreign exchange gains/losses, legal settlements, restructuring charges, gains and losses on sale of assets, writedowns of assets, acquisitions), differences in accounting (goodwill, pensions, taxation, associates) etc. It is important to note also the specifics of the particular market (i.e. liquidity) as well as the impact of the extraordinary events (i.e. natural catastrophe) on a price of the stock. 9

18 It is impossible to get perfect comparables, therefore specific adjustment methods have to be developed to deal with this problem. The calculated multiples should be adjusted at least for growth, size, performance, risk. Other potential adjustment could relate to leverage, market size, market share, relative position in the market, management depth and strength, nature of operations, ownership of patents, strong brands, technological strengths, R&D capabilities, available physical capacities, databases of clients, customer relationship management (CRM) etc. For comparable transaction method, two more adjustments are common adjustment for time and for potential synergies. Comparable transactions should be as recent as possible. When no data is available or no transactions have taken place recently, it is common to use a sample of older transactions which have taken place in a different economic climate (expansion, prosperity, contraction, and recession) and adjust them for the condition of the market as at the date of the valuation. When a majority interest is taken over, the transactions may also reflect the synergies and/or strategic advantages between the acquirer and the target company. As a result one should adjust for it by estimating the value of synergies and/or strategic advantages for each transaction separately. It is important that an appraiser does not simply normalize for the transaction premium, since that would essentially mean that also value of control would be normalized. Frequently multiples of comparables show data point, which is clearly far from the central value of the data series. Unless the appraiser is aware of the specific reasons, it is recommended to discard the outliers. Once all four steps are done, one either makes a conclusion or continues to enhance the selection of the comparables. It is generally accepted that market approach (relative valuation) requires less information than intrinsic valuation (income approach), although the process of choosing the comparables and adjusting the multiples for the differences requires the same assumptions to be made as in income approach, only indirectly. There are two methods referred to as the market approach: The comparable companies method develops value estimate based on prices at which stocks of similar companies are trading in a public market. The comparable transactions method is essentially similar to the comparable companies method. However the comparable transactions method gathers the data based on historical transactions rather that from current similar companies trading in a public market. Some appraisals prefer the comparable transactions method to comparable companies method, due to the fact that transactions of larger ownership shares are often subject to a more detailed assessment and negotiations. However, transactions referring to the majority ownership might, besides the control premium, include also the value of synergies and/or strategic advantages. In case of valuing a minority share, this is a significant drawback, since 10

19 it is very hard to distinguish between control premium and value of synergies and/or strategic advantages. Analyzing the transaction premium requires additional attention, since the transaction might refer also to potential under-pricing of the company. For both the comparable companies method as well as the comparable transactions method the underlying value level depends on the comparables. In the case of comparable companies method the underlying value most of the time refers to a non-controlling interest. However, when the institutions of corporate control such as investor activism, takeover threat and others are well developed and work properly, the underlying value might refer also to the controlling interest (this essentially means the control premium is included). In the case of comparable transactions method the underlying value is a value for non-controlling interest when the transactions chosen refer to the acquisitions of non-controlling interests and vice versa. Valuing banks requires the use of multiples that allow the direct calculation of market value of equity (not by calculating the enterprise value first and then subtracting the net debt). Equity value multiple compared to enterprise value multiple does not allow us to properly reflect differences in leverage. However, the use of the multiples is still reasonable, due to the fact that financial debt in financial industry primarily carries the operational (not financing) role and thus the adjustments should be relatively small. What is more, overall leverage does not significantly vary among banks, due to the regulatory requirements (Glass, 2003, p. 15). There are two main groups of multiples that are commonly applied: P/E multiple The ratio is defined as market value of equity as a multiple of profit for the period. The ratio is by definition one of the indicators of performance. The usage of the following ratio could return questionable results, due to the volatile or often even negative earnings. Therefore appraisals often use pro-forma (adjusted) earnings, which exclude the effects of unusual and non-recurring events or forward P/E multiples that reflect analyst estimates of prospective earnings. P0 d (1g n ) E r g 0 e n or FCFE (1g n ) P0 Earnings E r g 0 e n (1) Where: FCFE = Free cash-flow to equity holders = Market value of total equity as a multiple of Earnings d = Dividend payout ratio r e = Cost of equity g n = Growth rate 11

20 Note that by applying a certain P/E multiple one makes an indirect assumption of growth rate, risk and payout ratio. The higher the dividend payout ratio and growth, the higher is the value of the multiple. The most basic adjustments a multiple requires are the adjustments for risk, size and growth. The adjustment for profitability is already accounted for through the use of earnings in the denominator. Thus it is crucial to use the normalized ROE. P/B multiple The ratio is defined as market value of equity divided by book value of equity. The ratio is by definition one of the indicators of financial position. In order to understand the multiple it is crucial to understand its drivers. The higher the differential between the return on equity (ROE) and costs of equity (r e ), the higher is the value of the multiple. P0 ROE re 1 B r g 0 e n (2) Where: = Market value of equity as a multiple of book value of equity r e = Cost of equity g n = Growth rate The multiple is reasonable for valuing banks especially when book values of major assets and liabilities are relatively close to fair values and unrecognized intangibles are on average relatively small. By choosing the peers that have the leverage similar to target leverage of the bank being valued one is making book equity a useful measure of the scale of bank s operations, since shareholders equity commensurate with the scope and riskiness of their activities, assets and liabilities. Intangible assets are not often recognized in the statement of financial position and their valuation is often a subject of doubt. As a result practitioners prefer using tangible book value of equity calculated as book value of shareholders equity decreased for intangible assets. The multiple requires adjustments for risk, size, growth and performance. Performance is often accounted for based on the profitability item such as normalized return on invested capital (ROIC) or return on equity (ROE). In the case of banks, the equity value is valued directly (not through the enterprise value), therefore the use of ROE is logical. 12

21 Through time valuation practitioners started to use also some other potential derivation of the above two multiples: Multiple price-to-tangible book value (P/TBV) Past and forward multiple price-to-earnings (P/E t-1 and P/E t+1 ) The only limitation concerning the multiples is that both the numerator and denominator refer to the same basis namely either to the total equity or to the total capital (total equity plus financial liabilities). Consequently, the multiples in case of bank valuation where the market value of total equity is estimated directly could not use the accounts such as gross income, net interest income, total assets, net interest income, loans and receivables to customers, customer deposits etc. Even though the market approach is often used as a primary valuation for developed equity markets only, it often serves as a critical check for indicating whether the assumptions made within the income approach make sense and whether they differ from the assumptions inherent in the valuations of comparables. 2.2 INCOME APPROACH The income approach is defined as a net present value of future income, measured by available cash-flows a company generates. The approach requires far more explicit inputs and information than market approach. It consists out of the four steps presented below. Figure 4. The income approach process Assumptions used in the model are difficult to estimate. Slightly different inputs, can lead into completely different findings. The key to ensuring that the models provide an accurate value estimate lies in the appropriate individual parameters used in the valuation. While the process 13

22 is more an art than a math, the quality of the analyst then becomes a function of how well the assumptions are defined. There are two considerable challenges related to the model: Defining a plausible discount rate Modeling plausible future cash-flows Defining a plausible discount rate Discount rate is the return an investor expects and requires from an investment. Since debt is the raw material for banks, valuing banks require use of an approach where the equity is calculated directly. Thus the discount rate used should be the cost of equity. Unlike for banks, for non-financial institutions valuation is normally derived from the enterprise value, which requires the use of weighted cost of capital (commonly referred to as WACC). Determination of the appropriate discount rate is often a difficult task. Since the cost of equity is not readily observable on the market, historical data are often used as guidelines. However, one needs to be aware, that the concept as such should be forward-looking. There are several methods developed for estimating the costs of equity. The most common are capital asset pricing model (CAPM), asset pricing model (APM) and the Fama-French three factor model. The main difference is how they define the risk. CAPM defines it as the sensitivity to the stock market, APM as sensitivity to the multiple market risk factors and Fama-French three factor model as sensitivity to the proxies such as stock market, company size and book-to-market ratios. The main assumptions on which the capital asset pricing model has been developed are: Investors can buy and sell all securities at competitive market prices (without incurring taxes or transactions costs) and can borrow and lend unlimited amounts at the risk-free interest rate. Investors hold only efficient portfolios of traded securities (portfolios yielding the maximum expected return for a given level of volatility). Investors have homogeneous expectations regarding the volatilities, correlations, and expected returns of securities. The CAPM formula is presented bellow: r r * ERP (3) Where: r e = Cost of equity r f = Risk free rate β = Beta of the stock (exposure to the systematic risk) ERP = Equity risk premium (required return above the risk free rate) e f 14

23 In the following paragraphs the modified capital asset pricing model (MCAPM) will be presented. The model will be used for defining a plausible cost of equity for the case bank. The modifications mainly try to refer to the imperfections of the CAPM. The cost of equity is thus measured as the CAPM increased for additional premiums. Each premium represents the reward investors seek for taking the additional risk. Due to the several institutional deficiencies of the Slovenian financial markets, the main components of the cost of equity have been based on the developed financial markets components. As a result the MCAPM formula looks like: r r * ERP * CRP SP CSRP (4) e f ( EMU ) S&P S&P SI SI Where: r e = Cost of equity r f(emu) = Risk free rate for the European Monetary Union β S&P = Exposure to the systematic risk (Beta of the stock) measured against S&P ERP S&P = Implied required return above the risk free rate estimated for S&P CRP SI = Country risk premium λ SI = Exposure to country risk premium SP = Size premium CSRP = Company specific risk premium Determining the risk free rate (r f ) The model implicitly assumes the presence of the single risk free rate. The horizon of the risk free rate should match the horizon of whatever is being valued. If the premise is going concern then the risk free rate with longest yield to maturity should be taken. However, one should carefully choose the maturity of the risk free rate, since the instrument with very long maturities are not always very liquid and thus do not reflect the yield in the best possible way. The risk free rate is equal to the government bond rates for AAA rated countries, because these countries have zero sovereign risk. Risk free rate thus includes real rate of return and inflation expectations, while in case of sovereign risks (non-aaa rated countries) risk free rate reflects also country risks (expropriation, nationalization, war, politics, natural catastrophe) and credit risks (default risks, credit deterioration). The risk free rate for European monetary union represents the yield to maturity for AAA rated countries. Often the maturity of years is chosen as a long-term risk free rate, since the period is best aligned with the liquidity of the financial instruments and the assumption of going concern. Country risk is accounted for by applying the country risk premium. 15

24 Beta (β) A risk measure in CAPM which quantifies the company s systematic risk is called beta often marked as β (Pratt & Niculita, 2008, p. 187). Beta tells us how risky a stock is relative to the market. Statistically speaking, it is a correlation between returns of one specific security and the returns of the efficient portfolio (a portfolio that contains only systematic risk often referred to as market portfolio). The higher the volatility of the security returns over market returns, the higher the beta coefficient. A beta value of 1 (β = 1) means that a security is in average as risky as the efficient portfolio. It can be measured in a way expressed below s cov( r,r ) s m s,m (5) m var( r m ) Where: β s = Beta of a stock δ s = Standard deviation, or total risk, of stock returns δ m = Standard deviation, or total risk, of an efficient portfolio returns ρ s,m = Correlation of stock and efficient portfolio returns cov(r s, r m ) = Covariance between the stock returns and the efficient portfolio returns var(r m ) = Variance of the efficient portfolio returns For privately held companies a modified industry beta or modified comparable companies beta is normally applied. The historical yields are used as the source to predict the future beta. CAPM model requires future oriented betas. Studies support the idea that betas revert to the industry means and eventually to the market mean (β = 1). The Blum s formula has been used to determine the adjusted betas as listed below: Adjusted ( 0.331) ( 0.67 ) (6) Normally the median beta values are preferred in order to exclude the outliers. If comparable companies used for beta calculation are not that similar, beta values need to be adjusted also for regulatory and business risks. Taking the monthly or weekly returns rather than daily returns for calculating betas minimizes the need for full information beta application or use of developed market betas. However, due to changes in company s production, investment and financing decision policies over time, more recent periods better address the future estimations. There is also no need to adjust for the financial leverage, since banks aim towards the regulatory level of equity and thus have in average very similar levels of leverage. Besides that, debt is also difficult to measure, which would make the adjustment a demanding task (Damodaran, 2009, p. 17). 16

25 Beta should reflect the business cycle of the company. As a result high growth companies are expected to have higher betas than mature companies. Most of the banks are by nature considered as mature entities. However, valuing a bank in growing phase would require use of higher cost of equity in the beginning, which would then decline as the growth will be reduced (Damodaran, 2009, p. 17). Valuation practitioners often apply estimates based on betas of Western European banks also for Eastern European Banks. It is true, that the following approach addresses the issues of illiquid Eastern European markets and often returns a more accurate beta values (higher R square), but it leaves open a question how to account for growth and risks, which are significantly higher in undeveloped or developing markets Determining the equity risk premium (ERP) The equity risk premium (hereafter: ERP) represents one of the most important and at the same time vaguest parts of the discount rates. It can be defined as the excess return an investor expects to compensate for the additional risk associated with investing in equities as opposed to investing in risk free rate. Figure 5. Equity risk premium in time ERP (in %) T-bond rate Exp. stock return (T-bond rate + ERP) Note.* In recent decade the ERP (expressed relative to T-bond rate) represents historically the highest values. Source: A. Damodaran, Risk premiums: Looking backwards and forwards, 2012c, p. 22 The ERP estimates fall into two groups. The first group consists of the historical estimators based on measuring and extrapolating the historical returns. Commonly referred studies have been made by: Ibbotson, Duff & Phelps and Damodaran. Large standard errors, caused by high volatility of the equity markets, make a historical premium a relatively modest indicator. For any other market than US it is nearly impossible to estimate the historical equity risk premium, due to the relatively short history of equity markets. 17

26 Two Ibbotson s studies performed for US market are especially famous (Morningstar, 2012): Historical - based on the past large company equities returns minus long-term government bonds (amounts to 6.62% in 2012) Supply side - based on historical equity risk premium minus P/E ratio calculated using three year average equity risk premium (amounts to 6.14% in 2012) Alternatively, one can derive forward-looking equity risk premium estimates from the underlying expectations of growth in corporate earnings and dividends or from analysts consensus long-term outlook opinions. Damodaran has become a strong supporter of the implied equity risk premium approach. As at the date of valuation his equity risk premium estimate for US market (S&P 500) has amounted to 6.11% (Damodaran, 2012b) Country risk premium (CRP) The country risk includes risks such as political risks, foreign exchange rate risks, legislative risks, regulatory risks, tax risks etc. It is a common dilemma whether the country risk premium should be the part of the discount rate or not. Theoretically speaking, the only risk relevant to determine the cost of equity should be the risk that an investor could not diversify. Damodaran concludes that even though the trading barriers are gradually disappearing across the markets, the markets remain segmented, due to the local preferences of investors. What is more, the risks could not be diversified, since the times of low correlation across countries are gone. The latest financial crisis also reflected the contagion effect in full scope, which further neglect the assumption of the diversification of country risks. It is generally accepted among investors that countries with credit rating lower than AAA require the application of credit rating premium. The premium is calculated as the credit default swap or bond spread between the AAA rated country and the country where the company being valued operates. The following formula is used to derive the country risk premium: CRP SI ( Normalized YTM SI YTM Rf ) A (7) Where: CRP SI = Country risk premium for Slovenia Normalized YTM SI = Normalized required rate of return for a credit rating of Slovenia YTM Rf = Required rate of return for corporate bonds of EMU members rated AAA A = Adjustment for the difference in volatilities between bond (or CDS) and equity markets 18

27 It is important to have in mind also potential specifics of a particular industry. Banking sector is significantly more regulated compared to other industries and thus often more exposed to the influence of the politics. Subsequently the expected country risk premium would be above the country average Size premium (SP) One of the main imperfections of the original Capital Asset Pricing Model (CAPM) model is that it does not address the impact of the size of the company. Ibbotson SBBI 2011 Valuation Yearbook 2011 (Morningstar, 2011, p ) proves that small companies stocks even after the adjustment of equity risk premium for systematic risk have higher returns than stocks of the large companies Company specific risk premium Generally speaking, valuation practitioners believe that a specific premium should be applied when the risk characteristics of the subject company are different from the risk characteristics of companies used for determination of equity risk premium and size premium. Feldman (2005, p. 80) notes that in practice company specific risk premium can amount even up to 5.0% and can have a significant weight in the valuation process. Most often specific factors that affect the risk of a company relate to the key employee risks (often relates to management quality and depth), customer, supplier and product concentration, intensity of competition, availability of labour, life cycle of current products or services, technology life cycle, ecological issues risks, risks related to litigations, volatility of earnings and/or cash-flows, access to capital or/and extraordinary circumstances on the market Modeling plausible future cash-flows The valuation frequently requires reliance upon different sources of information. Some are more and some less reliable, therefore it is important to stress the base on which the projections are made. It would be most appropriate to base the valuation on modified management projections. As no data (except publicly available information) is normally available for outside valuation to base the projections on, the history should provide the main guidance for the future expectations. Deciding upon the number of years forecasted requires one to be aware of the point in time where most of the value is created. Modeling plausible cash-flows normally requires a forecasted horizon of 5-10 years long before applying the terminal value, but also any other number could be applied as long as it makes sense to forecast. It is generally believed that trends in growth and profitability, which will most likely occur, as a result of maturing, have 19

28 to be addressed. What is more, future cash-flows have to account also for the regulation, if the impact on the value could be measured. It is a common practice among the valuation practitioners to apply in their valuations a terminal growth in the amount between the long term expected inflation and growth rate of GDP. Projecting the terminal value in the higher amount would theoretically mean that a competitive advantage of the company is perpetual, which is rarely the case. Due to the nature of the residual income model, terminal value is often assumed only in case of discounted cash-flow to equity model and dividend discounting model. Choosing between mid-year and year-end discounting mainly depends on the share being valued (controlling/non-controlling) and the time of historical distribution of dividends Dividend discounting model (DDM) Dividend discounting model is based on the premise that the market value of equity is simply the present value of all future expected dividends. To apply this model, dividend payments are forecasted for all future periods and then discounted to the present value by using an appropriate discount rate. Alternatively, dividends can be forecasted over a finite horizon and a terminal value can be used to reflect the value of all remaining dividends to be received beyond the explicit forecast horizon. The model is in first place meant to determine the value for a minority interest. The model is commonly used in case of heavily regulated companies in the mature phase, where their net capital expenditures are close or equal to the level of amortization. It assumes that large portion of the cash-flows to equity will be distributed in the form of dividends and buybacks. div div div div (1g ) V n n n n (1 r e ) (1 r e ) (1 r e ) ( re g ) (1 r e ) (8) Where: V 0 = Unadjusted equity value of 100% share div = Dividend re = Cost of equity g = Long-term growth rate Banks are by definition heavily regulated entities. However, the amount that can be distributed to the equity holders depends also on the capital adequacy requirements. Since the growth and health of large and mature banks is highly interconnected with the system, many valuation practitioners make the assumption that the growth rates of dividends are expected to grow at the level of the economy. 20

29 Dividends are often estimated based on the projections of profitability and estimated dividend payout ratio. Since the ratio needs to reflect the capital expenditure required for the assumed growth rates, it is often determined as presented below (Damodaran, 2010, p. 607). d 1 r g r TV (9) e Where: d = Dividend payout ratio r = Retention ratio re = Cost of equity g TV = Long-term growth rate Discounted cash-flows (DCF) model The discounted cash-flows model is closely related to the dividend discounting model. However, the model focuses on free cash-flow rather than on forecasting and discounting the actual dividends. FCFE FCFE FCFE FCFE (1g ) V n n n n (1 r e ) (1 r e ) (1 r e ) ( re g ) (1 r e ) (10) Where: V 0 = Unadjusted equity value of 100% interest share FCFE = Free cash-flows to equity r e = Cost of equity g = Long-term growth rate The free cash-flow is defined as all cash that could be paid as a dividend, regardless of whether or not it actually will be paid in the period it is generated. Free cash-flows account for any amounts that are required to be reinvested in the company to maintain its operations and generate growth at the rate assumed in the forecasts. The model is based upon company s fundamentals and should thus be less exposed to market moods and perceptions. It is preferred by potential acquirers of the controlling interest, or finally also by investors with long time horizon, allowing the market time to correct its valuation mistakes and for price to revert to its value. There are two variations of the model, referred to as the free cash-flow to the firm (FCFF) and the free cash-flow to the equity (FCFE). First represents the value that could be paid to all sources of capital, including both the debt holders and the equity holders, while the second refers to the value paid to the equity holders only. By discounting the free cash-flow to the 21

30 equity, the market value of equity is derived directly, while using the free cash-flow to the firm (FCFF) model requires an additional step of subtracting the debt payments from the value of the total capital. Theoretically, direct and indirect methods are mathematically equivalent and return the same market value of the equity. In case of banks discounting the free cash-flow to the equity (FCFE) is preferred, since it reflects the fact that banks can create value also from the liability side of the balance sheet. The value for shareholders is created if the positive spread between costs of issuing deposits (e.g. interest expense, check clearing, and tellers) and costs of raising an equivalent amount of funds with equal risk in the open market is reached. If there would be no spread, the bank would be paying market rates for funds received and no value would be created for shareholders. In this case financing would take place like in any other company (aside from the tax shield of interest expense). However this is usually not the case (Copeland, Koller & Murrin, 2000, p ). The result may reflect either a control or minority level of value, depending on how future earnings or cash-flows are projected. If projections are based on business decisions that only a controlling shareholder could influence (i.e. operational and financial restructuring) then the value reflects elements of control and vice versa. The discounted cash-flow (DCF) model calculation as such is not as straight-forward as in case of non-financial companies. The problem occurs when assessing the free cash-flow to the equity (FCFE). Normally the equation for the free cash-flow to the equity (FCFE) looks like: FCFE NI NCC WC Net CapEx NB (11) Where: FCFE = Free cash-flow to equity holders NI = Net income NCC = Non-cash charges (i.e. depreciation etc.) WC = Change in working capital Net CapEx = Net investments (net capital expenditures) NB = Net borrowings The calculation as such opens several dilemmas when valuing banks. Capital expenditures as well as depreciation and amortization are often relatively unimportant. In contrast to nonfinancial institutions, banks invest mainly in intangible assets and human resource capital. The investments are thus often categorized as operating expenses (i.e. education and training expenses, bank employees salaries). When valuing banks from the outside, also working capital is most of the time skipped, due to the fact that it is very difficult to define the appropriate level of working capital. 22

31 According to Damodaran (2010, p ) free cash-flow to equity in case of banks is a function of growth in asset base (in case of Basel III capital adequacy, growth in risk weighted assets), desired and/or required capital ratio and its profitability. Net income by itself does not represent the FCFE. Bank needs to account also for increase in its regulatory capital base in order to account for potential solvency issues. The increase in regulatory capital base means that a bank needs to issue new shares or set aside its earnings instead of paying them out to the shareholders. Due to the banks financial statements reporting specifics, extremely volatile working capital and low importance of some items a slightly different equation is recommended. FCFE NI RCCB (12) Where: FCFE = Free cash-flows to equity NI = Net income RCCB = Increase in regulatory capital base (book equity) Koller, Goedhart and Wessels (2010, p ) are of the opinion that also other comprehensive income such as unrealized gains and losses on certain equity and debt investment, hedging activities, adjustment to the minimum pension liability and foreign currency translation items should be included in the FCFE. However in reality the other comprehensive income is by nature hard to predict and is most often omitted. In contrast with non-financial companies, banks net income might be seriously affected through non-cash charges, namely restructuring charges, gains/losses on sales of financial assets, impairment charges, changes in deferred taxes etc Residual income (RI) model Although less common than for example discounted cash-flow model or dividend discounting model, residual income model is frequently used to value banks. Unlike the previous two models, residual income model relies less on the proportion of estimated terminal value. As a result, this method is less sensitive to errors in forecasting (Wall Street Prep, p ). Equation below shows that residual income model is composed out of two parts: the adjusted current book value of equity and present value of future expected residual incomes. The concept of residual income is built on belief that only earnings above the level of providing cost of equity (the residual income) actually increase the value of the investment. Therefore the model measures the economic value and is a good indicator of management work. Residual income model is useful for valuing companies with negative cash-flows in the observed horizon and for companies that pay no dividends or at least have no stable dividend 23

32 policy, causing the dividends to be unpredictable. On the other side its disadvantages are its narrowness in use of the accounting figures. The model as such is more appropriate for the valuation of the controlling interest. Therefore also projections have to be prepared for the majority shareholder. Nonetheless, by adjusting for the value of control one could derive the value for a minority equity share. RI RI RI RI (1g ) V B n n n n (1 r e ) (1 r e ) (1 r e ) ( re g ) (1 r e ) (13) Where: Vo = Equity value of 100% share before adjustments for discounts/premiums Bo = Beginning of the period adjusted book value of equity Bt = Beginning of the period adjusted book value of equity at time t RI = Residual Income ROE = Return on equity r e = Cost of equity g = Long-term growth rate The model assumes that all changes of shareholders equity other than ownership transactions (dividends) flow through earnings. However, some pension adjustments, foreign currency translation and especially fair-value changes of available-for-sale securities avoid net income, but at the same time influence shareholders equity through the other comprehensive income. In case of large investment banks this could be a big issue, even though one could argue that gains and losses on financial assets available-for-sale (AFS) are impossible to forecast and that in the long run some changes offset each other as in case of foreign currency translation Determining the beginning of the period adjusted book value of equity Net asset method is a mixture of preliminary approaches, since the market values of assets and liabilities used are derived by using the cost, market and income principal approach. Intangible assets may be or may not be present in the statement of financial position. How one accounts for them depends on the situation. Most often it is recommended to subtract the value of intangible assets (i.e. goodwill, brands, human capital etc.) from the market value of assets and account for them in the projections of the residual income. Other way would be to account for the market value of the intangibles within the adjusted book value of equity and prepare the projections excluding the cash-flows occurring from the intangible assets. Including them in adjusted book value of equity as well as in projections, would theoretically mean double counting. 24

33 One should also consider any potential off-balance sheet items, that might impact the future profitability of the company. In case of banks the off-balance sheet items represent a significant amount and could largely impact the value. Unfortunately valuing banks from the outside most often do not give an appropriate data to account for the off-balance sheet items. The method is to some degree easy to apply for banks, since most of the banks report the fair values of the financial assets. They most of the time represent a significant part of the statement of financial position. Since no data is provided for other assets and liabilities, it is reasonable to assume that all the rest equal to book values Residual income projections Conceptually, residual income is free cash-flow to equity less a charge for the cost of equity (r e ), or free cash-flow to firm less a charge for the cost of capital (WACC). Since in case of banks direct method is used to calculate equity value, net income is the starting point for calculating free cash-flow to equity (FCFE). Net income includes a charge for debt capital (i.e. interest expense), but it does not include a charge for equity capital. Therefore the model deducts for this missing charge through the charge for the cost of equity. RI NI re B 0 ( ROE r e ) B0 (14) Where: RI = Residual income NI = Net income B 0 = Beginning of the period adjusted market value of equity r e = Cost of equity ROE = Return on equity It is fairly common assumption that terminal value is not part of the residual income model. In the terminal value ROE should reach cost of equity, due to the fact that company reaches its maturity. This is really difficult to argue, since positive economic profits attract competition and negative economic profits encourage consolidation and/or exit. At the same time really rare competitive advantages last in perpetuity and allow a company to yield return on equity above the industry average and equity cost (Wall Street Prep, p ). 2.3 ADJUSTING THE VALUE Frequently, discounts and premiums turn out to be one of the most debated topics in the valuation, often also because they greatly affect the value of a business interest. Generally speaking, estimated value may be a subject to adjustment, depending upon two categories (Pratt, 2009, p. 2): Risks related to the business as a whole Risks related to particular shareholders 25

34 Risks related to the business are reflected either through the discount rate (company specific risk premium) or free cash-flows (if the impact could be precisely measured), while the adjustment for the shareholder s risks are normally a subject of discounts and premiums applied on the shareholder s equity. Basic valuation theory suggests that there are five main value levels, concerning the shareholder s risks: Strategic controlling interest Marketable controlling interest Non-marketable controlling interest Marketable minority interest Non-marketable minority interest The value of control The value of control derives from the fact that a firm is believed to be run better after the acquisition of the controlling interest. A firm increases value by increasing the future cashflows from operations, increasing the period of growth and reducing its cost of capital. Exploiting the controlling interest allows a shareholder to boost the cash-flows from existing assets (by i.e. redeploying assets, improving the operational efficiency, reducing tax burden, reducing capital expenditures and working capital investments, etc.), prolong the period of high growth (by i.e. establishing competitive advantage, enhancing the entry barriers, etc.), reduce the financing cost (by i.e. appropriately price the maturity gap between assets and liabilities, changing financing mix, reducing operating exposures, etc.), appropriately manage the non-operating assets (by i.e. minimizing the amount of excess cash and cash equivalents, business non-related property, pension fund liabilities etc.), decide upon the distribution of earnings, choose own business partners and channels, access to the financial data important for decision making, change of financial, audit, marketing and other policies, change of firm s statute and others. The value of control is therefore determined as the difference between value of the optimally run firm and the status quo value (Damodaran, 2005, p ). Status quo does not by definition mean that the firm is operating inefficiently. As long as the institutions of corporate governance (especially investor activism, proxy contests, threats of hostile acquisitions and forced management turnover) do their role, it is possible that there is no (or very little) value of control. In the past, valuation practitioners have often simply apply the Mergerstat s control premium, however in last few years similar actions have been seriously criticized. Even though it is theoretically not acceptable to apply the average premium to the case firm, it is important to have guidance when estimating the value of control. Mergerstat s 2010 studies involving only financial buyers (by definition these transactions do not include synergies) resulted in a control premium average in amount of 32.0% and median of 34.6%. Latest studies of RSM 26

35 Bird Cameron (2012, p. 2-5) revealed the average transaction premium (control premium and synergies) for the financial industry in Australia for the last 5 years to be 13.3%. If we assume the sample firms to be fairly priced as at the date of acquisition, premium for financial industry is below the average for all industries (30.7%), which hints relatively modest possible enhancements and synergies compared to other industries The value of marketability Investors value liquidity and marketability and are prepared to pay more for marketable and liquid equity shares share than for one that is harder to sell. A discount for lack of marketability (DLOM) in a range between 0.0% and 50.0% is therefore normally applied to address the ease in selling. The value of marketability varies across investors, time and companies being valued. Degrees of marketability range from fully marketable to fully non-marketable. Highest degree of marketability refers to an actively traded equity share, which can be converted into cash within few days, while lowest degree of marketability refers to an equity share in privately owned business that pays no dividends, requires capital contributions and limits ownership to certain individuals (Reilly & Rotkowski, 2007, p. 242). The value of marketability is significantly affected by the following factors (modified Mandelbaum factors): Information access and reliability Dividend payments Prospect of IPO or sale of business Potential buyers The expected holding period of the equity share (time until sale or IPO) The expected growth rate in earnings/value of the subject company The required return during the period of illiquidity. This holding period return incorporates risks to the shareholder that differ from the risks of the enterprise. Size of the interest and the amount of control transferred Company redemption policy Identified put rights Restrictions on transferability Generally speaking, the approaches are divided into two groups: Empirical models (i.e. restricted stock studies, pre-ipo studies, comparing acquisitions studies, survey-based studies etc.) Theoretical models (i.e. option pricing models such as Chaffe s, Longstaff s, Finnerty s and discounted cash-flow models such as Mercer s quantitative marketability discounting model etc.) 27

36 Although the two studies stated bellow are not the only way how to determine the minority discount, they are in my opinion the most appropriate guide for adjusting the marketable value of the ordinary share for lack of marketability: Restricted stock studies compare the prices of equity shares in publicly traded companies that have issued both freely tradable stock and "restricted" letter stock, which is typically prohibited from trading for a particular period. The results of the studies could be grouped in three groups based on the minimal holding period (the period of trading prohibition). Pre-IPO discount is arrived at by comparing the price at which the equity share has been offered to the public with the transactions which have occurred when the company has been privately held. According to recent study of the FMV Opinions (2012), the marketability discounts of the financial industry have been found to be far below the discounts of other industries in the amount of 8.5% for the median volatility of 48.3% and sample size of 93 units Other adjustments of market value of equity The income approach by definition does not reflect the value of non-operating assets, for which no cash-flow generation is assumed in the projections. Similarly, adjustment is required in case of market approach, if comparable companies have different levels of non-operating assets than the company being valued. In case of banks other adjustments of market value of equity most often relate to business non-related property, non-strategic financial investments, excess cash etc. 3 SPECIFICS OF BANK VALUATION Especially in times of crisis banking industry is due to high leverage and funding structure both a critical and a vulnerable component of modern economies. Investors and customer confidence can disappear over the night, sending deadly signal for a bank. As a result, more uncertainty surrounds the valuation of banks and therefore a very good understanding of the business activities undertaken by banks, the ways in which banks create value, and the drivers of that value creation, is demanded (Koller et al. 2010, p. 766). 3.1 SPECIFICS RELATED TO OPERATIONS A bank deals with volatile customer confidence, which causes significant changes in cashflows (De Weert, 2011, p ). Due to the unknown future behaviour of customers, it is more difficult to plan and forecast the cash-flows than in other industries, where liquid funds are only a residual of the production process. Higher liquidity of a bank thus plays a central role as a basic input factor into its banking business (Gross, 2006, p. 23). 28

37 Normally, when valuing a company, discussion is related to the valuation of total amount of assets also refered to as enterprise value. For banks, only direct valuing of equity makes sense, due to their ability to create value also on the equity and liabilities side - deposits cost banks less than they would pay for the resources on the market (Dermine, 2010a, p. 7). Major part of the debt that a bank carries has operational meaning and is not meant only as a source of financing. For banks debt represent a raw material, which is then offered as financial products to bank s customers at a higher price and thus yields a profit (Gross, 2006, p ). Assuming that banks are only financial intermediaries and offer loans with the same maturities as deposits, one would expect changes in interest rates should not incur any additional risks. However, most of the banks deal with interest rate risks, due to the mismatched maturities. High leverage and large share of net interest income in net income cause bank to be highly vulnerable to even small changes in interest rates. Besides that, banks take on significant risks inherent in balance sheet items (such as proprietary trading activities) and also risks related to off-balance sheet positions (such as swaps, forward deals and options on foreign currencies or securities). Consequently the volatility of bank profitability and cyclicality in market valuations has increased. This is measured by their return on equity and their market-to-book ratios. The way banks operate in the financial markets result in a general dependency on exogenous factors such as the economic cycle or trends in money, capital or real estate markets, showing up through changes in a bank's credit losses. This immediate impact of macroeconomic factors on the value of a bank complicates bank valuation and requires a thorough analysis of the macroeconomic parameters and the forecasting of future trends (Gross, 2006, p. 23). The impact of inflation risk, however, is relatively low, as banks trade with monetary contracts and, unlike industrial companies, do not produce real products. 3.2 LAW AND REGULATION Banks are subject to various bank-specific rules and regulations, so the effects of regulatory requirements on value have to be considered when valuing a bank. High regulation is necessary due to specific role within the financial system, risks they face and dependency on economic cycles. In comparison to other financial institutions, banks are relatively highly regulated. However, one has to agree that more power an institution has in the system, the stricter supervision is needed. Regulation can be imposed at the state level and occasionally at the international level, as in the case of bank capital requirements. According to Sounders (2008, p. 11) six types of 29

38 regulation seek to enhance the net social welfare benefits of financial intermediaries services: (1) safety and soundness regulation, (2) monetary policy regulation, (3) credit allocation regulation, (4) consumer protection regulation, (5) investor protection regulation, and (6) entry and chartering regulation. Although it is clear that more regulation is needed to prevent a crisis such as financial crisis in years from ever occurring again, overregulation or poorly designed regulation could hamper the efficiency of the financial system. Excessive regulation might also choke off the financial innovation and deteriorate the future economic growth (Sounders, 2008, p. 450). The regulation that significantly influences the valuation for most of banks and impacts shareholders value is capital adequacy Basel III and capital adequacy requirements Most of the developed and developing financial markets nowadays adhere to the guidelines recommended by the Bank for International Settlements (BIS). The most recent Basel Accords are referred to as Basel III and were introduced in response to the deficiencies in financial regulation. Standards were set-out internationally in order to minimize the effect of rivalry among banks all over the world due to the world-widely accepted policies. The standards strengthen the capital required and at the same time also introduce new regulatory requirements on bank liquidity and bank leverage, helping to preserve confidence in bank, protecting uninsured depositors, bank insurance funds, taxpayers, preventing moral hazard in bank's behaviour etc. Figure 6. Basel III framework Basel III Pillar I Enhanced Minimum Capital & Liquidity Requirements Pillar II Enhanced Supervisory Review Process for Firm-wide Risk Management and Capital Planning Pillar III Enhanced Risk Disclosure & Market Discipline Source: Moody s Analytics, Basel III New Capital and Liquidity Standards FAQs, 2012, p. 1. Primarily, capital adequacy requirements regulation and supervision of financial institutions ensure that banks have enough capital to cope with the amount of risk they take. Capital helps individual banks to weather losses. Since most banks strive towards the lowest allowed levels 30

39 of capital adequacy requirements, the sources for competitive advantages should be sought in other areas (not leverage) in order to enhance the value of a bank (Grier, 2005, p. 13). Basel III standards also relate to issues such as systemically important financial institutions (literally too-big-to-fail), which are likely to take on more risk and thus need to have stricter capital requirements, and cyclicality effect of capital requirements, in order to restrain the boom-and-bust cycle in credit markets. An impact of Basel III framework may differ across types and size of banks. Banks that generate most of the income with net interest income will be most likely impacted by the increase in quantity and quality of capital, liquidity and leverage ratios, amended pillar 2 and capital preservation, while investment banks will be affected also by the amended treatment of counterparty credit risk, the more robust market risk framework and to some extent, the amended treatment of securitizations (Moody s Analytics, 2012, p. 4). Regulation measures are either taken into account by adjusting the future cash-flows, or simply by adding additional premium to the discount factor. The implementation of the capital adequacy requirements is known and should thus be accounted for through the cashflows. On the other hand, discount factor is used, when the risks of implementation of regulatory measures are high and not dispersible. Normally this happens in case of a dominant position of financial organizations in the market, which is typical for many European markets. Refer to the Appendix V for more details. 3.3 VALUE DRIVERS In the context of the valuation it is important to be aware of the value drivers, on which the value of the bank lies. Generally speaking we could divide them according to the source of the bank's income (Koller et al., 2010, p ): Net interest income is typically a source of income for the regional retail banks and retail-focused universal banks (such as Unicredit, Banco Santander etc.). Banks attract funds in the form of customer deposits and debt to provide funds to customers in the form of loans such as mortgages, credit card loans, and corporate loans. Refer to the Figure 7 and Figure 8 for the simplified value drivers for the retail banking. Fee and commission income is typical for investment banks and for universal banks with large investment banking activities (such as Morgan Stanley, UBS, Deutsche Bank). Fee and commission income is income charged for services such as transaction advisory, underwriting and placement of securities, managing investment assets, securities brokerage, and many others. Unlike net interest income it is independent of financing, so 31

40 for most of the investor it is easier to understand the process of value creation. However, in contrast to other sources of income some forms of fee income are highly cyclical - for example fees from underwriting and transaction advisory services. Refer to the Appendix N for the simplified value drivers for the asset management. Trading income is typical for investment banks (such as Goldman Sachs). Trading income is income generated from trading activities. Banks are trading a wide range of financial instruments (such as equity stocks, bonds, foreign exchange and also more exotic products, such as credit default swaps and asset-backed debt obligations, traded mostly over the counter) traded both on exchanges and over the counter. Refer to the Appendix N for the simplified value drivers for the trading activities. Other income is income generated from wide variety of nonbanking activities, including real estate development, minority investments in industrial companies, and distribution of investment, insurance, and pension products and services for third parties. Normally, other income is not considered as one of the main three groups, since these activities are rather unrelated to the banks main banking activities and thus make a small contribution to overall income. Ideally, a valuation of modern universal banks should consider businesses separately according to the source of income. Unfortunately public data most often does not allow this. Figure 7. Generic value driver tree for retail banking: DCFE version Source: T. Koller, M. Goedhart & D. Wessels, Valuation: Measuring and managing the value of companies, 2010, p. 772, exhibit

41 A value driver scheme used to directly address whether the value is being created or not is a slightly modified version of the above scheme. Figure 8. Generic value driver tree for retail banking: RI version Source: T. Koller, M. Goedhart & D. Wessels, Valuation: Measuring and managing the value of companies, 2010, p. 779, exhibit VALUATION OF GORENJSKA BANKA According to the International Valuation Standards Scope of Work a valuation has to include the following predispositions in order to clearly define value (International Valuation Standards Council, 2011, p. 1-4, paragraph 2): Identification and status of the valuer Identification of the client and any other intended users Purpose of the valuation Identification of the asset or liability to be valued Basis of value Valuation date Extent of investigation Nature and source of the information to be relied upon Assumptions and special assumptions Restriction on use, distribution or publication Confirmation that the valuation will be undertaken in accordance with the International Valuation Standards 2011 Description of report 33

42 Average annual market price and book value of the GBKR stock (in ) 4.1 DEFINING THE VALUATION PREDISPOSITIONS Gorenjska banka s stock price through time In order to get the first impression of how the stock price has been moving in time, the transactions (or offerings) that have been published in the media have been analysed. Average market price and book value of the GBKR stock Figure 9. Book value and share price of Gorenjska banka, , ,350 1,136 1,550 1,210 1,155 1,181 1,126 1, Share price ( ) Book value per share ( ) Note.* Gorenjska banka is a non-public bank. The term share price is an average for the known private transactions of the stock in a given year. Please refer to the Appendix DD for the transaction details.? Scope of work Source: Gorenjska banka d.d., Letno poročilo, As proposed by the International Valuation Standards Scope of Work, the scope of work is agreed with the client before the beginning of the valuation. Table 2. The summary of the scope of work Line item Predisposition Identification of the valuer Peter Šinkovec Identification of the client n/a Identification of the firm being valued Gorenjska banka d.d, Bleiweisova cesta 1, SI Kranj Purpose of the valuation To inform the owner about the value of one share. Subject being valued Ordinary equity share of Gorensjka banka Basis of value Market value Valuation date Data to be relied upon Public data only Restriction on use, distribution or publication The valuation can be used only by the client and for the stated purpose. Conformity with IVS The valuation is undertaken in accordance with the IVS Identification and status of the valuer The valuer undertaking the valuation is Peter Šinkovec. For the statement of independence please refer to the Appendix A. 34

43 Identification of the client and any other intended users The client is a long-term oriented financial investor. For the purpose of the master thesis the client does not want to be revealed. It is assumed that the client has a completely diversified investment portfolio. Purpose of the valuation The purpose of the valuation is to inform the client about the value of one ordinary share in Gorenjska banka, d.d., as at June 30 th, Identification of the asset or liability to be valued The subject of the valuation is one ordinary share of independent joint stock company Gorenjska banka, d.d., (ISIN: SI ) as at June 30 th, 2012 valued on a going concern (assumed operations in the perpetuity) and stand alone (no investor s synergies) basis. The valuation takes into account the minority ownership and its characteristics. Basis of value For the purpose of the valuation the market value as defined by the International Valuation Standards Framework (International Valuation Standards Council, 2011, paragraph 31-33) is being used: Market value is the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. Market value presumes a price negotiated in an open and competitive market where the participants are acting freely. At the same time it reflects assets highest and best use, which maximizes asset s productivity and are legally permissible and financially feasible. For calculating the market value the market approach (comparable companies method, comparable transactions method) and income approach (residual income model, discounted cash-flow to equity holders model and dividend discounting model) have been used. The value estimate conclusion is based on the residual income model, rather than discounted cashflow to equity holders model. Other methods and models should thus be considered more or less as supportive. 35

44 Valuation date The value applies exclusively to the valuation date, i.e. June 30 th, 2012, as valuation estimate can change from one day to another. The valuation report does not take into account any information that became available, or known, subsequent to the valuation date. The valuation started with the client s order on June 30 th, 2012 and lasted until November 1 st, 2012, when the report was finished and sent to the client. Extent of investigation The valuation has taken place in the agreed scope. The sources for the valuation of Gorenjska banka consist out of audited financial statements of the case company and other publicly available data. The analysis did not concern the appropriateness of the data used for the valuation (except in case of the impairments of financial assets based on the valuation models). Despite strict regulations, the clarity of the published accounts depends largely on accounting decisions made by the management. It is true that published accounts give an overview, but external analysts should make a final judgment about the appropriateness of those decisions. Nature and source of the information to be relied upon Valuation has been prepared completely independently and without any internal data. The main information provided consisted of: - Annual reports of Gorenjska banka, d.d., for the period Public data accessed through the company's website - Financial databases (such as Bloomberg Terminal, Capital IQ, GVIN, ViewsWire etc.) - Other sources (referred to under the heading Literature at the end) It is important to stress that past performance, which has been used as a base, is not necessarily a guide for future performance. Nature and sources listed above require from the outside valuer to avoid some of the core parts of the valuation such as: - To analyse the performance by businesses (retail banking, wholesale banking, investment banking, and asset management) and understanding which business units are driving the bank's profit potential. - To relate the change in interest-rate mismatch with the change in profits generated and directly link the profits and risks influencing the value. 36

45 - To determine the quality and potential future deteriorations of the biggest and most valuable financial assets (for retail and wholesale banking - the loan portfolio; for investment banking - securities). Assumptions, special assumptions and limitations Value estimate is based on limited information and thus does not necessarily reflect all information (only publicly available data). Note that the statute of Gorenjska banka (2012e) does not refer to any outstanding requirements related to the ownership or transaction of the equity share in Gorenjska banka. Current shareholders have pre-emptive rights to new share issues corresponding to their proportion of share capital held. While there is no requirement of obtaining the consent of the bank or other shareholders for the transfer of shares, approval from the Bank of Slovenia is required for the acquisition of a qualifying holding. Risks Publicly available data has lead to the recognition of the following risks: - The additional impairment charges required (refer to equity share in Abanka, Sava, Pivovarna Laško) have been estimated under the assumption that equity shares have remained unchanged. The additional impairments of financial assets required have been assumed in projections in the amount of 16,451 thousand. The amount has been determined based on the indicative valuation of the equity shares. If equity shares would be priced as presented in the 37

46 Appendix T, total impairment charges required would amount to 26,451 thousand and the final value estimate would additionally decrease for 32.7 per share. - Gorenjska banka (FY11: 0.9%; FY10: 0.7%; FY09: 1.3%) has had significantly lower allowances for loan losses expressed as a percentage of total net loans compared to the banking industry average (FY11: 2.8%; FY10: 1.9%; FY09: 1.6%). There are more and more speculations that the bank s credit portfolio is in reality worse compared to the one presented to the authorities and public. The accusations are mainly based on the analysis of the recent insolvency proceedings observed via publicly available databases einsolv and eobjave at AJPES. Potential future impairment charges for loan losses significantly impact the estimated value. The valuation assumes that no potential impairment charges have been accounted for in the prior periods, which decreases the value estimate for per share. Please refer to Appendix U for more details. - According to the efficient market theory, one could not expect future capital gains/losses. This view is reflected in the projections. However, the logic of not projecting the capital gains might lead to inconsistencies. For some companies, that do not pay dividends, the capital gain would be recorded as a sort of required return and will reflect higher future earnings of the company due to reinvestments. The projection technique does not reflect that point of view and thus it might be that projections undervalue the projected capital gains. - Due to the limited data, the value estimate does not consider any potential off-balance sheet items, which might impact the profitability of the bank in the future. It also returns a very modest estimate of the potential synergies, deriving from the merger with Abanka. - The current macroeconomic situation could easily push several Slovenian banks into bankruptcy at the same time. The fear of depositors could therefore easily erupt and bank will face too many requests for withdrawals and thus serious liquidity problems overnight. In this context no additional premium has been applied for Gorenjska banka, nevertheless it is important to have this risk in mind. Important facts after the valuation date One of the ways to overcome the credit crunch in Slovenia is the proposition of so called bad bank. By this act, a bank s assets are segregated into two categories, contaminated and good assets. It is believed that after the division investors and counterparties are more certain about the bank s financial health and performance, impairing its ability to borrow, lend, trade, and raise capital (Heffernan, 2005, p. 433). One of the big issues of the bad bank from the shareholders view is that the impact on the bank s liquidity, balance sheet, and profits can be difficult to predict, especially when there exists also other (i.e. political) motives. 38

47 Restriction on use, distribution or publication The valuation can be used only by the client for the stated purpose. It should not be published anywhere without the prior consent of the author. The author reserves all copyrights. The valuation is exclusively of an informational nature and should not be interpreted as a recommendation for any particular investment activity. It should not be relied upon or referred to as such. No responsibility is taken for any actions taken on the basis of this report. The author is also not obliged to appear as a witness in front of the court of justice in any relation to the valuation. Conformity with standards The valuation will be undertaken in accordance with the International valuation standards Description of report The detailed structure has already been discussed in the introduction part of the master thesis. However, it is important to stress, that the report is prepared in compliance with the International valuation standards 2011 reporting. Nothing is excluded from the proposed structure. 4.2 BANK OVERVIEW Presentation of the bank Gorenjska banka is an independent joint stock company (equity stocks not publicly traded) with its registered office at Bleiweisova cesta 1, SI-4000 Kranj. It is categorized as regional bank with 1,947,403 thousand of total assets as at the end of year 2011, which makes the bank the 10th largest commercial bank in Slovenia. As at December 31, employees were operating in 6 branches and 30 agencies, most of them located in the Gorenjska region (NW of Slovenia). Table 3. Bank s general information 39

48 Line item Predisposition Organization name Gorenjska banka, d.d., Kranj Address Bleiweisova cesta 1, SI-4000 Kranj, EU Legal form Joint stock company (equity stocks not publicly traded) Credit rating Long-term: BB (Negative Outlook); Short-term: B ISIN SI Type of shares Common/Ordinary shares Registered / Bearer Registered Number of issued securities 331,416 Share of foreign investors 3.91% The members of the management board Gorazd Trček (president), Srečko Korber, Tilen Zugwitz Supervisory board Miha Resman (president), Mojca Globočnik, Milan Marinič, Primož Karpe, Tibor Šimonka, Matej Podlipnik, Stojan Žibert. Accounting standards International financial reporting standards (IFRS) Website Source: Gorenjska banka d.d., Letno poročilo, 2011, p. 25; Gorenjska banka d.d., General Meeting, 2012a. The bank has authorization to provide universal banking services (Article 7 and 10 of the Banking Act - Official Gazette of the Republic of Slovenia, No. 99/10). The bank's main activity is accepting deposits of natural and legal persons, and extending loans out of these funds for its own account for which it is also authorized. The customers avail themselves of the wide network of ATMs and LINK electronic banking. Decades ago Gorenjska banka was very exposed to Slovenian Steel Group. The reorganization of the Slovenian Steel Group was an indirect support for the bank. Besides that, the bank s doubtful loans have been exchanged for bonds of the Agency for bank reorganization, established for the purpose of the reorganisation of Slovenian banks. Since then the bank has been earning relatively high interest rates on these bonds, while at the same time they have been guaranteed by the country (Damijan, 2012). In last decade, the bank gained its reputation as one of few remaining European conservative banks, known for its consistent returns and high dividend yields. Gorenjska banka is as at the date of valuation in contrast with other Slovenian banks considered»well capitalized«by regulatory standards and is strategically positioned targeting a strong customer base allowing it to reach one of the highest profit margins (high return on equity and assets and below the Slovenian banking average costs as a proportion of total assets). Gorenjska banka s values are: trust and respect, partnership and cooperation, quality and flexibility, stability and efficiency (Gorenjska banka, 2012b). Figure 10. Ownership structure of Gorenjska banka as at December 31 st, 2011 (in %) 40

49 Share in capital of Gorenjska banka d.d. as at Other 29.4 Own shares 7.8 Sava d.d Zav. Triglav d.d. 4.0 NKBM d. d. 4.0 Merkur d.d. 8.8 Source: Gorenjska banka, 2011, p. 38. As from February 20 th, 2012 the credit rating agency Fitch assesses the long-term credit rating of Gorenjska banka to BB with negative outlook, and short-term rating to equal B. The credit rating of Gorenjska banka as well as other Slovenian banks has been deteriorating, mainly due to the downside risks of Slovenia, which represents the credit rating ceiling (Search results - Fitch research, 2012). Gorenjska banka (2012a) follows the two-tier system of a board. The management board consist out of three members Gorazd Trček, Srečko Korber and Tilen Zugwitz, while supervisory board consist out of 7 members - president Miha Resman (Sava, d.d.), Mojca Globočnik (Sava, d.d.), Milan Marinič (Sava, d.d.), Primož Karpe (Blue Sea Capital, LLP), Tibor Šimonka (SIJ Group), Matej Podlipnik (lawyer) and Stojan Žibert (BPT-E, d.o.o.). As at December 31 st, 2011 the bank had two subsidiaries and one associate. In line with the non-materiality accounting rules the bank's subsidiaries accounts do not exceed set limits for materiality individually as well as a group. Thus the bank does not prepare consolidated financial statements. Nevertheless, investments in associates are accounted for by the equity method (Gorenjska banka, 2011, p. 25). Table 4. SWOT analysis for Gorenjska banka Strengths (+) Weaknesses (-) Considered extra safe due to the high core (Tier 1) capital adequacy ratio. High profitability and cost efficiency (above Slovenian average). Highly motivated key employees Rigid organization scheme. Presence limited mainly to Gorenjska region. Financial problems of the largest owner (Sava d.d.) Too much power in hands of management board. Relatively old and low educated ageing structure (not in favour of new technological solutions) Opportunities (+) Threats (-) The development of banking industry lags behind Western European countries - growth potential. Low indebtedness of the population. High level of savings. Broader product scope (non-banking products). High indebtedness of the corporate sector. Slovenian real estate market bubble. Inefficient legal environment (long lasting bankruptcy procedures). Political and macroeconomic stability. 41

50 Index (2005=100) 4.3 MACROECONOMIC ENVIRONMENT ANALYSIS European macroeconomic influences The world economic growth rate momentum recovery is highly dependent on imbalances of some major economies and expectations of high future commodity prices (European Central Bank, 2012a, p. 18). Short-term indicators at the beginning of the year 2012 pointed to further poor economic conditions and a slow rate of recovery for the European Monetary Union (hereafter: EMU). Looking ahead, economic activity is expected to recover gradually over the course of the year. The engine for future growth will remain export, especially to Asian countries. Real GDP growth is forecasted to be 0.0% for year 2012, 1.2% in 2013and 1.7% (The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, 2012, p. 10). Prevailing uncertainty in EMU will affect further tightening in labour market conditions. Unemployment rate in May 2012 reached 10.9% and is at the highest levels in 15 years. For some investors commodities represent the most important economic growth drivers. For example, the lower the prices of crude oil the higher the economic growth. The prices of metals (a strong impact of gold and silver) and agriculture have already exceeded the levels before the crisis, while energy and crude oil still have some place to grow if we compare the current levels to the pre crisis levels. From the figure bellow one sees that the highest levels of the Energy Index were sharply rejected in the mid-2008, signalling the new highs and the downside risks of the economic outlook. Figure 11. Commodity prices, Agricultural Index Metal index Energy index Source: IMF Primary Commodity Prices, The euro was among the weakest performing currencies in the previous year the effective exchange rate of the euro, measured in comparison to the twenty largest trading partners of EMU has been declining, due to the economic conditions within the union. 42

51 One of the main problems of the European Union (hereafter: EU) is also its inefficiency in accepting strategically important decisions and a rigid institutional environment Slovenian macroeconomic influences Slovenia is considered as an advanced economy by the International Monetary Fund (hereafter: IMF). The Slovenian economy is more than ever integrated with core European economies (EU and EMU member). Its GDP per capita (at PPP) amounts to slightly more than 80% of the Western Europe average. At such a high level of economic development, the scope for further catching up via just exploiting wage differentials is limited. Thus, additional efforts to strengthen the international competitiveness position are required. Recent years have shown that the development of Slovenia is not a one-way street and that political risks escalate even in more solid countries such as Slovenia. The unsustainable developments in the fiscal sphere to some degree reflects also the challenging situation in the economy and banking system (e.g. continuing problems in the construction sector, high leverage in the corporate sector, relatively high bank funding costs, poor banking asset quality). As from May 28 th, 2012 Fitch assesses Slovenian long-term credit rating to equal A (with negative outlook) and short-term rating to equal F1. The credit rating of Slovenia has been dangerously deteriorating since the financial crisis due to the downside risks of the economic growth and budget deficits (Fitch, 2011a). New loans are becoming more expensive, while at the same time the level of debt has been steadily increasing - compared to 2008 for 25.7% points. Slovenia s high degree of external openness and the unfavourable structure of exports (fairly high share of cyclically sensitive, low/medium technology goods) increase the downside risks to country s GDP growth and budget deficit (Fitch, 2011a). According to The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia (hereafter: IMAD) economic activity will begin to improve in 2013 and 2014 (Figure 12). At the same time, also a turning point in terms of productivity, investment in fixed assets and other important economic indicators growth rates will be reached in 2012 or 2013 (The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, p. 3). Figure 12. Real GDP growth for Slovenia, EU-27 and World,

52 Real GDP growth rate (in %) Comparison of real GDP growths Slovenia EU-27 World Source: GDP growth, The first positive impulses for future economic growth come from the export-oriented sector of the economy. EU and Balkan markets caused real growth rates of exports to increase for 6.8% in 2011 compared to The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia (2012, p. 9) forecasts current accounts to stay broadly in balance in the next few years. In spite of future economic growth, domestic demand will continue to remain sluggish, since household consumption is expected to be constrained by further high unemployment. Table 5. Macroeconomic data and forecasts for Slovenia Line item GDP ( 'bn) GDP per capita ( '000) Harmonized consumer price index real growth (in %) Unemployment rate (in %) Current account balance ( 'bn) Current account balance (% of GDP) Note.* Coloured fields refer to forecasts. Source: Macroeconomic data, Harmonized index of consumer prices in Slovenia amounted to 2.1% in 2011 (Figure 13). Based on modest economic growth and high unemployment rates IMAD expects inflation to be at similarly low levels as before, if only the volatility of commodities on international markets stays similar and further mitigations of the growth of oil prices with duties will take place (The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, 2012, p. 28). Figure 13. Consumer price index for Slovenia, EU-27 and World,

53 Consumer price index (in %) Consumer price index (CPI) Slovenia EU-27 World Note.* Harmonized consumer price index as defined and used by European Central Bank. Source: Consumer price index, According to several Slovenian economists past characteristics of the domestic equity market (unattractiveness and liquidity problems) forced Slovenian companies to raise capital mainly through borrowings. As a result of undeveloped domestic equity market lending activity is expected to remain on very low levels in the near future, due to the high number of companies plunged in debt, while the restructuring processes take place. Debt-servicing requirements after years of high borrowing lead mainly to cost-cutting strategies. Moreover, the financial sector is currently weighted also with plenty of failed leverage buy-outs (LBO). Due to the expectations of further tightening in labour market conditions, also households borrowings will remain sluggish (The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, 2012, p. 28). Future fiscal consolidation and structural reforms will be slow and incremental, due to the country's consensus-based politics. A multiparty coalition is led by the centre-right Slovenian Democratic Party (SDS) parliamentary party. A new, more stimulative corporate taxation (ZDDPO-2H) has been introduced recently. Profits in 2012 will be taxed at 18%, in 2013 at 17% in 2014 at 16% and in 2015 and onwards at 15%. Several incentives to invest in R&D have additionally been introduced. 4.4 INDUSTRY ANALYSIS European banking industry analysis Europe is the centre of banking. The world s oldest bank is the third largest Italian bank, Monte dei Paschi di Siena, which has been operating continuously since What is more, European banking accounts for 53.0% of the global banks sector value, while Asia-Pacific is second with 29.1%, Americas third with 15.7% and Middle East & Africa last with 2.3% (Datamonitor, 2011b, p. 12). 45

54 Within Europe, the biggest share is represented by the German banking sector with 20.4% of the European sector value, following by the UK with 20.2% and France with 19.4%. Italian and Spanish banking sectors represent 9.3% and 8.5% of the European banking sector value, respectively. The rest of the Europe together equals to 22.2% (Datamonitor, 2011a, p. 12). Total assets ( 'bn) Figure 14. European banking industry value, ,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 European banking sector value ,456 37,883 40,907 40,262 40,649 44,820 46,993 49,167 51,340 53, European banking sector value Growth rate Growth rate (in %) Note.* The data is analyzed for the following countries: Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, Turkey, United Kingdom (all Western Europe) and Czech Republic, Hungary, Poland, Romania, Russia, and Ukraine (all Eastern Europe). Data for the period is Datamonitor s own forecast, while data for 2011 is an estimate. Source: Datamonitor, Banks in Europe, 2011b, p. 10, 37. The European banking industry is expected to reach value of 53,513 million in The compound annual growth rate (CAGR) will decline from 7.6% reached in the period to an estimated 3.6% in the period The major part of the overall value (60.1%) will remain related to the credits given. As the deleveraging cycle intensifies in the European Monetary Union (EMU), one of the expected consequences is a reduction in cross border flows of capital. The greatest challenges are likely to be faced by countries in Eastern Europe, where lending activity is under heavy influence from Western European countries (Ernst & Young, 2012b, p. 3) Slovenian banking industry analysis Under the Law on Banking (Official Gazette of the Republic of Slovenia, No. 99/10), banks and savings banks in Slovenia are granted authorizations to provide banking services, mutually recognized services and additional financial services. At 2011 year-end there were 19 banks, 3 savings banks and 2 representative offices of foreign credit institutions operating. State owns around 20% of Slovenian banking sector, including the largest two banks by total assets, namely NLB and NKBM (Raiffeisen Research, 2012, p. 10, 40-41). 46

55 Total assets vs. GDP ( m) 33,868 31,045 42,343 34,563 47,628 37,280 35,311 35,417 51,612 50,319 48,753 35,638 Number of employees Table 6. The most important indicators for Slovenian banking industry, FY06-FY11 in % FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Average ROA Average ROE Costs/Gross income Interest margin on interest bearing assets Interest margin on total assets Non-Interest margin Gross income/average assets Source: Bank of Slovenia, Financial Stability Review, 2012, p. 62. Figure 15 refers to the overview of Slovenian banking industry developments. The total assets of all Slovenian banks were increasing by compounded annual growth rate (CAGR) in the period of 15.1%. The lending activity led to 4.4% compounded annual growth rate (CAGR) of GDP in current prices. Since the peak in 2009 the total banking assets have been slightly decreasing. According to the latest (2011) recordings, they amounted to 48,753 million. One can notice a similar pattern in GDP at current prices and in the number of employees in the banking industry all referring to current country specific issues. Figure 15. Overview of Slovenian banking industry developments, Total assets and employees of Slovenian banking industry ,000 50,000 40,000 11,707 11,829 12,045 11,994 11,735 11,587 13,000 12,000 11,000 30,000 10,000 20,000 9,000 10,000 8, ,000 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Total banking industry assets ( m) GDP at current prices ( m) Number of employees Source: Bank of Slovenia, Financial Stability Review, 2012, p. 49. According to the Slovenian central bank at 2011 year end loans and receivables to customers amounted to 67.6%, financial assets 16.1% and loans and receivables to banks 9.6% of total assets of Slovenian banks. Major loan recipients were companies (38.1%) and households (18.1%). In the last years the maturity of loans has been decreasing due to the declining share of short-term loans consumed by companies (Bank of Slovenia, 2012, p ). Figure 16. Largest Slovenian banks by total equity as at December 31 st, 2011 (in %) 47

56 Market shares of ten biggest Slovenian banks Other 23.0 NLB 24.4 Hypo 4.1 Banka Celje 4.6 Abanka Vipa 5.8 Unicredit 6.1 Banka Koper 6.8 SKB 7.1 NKBM 9.5 Gorenjska banka 8.6 Source: Financial data for Slovenian banks, The market leading bank by total assets as well as total equity in 2011 was NLB. Gorenjska banka had 4.0% market share by total assets and 8.6% market share by total equity. Figure 17. Profitability map for selected Slovenian banks, FY11 Profitability map for selected Slovenian banks in FY 2011 Return on assets (in %) NLB; -24.0; -1.7 Abanka Vipa; -40.2; -2.7 NKBM; -22.4; -1.7 Hypo; -16.4; -1.3 Gorenjska banka, 0.5, 0.1 Banka Celje; -7.8; -0.6 Banka Koper; 6.6; 0.8 SKB; 8.8; 0.9 Unicredit; 6.7; Return on equity (in %) Source: Financial data for Slovenian banks, Despite stable long-term outlook, the short- and mid-term risks for the Slovenian banking industry are increasing against a backdrop of weak GDP growth, worsening asset quality and potential funding constraints. Specifically high danger to the industry represent further deteriorating non-performing loans and over-valuation of construction and real-estate assets and stakes in local corporate sector, that banks own or hold as loan collateral. What is more, among others failed management buyouts and significant exposure to several major construction firms in the bankruptcy procedures poisoned the banking industry and caused credit crunch, that further impacts the economy continues to put additional pressure on banks, due to the thin capital cushions and weak pre-impairment profits (Fitch, 2012a). According to Fitch (2012a), it is a plausible scenario to see the non-performing loans (defined as total receivables overdue more than 90 days) rise from the 15.5% reported end of 2011 (end of 2010: 10.4%; end of 2009: 7.5%) to 25%, which would mean that the capital 48

57 requirements could range to approximately 4.5 billion, including about 3.5 billion (or roughly 10% of GDP) for domestic banks. According to the Appendix K the Herfindahl Hirschman Index for FY11 calculated on the basis of total assets indicates the unconcentrated index or medium to high internal rivalry. However due to the internal banking policies of Slovenian banks, with which they chain the companies and individuals and thus influence their rationality, we could sum up that the internal rivalry is medium and could even decrease due to the potential mergers and acquisitions within the industry. Figure 18. Forces driving competition Source: Datamonitor, Banks in Europe, 2011a, p. 13, own modifications. Concerning the competition (Appendix K), future changes are expected especially on the side of suppliers and buyers bargaining power and internal rivalry. Suppliers (depositors) and customers (borrowers) will be offered plenty of new alternatives and thus increase competition within the industry, while on the other side potential M&A activities (Appendix L) and low capital cushions of major banks will lead to a decrease in competition. The average capital adequacy ratio of Slovenian banks remains among the lowest in Central and Eastern Europe, which clearly points to the needs of capital increase. 4.5 FINANCIAL ANALYSIS OF THE BANK The financial analysis of a bank addresses viability, stability and profitability. It does not consider only the past financial indicators but also a comparative analysis of peers. Potential future developments are referred to within projections. Financial statements of the Gorenjska banka have been prepared in accordance with the International Financial Reporting Standards (IFRS). The analysis hereafter is based on the audited data for the period FY06-FY11. When analyzing the operations I did not simply rely on the accounts. Things that have been especially sought out and accounted for include restructuring charges, discontinued operations and extraordinary items (such as for example impairments and revaluations). 49

58 4.5.1 Income statement (Appendix Q) The bank is mainly oriented towards traditional banking operations. The key part of the bank's business activities is thus generated by net interest income. Figure 19. Gross income by source Gross income ( '000) Average interest rate (in %) , ,000 80,000 60,000 40,000 20,000 82,135 35,602 46, ,350 53,481 48,869 70,717 13,351 57,366 90,005 31,856 58,149 78,216 12,175 66,041 93,798 41,110 52,688 0 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Interest income Net non-interest income Source: Gorenjska banka d.d., Letno poročilo, A decline in average interest rate can be seen for loans to customers as well as loans to banks in the period (Figure 20). Figure 20. Average interest rate on categories of interest income Loans to customers Loans to banks Financial assets Source: Gorenjska banka d.d., Letno poročilo, Both changes in average interest rate as well as in financial assets interest rate directly refer to macroeconomic issues currently evolving in Slovenia. Interest spread in the observed period does not have a trend and in average amounts to 2.6%. In 2010 the spread was higher due to exceptionally low interest rate paid for deposits, while a significant decrease in 2011 was a consequence of not including an interest charged to clients that were in bankruptcy proceedings. 50

59 Figure 21. Average interest rates for interest income and interest expense, Average interest income and expense rate (in %) Spread (in %) FY 2008 FY 2009 FY 2010 FY 2011 Driver: Interest earning asset yield (IEA yield) Driver: Interest bearing liability cost (IBL cost) Driver: Net interest spread (IEA yield - IBL cost) Note.* The IEA yield is calculated on the adjusted average of Interest earning assets (IEA). The IBL cost is calculated on the adjusted average of Interest bearing liabilities (IBL). Source: Gorenjska banka d.d., Letno poročilo, As well as net interest income, net fee and commission income was also reasonably stable in the observed period was only slightly lower, due to a decrease in fees and commissions related to cards. Fee and commission income (2011: 11,557 thousand) mainly referred to payment system related commissions ( 4,530 thousand), assets management and related commissions ( 3,514 thousand), cards related fees and commissions ( 2,046 thousand) and credit related fees and commissions ( 1,102 thousand), while fee and commission expense mainly refers to other banks services fees paid ( 875 thousand). In FY11 dividend income refers to financial assets held for trading and available-for-sale (AFS) financial assets. It was related to six companies, of which the largest share represent dividend received from Mercator classified as financial assets held for trading (Gorenjska banka, 2011, p. 34). Normally by far the most volatile income statement account in case of banks relates to net gains/losses on financial assets. Speaking for our case bank, the account s volatility is especially high for financial assets and liabilities not measured at fair value through profit and loss for last two years of the observed period (Figure 22). In 2011 the account net gains on financial assets and liabilities not measured at fair value through profit and loss amounted to 31,867 thousand and represented 34.0% of the gross income of the case bank. Most of the gains on financial assets relate to the exchange of bonds RS33 (8% coupon; maturity of years) for RS59 (4% coupon; maturity of 3.6 years). Figure 22. Net gains on fin. assets and liabilities not measured at fair value through P&L 51

60 Net gains on financial assets and liabilities not measured at fair value through profit and loss ( '000) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 (5,000) 31,867 11,704 13,214 26,595 10,354 14,525 5,604 14,405 4, ,169-2,102-1, Recovery of previous years obligation Transfer from revaluation reserve Gains/(losses) from sale of financial assets Other Source: Gorenjska banka d.d., Letno poročilo, In FY11, administrative expenses amounted to thousand, 63.0% of which represented personnel expenses and 21.2% other professional services. Administrative expenses to net interest income of Gorenjska banka amounted to 49.0% in 2011 (industry average: 70%). In FY11 provisions amount to thousand (FY10: - 6,915 thousand) and refer to provisions for guarantees and commitments in amount of thousand and employee benefit provisions in amount of 123 thousand. In FY10 a large part of the provisions (- 4,623 thousand) represented other provisions. In the last two years of the observed period, impairment charges have increased significantly, mostly due to the impairment of financial assets. In FY11 the case bank impaired equity investments in Abanka, d.d. ( 22,085 thousand), in NFD Holding, d.d. ( 3,186 thousand) and Istrabenz, d.d. ( 1,479 thousand). Besides that, the bank has impaired also Greek government bonds ( 17,639 thousand) classified as available-for-sale debt securities, due to the major financial difficulties of the issuer, the state of Greece. The bank has transferred a cumulative loss recognized within other comprehensive income to the income statement despite the fact that derecognition was not made and the securities were not sold. Equity options have been impaired due to the counterparty credit risk. Impairment charges on loans and advances to customers expressed as percentage of total net loans of Gorenjska banka (2011: 0.9%; 2010: 0.7%) are compared to the industry (2011: 2.8%; 2010: 1.9%) on much lower levels. Figure 23. Impairment charges of Gorenjska banka,

61 Collateral received ( '000) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,000 64,472 8,319 17,639 30,904 9,931 26,750 14,422 15,709-5,424 11,426 14, ,595 9,588 11, , Impairment of fair value of equity options Impairment of available-for-sale debt securities Impairment of available-for-sale equity investment Impairment losses on loans and advances to customers Other Source: Gorenjska banka d.d., Letno poročilo, Total profit for the period amounted to 1,660 thousand in It has been declining since 2007 (2007: thousand; 2008: thousand; 2009: 33,839; 2011: 21,092 thousand). The statement of changes in equity shows that the bank had on average a loss deriving from financial assets available-for-sale in amount of 6,694 thousand in the period Statement of financial position (Appendix Q) Total assets amounted to 1,947 thousand in 2011 year-end, which is 1.7% less than a year before. The decrease in last year of the observed period occurred mostly due to decrease in loans and receivables, decrease in other assets and available-for-sale financial assets. Despite decline as at December 31 st, 2011, total assets have been growing with compound annual growth rate (CAGR) of 3.0% in the period FY07-FY11. Major accounts of total assets represent loans and receivables and financial assets. Loans and receivables to customers (December 31 st, 2011: 64.0% of the total assets) and available-forsale financial assets (December 31 st, 2011: 25.8% of the total assets) represent a major part of the latter two accounts. Loans and receivables relate to net amounts. In order to overcome creative accounting of allowances for impairment, one should focus on the gross amounts. Gross loans and receivables have been growing with the compound annual growth rate (CAGR) of 6.7% in the period FY07-FY11. Allowances for impairment have been increasing in the period FY08- FY11 from 6.2% in FY08 to 8.3% of Gross loans in FY11, resulting in lower compound annual growth rate (CAGR) of 6.6% for net loans and receivables in the period FY07-FY11. 53

62 The credit exposure of Gorenjska banka (Appendix Q) reveals relatively high exposure to the domestic market (the bank operates exclusively in Slovenia, while to other markets the bank is exposed through debt securities) and to sectors such as public administration and defence (21.6% of total credit exposure) and financial intermediation (17.8% of total credit exposure). In FY11 the total amount of collateral received (Appendix Q) has amounted to 1,754 thousand. Even though the loans to value ratio or so called collateral coverage is relatively high (collateral received represents 129.0% of gross loans), it might happen that it would not be sufficient in case of further deterioration of assets. Mortgages represented 48.7% of total collateral received. According to experts the prices of real estate might drop significantly in the case if Slovenian banks would be forced to start selling the seized properties that were given as collateral for loans. A sudden increase of real estate supply, would cause the market bubble to burst. As at December 31 st, 2011 financial assets related to available-for-sale financial assets ( 501,585 thousand), financial assets held for trading ( 52,733 thousand) and investment in subsidiaries, associate ( 4,626 thousand). Sale of the RS33 bond resulted in a decrease of held to maturity investments ( 0 thousand). Fixed assets relate to property and equipment, intangible assets and investment property. Property and equipment (December 31 st, 2011: 8,604 thousand) mainly relate to land and buildings (December 31 st, 2011: 6,606 thousand) and motor vehicles and other equipment (December 31 st, 2011: 1,635 thousand), intangible assets mainly relate to software licenses (December 31 st, 2011: 2,966 thousand), while investment property mainly refer to buildings (December 31 st, 2011: 714 thousand). Straight line amortization/depreciation is used for all three accounts. The net book value amount is initially recorded at cost, which means that the bank assesses each year whether there are indications that a particular assets should be impaired. Other assets relate to cash and balances with central bank (December 31 st, 2011: 27,707 thousand), deferred income tax assets (December 31 st, 2011: 17,362 thousand) and other assets (December 31 st, 2011: 5,018 thousand). In order to guarantee the deposits the central bank (Bank of Slovenia) requires from the Bank to hold a sufficient amount of liquid funds (2.2% of the total guaranteed deposits). As of 31 December 2011 the Bank had 16,657 thousand (2010: 16,262 thousand) invested in RS49, RS67 and RS68 bonds (Gorenjska banka, 2011, p. 104). Financial liabilities mainly relate to deposits - the accounts due to customers (December 31 st, 2011: 1,224,874 thousand), borrowings from banks (December 31 st, 2011: 254,869 thousand), borrowings from other customers (December 31 st, 2011: 12,075 thousand) and 54

63 debt securities in issue (December 31 st, 2011: 30,307 thousand). The latter account relates to the senior non subordinated and unlisted bond issued (GB01) with a 5.25% coupon and maturity in October 2014 (Gorenjska banka, 2011, p. 113). Shareholders' equity (Appendix Q) as at 2011 year-end has been influenced by dividends paid and total comprehensive income. Its amount has decreased by 8.1% or 29,820 thousand compared to the prior year. Other liabilities relate to the following accounts: due to central banks (December 31st, 2011: 75,068 thousand), trading liabilities (December 31st, 2011: 12 thousand), provisions (December 31st, 2011: 2,281 thousand), tax liabilities (December 31st, 2011: 1,542 thousand) and other liabilities (December 31st, 2011: 7,375 thousand) Maturity gap Most of the banks have a mismatch in maturities. This means that banks are using less expensive short-term liabilities (mainly deposits) as funding to back more expensive longterm assets (mainly loans). In this case, the bank earns income from being on different parts of the yield curve. Theoretically speaking a bank could enhance profitability by increasing the maturity gap. However at the same time a bank generates also additional risk to shareholders and it is a question how much of the true value is created in reality. From the Figure 24 one can notice this is not the case for Gorenjska banka. In the observed period the bank aimed towards increasing the deposit maturity and decreasing the loan maturity Figure 24. Maturity gap, FY09-FY11 Maturity gap ( '000) Up to 1 month 1-3 month 3-12 months 1-5 year Over 5 years FY 2009 FY 2010 FY 2011 Source: Gorenjska banka d.d., Letno poročilo, DETERMINING THE VALUE ESTIMATE Levels of value 55

64 Value estimate of one ordinary share should be considered as the non-controlling interest (no legal rights and control over the firm), thus the maximum that a rational shareholder is ready to pay for it is the status quo value of the ordinary share. What is more, Gorenjska banka is not trading on any stock exchange, therefore the maximum that a rational shareholder is ready to pay for it is the value of the non-marketable equity share. For Gorenjska banka, the following levels of underlying value have been determined. Table 7. Levels of underlying value Value adjustment Valuation method Inputs Basic level of value Control Marketability Income approach - DDM Projections for minority owner Value for marketable minority owner No action Decrease Income approach - DCFE Projections for minority owner Value for marketable minority owner No action Decrease Income approach - RIM Projections for majority owner Value for marketable majority owner Decrease Decrease Market approach - CoCos Minority share transactions Value for marketable minority owner No action Decrease Market approach - CoTrans Minority share transactions Value for non-marketable minority owner No action No action Income approach Determination of cost of equity Appropriate cost of equity for Gorenjska banka as at the date of valuation amounted to 17.10%. See the Appendix W for the details. Figure 25. The cost of equity calculation 17.10% = 2.55% x 6.11% % % % Cost of equity (r e ) Risk free rate (r f ) Beta (β) Equity risk premium (ERP) Country risk premium (CRP) Firm size premium (SP) Specific risks premium (SRP) Note.* All components except ERP and SP have been estimated as at the date of valuation. Source: Beta for Eastern European banks, 2012; European Central Bank, Statistical Data Warehouse, 2012b; Government bonds, 2012; A. Damodaran, The implied equity risk premium, 2012b; Morningstar, Ibbotson SBBI 2012 Valuation Yearbook, Since several practitioners use significantly lower cost of equity for valuing Slovenian banks, one should be aware of the fact that cost of equity in the long term equals to the return on equity. Figure below as well as Appendix H and Appendix J substantiate the estimation of the 56

65 cost of equity. It is important to stress that Gorenjska banka is also smaller than banks taken into account. Figure 26. ROE in CEE 25.0 ROE Return on equity (in %) CE SEE CIS Source: Raiffeisen Research, CEE Banking, 2012, p Projecting financial statements and free cash-flows Financial statements have been projected in line with maturing of Central and Eastern European banking industry and extremely specific current macroeconomic situation in Slovenia. In projections three stages have been assumed: Distressed phase in the period , which is a consequence of a previous deep recession, the macroeconomic environment and institutional deficiencies in Slovenia. Developing phase in the period , where the banking sector in Slovenia is expected to catch up with the EU average. Maturity phase in the period from 2021 onwards, where the Slovenian banking sector will grow along with the EU average. The projections (Appendix R) for the case bank are based on the historical financial analysis of the accounts (December 31 st, December 31 st, 2011). Projections of the financial statements have been prepared as presented in the Appendix R. Even though more complex, the use of projections based on drivers normally returns more accurate estimates, since the projection process requires thinking about the way a bank operates and generates profits. The projections are based on the findings of the financial statement analysis. The growth of the accounts is estimated in line with the current macroeconomic environment, pending market share, historical figures and long-term feasible growth of the economy. Main drivers relate to gross loans and net interest income, since Gorenjska banka is primarily a retail bank. Projections reflect the potential additional impairments ( 57

66 Appendix T) of the bank s financial assets as they would happen in the second half of FY12. These additional impairments relate to the equity shares in Abanka d.d., Pivovarna Laško d.d. and Sava d.d., for which the bank has estimated the fair value by itself, claiming that the market prices do not reflect the value in a proper way, due to the liquidity issues of the securities trading at the Ljubljana Stock Exchange. Generally speaking, liquidity issues might have a serious impact on the value of the above mentioned securities. According to the indicative valuation the appropriate level of additional impairments has been estimated in amount of 16,451 thousand. However, if one believes that market prices reflect the current conditions better, then the appropriate level of additional impairments should be 10,000 thousand higher. Projections have been prepared in current prices i.e. nominal terms (not real terms), since the inflation has been assumed as stable. What is more, Dermine (2010b, p. 113) recommends using nominal cash flows for valuing banks, because inflation impacts equity through the growth of loans and deposits, discount rate, interest margin on the retail market and an inflation tax Dividend discounting model (DDM) Gorenjska banka strives towards a stable dividend policy. Stable dividends reduce the chance of speculation in the market and investors desiring a fixed rate of return will naturally be attracted towards such securities. By term "stable" the bank means a constant amount per share (not a constant payout ratio). Due to the low profitability in the last year, the bank will most probably not pay out the dividends in In the past, Gorenjska banka has been paying a dividend in amount of 70 per share, which could also be a guide for projecting the future dividends. If the current stable dividend policy is assumed in the perpetuity, the dividend discounting model will return a significantly undervalued estimate, since it does not account for the potential future capital gains that would occur. As a result the value estimate has not been considered for the final value estimate conclusion. Refer to the Appendix AA for calculations Discounting cash-flow to equity holders (DCFE) model Free cash-flow to equity holders have been discounted to the present value by applying the costs of equity in amount of 17.1%. The estimated value level refers to the minority marketable interest, therefore a marketability discount in amount of 11.5% has been applied. 58

67 Table 8. Sensitivity analysis determined based on the DCFE model % 2.0% 2.5% 3.0% 3.5% 16.1% % % % % The assumptions which are of subjective nature (terminal growth rate and cost of equity), have been sensitized. The estimated market value per share as determined by the discounted cash flow to equity holders model (excluding the synergies) for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 690 to 739 per share, with a most likely value of 714. Refer to the Appendix Z for calculations Residual income model (RI) Residual incomes have been discounted to the present value by applying the costs of equity in amount of 17.1%. Part of the residual income model, adjusted book value of assets, has been estimated by net asset value method. The use of this method is by definition appropriate for the controlling owner, since it assumes the liquidation. The estimated value level refers to the controlling marketable interest, therefore a marketability discount in amount of 11.5% has been applied, as well as minority discount in amount of 12,2%. The value of investment property and investments in subsidiaries and associates has been considered within other adjustments of market value of equity, since the items could classify under business non-related property. Table 9. Sensitivity analysis determined based on the RI model 16.1% 16.6% 17.1% 17.6% 18.1% Cost of equity has an important impact on the valuation and has thus been sensitized. The estimated market value per share as determined by the residual income model (excluding the synergies) for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 787 to 809, with a most likely value of 798. Refer to the Appendix BB for calculations. 59

68 4.6.3 Market approach Normalization of earnings To determine a value estimate by the market approach methods and techniques, one of the most important things that need to be considered is the analysis and normalization of the company s financial performance. Appraiser should not account for the non-recurring and extraordinary items. The normalized and estimated financial data has been used to derive the value estimate also in the case of Gorenjska banka. Table 10. Normalization of earnings '000 Audit. Audit. Audit. Audit. Audit. Unaudit. Unaudit. Forecast. Forecast. Forecast. Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 I-VI 2012 LTM VI/ Profit for the period 53,198 42,529 33,839 21,092 1,680-6,342-12, ,205 31,204 Provisions (excess) 1,860-1,047-5,829 5, n/a Impairment charges (excl. loan impairments) ,316 53,198 10,000 59,398 16, Impairment of available-for-sale equity investment ,426 26,750 n/a n/a 16, Impairment of available-for-sale debt securities ,639 n/a n/a n/a 0 0 Impairment of fair value of equity options ,931 8,319 n/a n/a n/a 0 0 Other n/a n/a n/a 0 0 Tax shield ,189 3,075 10,740 n/a 11,996 2, Normalized earnings 55,443 41,283 26,935 45,276 43,634 34,563 12,976 27,205 31,204 Tax expense related to profit or loss 12,551 7,053 6,035 1,934-10,748-12,185-1, Normalized EBT 67,994 48,336 32,971 47,210 32,885 22,378 11,738 27,205 31,204 Note.* Additional impairments of available-for-sale equity investments is presented in the 60

69 Abanka Vipa Dd Nova Kreditna Banka Maribor Bks Bank Ag Erste Group Bank Ag Raiffeisen Bank Internationa Bank Fuer Tirol & Vorarlberg Bank Zachodni Wbk Sa Bre Bank Sa Ing Bank Slaski Sa Vseobecna Uverova Banka As Kredyt Bank Sa Pko Bank Polski Sa Bank Pekao Sa Komercni Banka As Bank Millennium Sa Bank Ochrony Srodowiska Sa Adjusted P/TBV multiples as at x 0.3x 0.3x 0.5x 0.5x 0.5x 0.7x 0.6x 0.8x 0.7x 0.9x 0.9x 0.9x 1.0x 1.0x 1.5x Appendix T. Since financial data reported as at June 30 th, 2012 does not include notes, the amount of impairment charges (excl. loan impairments) for the period I-VI 2011 and I-VI 2012 have been estimated as one half of the actual (2011)/planned (2012) impairment charges for loan losses. Source: Gorenjska banka d.d., Letno poročilo, The comparable companies method is based on the comparable companies operating in the Central and Eastern European markets (Tier 1) and Western markets (Tier 2). Due to the fact that companies are not so similar as they might appear at first sight, adjustments for the profitability, risks and growth are required. A larger sample of companies has been taken, in order to account for the lack of comparability. Since the data for the proper adjustments of comparable companies has not been available for all peers, the best proxies have been taken (long-term growth rate of the market for the growth rate of the company, average past - instead of future - profitability). Please refer to the Appendix CC for the derivation of multiples and their adjustments. Estimated additional impairment of financial assets refers to both normalization of profit for the period (already reflected in the EBT, but normalized) as well as normalization of shareholders equity Comparable companies method Figure 27. Adjusted tangible book value multiples for the Tier I peers 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 0.7x P/TBV Median Source: Comparable banks selection, 2012; Financial data of comparable banks, Table 11. Comparable companies method estimate 61

70 Comparable companies method value estimate Adjusted multiples - Total equity value as a multiple of '000 (unless marked differently) Adjusted earnings (EBT) BV TBV LTM 6/2012 FY 2012 F FY 2013 F FY 2014 F Jun 30, 2012 Jun 30, 2012 Valuation range Upper border 9.30x 8.34x 8.50x 7.31x 0.71x 0.73x Lower border 8.84x 8.22x 8.10x 6.49x 0.71x 0.72x Gorenjska banka d.d. Financial data 22,378 11,738 27,205 31, , ,812 Normalized Normalized Forecasted Forecasted Unaudit. Unaudit. Estimated additional imp. of fin. assets ,451 16,451 Estimated additional imp. charges for loan losses Adjusted financial data 22,378 11,738 27,205 31, , ,361 Equity value of Gorenjska banka d.d. as at Jun 30, 2012 Upper border 208,015 97, , , , ,526 Lower border 197,927 96, , , , ,031 Minus: Discount for lack of marketability 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% Adjusted equity value of Gorenjska banka d.d. as at Jun 30, 2012 Upper border 184,093 86, , , , ,441 Lower border 175,165 85, , , , ,462 Adjusted value per share ( ) Upper border Lower border Note.* Estimation of marketability discount is presented in the Appendix X. Source: Comparable banks selection, 2012; Financial data of comparable banks, A conclusion based on the book value multiple (or its derivations) is considered as more appropriate since it reflects the capital surpluses of Gorenjska banka. The estimated market value per share as determined by the comparable companies method based on the P/TBV for Tier I peers (excluding the synergies) for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 669 to 682. Refer to the Appendix CC for calculations Comparable transaction method Table 12. Comparable transaction method value estimate 62

71 Comparable transactions method value estimate '000 (unless marked differently) Unadj. Unadj. proforma P/E P/E Unadj. P/B Unadj. P/TBV Unadj. Adj. pro- P/E forma P/E SBI TOP Index adj. Adj. P/B Adj. P/TBV Unadj. P/E EuroStoxx TMI Banks adj. Adj. proforma P/E Adj. P/B Adj. P/TBV Valuation range Upper border 10.92x 13.53x 1.09x 1.10x 6.63x 8.44x 0.63x 0.63x 5.67x 6.92x 0.60x 0.61x Lower border 10.79x 12.32x 0.99x 1.00x 5.38x 6.78x 0.61x 0.61x 5.24x 6.07x 0.55x 0.56x Gorenjska banka d.d. Financial data 34,563 34, , ,812 34,563 34, , ,812 34,563 34, , ,812 Norm. Norm. Unaudit. Unaudit. Norm. Norm. Unaudit. Unaudit. Norm. Norm. Unaudit. Unaudit. Additional adjustments of financial data ( m) Adj. for est. extraordinary imp. of fin. assets ,451 16, ,451 16, ,451 16,451 Adjusted financial data Unadjusted equity value of Gorenjska banka d.d. as at Jun 30, 2012 Upper border 377, , , , , , , , , , , ,799 Lower border 373, , , , , , , , , , , ,828 Adjusted equity value of Gorenjska banka d.d. as at Jun 30, 2012 Upper border 377, , , , , , , , , , , ,806 Lower border 373, , , , , , , , , , , ,611 Adjusted value per share ( ) Upper border 1,235 1,530 1,158 1, Lower border 1,220 1,392 1,054 1, Note.* No marketability discount has been applied, since the multiples refer to the non-marketable basis. Source: Comparable transactions selection and related transaction financial data, The comparable transaction method has been prepared based on recent closed and announced equity share comparable transactions of Gorenjska banka and its competitors in the period as of A longer time period than recommended has been chosen in order to gather a representative sample of comparable transactions. To overcome the problem of time differences, an adjustment for the movements of the Slovenian equity market index (SBI TOP Index) and European bank index (EuroStoxx TMI Banks index) has been made. A conclusion based on the book value multiple (or its derivations) is considered as more appropriate since it reflects the capital surpluses of Gorenjska banka. The estimated market value per share as determined by the comparable transactions method based on the P/TBV for Tier I peers adjusted for the Slovenian SBI TOP Index (excluding the synergies) for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 648 to 667, while the estimated value per share adjusted for the EuroStoxx TMI Banks Index was in the range of 591 to 641. Refer to the Appendix DD for calculations Adjustments Value of marketability Due to the fact that Gorenjska banka is not a publicly listed company, a share being valued has been assumed to be a subject to the marketability discount. 63

72 Firstly, FMV Opinions (2012) study concerning block sizes has been considered. According to the findings, discounts are believed to increase along with the share size. Considering pros and cons of the marketability discount studies, restricted stocks studies are assumed to be the most appropriate baseline for determination of the marketability discount. Based on the current interest of the potential buyers on the grey market (i.e. stock brokers, investment funds), the share being valued is assumed to be on sale in the period from maximum half a year to one year. In order to account for the maximum period of the share being held, the discount for lack of marketability has been estimated based on the restricted stocks studies after year The median discount in amount of 13.5% has been assumed as a base. Once this has been done, slightly modified Mandelbaum factors have been used in order to adjust for the specifics of Gorenjska banka. The most influential factors increasing the marketability discount relate to the dividend policy of the bank (Gorenjska banka has been paying out a stable and relatively high dividends), redemption policy (dividends are preferred to share buybacks and retained earnings), estimated holding period (in average a bit shorter as the reference restricted stocks studies taken into account for the determination of the discount base) and nature of the bank (always more profitable than the industry). On the other side, factors such as information access and reliability (Gorenjska banka reports annually and has relatively modest investor relations department), potential buyers (modest interest in Slovenian equity shares as at the date of the valuation) and management (little depth of the management) increase the value of the marketability. To sum up, based on the adjustments derived on the basis of modified Mandelbaum factors the base discount has been decreased for the 2.0% points. The discount for lack of marketability has been thus estimated in the amount of 11.5%. Considering the basis of value it has been applied in all methods, except in the comparable transaction method. As a general guide for determining the marketability discount also a recent study of FMV Opinions (2012) has been considered, in which marketability discounts for the financial industry have been found to be far below the discounts of other industries in the amount of 8.5% for the median volatility of 48.3% and sample size of 93 units. Refer to the Appendix A for calculations and additional information Value of control 64

73 In order to derive the value of control, one should prepare the optimised and status quo projections. Based on the past financial performance of Gorenjska banka and comparable companies analysis, it seems that Gorenjska banka has been relatively efficiently run. The potential for optimisation is assumed to be rather small from the operational and financial perspectives. However, the value of control is significantly affected by the capital surplus, therefore a controlling and non-controlling scenario for exploiting the regulatory capital base has been assumed. Status quo projections assume gradual decrease of the equity above the regulatory levels total equity has thus been assumed to equal adjusted capital adequacy in 2019, while in the case of optimized projections, the total equity has thus been assumed to equal adjusted capital adequacy in The value of control has been estimated based on the difference between value estimates for the controlling and minority interest calculated with the discounted cash-flow to equity model. The control premium has been determined in the amount of 13.9%. Refer to the 65

74 Frequency Appendix Y for calculations Other adjustments If a company has significant nonoperating assets, then analysts often calculate the value of the firm as the value of its operating assets (Pinto, Henry, Robinson & Stowe, 2010, p. 194). In case of banks, the approach is similar although we are calculating equity value directly. In case of Gorenjska banka other adjustments relate to fair value of investment property ( 2,903 thousand, 2010: 2,622 thousand). It has been estimated by the bank based on comparable market transactions. Investment properties generated in 2011 a rental income of 280 thousand (2010: 317 thousand). There were no direct operating expenses in the year 2010 and in the year Investment property is assumed to be business non-related property and is thus considered as available for sale. The income that would have been generated by investment property has been excluded from the projections in order to avoid double counting. Business non-related property has been considered only in case of income approach methods, since comparable peers in comparable companies method and comparable transaction methods are assumed to have similar levels of business non-related property as the bank being valued. Moreover, other adjustments include also investments in associates and subsidiaries ( 4,626 thousand). The account has been added to the equity value for all methods, due to the fact that the financial data are unconsolidated. 4.7 SENSITIVITY ANALYSIS One of the major problems of the used valuation models is that value estimates rely upon single inputs. They are not probability based, yet uncertainty is probability driven. Figure 28. Value per share distribution σ +1σ ,068 1,424 1,780 Value per share ( ) 66

75 Note.* Total number of Monte Carlo analysis trails is In the above figure a more detailed probability-based model (using Crystal Ball) is used in order to address the shortcomings of the value estimates used above. By stressing the uncertainty relating to the inputs used in the model, one is able to get an in-depth understanding of the value estimate. The analysis has been based on the DCFE model (estimated value of 714 /per share). The impact on the value derives from the parameters presented in the 67

76 Appendix FF. A distribution of the specific parameter is either normal or triangular and impacts the complete period planned. Assuming the range of ±10% percent in the sensitized parameters of Gorenjska banka, the value determined by the DCFE model would range as presented below... Figure 29. Tornado chart of parameters that critically influence the estimated value Value per share ( ) Cost of equity 18.81% 15.39% Net interest spread (IEA yield - IBL cost) 1.06% 1.30% Net fee and commision income as % deposits Dividend yield Growth rate in terminal value Loan growth: Corporates Loan growth: Small and medium enterprises (SME) Loan growth: Consumer and other loans Loan growth: Housing loans Loan growth: Overdrafts 0.76% 0.77% 2.25% -3.1% 0.9% -1.1% 9.0% -1.7% 0.93% 0.94% 2.75% -2.5% 1.1% -0.9% 10.5% -1.4% Note.* The parameters have been sensitized based on the DCFE model. The percentages written at the side of the bar mark the lower/upper value of the parameter being sensitized in year 2012, while the effect on value is presented for the complete period planned.triangular or normal distribution have been chosen for all parameters based on the historical analysis and personal estimate ( 68

77 Appendix FF). Note that correlation factors among parameters could differ from those being used. Figure above obviously stresses that besides the cost of equity (mostly external factor), the value is significantly impacted by net interest spread Gorenjska banka would be earning in the future (internal factor). 4.8 IMPACT OF A POTENTIAL MERGER ON THE VALUE A merger is most often stimulated by synergies. They are of either financial or operational nature. Theoretically speaking, they refer to any improvements in the value that could be achieved on top of bank s stand alone value. Most commonly they are of operational nature and refer to: The value of reduced costs (exploiting i.e. economies of scale, economies of scope etc.) The value of enhanced revenues (exploiting i.e. complementary client basis and product capabilities etc.) Markets often attribute less relevance to the revenue synergies, since they are often more difficult to realize. Also in case of merged banks, only the operational synergies (value of reduced costs) would be expected. The management board of Gorenjska banka has announced at the General meeting in 2012 the merger of Gorenjska banka with Abanka. The merger is expected to take place as of January 1 st, In case the negotiations for a merger are assumed to end with the banks merged on the basis of the total equity as at (without further deterioration in asset quality and capitalization of any of the banks), the ownership structure will look like in the figure below. Figure 30. Ownership structure of merged bank as at (in %) Share in capital of merged bank on the basis of equity as at Other 28.0 Hit d.d. 2.4 NKBM d.d. 2.8 Merkur d.d. 5.8 Own share 10.9 Zav. Triglav d.d Sava d.d Note.* The level of total shareholders' equity for Gorenjska banka as at is an estimate. Share of Zavarovalnica Triglav d.d. includes equity shares of its mutual funds. 69

78 Source: Gorenjska banka, Letno poročilo, 2011, p. 38; Gorenjska banka, Semi-annual income statement, 2012c; Lastniška struktura Abanke, Synergies partially refer to the excess facilities, namely the offices on similar locations. Three offices of Abanka (Jesenice, Tržič, and Kranj) and one office of Gorenjska banka (Ljubljana) are assumed to close down, which would eventually result in the synergies in amount of 600 thousand. Closing down the offices will eventually also cut down the personnel expenses of the merged bank in amount of 1,893 thousand. A significant part of the synergies, however, relate to the economies of scope and the optimization of cost to income ratio of a merged bank. Due to the current cost effectiveness of Gorenjska banka, it is rational to expect the cost optimization for the merged bank also from the perspective of minority shareholder. Thus the synergies consider savings in amount of 1,668 thousand for administration and 3,074 thousand for management. Additional capital expenditures in the amount of 2,300 thousand (approximately 30 thousand per office and 0.5 thousand for the ATM machine) could be assumed for the rebranding. The merged bank will be most likely trading on the stock exchange, which could lead to slightly lower marketability discount than it has been applied for Gorenjska banka. Nevertheless due to the illiquidity of the Ljubljana stock exchange, it is hard to expect significant improvement. No added value has been assumed in relation to the marketability discount. In the case of a successful merger, the bank will hold the position of the second largest bank in Slovenia and will most likely be treated as a strategically important bank. This would essentially mean, that the bank will be required to adhere to the Basel III capital adequacy requirements including the capital buffer for systemically important banks. Since the buffer relates to the total common equity, the regulation should not have any impact on the value. Table 13. Estimating the value created by merger with Abanka '000 Estimate Rebranding expense -2,300 Excess facilities 1,010 Personnel expenses optimisation 6,700 Total (as at January 1 st,2013) 5,410 Note.* Please refer to the Appendix EE for more information regarding the synergies. Estimated synergies as at January 1 st, 2013 amount to 5,410 thousand. The synergy estimate has been made under the assumption that the potential merger reflects book values of shareholder s equity of both banks as at the date of valuation, which implies, than significant 70

79 changes in book values of shareholder s equity (most likely as a consequence of future impairment charges) are equally likely for Gorenjska banka and Abanka. Value per share created by merging with Abanka has been estimated to 9.9 as at the date of valuation. 4.9 INTERPRETING THE RESULTS Theoretically one should get the same value independent of the valuation model. In practice different valuation approaches and methods most often give us different results. The reason is that the inputs differ across valuation approaches, and hence different answers emerge depending on which method is being used. It is necessary to be aware that valuation techniques have their advantages and disadvantages. Hence the stress should not be on the inconsistency of the results, but rather on capturing and including relevant and important information into the valuation. Therefore most often valuation practitioners use a value range, which reflects their opinion about the value estimate as well as the potential risks related to the valuation. The primary approach used in the valuation of Gorenjska banka is the income approach. It is likely that the approach has returned a smaller error than a market approach. However, since the approach requires subjective assumptions, the market approach has been used as a supportive method. Due to the fact, that comparable peers have similar characteristics, also the supporting approach has yielded comparable multiples. The limitation of the discounted cash-flow to the equity holders model is in its exposure to the profit generation in perpetuity. On the other side, the residual income overcomes that problem, but forces an outside valuer to consider the book values of certain assets to equal market values, which is often a misconception. Due to the several subjective inputs in the valuation, it is reasonable to express the value as a range rather than a single estimate. After considering the result of the various methods and approaches used, I am of the opinion that the discounted cash flow to equity model returns the best estimate of market value. Figure 31. Comparing the results 71

80 Comp. trans. (Ind. adj.) Comp. trans. (Reg. adj.) Comparable companies Disc. cash flow to equity Residual income model ,000 1,200 1,400 Estimated value per share ( ) Note.* Comparable transaction method estimates are adjusted by SBI TOP - Slovenian stock exchange index ( Reg. Adj. ) and EuroStoxx TMI Banks Index ( Ind. Adj. ). The value estimate range for market approach methods has been based on the P/TBV multiple. The value estimates are presented excluding the estimated synergies of the merger with Abanka. The estimated market value per share as determined by the discounted cash flow to equity model (excluding the synergies) for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 690 to 739, with a most likely value of 714. By taking into account the estimated synergies of the merger with Abanka in the amount of 9.9 per share, the estimated market value per share for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 700 to 749, with a most likely value of 724. Please refer to the risks stated in the scope of work in order to get more appropriate view on the value estimate and potential dangers that might significantly impact the valuation. Extremely important are additional impairment charges for loan losses (reflected in the projections and valuation). If one assumes, none of the insolvency procedures presented in the Appendix U have been impaired in the past, potential additional impairments amount to 72.3 million, which eventually decreases the value estimation for per share. CONCLUSION Value is the central concept of our thinking and living. Everything is judged according to value, so the value could be understood not only as a sort of a measure of performance but also as the main concept in the market economy. To understand how value is constructed in markets and how prices emerge is the key to understanding the economy. Debt crisis of several countries (Greece, Portugal, Ireland, Italy, Spain) within the EU has brought plenty of fear on the financial markets and thus banks, with their strategic role in the financial system, have been under big pressure. At the beginning of 2012 EU banks traded on average multiple 0,4 P/B, which was two times less than their US and four times less than Canadian peers (European banks: lost decade looms, 2012). A simple comparison of multiples 72

81 would eventually hint that prices were close to the historically lowest levels, however once one accounts for the things, which significantly impact the value estimate (value drivers, risks related, etc.), the multiples seem to be fairly priced. In order to really master valuation, it is necessary to understand not only what the value is but also where the source of the value lies. Many practitioners thus often expose the intrinsic valuation as the most reliable source of valuation. For most of the valuations performed for undeveloped or developing equity markets this is often also the only choice. The inputs require plenty of subjectivity, even though the models used are mainly quantitative. The final value is thus biased by the assumptions that are brought into the valuation, which makes a valuation more of an art than a science (Damodaran, 2002, p. 1-2). This master s thesis has dealt with the theoretical and practical part of the value estimate of the ordinary share in a non-public regional retail bank. In the very beginning it has been addressed how one should approach to the valuation. After, the theoretical part mainly relates to the models and techniques often employed for valuing a mature retail bank. In this part also specifics of banks have been considered. Due to the fact that debt in banking carries not only a financing, but also an operating role the value estimate of the market value of the equity needs to be carried out directly (not through the enterprise value). Thus the valuation models and methods commonly used are the discounted cash-flows to equity holders (DCFE) model, the dividend discounting model (DDM), the residual income (RI) model, the comparable transactions and the comparable companies methods (by using the P/B and P/E multiples and their derivations). Not only their composition, use and applicability have been explained, but also best practices and dilemmas appearing in the valuation process. After, the master s thesis has applied the theoretical part on the case of valuing a minority equity share in a regional retail bank - Gorenjska banka. The value estimate has been prepared in compliance with the latest International Valuation Standards. By taking into account the estimated synergies of the merger with Abanka in the amount of 9.9 per share, the estimated market value per share for Gorenjska banka, d.d., as at June 30 th, 2012 was in the range of 700 to 749, with a most likely value of 724. The value estimate has been made on the publicly available data only, therefore it is extremely important to be aware of the risks stated in the scope of work. Due to specifics (such as undeveloped equity markets, banking business, size of the interest being valued, distressed macroeconomic environment etc.) the valuation could in certain things serve also as a source of inspiration for experienced valuation practitioners. This thesis has tried to address all important issues in the best possible way and in line with the scope of work. Due to the limited resources, there is plenty of room for enhancements. 73

82 Inputs used in the valuation could be estimated in a more appropriate way. Elements of cost of equity (equity risk premium, size premium etc.) should be estimated based on the EMU and not US equity market data as well as the correlation coefficients used in the sensitivity analysis should have been observed on the actual set of data and should not base on the common sense. More information related to the risks could eventually be presented in order to mitigate the client s decision process: (1) additionally master s thesis could include individual assessment of the potential future impairment charges, (2) point out my personal vision of the macroeconic development of Europe and the impact on the valuation, as well as (3) address off-balance sheet contingency liabilities by carefully examing the media, since they could eventually relate to potential significant future liabilities of the bank. 74

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89 APPENDIXES

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91 LIST OF APPENDIXES Appendix A: Short summary of the master s thesis in Slovenian language... 1 Appendix B: Terminological glossary Appendix C: Definitions Appendix D: Statement of independence Appendix E: Macroeconomic analysis - Global context Appendix F: Industry analysis - Global trends and issues Appendix G: Industry analysis - Larger players in the Central and Eastern Europe Appendix H: Banking industry developments Appendix I: Banking industry developments Appendix J: Industry analysis - Banks in Central and Eastern Europe Appendix K: Overview of Slovenian banking industry developments Appendix L: Potential M&A activity in Slovenian banking industry Appendix M: Impact of the yield on the financial statements Appendix N: Simplified value drivers for asset management and trading activities Appendix O: Authorization for providing banking services for Gorenjska banka Appendix P: About Gorenjska banka Appendix Q: Financial data for Gorenjska banka Appendix R: Projecting financial statements and free cash-flows Appendix S: Main assumptions of projections Appendix T: Potential add. impairments of fin. assets included in the value estimate Appendix U: Future impairment charges related to bankruptcy procedures Appendix V: Basel III Appendix W: Deriving the cost of equity Appendix X: Marketability value Appendix Y: Value of control estimation (based on the DCFE model) Appendix Z: Discounted cash-flow to equity holders Appendix AA: Dividend discounting model Appendix BB: Residual income model Appendix CC: Comparable companies method Appendix DD: Comparable transactions method Appendix EE: Estimation of value created by merging with Abanka Appendix FF: Sensitivity analysis Appendix GG: Financial statements of Gorenjska banka Appendix HH: Key accounts management projections i

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93 Appendix A: Short summary of the master s thesis in Slovenian language Naslov: Vrednotenje nejavne regionalne komercialne banke za manjšinskega lastnika primer Gorenjske banke Avtor: Peter Šinkovec Svetovalec: doc. dr. Igor Lončarski Uvod Magistrsko delo obravnava vrednotenje bank. Banke se močno razlikujejo od drugih družb po izpostavljenosti makroekonomskim dejavnikom in regulatornim ukrepom, po načinu poročanja finančnih izkazov, po specifičnosti poslovanja oz. osnovni dejavnosti. Vse navedeno je razlog, da je vrednotenje bank izjemno zahtevno opravilo. Osnova vrednotenja je razumevanje podlage, namena ter datuma ocene vrednosti ter nenazadnje tudi predmeta vrednotenja. Namen magistrskega dela je predstaviti pristope, tehnike in metode, ki se pogosto uporabljajo za vrednotenje bank, medtem ko je cilj določiti razpon ocene vrednosti za Gorenjsko banko na podlagi obravnavane teorije. Magistrsko delo se v grobem deli na dva sklopa - teoretični in praktični. Metodologija uporabljena v prvem zajema opisni iz zbirni pristop, medtem ko je v drugem uporabljen aplikativni pristop obravnavane teorije. Slednja je v glavnem povzeta po vodilni literaturi s tega področja (Damodaran, Koller, Pratt), pri čemer pa odraža tudi moj osebni pogled, ki sem si ga ustvaril z delom v oddelku za Transakcije in prestrukturiranja družbe KPMG. Razumevanje ocene vrednosti Ocene vrednosti zahteva razumevanje osnov vrednotenja. Pomembno je, da razlikujemo med pojmoma cena in vrednost ter da se zavedamo, da se vrednost lahko močno razlikuje, v kolikor imamo opravka z različnimi podlagami vrednosti (tržna, investitorjeva in poštena vrednost). Namenov ocene vrednosti je več in se pogosto razlikujejo glede na to ali gre za zunanje uporabnike (investitorje in analitike) ali za notranje uporabnike (managerje). Pogosto se nanašajo na računovodsko poročanje, poslovno planiranje, upravljanje na podlagi vrednosti, postopke prestrukturiranje in insolvenčne postopke, dokapitalizacije, javne izdaje delnic, prevzeme in združitve idr. 1

94 Največ podpornikov med ocenjevalci vrednosti ima t.i. top-down pristop, ki temelji na umestitvi družbe, ki je predmet ocene vrednosti, v širši kontekst. Pristop tako zahteva analizo makro okolja in panoge v katerem družba posluje. Prav slednje naj bi bila ustrezna podlaga za pripravo ocene vrednosti, ki temelji na: - dohodkovnem pristopu, ki predpostavlja oceno vrednosti kot sedanjo vrednost bodočih diskontiranih denarnih tokov, - tržnem pristopu, ki predpostavlja oceno vrednosti na podlagi primerljivih sredstev, za katere je na voljo podatek s trga in - stroškovnem pristopu, ki predpostavlja oceno vrednosti kot vsoto stroškov sredstev s primerljivo uporabnostjo. Za oceno vrednosti družb, ki niso na novo ustanovljene, se večinoma uporabljata prva dva pristopa. Ključna prednost prvega je, da zagotavlja jasno povezavo med oceno vrednosti in uporabljenimi predpostavkami, medtem ko je prednost drugega enostavnost in odraz dejanskega stanja na trgu. Metode ocenjevanja vrednosti - Tržni pristop Tržni pristop sestavljajo štirje koraki: (1) analiza obravnavane družbe, (2) Izbira primerljivih družb, (3) Izračun in prilagoditev mnogokratnikov, (4) pregled rezultatov in ocena vrednosti. Tržni pristop je pogosto relativno nezanesljiv na razvijajočih in manjših delniških trgih predvsem zaradi problemov z nelikvidnostjo ali pomanjkanjem primerljivih trgujočih družb. Ko enkrat zberemo primerljive družbe, je potrebno njihove mnogokratnike prilagoditi vsaj za ocenjeno stopnjo rasti, tveganje, velikost in poslovanje. Zanesljivost rezultata je odvisna od uporabljenih podatkov, čeprav so ocenjevalci mnenja enotni, da gre pri metodi primerljivih transkacij večjih lastniških deležev pogosto za pravilnejšo oceno, saj je le-ta odraz poglobljene analize. Kljub temu pa pogosteje srečujemo metodo primerljivih na borzo uvrščenih družb, saj je podatke primerljivih transakcij pogosto težko dobiti ali pa so starejše in tako manj zanesljive. Ocenjevalci vrednosti bank temeljijo svoje izračune na uporabi P/B in P/E mnogokratnikov ter njunih izpeljav. Z uporabo mnogokratnikov naredimo indirektne predpostavke dodane vrednosti (razlike med bodočimi in zahtevanimi donosi), stopnje rasti, tveganja in razmerja izplačila dividend. 2

95 - Dohodkovni pristop Tako kot tržni pristop tudi dohodkovni pristop sestavljajo štirje koraki: (1) analiza obravnavane družbe, (2) planiranje finančnih izkazov in določitev diskontne stopnje, (3) Izbira primerne metode in izračun ocene vrednosti, (4) pregled rezultatov in ocena vrednosti. V magistrskem delu je podrobneje obdelan izračun diskontne stopnje, ki je ocenjena s pomočjo CAPM modela, prilagojenega za državno tveganje, velikost družbe in specifična tveganja povezana s tveganji poslovanja. Sledi dobra praksa planiranja finančnih izkazov. Priporočila se tako nanašajo na obdobje priprave projekcij finančnih izkazov, način diskontiranja in omejitve v zvezi z dokumenti na katerih temelji ocena vrednosti. Metod ocenjevanja vrednosti bank po dohodkovnem pristopu je več, v magistrskem delu pa sem predstavil tiste, ki se pogosteje uporabljajo in sicer metodo diskontiranih dividend, metodo diskontiranih denarnih tokov in metodo preostalega dobička. Skupna prednost modelov dohodkovnega pristopa je, da niso podvrženi trgu in da v največji možni meri naslavljajo stanje družbe, ki je predmet vrednotenja. Metoda diskontiranih dividend predpostavlja, da je vrednost lastniškega kapitala enaka sedanji vrednosti bodočih dividend. Primerna je predvsem za tiste banke, za katere je odstotek izplačila dividend in/ali odkupa lastnih delnic glede na dobiček visok. Ocena vrednosti, ki temelji na dividendnem modelu največkrat ne temelji na pripravljenih projekcijah, pač pa na obstoječi dividendni politiki. Model tako pomanjkljivo (ali pa sploh ne) odraža zahtevano povečanje regulatornega kapitala. Metoda diskontiranih denarnih tokov predpostavlja, da je vrednost lastniškega kapitala enaka sedanji vrednosti bodočih denarnih tokov lastniškemu kapitalu oz. sedanji vrednosti bodočih denarnih tokov celotnemu kapitalu znižani za neto dolg in druge prilagoditve. Model predpostavlja vse proste denarne tokove kot potencial za izplačilo, ne glede na to ali se v resnici tudi izplačajo. Prav tako zahteva tudi pripravo projekcij investicij, spremembe obratnega kapitala. V primeru bank sta omenjeni projekciji relativno zanemarljivi, zato ocenjevalci vrednosti pogosto v svoj model vključijo zgolj spremembo zahtevanega regulatornega kapitala. Metoda preostalega dobička za razliko od preostalih dveh predstavljenih metod dohodkovnega pristopa ne temelji tako zelo na preostali vrednosti in je pogosto uporabljena metoda predvsem v primeru ocenjevanja vrednosti finančnih institucij. Model preostalega dobička je torej sestavljen iz dveh delov prilagojene knjigovodske vrednosti 3

96 in preostalega dobička. Pretežni del izkaza finančnega položaja bank se običajno nanaša na posojila in finančne naložbe, za katere je možno trditi, da relativno dobro odražajo tržno vrednost. Model je sicer po sami zasnovi primeren predvsem za vrednotenje večinskih lastniških deležev. - Prilagoditve vrednosti Izrednega pomena so tudi prilagoditve, ki se nanašajo bodisi na tveganja povezana s poslovanjem bodisi na tveganja povezana z lastništvom. Prva so pogosto sestavni del diskontne stopnje, medtem ko se druga običajno odražajo naknadno skozi prilagoditve lastniškega kapitala z diskonti in/ali premijami. Tako ene kot druge imajo velik vpliv na vrednost, njihovo apliciranje pa zahteva prakso in poznavanje rezultatov in okoliščin številnih raziskav. Premija za kontrolo je definirana kot razlika med projekcijami, ki odražajo vse potencialne izboljšave in projekcijami, ki so pripravljene ob predpostavki nespremenjenega poslovanja (t.i. status quo). Diskont za tržljivost je posledica dejstva, da investitorji dajejo prednost likvidnim in/ali tržljivim lastniškim deležem pred nelikvidnim in/ali tržljivim lastniškim deležem. Višina diskonta za tržljivost se običajno giblje med 0% in 50% in je odvisna od informacij, ki so na voljo, dividendne politike in izplačil dividend, možnosti javne ponudbe delnic oz. prodaje družbe, števila potencialnih kupcev, pričakovanega časa držanja naložbe in donosa v tem času, velikosti lastniškega deleža in prenos kontrole, možnosti prodajnih opcij in omejitev prenosa. Druge prilagoditve se nanašajo na sredstva, katerih donosi v projekcijah bodisi niso predvideni bodisi jih sredstva ne ustvarjajo. V primeru bank imamo pogosto opravka predvsem s poslovno nepotrebnim premoženjem in presežki denarnih sredstev. Specifike vrednotenja bank Specifike vrednotenja bank so v magistrskem delu razdeljene v tri sklope. Prvi sklop se nanaša na posebnosti povezane s poslovanjem bank, drugi na regulativne okvirje in tretji na tvorce vrednosti. - Posebnosti povezane s poslovanjem bank Tradicionalna vloga banke (t.i. komercialna banka) je zbiranje denarnih presežkov fizičnih in pravnih oseb na eni strani in ponujanje prilagojenih finančnih rešitev (izdelkov in 4

97 storitev) fizičnim in pravnim osebam z deficitom denarnih sredstev na drugi strani. Banka vlogo posrednika zaračunava, kar predstavlja njen prihodek. Pri poslovanju se banke običajno srečujejo z razliko v zapadlostih depozitov in posojil. Visok finančni vzvod in struktura financiranja je razlog zakaj banke danes predstavljajo izjemno ranljivo komponento moderne ekonomije. Zaupanje dajalcev depozitov lahko izgine čez noč, kar lahko banke vodi v nelikvidnostni položaj. Upravljanje s tveganji se ne nanaša le na usklajevanje zapadlosti in obrestnih mer, pač pa tudi na druge zunanje faktorje. Uspeh banke je močno odvisen od stanja gospodarstva, faze ekonomskega cikla posamezne industrije, stanja na kapitalskih in nepremičninskih trgih, monetarne politike države idr. Obrestne mere, ki jih banke plačujejo dajalcem depozitov so pogosto nižje od tistih, ki bi jih banke pridobile pod tržnimi pogoji. Za razliko od drugih družb tako banke pogosto ustvarjajo dodano vrednost tako na aktivni kot tudi na pasivni strani izkaza finančnega položaja. To je tudi razlog, da je potrebno k vrednotenju bank pristopiti direktno z oceno vrednosti lastniškega kapitala (ne oceno vrednosti celotnega kapitala). - Regulativni okvir Banke so močno regulirane institucije tako na nacionalni ravni kot tudi širše. Regulacija je potrebna zaradi pomembne vloge v finančnem sistemu in visokih tveganj, s katerimi se banke srečujejo. V splošnem se regulativni okvir nanaša na varnost poslovanja, monetarno politiko, izpostavljenost posameznih bank, zaščito komitentov in investitorjev ter vstopne ovire ter zagotovljeno strokovnost bank. Iz vidika vrednotenja imajo lahko na vrednost izjemno velik vpliv Basel III standardi. Vpliv standardov se sicer razlikuje glede na primarno dejavnost bank, pri tradicionalnih (komercialne) bankah pa bodo standardi razlog za povišanje in izboljšanje kapitala in likvidnosti bank. Ker so ukrepi standardov Basel III znani, se naj bi njihov efekt na oceno vrednosti upošteval v denarnih tokovih in ne v diskontni stopnji. - Tvorci vrednosti Analiza tvorcev vrednosti predstavlja osnovo za pripravo in/ali presojo projekcij poslovanja. Čeprav poslovanje bank na prvi pogled zgleda enotno, pa se v resnici precej 5

98 razlikuje. Glede na vir prihodkov ločimo banke, ki večino ustvarijo s posojanjem, storitvami svetovanja, trgovanjem in z drugimi ne-bančnimi aktivnostmi. Ker gre pri Gorenjski banki za komercialno banko, so tako med pomembnejšimi tvorci na katere ima banka vpliv obseg kreditov in depozitov, dosežena obrestna mera, kapitalska ustreznost in izgube iz slabitev finančnih sredstev ter stroški poslovanja (stroški-dohodek razmerje). Ocena vrednosti Gorenjske banke Začetek procesa ocene vrednosti Gorenjske banke se nanaša na določitev ključnih sestavin - in sicer na identifikacijo ocenjevalca vrednosti, naročnika in drugih vpletenih; določitev namena ocene vrednosti; navedbo predmeta ocene vrednosti; opredelitev podlage vrednosti in datuma ocene vrednosti; opis poglobljenosti postopkov, izbiro finančnih podatkov, ki so osnova za oceno vrednosti; definiranje predpostavk in omejitev ocene vrednosti, ugotovitve tveganj, ki se nanašajo na oceno vrednosti; navedbo glede neupoštevanja pomembnih dejstev po datumu cenitve; določitev omejitev uporabe in objave ter skladnost ocene vrednosti s standardi ocenjevanja vrednosti. - Predstavitev Gorenjske banke Gorenjska banka je tretja največja banka po lastniškem kapitalu v Sloveniji. Banka je prisotna na Gorenjskem (regionalno) s sedežem v Kranju. V zadnjem desetletju si je izoblikovala zavidanja vreden status ene izmed redkih konservativnih bank, ki izplačujejo visoke dividende. V skladu z zakonodajo lahko Gorenjska banka ponuja širok nabor bančnih storitev, pri čemer pa daje poudarek predvsem tradicionalnem bančništvu privabljanju depozitov in dajanju posojil. Na dan vrednotenja je največji lastnik Sava, ki ima v neposredni lasti 45,9% lastniški delež, kar ob upoštevanju lastnih delnic (7,8%) predstavlja 49,8% glasovalnih pravic. Ključne ugotovitve matrike prednosti, slabosti, priložnosti in nevarnosti (t.i. SWOT matrika) se nanašajo na nadpovprečno visoko donosnost glede na konkurenčne banke, relativno visok delež depozitov glede na kredite, rigidno organizacijsko strukturo, visoko zadolženost podjetij v Sloveniji in probleme v bančnem sektorju. - Makroekonomska slika Svetovna gospodarska rast je močno odvisna od razvoja neravnovesij v večjih gospodarskih velesilah in pričakovanj nadaljnje visoke rasti cen surovin. 6

99 Kratkoročni kazalci na začetku leta 2012 kažejo na težke ekonomske razmere in skromno ter dolgotrajno okrevanje EMU. Stopnja brezposelnosti je maja 2012 dosegla najvišje ravni v zadnjih 15-ih letih. Stanje gospodarstva je povzročilo tudi upad vrednosti evra v primerjavi z dvajsetimi največjimi trgovinskimi partnerji EMU. Po ocenah bo glavno gonilo gospodarske rasti tudi v bodoče izvoz, predvsem v hitro razvijajoče se Azijske države. Gospodarsko stanje Slovenije je predvsem zaradi problemov v gradbeništvu, visoke zadolženosti podjetij, relativno visokih stroškov financiranja slovenskih bank in številnih slabih posojil precej problematično. Relativno visoka odprtost Slovenije, visok javnofinančni primanjkljaj in močna podvrženost cikličnosti glavnih izvoznih proizvodov še dodatno povišujejo negativna tveganja. UMAR dodatno opozarja na težave nekaterih izvoznih partnerjev Slovenije in upad izvozne konkurenčnosti. Kljub temu, pa naj bi se stanje v gospodarstvu začelo postopoma izboljševati v letu Glede na nerazvit kapitalski trg, se v bodoče tako pričakuje predvsem številna finančna in operativna prestrukturiranja prezadolženih družb. Politični konsenz za potrebne reforme bo glede na politično stanje težko dosegljiv. - Predstavitev bančne industrije Evropa je zibelka bančništva. Najstarejša banka, Italijanska Monte dei Paschi di Siena, posluje že od daljnega leta Bančna aktiva evropskih bank predstavlja več kot polovico svetovne bančne aktive. V obdobju se pričakuje skupna letna rast (angl. CAGR) v višini 3,6%. Zahodnoevropske banke so močno prisotne tudi na nekaterih trgih Vzhodne Evrope, kar lahko v času krize predstavlja sistematično tveganje. Konec leta 2011 je bilo v Sloveniji registriranih 19 bank, 3 hranilnice in 2 predstavništev, pri čemer ima država v lasti približno 20%. Bančna aktiva se je v obdobju povečevala s skupno letno rastjo v višini 15,1%, medtem ko je bila skupna letna rast BDP Slovenije 4,4%. Kljub dolgoročno stabilnem pogledu pa se kratkoročna in srednjeročna tveganja bančne industrije povečujejo. - Finančna analiza Gorenjske banke Gorenjska banka veliko večino svojih neto prihodkov ustvari z neto obrestnimi prihodki na bančna posojila. V obdobju od 2008 do 2010 je moč opaziti rast neto obrestnega razmika 7

100 (med danimi in prejetimi obresti), medtem ko je le-ta v letu 2011 močno upadel. Ob tem je potrebno poudariti, da bistvene spremembe v vrzeli ročnosti (razlika med ročnostjo danih posojil in prejetih virov financiranja) v opazovanem obdobju ni bilo. Med neobrestne prihodke sodijo prihodki iz naslova opravnin, ki se pretežno nanašajo na stroške plačilnega sistema in posredniške provizije (plačilne kartice, upravljanje premoženja itd.) Preostali del neobrestnih neto prihodkov se nanaša na prejete dividende (v letu 2011 predvsem dividenda družbe Mercator) in neto dobiček na finančna sredstva in obveznosti. Slednji se v letu 2009 in 2011 nanaša na dobiček od prodaje finančnih sredstev (2009: prodaja lastniškega deleža v Iskratelu v višini T EUR; 2011: predvsem se nanaša na dobiček od prodaje obveznice z oznako RS33 in na drugo v skupni višini T EUR). Precejšen strošek za banko predstavljajo tudi administrativni stroški, ki se večinoma nanašajo na stroške zaposlenih in druge strokovne storitve. Gorenjska banka ima relativno gledano glede na neto obrestni prihodek relativno nizke administrativne stroške v primerjavi z drugimi slovenskimi bankami. Na poslovni izid Gorenjske banke so v preteklosti imele precejšen vpliv tudi slabitve finančnih sredstev. Le-te v obdobju od leta 2009 do leta 2011 znatno naraščajo, a so kljub temu v letih 2010 in 2011 še vedno bistveno nižje od primerljivih slovenskih bank. Največji slabitvi v letu 2011 se tako nanašata na slabitev finančne naložbe v Abanko ( T EUR) in grške obveznice ( T EUR). Stanje gospodarstva se odraža tudi skozi izkaz finančnega položaja. Celotna sredstva so se v letu 2011 glede na predhodno leto znižala za 1,7%. Največji del celotnih sredstev se nanaša na dana posojila. Bruto znesek (neupoštevajoč popravke vrednosti) danih posojil je v obdobju rasel s povprečno skupno letno stopnjo rasti (CAGR) 6,7%, neto znesek danih posojil pa zaradi naraščajočih popravkov vrednosti s povprečno skupno letno stopnjo rasti (CAGR) 6,6%. Portfelj banke je izpostavljen predvsem slovenskemu trgu in sicer še posebej sektorjema javni sektor in obramba ter finančno posredništvo. Zavarovanja za dana posojila znašajo 129,0% bruto vrednosti posojil, kar 48,7% pa se jih nanaša na nepremičnine. Slednje lahko ob morebitnem poku nepremičninskega balona in znatnem znižanju cen nepremičnin predstavlja resen problem. Finančne naložbe prav tako predstavljajo pomemben delež celotnih sredstev. Nanašajo se predvsem na finančne naložbe razpoložljive za prodajo. 8

101 Gorenjska banka med viri financiranja izkazuje predvsem depozite, bančna posojila, in lastniški kapital. Slednji se je konec leta 2011 glede na predhodno leto znižal za 8,1%. Banka lahko izboljša svoj donos s povečevanjem vrzeli med ročnostjo depozitov in kreditov. Slednje vrednosti banke ne poviša, saj gre presežek donosa pripisati višjemu tveganju. - Ocena vrednosti Gorenjske banke Pred izvedbo ocene vrednosti je potrebno poznati ravni osnovne vrednosti. Odvisne so od vhodnih podatkov in se od najvišje do najnižje vrednosti lastniškega kapitala vrstijo takole: (1) strateški kontrolni delež, (2) kontrolni delež, (3) netržljiv kontrolni delež, (4) tržljiv manjšinski delež in (5) netržljiv manjšinski delež. V primeru Gorenjske banke gre za oceno netržljivega manjšinskega deleža (najnižja raven osnovne vrednosti). Pri modelu diskontiranih dividend in denarnih tokov lastniškemu kapitalu so uporabljene projekcije, pripravljene ob predpostavki nespremenjenosti poslovanja (t.i.»status quo«), dodatno pa je uporabljen še diskont za tržljivost. Model preostalega dobička je primeren predvsem za izračun kontrolnega deleža, zato so pri oceni vrednosti uporabljene projekcije za večinskega lastnika, ocena vrednosti pa je nato znižana za vrednost kontrole in tržljivosti. Pri metodi primerljivih na borzo uvrščenih družb je dobljena ocena vrednosti znižana za vrednost tržljivosti, pri metodi primerljivih transakcij pa prilagoditve ocene vrednosti lastniškega kapitala niso potrebne. Diskont za tržljivost je ocenjen na 11,5%. Osnova je določena na podlagi študij delnic z omejenim razpolaganjem in. Končna ocena diskonta za tržljivost pa se nanaša na individualno obravnavo prilagojenih Mandelbaumovih faktorjev. Vrednost kontrole oz. diskont za manjšinski lastniški delež je ocenjen na podlagi ocene vrednosti modela diskontiranih denarnih tokov lastniškemu kapitalu pripravljene na (1) projekcijah za večinskega lastnika in (2) projekcijah nespremenjenega poslovanja. Projekcije poslovanja dohodkovnega pristopa so pripravljene v treh fazah: (1) faza odprave makroekonomskih težav in neravnovesij v Sloveniji, (2) faza razvijanja na raven zahodnoevropskih bančnih trgov in (3) faza razvitosti ter dolgoročno vzdržne stopnje rasti. Strošek lastniškega kapitala je ocenjen s pomočjo CAPM modela, prilagojenega za državno tveganje, velikost družbe in specifična tveganja povezana s tveganji poslovanja. Spodaj so prikazane ocene vrednosti za vse uporabljene metode in modele: 9

102 Tržni pristop Metoda primerljivih transakcij (prilagoditev za industrijo): 648 /delnico-667 /delnico Metoda primerljivih transakcij (prilagoditev za državo): 591 /delnico -641 /delnico Metoda primerljivih na borzo uvrščenih družb: 669 /delnico -682 /delnico Dohodkovni pristop Model preostalega dobička: 787 /delnico /delnico Metoda diskontiranih denarnih tokov lastniškemu kapitalu: 690 /delnico -739 /delnico Metoda diskontiranih dividend: / Pripravljena je bila še dodatna analiza občutljivosti (ne samo na vrednost lastniškega kapitala in planirano rast denarnih tokov v preostali vrednosti), ki prikazuje verjetnostni razpon ocene vrednosti ob predpostavki preteklih odklonov v vrednosti posameznih parametrov v celotnem obdobju napovedi. Zaradi relativno visoke pretekle volatilnosti posameznih parametrov v preteklosti je približno 68% verjetnost, da se ocena vrednosti giblje v ocenjenem razponu med 256 /delnico in /delnico. Na oceno vrednosti banke sicer najbolj vplivata strošek kapitala (zunanji faktor) in neto obrestni razmik (notranji faktor). Pri oceni vrednosti je potrebno še dodatno upoštevati učinek sinergij napovedane združitve z Abanko, ki naj bi se zgodila , in znaša 9,9 /delnico. Pri oceni sinergij so bile upoštevane izključno sinergije na stroškovni strani, ki se nanašajo na presežne kapacitete, optimizacijo stroškov dela in strošek posodobitve blagovne znamke. Ob upoštevanju sinergij napovedane združitve z Abanko, razpon ocene vrednosti, določen na osnovi modela diskontiranih denarnih tokov lastniškemu kapitalu, znaša med 700 /delnico in 749 /delnico z najverjetnejšo vrednostjo 724 /delnico. Pri razumevanju ocene vrednosti je potrebno upoštevati tudi tveganja in omejitve ocene vrednosti. Ključno tveganje je povezano predvsem s slabitvami slabih terjatev, ki jih je banka prijavila v insolvenčnih postopkih in delno ali v celoti še niso bile slabljene. Slednje predvideva znižanje vrednosti tudi še za dodatnih 236,3 /delnico. Ker ocena vrednosti temelji v celoti na zunanjih podatkih, presojanje ustreznosti slabitev ni predmet magistrske naloge, potencialne največje dodatne slabitve pa so le groba ocena. 10

103 Appendix B: Terminological glossary Acronym AFS AJPES CAGR CE CEE CRP CIR CIS DCFE DDM DLOM EBIT EE EIU EMU ERP EU or EUR Euro (currency) 000 Thousands of euros m Millions of euros bn FCFE GDP IBL IEA IMF M&A NI NPL p.c. P/B P/E PPP P/TBV R&D RI ROA Term Available-for-sale The Agency of the Republic of Slovenia for Public Legal Records and Related Services Compound annual growth rate Central Europe Central and Eastern Europe Country risk premium Cost-to-income ratio Commonwealth of Independent Discounted cash-flow to equity holders Discounting dividend model Discount for lack of marketability Earnings before interest and tax Eastern Europe Economist intelligence unit European Monetary Union (Euro zone) Equity risk premium European Union Billions of euros Free cash-flow to equity holders Gross domestic product Interest bearing liabilities Interest earning assets International Monetary Fund Mergers and acquisitions Net income Non-performing loans Per capita Multiple market value of equity to book value of equity Multiple market value of equity to earnings Purchasing power parity Multiple market value of equity to tangible book value of equity Research and development (expense) Residual income Return on assets 11

104 ROE SBI TOP SEE SWOT TV US or USA WACC WE YTM YTW Return on equity Slovenian stock exchange index South Eastern Europe Strengths, weaknesses, opportunities and threats of the company Terminal value United States of America Weighted average cost of capital Western Europe Yield to maturity Yield to worst Appendix C: Definitions Term Definition Enterprise value The value of the equity in a business plus the value of its debt or debt-related liabilities, minus any cash or cash equivalents available to meet those liabilities (IVS 2011). Equity value The value of a business to all of its shareholders (IVS 2011) Gross income Gross income is defined as Net interest income plus Net non interest income. Net non interest income Net non interest income is defined as: Dividend income + Net fee and commission income + Net gains on financial assets + Foreign exchange differences + Other operating net income. Net CapEx Net investments are calculated as Cash payments to acquire tangible and intangible assets (outflows) plus cash receipts from sale of tangible and intangible assets (inflows). PPP Purchasing power parity is a technique used to determine the relative value of currencies. SWOT The SWOT analysis is a strategic matrix used to evaluate the strengths, weaknesses, opportunities and threats the bank is facing. YTW Yield to worst stands for yield that an investor gains in worst case scenario if the issuer does not default. 12

105 Appendix D: Statement of independence As a valuation practitioner I am competent to provide an objective and unbiased valuation in accordance with the generally accepted standards in Slovenia and broadly, namely in compliance with International valuation standards For determining the valuation I did not receive any help from a third party. I do not consider myself to be influenced by any factors that would cause my independence to be influenced or compromised. I have no material connection or involvement with the subject of the valuation or the party commissioning the valuation. Fees charged for this valuation have been calculated on the basis of the time, work and professional expertise required to provide this opinion. Ljubljana, February 2013 Peter Šinkovec 13

106 Appendix E: Macroeconomic analysis - Global context In last few years we have seen incredible series of events, which caused not only a meltdown of stocks all over the world, but also a steep come back of stock market indexes. Figure 1. Market capitalization and turnover of WFE members, Domestic market capitalisation (in trilion of USD) Domestic market capitalisation (in trilion of USD) Turnover (in trillion of USD) Turnover (in trillion of USD) Note.* Data comprises members of the World Federation of Exchanges only. Turnover for 2012 is an estimation based on the first 6 months. Source: Global market capitalization and turnover, The last world-wide crisis, better known as the financial crisis, is rooted in the imbalances built up in Europe and North America. Strong income growth and easy access to loans boosted the demand for real estates. The housing bubble was allowed to expand abnormally, while at the same time government expenditure and debt grew too fast (Gjedrem, 2010, p. 1). The real estate market had been heating up, inspiring banks to invent. Eventually financial engineers introduced derivatives such as mortgage-backed securities and collateralised debt obligations (CDOs). Their use led to an increase in lending to the non-creditworthy consumers, while the increases in home prices provided a perceived buffer to the banks in case the loans went bad. Initially the problems arose when money and capital markets abruptly dried up in September The financial crisis begun with the bankruptcy of one of the leading U.S. investment banks, Lehman Brothers. Once the crisis had become a reality, the authorities responded rapidly (Gjedrem, 2010, p. 1). However, many countries already had very high levels of deficits and a relatively high level of debt when entering the financial crisis. After enormous rescue packages, decreasing tax revenues on the one and increasing social security expenditures on the other side, their financial stability has become even less sustainable. 14

107 Figure 2. Debt/GDP for recently defaulted countries and peripherial EU countries General gross gov. debt/gdp (in %) Ukraine 1998 Pakistan 1998 Note.* Data for Greece and Portugal are estimated. Indonesia 1998 Uruguay Argentina average* (GRE, IRE, ITA, POR) Source: International Monetary Fund, World Economic Outlook Database, As a result, sovereign credit ratings have downgraded their credit ratings and the price of insurance against sovereign debt default soared. Fear arose for some European countries that they would be unable to pay the debts and government bond yields of some peripherial EU countries such as Greece, Spain, Portugal and Ireland significantly rose compared to German bond yields. Reversing a trend of the public debt will require a lot of effort, strictness and consistency not only for the countries mentioned above, but for most of the EU. Since the beginning of 2010, after being hit by the sovereign debt crises, the EU economy has stabilised. The European Central Bank has shifted from its original mandate of providing the economy with liquidity to supporting the euro by buying up sovereign debt. On the other side, the European Commission have come up with ideas related to greater regulation of the financial sector (tighter rules on rating agencies and a financial transaction tax). After improvements in liquidity conditions have been observed, the focus has shifted on a greater EU-wide and international cooperation and coordination in order to put appropriate regulatory frameworks in place. If governments will fail to act, Europe could face some disorderly defaults by some peripheral governments. This will most likely lead to a new financial crisis and global economic slump. As Ernst & Young (2011, p. 3) reports, the European Monetary Union (EMU) GDP could fall by up to 2% in 2012 and a further 1% in 2013 in a disorderly default scenario. The resulting strains on banks in the region could reduce lending by more than 6% in 2012 and a further 2% in

108 Appendix F: Industry analysis - Global trends and issues Banking is expected to change in its fundamentals. Emerging market banks are, due to a number of barriers to entry, including the lack of robust investment banking capabilities, well positioned to continue to benefit from strong credit growth in their local economies. Some of them, particularly Chinese, Indian and Brazilian, will even make a strong move towards increasing their presence on the global scene (Ernst & Young, n.d.). Current level of mergers and acquisition in Europe is exceptionally low, however as soon as the financial markets stabilise, the level of strategic acquisitions is expected to increase as large and well-funded banks look to undertake the European banks under the liquidity pressures. Macroeconomic pressures lead European banks to a reduction in the supply of credit and focusing on lowest-risk customers, while new unsecured lending is largely reined back. Since the financial markets are not keen for European banks to issue securities, banks have started to cut back on activities that no longer have favourable cost-to-benefit ratios, have become too risky, or are otherwise no longer viable. Banks across Europe have also transformed their previous risk management systems to overcome the failures made in the financial crisis (Datamonitor, 2012). Both political and regulatory bodies in the developed world are increasing their participation in the financial sector. The most influential step forward relates to Basel III. The required boost in capital and liquidity levels forces top 12 wholesale banks to sell off, reduce or shut down about $1.3 trillion of their risk-weighted assets. Besides that, the new regulation also raises standards for supervisory review and implements a leverage ratio and increases risk coverage for certain assets and activities. The restructuring processes within the industry, will not make complex products to disappear, instead, they may simply move to less-regulated segments of the industry (Ernst & Young, n.d.). In the comparison to emerging markets, the developed world institutions demand increased transparency and consumer protection. Besides stricter regulation (i.e. Dodd-Frank Act mandates the OTC derivatives to be regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission), plenty of new consumer financial protection agencies have also been created (Ernst & Young, n.d.). A great importance has been given also to corporate governance. Compensation schemes aim to prevent the excessive risk-taking of executives, while the aggregate bank bonuses (i.e. in the UK), deferred shares related to vesting periods etc. were reduced (Ernst & Young, n.d.). 16

109 UniCredit Raiffeisen Bank Erste Société Générale KBC Intesa Sanpaolo OTP Commerzbank Santander Swedbank NLB Hypo Group BCP EFG Eurobank Total assets ( bn) Banks tend to focus again more on the core banking activities, while the product innovation and use of alternative channels (especially mobile and online banking) are becoming the source of sales improvements. The majority of banks are not planning to increase their marketing expenditures over the next 12 months, therefore social media campaigns will move away from the vague goals towards objectives such as increasing cross-sales and profitability per customer (Datamonitor, 2012, p. 7-9). Appendix G: Industry analysis - Larger players in the Central and Eastern Europe Recent M&A activity has slightly changed the ranking of the largest EU based banks by total assets in Central and Eastern Europe. If the rankings were to include also Russian banks, Sberbank would be by far the largest group (total assets of 269 billion) followed by VTB (also a Russian bank). Since our ratings take into account EU based banks only, UniCredit leads with quite a significant gap to other players. Raiffeisen Bank has advanced to second place after its acquisition of Polbank. A leap forward has been made also by Société Générale, which has come closer to the top three, namely from around 16 billion to 10 billion. KBC is still among the Top-5 banks, despite the fact that its Polish assets have been sold to Santander. Hungary s OTP and Italy s Intesa Sanpaolo managed to defend their positions compared to 2010, while Spain s Santander has entered the Top-10 after the purchase of a majority stake in Kredyt Bank in Poland. Top 10 ranked banks outperformed their smaller peers in total asset growth, as they were more exposed to Russia, Poland, Slovakia and the Czech Republic, while banks such as EFG Eurobank (Greek bank), NLB (Slovenia), Hypo Group, Swedbank and Volksbank International (Romania) - posted declines in their total consolidated assets on a year-on-year basis. Top 15 EU based banks in the Central and Eastern Europe (CEE) by total assets in 2011 Figure 3. Top 15 EU based banks in the CEE by total assets in Note.* Data is presented on a consolidated basis. Source: Raiffeisen Research, CEE Banking, 2012, p

110 Appendix H: Banking industry developments ROE for Eastern European retail banks (in %) Figure 4. Median ROE for E. European (65) and W. European (151) retail banks ROE for Western European retail banks (in %) Note.* ROE data for Eastern European retail banks is available for the period starting with December 31th, 1997 onwards, due to relatively small sample size in prior years. Source: ROE for European retail banks,

111 Appendix I: Banking industry developments Figure 5. Median P/B for E. European (65) and W. European (151) retail banks P/B for Eastern European retail banks 4.0x 3.0x 2.0x 1.0x 0.0x 1.4x 1.4x 1.2x1.2x 1.3x 1.0x 1.2x 1.1x 1.2x 1.2x 1.2x 1.2x 1.3x 3.5x 2.5x 2.2x 2.8x 2.4x 1.6x 1.9x 3.0x 2.1x 1.0x 1.1x 1.3x 1.3x 1.0x 1.3x 0.8x 1.1x 0.9x 0.7x P/B for Western European retail banks 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x 1.1x 1.1x 1.6x 1.4x 1.3x 1.3x 1.4x 1.4x 1.3x 1.4x 1.9x 1.8x 1.5x 1.5x 1.6x 1.6x 1.4x 1.3x 1.1x 1.1x 1.1x 1.0x 1.1x 1.4x 1.3x 1.5x 1.5x 1.8x 1.7x 1.9x 1.8x 1.5x 1.0x 0.6x 0.7x 0.8x 0.7x 0.7x 0.6x 0.5x 0.4x 0.5x 0.5x Note.* ROE data for Eastern European retail banks is available for the period starting with December 31th, 1997 onwards, due to relatively small sample size in prior years. Source: P/B ratio for European retail banks,

112 Appendix J: Industry analysis - Banks in Central and Eastern Europe Raiffeisen Research (2012) for the purpose of banking industry comparison divides Central and Eastern Europe (CEE) in three sub-regions, namely Central Europe (CE), South Eastern Europe (SEE) and the Commonwealth of Independent States (CIS). Categories are built-up in a such way that they reflect the substantial heterogeneity of economies, mainly on the basis of economic development. Slovenia is part of the Central Europe (CE) group. Besides Slovenia, the sub-region Central Europe (CE), consists of four other OECD and EU members - Poland, Hungary, the Czech Republic and Slovakia. EU member states Romania and Bulgaria as well as four countries from the Western Balkans, namely Serbia, Bosnia and Herzegovina and Albania represent sub-region South Eastern Europe (SEE), while Russia, Ukraine and Belarus form sub-region Commonwealth of Independent States (CIS). Figure 6. GDP p.c. at PPP for 2011 (left column) and for 2017 (right column) for CEE GDP p.c. at PPP in % of Western Europe in 2011 and 2017 GDP p.c. at PPP (in % of Western Europe) Poland 67.6 Hungary Czech Rep. Slovakia Slovenia Romania Bulgaria Croatia Serbia 33.5 BIH Albania Russian Fed Ukraine Belarus Note.* Western Europe has been taken for comparison. Source: GDP p.c. at PPP, IMF Data Mapper, Even though the total banking industry assets to GDP ratio has significantly increased for CEE countries in last decade, it is still relatively underpenetrated compared to the average of European Monetary Union (EMU). The most developed markets from Central Europe (CE) like the Czech Republic, Hungary and Slovenia have ratio ranging from a maximum of %, while less mature markets like Romania or Ukraine have ratio of minimum 70-80%. The average of European Monetary Union (EMU) for 2011 amounts to 269% (Raiffeisen Research, 2012, p. 11), notifying a big growth potential. Unlike for the European monetary union (EMU), where total loans given represent on average around 45% of total assets, the ratio for CEE amounts on average to 55-60%. Thus, one should bear in mind that the banking business in CEE is mostly about lending. 20

113 Total banking sector assets to GDP (in %) Figure 7. Total banking industry assets to GDP in CEE 120% 100% Total banking industry assets to GDP 80% 60% 40% 20% 0% CE SEE CIS Source: Raiffeisen Research, CEE Banking, 2012, p. 13 Structural and demand-side aspects are expected to increase loan demand and supply in CEE in the long-term perspective. This should result in another round of financial deepening (i.e. a loan growth rate above that of GDP growth) raising the loan-to-gdp ratio in Central and Eastern Europe (CEE) in average from some 50% in 2011 to around 57% in This financial deepening will most likely be driven by countries like Poland, Russia, the Czech Republic, Slovakia, Romania, Serbia and Albania, all characterized by a decent distance to so-called equilibrium levels of loan-to-gdp ratio (Raiffeisen Research, 2012, p. 25). In some other Central and Eastern European countries like Hungary, Slovenia, Croatia, Bulgaria, BIH, and Ukraine, expectations are modest - in line or below the nominal GDP growth. Fairly high nominal trend GDP growth outlook will still translate into decent growth rates of loans in less developed South Eastern Europe (Raiffeisen Research, 2012, p. 25). Figure 8. Loan growth outlook, Loan outlook Sustainable annual loan growth rate (% yoy in nominal terms) 20.0% 15.0% 10.0% 5.0% 0.0% Albania 2; 10.9 BIH 2; 4.0 Croatia, 2; 1.4 Belarus 7; 8.5 Bulgaria 7; 4.9 Serbia 8; 8.2 Slovenia 6; 2.8 Romania 23; 10.0 Poland 170; 14.6 Czech Rep. 67; 11.8 Slovakia, 24, 10.0 Hungary, 21; 7.1 Ukraine 21; Change in total loan volume ( 'bn) Russian Fed. 578; 15.3 Source: Raiffeisen Research, CEE Banking, 2012, p

114 The figure above represents the markets according to the absolute and relative loan growth potential. Major markets of the Central and Eastern Europe (CEE) represent Russia and Poland, which together account for slightly more than 60% of the region s total asset. The outlook for Slovenia may constitute something like a normalization following the exceptionally strong expansion it experienced in the pre-crisis era. Moreover, a certain amount of deleveraging can go hand-in-hand with an economic recovery as in case of Ukraine, where the loan to GDP ratio has already declined by some 20% points in recent years. While foreign ownership stands at some 5-15% of total assets in countries like France, Germany, the UK and the US, it accounts for 60-90% in the Central and South Eastern Europe and 10-40% in the Commonwealth of Independent States (CIS) as well as in many other Emerging markets around the world. Plenty of fear about future performance of Central and Eastern Europe, caused by the European debt crisis (problems of countries such as Greece, Ireland, Portugal, Spain and Italy), led up to forecasts of deathly credit crunches over the Central and Eastern Europe in the second half of However, the measurements of European Central Bank assured that some major Western banks, which operate in the region and are at the same time among the biggest players, did not stop crediting the emerging markets and pulling back their assets. Thus the loan growth is expected to continue in as shown in the chart above. The risk of write-downs on banks sovereign debt holdings and deterioration in loan quality strengthened the concerns about bank solvency issues. Low levels of trust among banks on unsecured wholesale funding markets resulted in fierce competition in attracting retail deposits. The deposit wars decreased the profit margins on one side, but also decrease or at least stabilize risks (to external shocks) on other side. The loan-to-deposit ratio has stabilized for Central Europe (CE) and South Eastern Europe (SEE) to cca. 110% and decreased for Commonwealth of Independent States (CIS) to 95% in 2011, leading to even higher attractiveness of the banking sector in Central and Eastern Europe (Raiffeisen Research, 2012, p. 21). Countries such as Poland, Russia, the Czech Republic, Slovakia and Ukraine have already reached their peak in the non-performing loan (NPL) ratio. The non-performing loan (NPL) ratio for the Central and Eastern Europe (CEE) region as a whole stabilized at slightly below 7% in 2011 (European monetary union average represents 9%). In 2011, banks in Central and Eastern Europe achieved decent performance, with an average return on equity (ROE) of 12.6% and return on assets (ROA) of 1.4%. The return on equity levels reached in Central Europe (CE) and Commonwealth of Independent States (CIS) in 2011 were close to the long-term profitability averages, while most countries in the South Eastern Europe did not manage to follow the trend of stabilizing asset quality in spite of 22

115 already high levels of non-performing loans (NPL) and consequently they were significantly below the profitability they used to reach in average in the past decade. Similar negative developments were visible in Slovenia (CE) and Hungary (CE), where the profitability was not only below the costs of capital but even negative, which obviously does not support the extension of new loans. Figure 9. Latest (left Current column) NPL vs. and NPLs 2015 in 3-4 (right years column) NPL Non-performing loans (in %) Poland Hungary n/a Czech Rep Slovakia Slovenia Romania Bulgaria n/a Croatia 4.2 n/a Serbia BIH Albania Russian Fed. Ukraine Belarus Note.* International Monetary Fund s data was used for latest NPL (Q or Q4 2012), except for Albania, Bulgaria and Serbia, where the data from Raiffeisen Research was taken. The 2015 NPL estimate for Slovenia was calculated on the basis of its Central European (CE) peers excluding Hungary. Other NPL estimates are averages between optimistic and pessimistic estimates of Raiffeisen Research. Source: Bank of Slovenia, Financial Stability Report, 2012, p. 82; Non-performing loans, 2012; Raiffeisen Research, CEE Banking, 2011, p

116 Return on assets (in %) 25.0 Figure 10. ROE in CEE ROE 4.0 Figure 11. ROA in CEE ROA Return on equity (in %) CE SEE CIS CE SEE CIS Source: Raiffeisen Research, CEE Banking, 2012, p. 24. Source: Raiffeisen Research, CEE Banking, 2012, p Figure 12. Loan-to-deposit ratio Loan to deposit ratio 60.0 Figure 13. Past Loan loan growth growth in CEE in CEE Loan to deposit ratio (in %) Loan growth (in %) CE SEE CIS CE SEE CIS Source: Raiffeisen Research, CEE Banking, 2011, p. 23. Source: Raiffeisen Research, CEE Banking, 2011, p

117 Appendix K: Overview of Slovenian banking industry developments Table 1. Overview of Slovenian banking industry Total TOP 9 Slovenian banks Total banking sector ( 'm) FY 2008 FY 2009 FY 2010 FY 2011 FY 2008 FY 2009 FY 2010 FY 2011 Net interest income , ,007.0 Net non-interest income Administration costs* Gross income 1, , , , , , , ,429.0 Net income NI margin (in %) Net interest income / Gross income (in %) Impairments n/a n/a n/a n/a Loan losses impairments n/a n/a n/a n/a Loans and receivables to customers (net) 26, , , , , , , ,955.0 Due to customers (deposits) 18, , , , , , , ,188.0 Total assets 37, , , , , , , ,753.0 Shareholders' equity 3, , , , , , , ,929.0 Loan-to-deposit ratio (in %) Provision for loan losses/assets (in %) n/a n/a n/a n/a Shareholders' Equity / Assets (in %) Total capital ratio / Capital adequacy ratio (in ROE (in %) ROA (in %) Gross income / average assets (in %) Gross income CAGR (in %) Total assets CAGR (in %) Source: Financial data for Slovenian banks, 2012; Bank of Slovenia, Financial Stability Review, 2012, p. 139, 140. Table 2. Fitch credit ratings for Slovenian banks as at the valuation date Note.* Red circle represents negative outlook for the rating, while red diamond means negative watch. Source: Search results - Fitch research,

118 Since Slovenian banks have very similar business models and the net interest income (NII) represents the main source of income for all of them (in average for March 2012: 72.6% of gross income), calculating a Herfindahl Hirschman Index (short HHI) could give us a general impression of the competitiveness of the Slovenian banking sector. Generally speaking the higher the index, the higher concentration and consequently lower the competition within the sector. If there would exist only two banks with equal market share, the calculation of the index would be the following: = The range varies from 0 to 1, nevertheless we could claim that a HHI index below 0.01 indicates a highly competitive index, a HHI index below 0.15 indicates an unconcentrated index, a HHI index between 0.15 and 0.25 indicates moderate concentration and a HHI index above 0.25 indicates high concentration. Table 3. Banks by total assets, market shares, ownership and size categories ( m) Total assets Market shares Ownership category* Bank FY 2009 FY 2010 FY 2011 CAGR (in %) FY 2009 (in %) FY 2011 (in %) HHI index NLB 15,509 13,830 12, Big & majority domestic NKBM 4,789 4,807 4, Big & majority domestic Abanka Vipa 4,510 4,551 4, Big & majority domestic SID banka 3,025 3,896 4, Big & majority domestic Unicredit 3,267 2,996 2, Majority foreign SKB 2,737 2,692 2, Majority foreign Banka Celje 2,559 2,598 2, Big & majority domestic Banka Koper 2,426 2,260 2, Majority foreign Hypo 2,332 2,188 1, Majority foreign Gorenjska banka 1,938 1,981 1, Big & majority domestic Large banks 43,093 41,798 40, Raiffeisen 1,382 1,398 1, Majority foreign Probanka 1,274 1,294 1, Small & majority domestic Sparkasse 1,093 1,099 1, Majority foreign Factor banka 1,054 1,083 1, Small & majority domestic Volksbank , Small & majority domestic DBS Majority foreign PBS Small & majority domestic BKS Majority foreign Bawag Majority foreign KD banka Small & majority domestic Other n/a n/a n/a n/a n/a Small banks 8,448 8,449 8, Total 51,612 50,319 48, Note.* Ownership and size categories were defined by Bank of Slovenia. Source: Financial data for Slovenian banks,

119 Figure 14. Loan impairment charges for TOP10 Slovenian banks, FY08- FY NLB NKBM 3.9 Abanka 2.8 Unicredit 5.4 SKB 1.0 Banka Celje Loan impairments/total net loans (in %) Banka Koper Hypo Gorenjska banka Banking ind. avg. Average interest rates (in %) FY 2009 FY 2010 FY 2011 Source: Financial data for Slovenian banks, Figure 15. Average interest rates for Slovenian banking industry, FY08-FY FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Spread between effective rate Average interest rate on equity and liabilities side Average interest rate on asset side Note.* Spread between effective rates is not comparable with the one in projections, due to different denominator (total assets vs. total loans; total equity and liabilities vs. total deposits). Source: Bank of Slovenia, Financial Stability Review, 2012, p

120 Figure 16. Loan-to-deposit ratio for selected Slovenian banks, FY08- FY Loan-to-deposit ratio (in %) FY 2008 FY 2009 FY 2010 FY NLB NKBM Abanka Unicredit SKB Banka Celje Banka Koper Hypo Gorenjska banka Banking ind. avg. Source: Financial data for Slovenian banks, Figure 17. Administrative expenses for selected Slovenian banks, FY08- FY11 Admin. expenses/net int. income (in %) NLB NKBM Abanka Vipa Unicredit SKB Banka Celje Banka Koper Hypo Gorenjska banka TOP 9 Slo. banks FY 2008 FY 2009 FY 2010 FY 2011 Source: Financial data for Slovenian banks,

121 Table 4. The five threats for Slovenian banking industry Threat Position Future change Rationale Threat of new entrants Low No change Generally speaking, high initial capital contribution, regulatory constraints and competition divert new entrants. Threat of substitute products High No change Other financial institutions offer alternatives to bank products and services (i.e. insurance, mutual funds or fixed income securities). Due to the significantly better position of other financial institutions (i.e. the Slovenian insurance industry, namely Zavarovalnica Triglav), potential entries are most likely possible, nevertheless probably in relation with the existing bank. Supplier bargaining power Medium to high Increase Despite the fact that banks tight smaller depositors with different products (high switching costs), there are more and more alternatives to safeguard and/or invest surplus funds. Customer bargaining power Medium to high Increase Many alternatives for bank borrowers and their financing needs (to borrow directly on the markets or from other financial institutions). Internal rivalry Low to medium No change/decrease The credit activity has been significantly decreasing and in order to retain the existing market share banks seriously compete for loans to few high rated companies (mostly export oriented). The macroeconomic events will increase the possibility of mergers and acquisitions and liquid asset outflows of banks owned by foreigners. Source: W. A. Grier, Valuing a Bank. Under IAS/IFRS and Basel II, 2005, p

122 Appendix L: Potential M&A activity in Slovenian banking industry The total number of credit institutions in Slovenia was unchanged since Consolidation of banking system has never been so attractive before, mainly due to operational synergies (in the form of cost reduction) and financial synergies (through a reduction in the costs of equity). Also improvements in the risk management, greater capital strength, funding needs and the market position are needed more than ever. The domestic regulators as well as politics seem to become more stringent in their requirements for bank acquirers, given concerns about the weak economic position and the potential impact of foreign ownership on the economy (Fitch, December 2011b). Although the Slovenian banking sector has not seen much consolidation for a long time, Raiffeisen banking report assesses that some mergers and acquisitions might take place in the near future. Overall challenging growth outlook may additionally foster consolidation beyond what is needed in order to comply with the capital adequacy requirements. Recapitalizations could lead not only to broaden investor base, but might also help to overcome some weakness in terms of governance and risk management of banks (Raiffeisen Research, 2011, p. 47). Table 5. Potential recent M&A activity of Slovenian banking sector Threat NLB NKBM Abanka Gorenjska banka Banka Celje Rationale The bank needs recapitalisation in amount of 400 million. State and KBC might sell minority stake, EBRD might step in. The bank needs fresh capital. State might sell minority stake in the mid-term. Recapitalisation is in focus. Potential merger with Gorenjska Banka. May be sold together with Abanka - Apax and Banka Celje might be interested. After recapitalisation of NLB, destiny of its 49% stake in Banka Celje will be known. Source: Raiffeisen Research, Banking report, June 2012, p. 35. According to the rating agency Fitch (April 2012a) many domestic companies, which are shareholders in the banks, are themselves overleveraged and therefore might struggle to inject equity. Although the strong initiatives for merger activities in the past have come from one of the banks largest owner, current financial condition, without sale of particular assets, won t allow Sava, d.d. (45,9% owner of Gorenjska banka and 23,8% owner of Abanka as at December 31 st, 2011) to actively cooperate in the process of merging and backing-up the newly created bank. Furthermore, potential private foreign investors are unlikely to come forward, given the difficult operating environment in Slovenia. 30

123 Yield to maturity (in %) Appendix M: Impact of the yield on the financial statements Large part of the loan portfolio of Gorenjska banka is based on the variable interest rate EURIBOR. The table bellow presents potential changes that are likely to occur, when the EURIBOR yield curve shifts upwards or downwards. Table 6. Impact of EURIBOR yield curve shift Threat Impact on statement of financial position - net loans Impact on income statement net interest income Parallel shift upwards Positive Higher interest income, might be offset by higher deposit rates. Parallel shift downwards Negative Lower interest income, might be offset by lower deposit rates. Source: W. A. Grier, Valuing a Bank. Under IAS/IFRS and Basel II, 2005, p. 12. The figure below presents the risk free rate yield curves of EMU member states through time. Traditional banks generate profits with maturity transformation. A significantly worse performance of the banks is observed when the curve is flat (as in June 2008). At the date of valuation the shape of the yield curve is upward sloping and thus the conditions for profit generation are again much better. Figure 18. The yield curve spot rates for AAA EMU members, Years to maturity Jun 2008 Jun 2009 Jun 2010 Jun 2011 Jun 2012 Note.* The yield curves relate to spot rates for AAA rated government bonds of EMU member states. Flat curve before the crisis is a successful predictor of the recession.when the yields are not upward sloping, it is more difficult for banks to make profit. Source: Euro area yield curve, June

124 Appendix N: Simplified value drivers for asset management and trading activities Figure 19. Simplified value drivers for asset management Source: T. Koller, M. Goedhart & D. Wessels, Valuation: Measuring and managing the value of companies, 2010, p Figure 20. Simplified value drivers for trading activities Source: T. Koller, M. Goedhart & D. Wessels, Valuation: Measuring and managing the value of companies, 2010, p

125 Appendix O: Authorization for providing banking services for Gorenjska banka Banks and other financial institutions are required to operate within the allowed scope of work prescribed by the Banking Act (Official Gazette of the Republic of Slovenia, No. 131/06; later referred to as ZBan-1). Gorenjska banka, d.d., is authorization to provide banking services pursuant to Article 7 of the ZBan-1, that include accepting deposits from the public and extending loans on own account. The bank may provide also the following mutually recognized financial services, pursuant to Article 10 of the ZBan-1: accepting deposits; extending loans and credits, including: consumer and mortgage loans, the purchase of receivables with or without recourse (factoring) and the financing of commercial transactions, including export financing based on a discounted purchase without recourse of non-current, undue receivables collateralized with a financial instrument (forfeiting); payment transaction services pursuant to the Payment Transaction Act (ZPlaP), excluding payment system management services; issuing and managing payment instruments (e.g. credit cards and travellers cheques); issuing guarantees and other warranties; trading on own account or the account of customers in: money market instruments, foreign legal tender, including exchange transactions, futures and options, currency and interest rate derivatives and transferable securities; participating in the issue of securities and providing related services; consultancy services and services related to mergers and acquisitions; investment management and related consultancy services; safekeeping of securities and other safekeeping services; renting of safes; investment and ancillary investment services and transactions. Appendix P: About Gorenjska banka Figure 21. Educational structure of Gorenjska banka in FY11 (in %) IV 3.1 III IX VIII 8.9 VII 21.9 V 56.5 Note.* Structure has been determined based on average number of employees by qualification degree. VI 8.2 Source: Gorenjska banka d.d., Letno poročilo, 2011, p

126 Figure 22. Subsidiaries and associated companies of Gorenjska banka Group Gorenjska banka d.d. Subsidiaries Associated company Imobilia GBK d.o.o. (100%) Skupna d.d. (26%) Gorenjski Glas d.o.o. (82%) Note.* Consolidation of subsidiaries is of no material importance. Source: Gorenjska banka d.d., Letno poročilo, 2011, p. 16. Figure 23. Organisational chart of Gorenjska banka Management Branches and agencies Divisions Departments Branch Kranj (9 agencies) Branch Jesenice (3 agencies) Branch Radovljica (5 agencies) Branch Škofja Loka (8 agencies) Branch Tržič (2 agencies) Branch Ljubljana (3 agencies) Commercial banking Treasury International Retail banking Accounting Administrative & human resources Information system Internal audit Legal counselling Risk management Marketing & public relations Source: Gorenjska banka d.d., Letno poročilo, 2011, p

127 Appendix Q: Financial data for Gorenjska banka Table 7. Income statement of Gorenjska banka ( '000) Audit. Audit. Audit. Audit. Audit. Unaudit. Unaudit. (in %) Vertical analysis (in %) Horizontal analysis # Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 I-VI 2012 LTM VI/12 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 LTM VI/12 AM* σ (07-11) FY 2008 FY 2009 FY 2010 FY 2011 AM* GM* σ (08-11) 1 Interest and similar income 82, ,876 93,387 95,026 87,717 39,408 81, Interest expense and similar charges 34,111 50,510 35,238 28,985 35,029 17,779 36, Net interest income = (1-2) 48,869 57,366 58,149 66,041 52,688 21,629 44, Dividend income 7,468 4, ,211 1, , Fee and commission income 12,144 11,399 10,794 11,342 11,557 5,521 11, Fee and commission expense , , Net fee and commission income = (5-6) 11,198 10,491 9,890 10,465 10,488 5,027 10, Net gains on fin. assets and liabilities not measured at fair value through P&L 11,704 10,354 13, ,867-2,354 29, Net gains and loses on fin. assets and liabilities held for trading 25,113-19,867 2,494-2,405-4,488-3,640-5, n/a Net gains and losses on fin. assets and liabilities designated at fair value through P&L -5,287-17,036 2,488 1, ,096 3, n/a Foreign exchange difference Net gains on disposals of assets other than held for sale 45 23, Other operating net income/loss 594 1,433 2, Administrative expenses 22,616 24,500 25,595 26,019 25,795 12,074 25, Depreciation 2,512 1,645 2,665 2,107 2,131 1,083 2, Provisions -2, ,973-6, Impairment charges 14,422-5,424 15,709 30,904 64,472 16,223 71, Share of profit of associates and joint ventures accounted for using the equity method 2, Total profit before tax = ( ) 65,380 49,794 41,063 26,101 1,672-4,618-12, Tax expense related to profit or loss 12,182 7,265 7,224 5, , n/a Total profit after tax = (19-20) 53,198 42,529 33,839 21,092 1,680-6,342-12, Profit for the period 53,198 42,529 33,839 21,092 1,680-6,342-12, Source: Gorenjska banka d.d., Letno poročilo, ; Gorenjska banka d.d., Semi-annual income statement, 2012c. Table 8. Statement of changes in equity of Gorenjska banka ( '000) Audit. Audit. Audit. Audit. Audit. Unaudit. Unaudit. Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 I-VI 2012 LTM VI/12 Equity - begining of the period 343, , , , , , ,942 Dividends paid -25,777-21,735-21,809-21,399-21, ,399 Profit for the period 53,198 42,529 33,839 21,092 1,680-6,342-12,258 Net unrealised gains/(losses) recognised in other comprehensive income, before tax n/a -22,643 14,706-18,283-50,493 11,079-20,266 Realised gains/(losses) reclassified to the income statement n/a -6, ,788 37,867 2,303 40,397 Other reclassification n/a Net losses on financial investments available-for-sale = (4+5+6) n/a -28,883 14,867-7,495-12,626 13,932 20,681 Tax related to other comprehensive gains/(losses) n/a 6,162-3,073 1,499 2,525-2,825-4,175 Revaluation reserves (for availible-for-sale financial assets) = (7+8) -6,447-22,721 11,794-5,996-10,101 11,107 16,506 Sales/(purchases) of treasury shares 0-10,723-6, Other Total comprehensive income = ( ) 46,751 9,053 39,301 15,131-8,421 4,765 4,248 Equity - end of the period 364, , , , , , ,791 Source: Gorenjska banka d.d., Letno poročilo, ; Gorenjska banka d.d., Semi-annual statement of financial position, 2012d. 35

128 Table 9. Statement of financial position of Gorenjska banka ( '000) Audit. Audit. Audit. Audit. Audit. (in %) Vertical analysis (in %) Horizontal analysis Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2007 FY 2008 FY 2009 FY 2010 FY AM* σ (07-11) FY 2008 FY 2009 FY 2010 FY 2011 AM* GM* σ (08-11) Cash and balances with central bank 17,807 22,453 19,999 10,758 27, Financial assets held for trading 67,420 48,155 75,843 65,984 52, Financial assets designated at fair value through profit or loss 89,603 50,035 52,541 54,269 55, Available-for-sale financial assets 490, , , , , Loans and receivables 1,010,249 1,205,753 1,199,202 1,292,779 1,270, loans and receivables to banks 44,271 40,128 16,547 10,663 25, loans and receivables to customers 965,978 1,165,625 1,182,655 1,282,116 1,245, Held-to-maturity investments 25,814 27,370 26,470 27, Property and equipment 7,099 6,441 7,424 7,448 8, Investment property Intangible assets 2,269 2,279 2,831 2,902 3, Investments in subsidiaries, associate 12,809 3,343 3,881 4,297 4, Deferred income tax assets 2,964 4,874 3,482 8,698 17, current income tax assets 2, , n/a n/a n/a n/a deferred income tax assets 434 4,874 3,482 8,698 16, Other assets 5,223 5,957 7,291 5,766 5, Total assets 1,732,976 1,825,832 1,937,579 1,980,801 1,947, Off-balance sheet assets 141, , , , ,416 Total 1,874,756 1,956,031 2,250,488 2,413,217 2,379,819 Audit. Audit. Audit. Audit. Audit. Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2007 FY 2008 FY 2009 FY 2010 FY AM* σ (07-11) FY 2008 FY 2009 FY 2010 FY 2011 AM* GM* σ (08-11) Due to central banks 25,038 64,082 90,267 70,064 75, Trading liabilities , n/a n/a n/a Financial liabilities measured at amortised cost 1,312,448 1,391,181 1,451,321 1,525,648 1,524, due to banks 14,366 1, , n/a n/a due to customers 923, ,435 1,068,768 1,176,704 1,224, borrowings from banks 366, , , , , borrowings from other customers 8,588 4, ,045 12, n/a debt securities in issue ,300 30,302 30, n/a n/a n/a 0.0 Provisions 4,494 4,636 9,543 2,553 2, Tax liabilities 9,237 3,113 3,853 5,750 1, current income tax liability , n/a n/a deferred income tax liability 9,237 2,369 3,672 3,590 1, Other liabilities 13,456 7,198 8,618 6,907 7, Total liabilities 1,364,673 1,470,210 1,564,465 1,613,955 1,610, Share capital 13,830 13,830 13,830 13,830 13, Share premium 8,572 9,349 9,370 9,381 9, Revaluation reserves 14,854-7,867 3,927-2,069-12, n/a Reserves from profit 314, , , , , Treasury shares ,322-18,675-18,650-18, Retained earnings 17,178 18,363 24,792 21,426 1, Total equity 368, , , , , Total equity and liabilities 1,732,976 1,825,832 1,937,579 1,980,801 1,947, Off-balance sheet liabilities 141, , , , ,416 Total 1,874,756 1,956,031 2,250,488 2,413,217 2,379,819 Source: Gorenjska banka d.d., Letno poročilo, ; Gorenjska banka d.d., Semi-annual statement of financial position, 2012d. 36

129 Structure of gross loans ( '000) 1,010,249 1,205,753 1,199,202 1,292,779 1,270,770 Figure 24. Structure of total assets, FY07-FY11 Structure of total assets ( '000) 2,000,000 1,500,000 1,000, , ,732,976 1,937,579 1,980,801 1,947,403 1,825, , , , , ,976 1,010,249 1,205,753 1,199,202 1,292,779 1,270,770 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Other Fixed assets Financial assets (excl. loans and rec.) Loans and receivables Source: Gorenjska banka d.d., Letno poročilo, Figure 25. Structure of gross loans, FY07-FY11 1,600,000 1,400,000 1,200,000 1,000, , , , , ,394,954 1,384,219 1,282,744 1,291, , ,449 76,991 92,587 1,092,698 82,449 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Allowance for impairment Net loans Source: Gorenjska banka d.d., Letno poročilo, Figure 26. Structure of total Equity and liabilities, FY07-FY11 Structure of total equity and liabilities ( '000) 2,000,000 1,500,000 1,000, ,000 1,732,976 52, ,303 1,312,448 1,980,801 1,937,579 1,825,832 1,947, ,144 88,307 86,278 79, , , , ,026 1,391,181 1,451,321 1,525,648 1,524,099 0 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 Other liabilities Shareholders' equity Financial liabilities Source: Gorenjska banka d.d., Letno poročilo,

130 Figure 27. Average interest rate on categories of interest income Average interest rate (in %) Loans to customers Loans to banks Financial assets Source: Gorenjska banka d.d., Letno poročilo, Figure 28. Average interest rate on categories of interest income Average interest rate (in %) Deposits (due to customers) Borrowings from banks Source: Gorenjska banka d.d., Letno poročilo,

131 Figure 29. Collateral received ( 1,754 thousand), FY09-FY11 900,000 Collateral received Collateral received ( '000) 750, , , , , , , , , , , , , , , , ,780 97,636 95,725 92,252 62,090 62,130 69,525 FY 2009 FY 2010 FY 2011 Mortgages Accession to obligations Equity shares Company guarantees Insurance Other Source: Gorenjska banka d.d., Letno poročilo, 2011, p. 75. Figure 30. Credit exposure by sectors ( 1,799 thousand), FY11 Credit exposure by industry sectors Other sectors; 333,588; 18.5% Individuals; 118,527; 6.6% Public administration and defence; 389,212; 21.6% Wholesale, retail; 174,126; 9.7% Financial intermediation; 320,940; 17.8% Real estate renting, business activities; 84,388; 4.7% Manufacturing; 378,153; 21.0% Source: Gorenjska banka d.d., Letno poročilo, 2011, p. 81. Figure 31. Credit exposure Credit exposure by geographic by geographic location location ( 1,799 thousand), FY11 EU countries (excl. Slovenia); 170,931; 9.5% Other countries; 109,061; 6.1% 39 Slovenia; 1,518,942; 84.4% Source: Gorenjska banka d.d., Letno poročilo, 2011, p. 80.

132 Appendix R: Projecting financial statements and free cash-flows Financial statements have been projected in line with the maturing of Central and Eastern European banking industry and extremely specific current macroeconomic situation in Slovenia. In projections three stages have been assumed: Distressed phase in the period , which is a consequence of a previous deep recession, macroeconomic environment and institutional deficiencies in Slovenia. Developing phase in the period , where banking sector in Slovenia is expected to catch up with the EU average. Maturity phase in the period from 2021 onwards, where the Slovenian banking sector will grow along with the EU average. Projections of the financial statements have been prepared as presented in the Appendix R. Even though more complex, the use of projections based on drivers normally returns a more accurate estimates, since the projection process requires thinking about the way a bank operates and generates profits. The projections are based on the findings of the financial statement analysis. The growth of the accounts is estimated to align with the current macroeconomic environment, pending market share, historical figures and long-term feasible growth of the economy. The main drivers are gross loans and net interest income, since Gorenjska banka is primarily a retail bank. 40

133 Table 10. Techniques and rationale for projecting the statement of fin. position items Line item Projection technique Rationale Assets Interbanking assets Cash and balances with central banks If A<E+L then prior year balance + surplus, else prior year balance As % of total deposits Guaranteed deposits (below 100 thousand per depositor) 41 In first year interbanking assets have been assumed in amount of 25,000 thousand. After, a test have been performed for the projected period. If the sources of capital (E+L) exceeded assets (A), then the interbanking assets have been planned in order to invest the excess capital "somewhere" and vice versa. The accounts have been forecasted seperately. Cash has been projected in line with deposits, since it is assumed that bank holds only the amount of cash required for daily operations. Balances with central banks are projected according to the regulator requirements. Financial assets Growth rate on the level of inflation Since it is difficult to project future growth rates w/o knowing the investments and historical growth is a subject of significant changes, inflation has been used as a guide. Business non-related property In amount of 0 thousand Projected to be sold as at the date of valuation at the market price, since the income models do not reflect the value of business non-related property, due to the fact that it is not generating any income. Gross loans Historical growth rates Gross loans have been forecasted for each type of loan seperately (individuals: overdrafts, housing loans, consumer and other loans; corporates and other enitities: coporates, small and medium enterprises) based on historical growth. Allowances for loan losses Loans charged-off as % of gross loans Charged-off loans recovered as % of loans charged-off Allowances for loan losses have been assumed based on the difference between charged-off loans projected as % of gross loans and recovered charged-off loans projected as % of charged-off loans). Fixed assets Prior year balance increased for net investments (CapEx) and decreased for depreciation expense. Fixed assets are projected as to reflect the net investments and depreciation. Depreciation is believed to move aligned with the net interest income in the projected period, while the net investments are due to the mature phase of the bank assumed on the level of depreciation. The bank has been investing in the past years below the amount of depreciation, so the level of net investments has been additionally increased for the CapEx gap. It is important to note, that the amount of the net investments will allow recording target profitability. Other assets As % of Gross loans The amount is assumed to be linked to the amount of gross loans. Shareholders' equity & liabilities Interbanking liabilities If A>E+L, then prior year balance + shortfall, else prior year balance If there are more assets (A) than sources of capital (E+L) predicted, then the interbanking liabilities have to increase in order to meet the funding need. Total deposits from customers As % of gross loans The amount is assumed to be linked to the amount of gross loans. Debt securities According to the maturity of debt securities Debt securities have been assumed according to the maturity assumed, when the bond has been issued. Other liabilities As % of gross loans The amount is assumed to be linked to the amount of gross loans. Shareholders' equity As % of total capital (CAD) Shareholders' equity is projected in line with total capital as calculated for the capital adequacy requirements (Basel III) Source: Wall Street Prep., Bank modeling program, p

134 Table 11. Techniques and rationale for projecting the income statements items Line item Projection technique Rationale Interest income Average interest-earning assets (IEA) x interest earning asset yield (IEA yield) Interest earning asset yield (IEA yield) is calculated as interest bearing liability cost (IBL cost) + net interest spread (defined on historical data), while average interest-earning assets (IEA) have been determined based on the forecasted accounts of the statement of financial position. Interest expense Average interest-bearing liabilities (IBL) x interest bearing liability cost (IBL cost) Interest bearing liability cost (IBL cost) is calculated as interest bearing liability cost (IBL cost) + net interest spread (defined on historical data), while average interest-bearing liabilities (IBL) have been determined based on the forecasted accounts of the statement of financial position. Dividend income Historical dividend yield The income has been assumed in line with historical dividend yield. Net fee and commission income As % of total deposits Fee and commission income is assumed to develop through time linked to total deposits. Gains/(losses) on financial assets In amount of 0 thousand Financial gains could not be predicted and are thus projected in amount of 0 thousand. Required return on financial assets is assumed to be in the long-term received through dividends. Other gains/(losses) In amount of 0 thousand Financial gains could not be predicted and are thus projected in amount of 0 thousand. Required return on financial assets is assumed to be in the long-term received through dividends. Administrative expenses Average number of employees Administration expense per average number of employees Administrative expenses are projected based on the estimated average number of employees and administration expense per average number of employees. Depreciation As % of net interest income Depreciation is assumed to be linked to net interest income. Provisions As % of net interest income Provisions are assumed to be linked to net interest income. Taxes As % of pretax profit Taxes have been assumed on the level of regulatory corporate tax rates decreased for the deferred taxes. Source: Wall Street Prep., Bank modeling program, p

135 Table 12. Critical indicators for projections (in %) Audit. Audit. Audit. Audit. Audit. Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F General indicators Market share Equity/total assets Loans/Deposits Growth rates Loans and receivables to customers growth Effective loan interest rate Financial assets growth Total deposit from customers growth Effective deposit interest rate Profitability ROA (Return on avg. assets) ROE (Return on avg. equity) Operation cost/income Operation cost/average assets Average number of employees

136 Table 13. Projections of income statement of Gorenjska banka ( '000) Audit. Audit. Audit. Audit. Audit. Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 F VI-XII 2012 FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Interest and similar income 82, ,876 93,387 95,026 87,717 86,244 46,836 88,450 91,069 95,707 98, , , , , ,403 Interest expense and similar charges 34,111 50,510 35,238 28,985 35,029 36,585 18,806 37,714 39,330 42,076 43,740 45,732 47,815 50,000 51,960 53,528 Net interest income 48,869 57,366 58,149 66,041 52,688 49,659 28,030 50,737 51,739 53,631 55,154 56,538 58,018 59,602 61,287 62,875 Net interest margin (NII/Average IEA) (in %) n/a Dividend income 7,468 4, ,211 1,908 1,922 1,064 2,944 4,015 5,141 5,275 5,412 5,553 5,697 5,845 5,997 Fee and commission income 12,144 11,399 10,794 11,342 11,557 Fee and commission expense ,069 Net fee and commission income 11,198 10,491 9,890 10,465 10,488 9,724 4,697 9,535 9,610 9,946 10,303 10,683 11,089 11,523 11,886 12,170 Gains/(losses) on financial assets 31,575-3,219 18, ,392-3, ,575-1, Gains/(losses) on financial assets generated with debt securities ,575-1,181 Gains/(losses) on financial assets generated with equity securities and other Other gains/(losses) 3,240 1,823 3,158 1, Other operating net income/loss Share of profit of associates and joint ventures accounted for using the equity method 2, Foreign exchange difference Administrative expenses 22,616 24,500 25,595 26,019 25,795 26,441 14,367 27,176 27,959 28,925 29,951 31,011 32,106 33,237 34,405 35,689 Depreciation 2,512 1,645 2,665 2,107 2,131 1, ,012 2,052 2,127 2,187 2,242 2,301 2,363 2,430 2,493 Impairment charges 14,422-5,424 15,709 30,904 64,472 29,028 12,805 5,995 3,730 1,597 1,711 1,822 1,944 2,078 1,736 1,359 Impairment for credit losses 15,784-5,436 15,595 9,588 11,274 12,577 n/a 5,995 3,730 1,597 1,711 1,822 1,944 2,078 1,736 1,359 Other impairments -1, ,316 53,198 16,451 n/a Provisions -2, ,973-6, Income Before Income Taxes 65,380 49,794 41,063 26,101 1,672 1,209 5,827 27,205 31,204 36,860 37,695 38,391 39,165 40,022 41,350 42,427 Effective tax rate (in %) Tax expense related to profit or loss 12,182 7,265 7,224 5, , ,462 5,654 5,759 5,875 6,003 6,202 6,364 Profit for the period 53,198 42,529 33,839 21,092 1, ,827 27,205 31,204 35,397 32,041 32,633 33,290 34,019 35,147 36,063 Note.* The data has been projected based on the semi-annual financial results, historical financial analysis, comparable peers and management plans for major accounts. 44

137 Table 14. Projections of statement of financial position of Gorenjska banka ( '000) Audit. Audit. Audit. Audit. Audit. Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Line item FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Interbanking Assets 107,007 80,256 33,094 16,217 25,394 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 Loans and receivables to banks 44,271 40,128 16,547 10,663 25,394 Loans and receivables to banks (with original maturity of less than 90 days) 23,580 21,433 5,431 5,554 0 Other placements with other banks 39,156 18,695 11, Cash and balances with central banks 17,807 22,452 19,999 10,758 27,707 23,221 21,937 21,266 22,010 22,801 23,643 24,541 25,502 26,304 26,932 Cash in hand 4,165 5,758 7,073 7,306 9,306 Balances with central banks 13,642 16,694 12,926 3,452 18,401 Financial assets 673, , , , , , , , , , , , , , ,472 - Debt securities classified as 521, , , , , , , , , , , , , , ,444 Financial assets held for trading 35,587 33,755 35,579 35,472 28,944 Financial assets designated at fair value through profit or loss Available-for-sale financial assets 460, , , , ,157 Held-to-maturity investments 25,814 27,370 26,470 27, Equity securities and similar items (w/o inv. in subsid. & assoc.) classified as 152,267 79, , , , , , , , , , , , , ,028 Financial assets held for trading 31,833 14,400 40,264 30,512 23,789 Financial assets designated at fair value through profit or loss 89,603 50,035 52,541 54,269 55,032 Available-for-sale financial assets 30,831 15,485 65,572 58,123 62,427 Business non-related property 13,658 4,224 4,669 5,017 5, Investment property Investments in subsidiaries, associate 12,809 3,343 3,881 4,297 4,626 Loans and receivables to customers 965,978 1,165,625 1,182,655 1,282,116 1,245,376 1,205,328 1,173,501 1,179,915 1,224,341 1,271,545 1,321,810 1,375,442 1,432,780 1,480,679 1,518,173 Gross loans 1,048,427 1,242,616 1,275,242 1,384,291 1,358,825 1,331,354 1,305,522 1,315,666 1,361,689 1,410,603 1,462,691 1,518,265 1,577,682 1,627,316 1,666,169 Less: Allowance for loan losses -82,449-76,991-92, , , , , , , , , , , , ,996 Fixed assets 9,368 8,720 10,255 10,350 11,846 12,634 13,539 14,360 14,785 15,004 15,004 15,004 15,004 15,004 15,004 Property and equipment 7,099 6,441 7,424 7,448 8,604 Intangible assets 2,269 2,279 2,831 2,902 3,242 Other assets 8,187 10,831 10,773 14,464 22,380 18,721 14,114 9,140 5,093 5,111 5,130 5,149 5,168 5,187 5,206 Deferred income tax assets 2,964 4,874 3,482 8,698 17,362 13,684 9,059 4, Other assets 5,223 5,957 7,291 5,766 5,018 5,037 5,055 5,074 5,093 5,111 5,130 5,149 5,168 5,187 5,206 Total Assets 1,732,976 1,825,832 1,937,579 1,980,801 1,947,403 1,876,785 1,853,642 1,869,826 1,926,939 1,991,765 2,059,916 2,131,932 2,208,172 2,275,280 2,332,287 Interbanking liabilities 405, , , , , , , , , , , , , , ,250 Borrowings from banks (term deposits) 366, , , , ,869 Due to banks 14,366 1, ,974 Due to central banks 25,038 64,082 90,267 70,064 75,068 Total deposits from customers 931, ,615 1,068,768 1,188,749 1,236,949 1,146,860 1,124,607 1,133,346 1,172,991 1,215,127 1,259,996 1,307,870 1,359,052 1,401,808 1,435,277 Deposits from non-bank customers 923, ,435 1,068,768 1,176,704 1,224,874 Corporates and other entities Current/settlement accounts 60,220 57,313 58,855 76,407 92,460 Term deposits 243, , , , ,632 Individual clients Current/settlement accounts 305, , , , ,641 Term deposits 314, , , , ,142 Loans and advances from non-bank customers 8,588 4, ,045 12,075 Debt securities ,300 30,302 30,307 30,307 30, Other liabilities 27,187 14,947 22,877 18,243 11,210 11,111 11,013 11,205 11,696 12,208 12,742 13,300 13,882 14,366 14,740 Trading liabilities , Provisions 4,494 4,636 9,543 2,553 2,281 Tax liabilities 9,237 3,113 3,853 5,750 1,542 Other liabilities 13,456 7,198 8,618 6,907 7,375 Total equity 368, , , , , , , , , , , , , , ,020 Total equity and liabilities 1,732,976 1,825,832 1,937,579 1,980,801 1,947,403 1,876,785 1,853,642 1,869,826 1,926,939 1,991,765 2,059,916 2,131,932 2,208,172 2,275,280 2,332,287 Note.* The data has been projected based on the semi-annual financial results, historical financial analysis, comparable peers and management plans for major accounts. 45

138 Average interest income and expense rate (in %) Spread (in %) Gross incomeby source ( '000) 48,869 57,366 58,149 66,041 52,688 49,659 50,737 51,739 53,631 55,154 56,538 58,018 59,602 61,287 62,875 53,481 13,351 31,856 41,110 8,257 10,904 12,443 12,175 15,087 15,578 16,095 16,642 17,220 17,731 18,167 Appendix S: Main assumptions of projections Figure 32. Gross income by source 120, , ,350 70,717 90,005 78,216 93,798 57,916 61,641 64,183 68,718 70,732 72,633 74,660 76,822 79,018 81,041 80,000 60,000 40,000 20,000 0 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Net interest income Net non-interest income Figure 33. Average interest income and expense rate in the forecasted period FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Driver: Interest earning asset yield (IEA yield) Driver: Net interest spread (IEA yield - IBL cost) Driver: Interest bearing liability cost (IBL cost) 46

139 Figure 34. Defining allowances for loan losses Loans charged-off ( '000) 70,000 60,000 50,000 40,000 30,000 20, , Profit for the period ( '000) 53,198 42,529 33,839 21,092 1,680-1,237 27,205 31,204 35,397 32,041 32,633 33,290 34,019 35,147 36,063 Profit margin (in %) 10, , ,213 46, , , , , FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Loans charged-off Note.* Loans charged-off are in line with the gross loans growth 47,620 49,330 Driver: Prior year charged-off loans recovered as % of loans charged-off. Figure 35. Profitability in the forecasted period 51,152 53,095 55,173 56,909 58, Charged-off loans recovered as % of loans charged-off 60,000 45,000 30,000 15,000 55, , , ,276 43, FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Pro-forma earnings Profit for the period Profit margin 47

140 Appendix T: Potential add. impairments of fin. assets included in the value estimate Equity shares in Abanka (trading symbol: ABKN) and Pivovarna Laško (trading symbol: PILR), classified as equity investment securities, are assumed to be fairly valued at 7.00 per share (the price of recapitalization) or at 7.99 (market value as at ), while fair value of equity share in Sava (trading symbol: SAVA) is assumed to be fairly valued at 6.20 per share (market value as at ). Table 15. Adjustment for assumed required impairment of financial assets Line items Original Adjustment as at Add. impairments needed Adjustment as at Add.impairments needed Total impairments - 14,74% equity share in Abanka Vipa d.d. (ABKN) classified as availible-for-sale financial assets - 6,3% equity share in Pivovarna Laško d.d. (PILR) classified as availible-for-sale financial assets - 14,74% equity share in Sava d.d. (SAVA) classified as financial assets held for trading The fair value of ABKN share price of 14.74% equity share (1,061,220 stocks) is assumed to be priced at 25.4 EUR/share. The fair value of PILR share price of 6.3% equity share (542,448 stocks) is assumed to be to be priced at 16.3 EUR/share. The fair value of SAVA share price of 2.8% equity share (56,475 stocks) is assumed to be priced at 49 EUR/share. The fair value of ABKN share price of 14.74% equity share (1,061,220 stocks) is assumed to be market value as at (16 EUR). The fair value of PILR share price of 6.3% equity share (542,448 stocks) is assumed to be market value (11.02 EUR). The fair value of SAVA share price of 2.8% equity share (56,475 stocks) is assumed to market value (12 EUR). 9,975 The fair value of ABKN share price of 14.74% equity share (1,061,220 stocks) is assumed to be bank recapitalisation price (7 EUR). 2,864 The fair value of PILR share price of 6.3% equity share (542,448 stocks) is assumed to be market value (7.99 EUR). 2,090 The fair value of SAVA share price of 2.8% equity share (56,475 stocks) is assumed to market value (6.20 EUR). 9,551 19,526 1,644 4, ,417 Total 14,929 11,522 26,451 Note.* Forecasted additional impairment charges included in the projections have been decreased for the estimated effect of illiquidity and amount to thousand. 48

141 Appendix U: Future impairment charges related to bankruptcy procedures Several articles in the media have stressed that credit portfolio of Gorenjska banka should be additionally impaired. The accusations are mainly based on the analysis of the recent insolvency proceedings observed via publicly available databases einsolv and eobjave (AJPES). The conclusions mainly refer to the securization of the claims for the following companies involved in the insolvency proceedings (Abanka na poti v pogubo, 2012): Zvon Ena Holding (open claims in the amount of million securitized with 3,411 shares of Helios, 174,331 shares of Abanka, 28,081 shares of Beti Holding and 184,556 shares of PIF Eurofond together amounting to the market value of 2.32 million). Zvon Dva Holding (open claims in the amount of million securitized with 106,339 shares of Vegrad bankrupted and deleted from the KDD register as of January, 28th, 2011 and 36,540 points of mutual fund Krekov Globalni amounting to the market value of 0.20 million). Poteza Skupina (open claims in the amount of million securitized with the property for which an official receiver claims it is not owned by debtor). Konstruktor VGR (open claims in the amount of 9.75 million securitized with the property for which an official receiver claims it is not supported with the valid evidences). Valuation assumes that none of the above has already been impaired. Potential additional impairments therefore amount to 72.3 million, which eventually decrease the value estimation for per share. Table 16. Add. impairment charges for loan losses (RIM) Insolvency proceding Open claims ( m) Market value of securitization ( m) Securitization Zvon Ena Holding 3,411 shares of Helios, 174,331 shares of Abanka, 28, shares of Beti Holding and 184,556 shares of PIF Eurofond Zvon Dva Holding 36,540 points of mutual fund Krekov Globalni amounting to the market value of 0.20 million Poteza Skupina / Konstruktor VGR / Total value of open claims 74.8 Market value of securitization 2.5 Impairments required 72.3 Impact on value ( /per share) Note.* The table presents the open claim, which could have been partially already impaired. 49

142 Appendix V: Basel III Figure 36. Basel III Framework Basel III - Framework Pillar I Capital Ratios Liquidity Ratios Leverage Ratio Pillar II Supervisory Review Process Pillar III Market Discipline (Reporting) Capital RWA LCR NSFR Tier 1 Tier 2 Credit Market Operational Concentration (EU Large Exposure) Standard IRB F CCR Derivative Exposure BIA Standard IRB A CEM CVA Standard AMA Legend: EPE IMA VAR Brand new with Basel 3 WWR Stressed VAR Updated with Basel 3 Updated with Basel 2,5 IRC No change from Basel 2 Source: Moody s Analytics, Basel III New Capital and Liquidity Standards FAQs, 2012, p

143 The valuation assumes that the required amount of regulatory capital amounts to: Total common equity: maximum of minimum tier 1 capital and minimum common equity plus capital conservation buffer Common equity: minimum total capital plus conservation buffer Table 17. Basel III Phase-in capital adequacy arrangements (in %) FY 2011 FY 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Leverage Ratio Supervisory Monitoring Supervisory Monitoring Parallel run: 1 Jan Jan 2017 Disclosure starts 1 Jan 2015 Migration to Pillar 1 Minimum common equity capital ratio Capital conservation buffer Minimum common equity plus capital conservation buffer Phase-in of deductions from CET Minimum tier I capital Counter-cyclical buffer Capital buffer for systemically important banks only Total common equity Personally assumed safety margin Minimum total capital Minimum total capital plus conservation buffer Personally assumed safety margin Capital instruments that no longer qualify as Non-core Tier 1 Phased out over 10 year horizon beginning 2013 Liquidity Coverage Ratio Net Stable Funding Ratio Observation period begins Observation period begins 51 Introduce minimum standard Introduce minimum standard Source: Bank for International Settlements, Basel III: A global regulatory framework for more resilient banks and banking systems - revised version June 2011, p. 69.

144 Table 18. Estimation of regulatory capital base (1/2) Actual Actual Actual Actual Actual Estimate Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast End of year/as at FY 2007 FY 2008 FY 2009 FY 2010 FY /06/2012 FY 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Interest earning assets (IEA) 1,765,557 1,842,383 1,928,647 1,954,984 1,903,538 1,839,020 1,842,690 1,824,251 1,845,395 1,905,940 1,970,324 2,038,237 2,110,000 2,185,968 2,252,850 2,309,679 Risk weighted assets as % of interest earning assets Risk weighted assets (RWA) 1,145,419 1,415,462 1,532,638 1,623,718 1,599,875 1,545,649 1,548,733 1,533,236 1,551,007 1,601,893 1,656,006 1,713,086 1,773,400 1,837,250 1,893,462 1,941,226 Required total common equity ratio with 5% safety margin (in %) Required total common equity 48,108 59,449 64,371 68,196 67,195 64,917 65,047 72,445 89, , , , , , , ,637 Required total capital ratio with 5% safety margin (in %) Required total capital 96, , , , , , , , , , , , , , , ,020 Total common equity n/a n/a 219, , , , , , , , , , , , , ,020 Total common equity ratio (in %) n/a n/a Assumed ratio Tier 1 vs. Total capital (in %) n/a n/a Adjusted Total capital / Capital adequacy n/a n/a 219, , , , , , , , , , , , , ,020 Adjusted Total capital ratio / Capital adequacy ratio (in %) n/a n/a Total equity 368, , , , , , , , , , , , , , , ,020 Total equity/adjusted actual total capital (in %) n/a n/a End of year/as at VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Difference between total common equity and required common equity (% points) Difference between total capital and required total capital (% points) Estimated excess of capital (new additional total common equity required) 19,134 10,153 5,470 1,321 1,439 1,638 1,852 2,083-6,197-5,266 Estimated excess of capital (new additional total capital required) 19,134 10,153 5,470 1,321 1,439 1,638 1,852 2,083-6,197-5,266 Estimated excess of capital (new additional regulatory capital required) 19,134 10,153 5,470 1,321 1,439 1,638 1,852 2,083-6,197-5,266 Note.* The regulatory level of total capital has been assumed to reach the level of required total capital in year Gradual decrease reflects the minority interest being valued (no control over the management policies). 52

145 Table 19. Estimation of regulatory capital base (2/2) Actual Actual Actual Actual Actual Estimate Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast End of year/as at FY 2007 FY 2008 FY 2009 FY 2010 FY /06/2012 FY 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Interest earning assets (IEA) 1,765,557 1,842,383 1,928,647 1,954,984 1,903,538 1,839,020 1,842,690 1,824,251 1,845,395 1,905,940 1,970,324 2,038,237 2,110,000 2,185,968 2,252,850 2,309,679 Risk weighted assets as % of interest earning assets Risk weighted assets (RWA) 1,145,419 1,415,462 1,532,638 1,623,718 1,599,875 1,545,649 1,548,733 1,533,236 1,551,007 1,601,893 1,656,006 1,713,086 1,773,400 1,837,250 1,893,462 1,941,226 Required total common equity ratio with 5% safety margin (in %) Required total common equity 48,108 59,449 64,371 68,196 67,195 64,917 65,047 72,445 89, , , , , , , ,637 Required total capital ratio with 5% safety margin (in %) Required total capital 96, , , , , , , , , , , , , , , ,020 Total common equity n/a n/a 219, , , , , , , , , , , , , ,020 Total common equity ratio (in %) n/a n/a Assumed ratio Tier 1 vs. Total capital (in %) n/a n/a Adjusted Total capital / Capital adequacy n/a n/a 219, , , , , , , , , , , , , ,020 Adjusted Total capital ratio / Capital adequacy ratio (in %) n/a n/a Total equity 368, , , , , , , , , , , , , , , ,020 Total equity/adjusted actual total capital (in %) n/a n/a End of year/as at VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F Difference between total common equity and required common equity (% points) Difference between total capital and required total capital (% points) Estimated excess of capital (new additional total common equity required) 103,918 1,302-1,493-4,274-15,413-16,411-17,496-18,677-6,197-5,266 Estimated excess of capital (new additional total capital required) 103,918 1,302-1,493-4,274-15,413-16,411-17,496-18,677-6,197-5,266 Estimated excess of capital (new additional regulatory capital required) 103,918 1,302-1,493-4,274-15,413-16,411-17,496-18,677-6,197-5,266 Note.* The regulatory level of total capital has been assumed at the regulatory level from year 2012 onwards. Immediate decrease reflects the controlling interest being valued (full control over the management policies). 53

146 Appendix W: Deriving the cost of equity Risk free rate has been estimated as a median yield to maturity for government bonds of European monetary union members with the credit rating AAA attributed by Moody s as at the date of valuation. Due to the premise of going concern, the maturity of 10 years is assumed as appropriate time period for the risk free rate. While the potential default of several developed economies have triggered investor concerns, the economic slowdown of the Western economies resulted in selling of risky assets and moving them into safer assets, including bonds (in Europe especially Swiss, German, Swedish, Danish, Norwegian, Finish and Austrian) and deposits in banks. The banks invest the excess deposits over loans again into safest bonds and thus further drive down the yields. As a response, as at the date of valuation YTM is bellow the three year average risk free rate. Figure 37. The YTM for AAA rated 10Y governmental bonds of EMU members 6.0 Yield to maturity for AAA rated government bonds (in %) May 2005 Jun 2006 Sep 2007 Nov 2008 Jan 2010 Mar 2011 Yield to maturity for AAA rated EU government bonds 3 year median 3.6 May 2012 Note.* The maturity of the government bonds is 10 years. Source: European Central Bank, Statistical Data Warehouse, 2012b. Long-term inflation within the European Monetary Union (EMU) should aim to be at the same level for all member countries of the union. As a result no difference in the inflation between European Monetary Union (EMU) and Slovenia has been added to the risk free rate. Equity risk premium has been determined based on the implied equity risk premium for US S&P 500 Index. As at the date of valuation it amounts to 6.11% (Damodaran, 2012b). The premium is calculated on the basis of the estimated growth rates of the index and averaged past dividend and buyback yields. The beta has been calculated based on the bottom-up approach. This approach is normally used for non-trading companies. It assumes that the average beta of comparable peers could be applied for the case bank. 54

147 Company Table 20. Betas for banks mainly exposed to developing (EE) markets Country GICS Sub-Industry classification Levered beta (Bloomberg) Two year weekly beta values Five year monthly beta values Debt / Market value of equity (in %) Effective tax rate (in %) OTP Banka Slovensko AS Slovakia Diversified Banks Nova Kreditna Banka Maribor dd Slovenia Diversified Banks Bank Zachodni WBK SA Poland Diversified Banks BRE Bank SA Poland Diversified Banks ING Bank Slaski SA Poland Diversified Banks Vseobecna Uverova Banka AS Slovakia Diversified Banks Bank BPH SA Poland Diversified Banks Powszechna Kasa Oszczednosci Bank Poland Diversified Banks Bank Handlowy w Warszawie SA Poland Diversified Banks Bank Pekao SA Poland Diversified Banks Komercni Banka AS Czech Diversified Banks Bank Millennium SA Poland Diversified Banks Erste Group Bank AG Austria Diversified Banks Raiffeisen Bank International AG Austria Diversified Banks Kredyt Bank SA Poland Diversified Banks Median Average Note.* Betas are identified as at the valuation date. By adjusting them with the Blum s formula, future oriented betas have been estimated. All betas presented above are statistically significant. Source: Beta for Eastern European banks, In order to have an impression of beta in developed equity markets refer to the figure below. Company Table 21. Betas for banks mainly exposed at developed (WE) markets Country GICS Sub-Industry classification Levered beta (Bloomberg) Two year weekly beta values Five year monthly beta values Debt / Market value of equity (in %) Effective tax rate (in %) BKS Bank AG Austria Diversified Banks Oesterreichische Volksbanken AG Austria Diversified Banks Bank fuer Tirol & Vorarlberg AG Austria Diversified Banks Banco di Desio e della Brianza SpA Italy Diversified Banks Ringkjoebing Landbobank A/S Denmark Regional Banks Sparebank 1 Nord Norge Norway Regional Banks Spar Nord Bank A/S Denmark Regional Banks Sparebanken More Norway Regional Banks Sparebanken Vest Norway Diversified Banks Vestjysk Bank A/S Denmark Regional Banks SpareBank 1 Buskerud-Vestfold Norway Regional Banks Banque Cantonale Vaudoise Switzerland Regional Banks Banca Popolare di Sondrio SCARL Italy Diversified Banks Sydbank A/S Denmark Diversified Banks Basler Kantonalbank Switzerland Regional Banks Ringkjoebing Landbobank A/S Denmark Regional Banks Sparebank 1 Nord Norge Norway Regional Banks Vestjysk Bank A/S Denmark Regional Banks Median Average Note.* Betas are identified as at the valuation date. By adjusting them with the Blum s formula, future oriented betas have been estimated. All betas presented above are statistically significant. Source: Beta for Western European banks,

148 By using a longer time scale (not daily) yields for deriving the beta values one avoids the need of applying the sum beta (illiquidity effect). Five year monthly betas are not assumed as the best proxy, since five year period in larger scale reflects the extreme conditions (above average fear and thus above average volatility) on the equity markets in times of the financial crisis. As a result, the two year weekly beta values have been chosen as more appropriate. Median beta is taken in order to eliminate the outliers. Gorenjska banka operates exclusively in Slovenia. Due to the liquidity problems and relatively (too) high yield to maturity of Slovenian governmental bonds, a normalised country risk premium in amount of 3.54% derived from the statistical model for its credit rating (assigned by Moody s) group of A2 at the date of valuation has been applied. Figure 38. YTW for the most liquid gov. bonds of EMU members as at the val. date 12.0% 10.0% Yield to worst (YTW) 8.0% 6.0% 4.0% 2.0% 0.0% France 3.4% Finland 2.6% Germany 2.4% Austria 2.9% Netherlands 2.5% Belgium 3.7% Moody's credit grade Slovenia 6.3% Spain 7.0% Italy 6.3% Aaa Aa1 Aa2 Aa3 A1 A2 A3 Note.* Where possible the government bond with maturity closest to 20 years with annual or semi-annual coupons have been chosen. Offering amount of at least 1.5bn and outstanding amount of 2.5bn or more has been applied as a search query. The Slovenian government bond (with maturity in 2024) is presented only for the indicative purposes. Source: Government bonds, In order to reflect for the higher volatility of emerging equity markets above corporate bonds, Damodaran recommends adjusting the CRP estimate by 1.5 (Damodaran, 2012a). An appraiser who would eventually derive the CRP from the volatility of the SBI TOP, could eventually make a big mistake. It is important to be aware of its illiquidity issues. The volatilities of comparable Central European countries are above the volatility of S&P500, i.e. Czech (1.57x) and Polish (1.51x), while this is not the case for the SBI TOP. 56

149 Figure 32: 90-days volatility of S&P 500 and SBI TOP, day volatility of indices 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Jun 03 Jun 05 Jun 07 Jun 09 Jun 11 3 year avg. vol. S&P500 Volatility SBI TOP 3 year avg. vol. SBI TOP Volatility S&P % 14.4% Note.* The government bond whit maturity closest to 10 years has been chosen (maturity in September 2024). The offering and outstanding amount is 1.5 billion. Source: Volatility of SPI TOP and S&P 500, Note, that a direct use of the Slovenian long-term bond YTW (instead of the risk free rate and country risk premium) has not been considered, since it is a vague indicator of the required return base for Slovenia, due to the speculations. Figure 33. The YTW for Slovenian long-term bond, Yield to worst (YTW) for Slovenian government bond (in %) Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Note.* The government bond whit maturity closest to 10 years has been chosen (maturity in September 2024). The offering and outstanding amount is 1.5 billion. Source: Slovenian long-term bond, According to the market capitalization range, our case bank would be placed within 9 th decile, which requires a size premium of 2.80%. The size premium has been attributed as estimated by Ibbotson SBBI 2012 Valuation Yearbook (Morningstar, 2012). 57

150 Table 22. Size premium as estimated by Ibbotson SBBI 2012 Yearbook Decile Market cap. Range minimum ( '000) Range maximum ( '000) Size premium (in %) 1 Large-cap 20,053, ,886, Large-cap 8,971,195 19,953, Mid-cap 4,657,517 8,930, Mid-cap 3,064,574 4,633, Mid-cap 2,099,321 3,059, Low-cap 1,412,396 2,099, Low-cap 884,562 1,412, Low-cap 547, , Micro-cap 267, , Micro-cap 1, , Source: Morningstar, Ibbotson SBBI 2012 Valuation Yearbook, No indefinite risks specific to Gorenjska banka have been identified even though the media often write about potential irregularities (for example: Vojko, 2010). Thus 0% specific company risk premium has been assumed. Appendix X: Marketability value Gorenjska banka is not listed on the Ljubljana stock exchange or any other exchange. Valuing one ordinary share of Gorenjska banka thus requires a marketability discount applied to the estimated market value of equity. The restricted stock studies are all mainly based on minority shares. As a result, it is assumed, that the studies appropriately reflect the discount that should be applied for the minority equity share being valued. The results of the restricted stock studies are market based and conceptually easy to understand. However, many appraisers warn against the deficiencies of particular studies, such as extremely high standard errors and relatively small sample sizes. 58

151 Table 23. Restricted stocks studies Study Period Sample size Min. holding period Average DLOM (in %) Median DLOM (in %) Prior to 1990 SEC Institutional Investor years Milton Gelman years Robert Trout years n/a Robert Moroney years Michael Maher years n/a Standard Research Consultants years n/a Willamette Management Associates years n/a Hertzel & Smith years William Silber years n/a Median (studies prior to 1990) Average (studies prior to 1990) Between 1990 and 1997 Management Planning, Inc years Bruce Johnson years n/a FMV Opinions years Columbia Financial Advisers years Tetra Tech, Inc. SEC Form 10-K n/a n/a 1.5 years n/a Median (studies between 1990 and 1997) Average (studies between 1990 and 1997) After 1997 Columbia Financial Advisers year Tetra Tech, Inc. SEC Form 10-K n/a n/a 1 year n/a FMV Opinions year Trugman Financial Advisors year FMV Opinions year Median (studies after 1997) Average (studies after 1997) Source: S. P. Pratt, Business valuation. Discounts and premiums, 2009, p. 89; S.P. Pratt & R.J. Grabowski, Cost of capital. Application and examples, 2010, p. 577; R. Reilly & A. Rotkowski, The discount for lack of marketability: Update on current studies and analysis of current controversies, 2007; New York State Society of CPA s, A review of Lack of Marketability Discount Issues, According to the FMV Opinions (2012) restricted stocks study industry as such does not have a significant impact on the DLOM. However, the financial characteristics and stock price volatility have. As presented in the table below, the median discounts vary across industries. The variation in discounts appears to result from differing key financial characteristics. For example, above average discounts for services industry may be a result of below the average total asset values and greater stock price volatility, while similarly, lower-than-average discounts in finance, insurance and real estate, as well as retail trade, may be due to high market values and total assets and lower stock price volatility compared to other groups. 59

152 Table 24. Estimated marketability discount by industries Industry Sample Discount (in %) % share Market value placed ($m) Total assets ($m) volatility (in %) All Mining Manufacturing Transportation, Communication, Electric, Gas and Sanitary services Wholesale trade Retail trade Finance, Insurance, Real estates Services Source: FMV Opinions, Determining Discounts for Lack of Marketability. A Companion Guide to The FMV Restricted Stock Study, p. 13. Figure 39. Estimated marketability discount by block sizes Marketability discount (in %) %-10.0% % % % >40.0% Block size (as % of outstanding) Source: FMV Opinions, Determining Discounts for Lack of Marketability. A Companion Guide to The FMV Restricted Stock Study, p

153 In order to present the relativity of the discount for lack of marketability studies, one of the latest pre-ipo studies is presented below. Besides Valuation Advisors study, also Emory s and Williamette Management s studies are well known. Although the sample size of pre-ipo studies is by far the largest of all DLOM empirical models, many practitioners stress that Pre- IPO studies may suffer from a selection bias (all the companies in the study went public). Nevertheless, the results of pre-ipo studies are market based and conceptually easy to understand. Period Table 25. Valuation Advisors' pre-ipo studies 1-90 days days days days 1-2 years 2001 Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Nr. of transactions Median DLOM (in %) Results Nr. of transactions Median DLOM (in %) Source: S.P. Pratt & R.J. Grabowski, Cost of capital. Application and examples, 2010, p

154 It is assumed that an ordinary share of Gorenjska banka could be sold in maximum half a year to one year, therefore the restricted stock studies analyzing the discounts after 1997 have been assumed as the base discount. In order to adjust for the specifics of Gorenjska banka, slightly modified Mandelbaum factors have been used. Table 26. Final estimation of marketability discount for Gorenjska banka Factors influencing DLOM Negative (increasing DLOM) < Effect > Positive (decreasing DLOM) Rationale Weights 2.0% 1.0% 0.0% -1.0% -2.0% Information access and reliability x Reporting annualy. Modest investor relations. Estimated holding period (until IPO or sale) x Estimated holding period between half and one year. Share size (degree of control transferred) x None. Potential buyers x Currenly modest interest in Slovenian equity shares. Dividend policy (dividend yield, dividend payements) x High and stable dividend payements (except for last year). Nature of the firm (history, position in the industry & outlook) x Long history of profitability (always above industry). Management x Experienced management, but little depth. Costs associated with IPO x Publicly traded stocks after the merger with Abanka (January 2013). Redemption policy x Financial capability and historical actions. Transfer restrictions x No abnormal restrictions. 0.0% 3.0% 0.0% -3.0% -2.0% ESTIMATION OF THE MARKETABILITY DISCOUNT Median discount for an est. holding periods of 1 year 13.5% Estimated adjustment based on factors influencing DLOM -2.0% Marketability discount 11.5% Note.* The factors influencing the discount for lack of marketability are similar to Maundelbaum s, which have been considered as appropriate guideline to consider when estimating a DLOM by US courts. 62

155 Appendix Y: Value of control estimation (based on the DCFE model) Table 27. Discounted cash-flow to equity model value estimate '000 Fiscal year VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F TV Time factor Net income 5,827 27,205 31,204 35,397 32,041 32,633 33,290 34,019 35,147 36,063 Estimated excess of capital (new add. regulatory capital required) 103,918 1,302-1,493-4,274-15,413-16,411-17,496-18,677-6,197-5,266 Depreciation 886 2,012 2,052 2,127 2,187 2,242 2,301 2,363 2,430 2,493 Net investments (refered also as Net CapEX) -1,378-2,917-2,872-2,552-2,406-2,242-2,301-2,363-2,430-2,493 Free cash flow to equity holders 109,253 27,601 28,891 30,698 16,409 16,221 15,794 15,341 28,950 30,797 31,567 Discount Factor PV of FCFE 100,961 21,781 19,469 17,666 8,064 6,808 5,660 4,695 7,566 6,873 48,252 Sum PV RE 199,545 73% Sensitivity analysis - growth & cost of equity PV of TV 73,756 27% Equity value before any adjustments 273, % % 2.0% 2.5% 3.0% 3.5% 16.1% Investment in associates and subsidiaries 4, % Fair value of investment property 2, % % Equity value of 100% share before discounts = (19+20) 280, % Discount for lack of marketability 11.5% Value per share (in EUR) 813 P/BV before discounts 0.83 P/BV for equity value of 1% share 0.74 Value per share for a minority share 714 Value of control 99 P/TBV before discounts 0.84 Control premium 13.9% P/TBV for equity value of 1% share 0.74 Discount for lack of control 12.2% Note.* All the inputs for the model have been derived from the projections. The valuation model consists out of 3 stages distressed phase, developing phase and maturity phase. Calculation of additional regulatory capital required is presented in the Appendix V. The net investments are projected slightly above the amortization until FY16 in order to cover the estimated CapEx gap. Other adjustments relate to investment in associates and subsidiaries and fair value of investment property, since the cash-flows do not reflect their value. Estimation of marketability discount is presented in the Appendix X. 63

156 Appendix Z: Discounted cash-flow to equity holders Table 28. Discounted cash-flow to equity model value estimate '000 Fiscal year VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F TV Time factor Net income 5,827 27,205 31,204 35,397 32,041 32,633 33,290 34,019 35,147 36,063 Est. excess of capital (increase in reg. capital base) 19,134 10,153 5,470 1,321 1,439 1,638 1,852 2,083-6,197-5,266 Depreciation 886 2,012 2,052 2,127 2,187 2,242 2,301 2,363 2,430 2,493 Net investments (refered also as Net CapEX) -1,378-2,917-2,872-2,552-2,406-2,242-2,301-2,363-2,430-2,493 Free cash flow to equity holders 24,469 36,452 35,854 36,293 33,261 34,270 35,142 36,101 28,950 30,797 31,567 Discount Factor PV of FCFE 22,612 28,766 24,162 20,886 16,346 14,382 12,594 11,049 7,566 6,873 48,252 Sum PV RE 165,237 69% Sensitivity analysis - growth & cost of equity PV of TV 73,756 31% Equity value before any adjustments 238, % % 2.0% 2.5% 3.0% 3.5% 16.1% Investment in associates and subsidiaries 4, % Fair value of investment property 2, % % Equity value of 100% share before discounts 246, % Discount for lack of marketability 11.5% P/BV before discounts 0.73 Number of common shares 331,416 P/BV after discounts 0.65 Number of own common shares 25,715 Effective number of common shares 305,701 P/TBV before discounts 0.74 Value per share (in EUR) 714 P/TBV after discounts 0.65 Note.* All the inputs for the model have been derived from the projections. The valuation model consists out of 3 stages distressed phase, developing phase and maturity phase. Calculation of additional regulatory capital required is presented in the Appendix V. The net investments are projected slightly above the amortization until FY16 in order to cover the estimated CapEx gap. Other adjustments relate to investment in associates and subsidiaries and fair value of investment property, since the cash-flows do not reflect their value. Estimation of marketability discount is presented in the Appendix X. 64

157 Appendix AA: Dividend discounting model Table 29. Dividend discount model value estimate '000 Fiscal year 30/06/2012 VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F TV Time factor Dividend per share Total dividends paid 0 21,399 21,399 21,399 21,399 21,399 21,399 21,399 21,399 21,399 21,934 Discount Factor PV dividends 0 16,887 14,421 12,315 10,516 8,981 7,669 6,549 5,593 4,776 33,528 Present value of free cash-flow to equity 87, % Sensitivity analysis - growth & cost of equity Present value of terminal value 33, % Equity value of 100% share before discounts 121, % % 2.0% 2.5% 3.0% 3.5% 16.10% Liquidity discount 11.5% 16.60% % Equity share 100.0% 17.60% Equity value of 100% share after discounts 107, % Number of common shares 331,416 Number of own common shares 25,715 Effective number of shares 305,701 P/TBV before discounts 0.36 Value per share ( ) P/TBV after discounts 0.32 Note.* The model reflects the dividend policy of the bank (i.e. to pay-out fixed dividend in amount of 70 per share). The model is not considered as appropriate, since it does not account neither for the capital adequacy ratio and excess of shareholders' equity, nor for the potential capital gains, which could occur by reinvesting the retained capital. The model also considers that the dividends will not be paid out in Estimation of marketability discount is presented in the Appendix X. 65

158 Appendix BB: Residual income model Table 30. Determining the market value of equity as at '000 Book value Adjustment Market value Line item June 30th, 2012 June 30th, 2012 Cash and balances with central bank 18,943 18,943 Financial assets held for trading 39,531 39,531 Financial assets designated at fair value through profit or loss 58,138 58,138 Available-for-sale financial assets 480, ,252 Loans and receivables loans and receivables to banks 22,423 22,423 loans and receivables to customers 1,217,972 1,217,972 Investment property 681 Investments in subsidiaries, associate 4,625 5,306 0 Property and equipment 7,977 7,977 Intangible assets 2,979 2,979 Deferred income tax assets 14,733 14,733 Other assets 5,494 5,494 Total assets 1,873,748-5,306 1,868,442 Financial liabilities measured at amortised cost due to customers 1,152,117 1,152,117 debt securities in issue 31,089 31,089 due to banks 1,195 1,195 borrowings from banks and other customers 251, ,886 Due to central banks 80,349 80,349 Trading liabilities 0 0 Provisions 2,430 2,430 Tax liabilities 1,837 1,837 Other liabilities 11,055 11,055 Total liabilities 1,531,957 1,531,957 Total equity 341,791-5, ,485 Note.* The use of net asset method is appropriate for the calculation of the controlling interest only. The adjustments refer to the sale of the investments in subsidiaries, associates and investment property (assumed as business non-related property). 66

159 GBKR - Residual income model (RIM) Table 31. Residual income model value estimate '000 Fiscal year 30/06/2012 VI-XII 2012 F FY 2013 F FY 2014 F FY 2015 F FY 2016 F FY 2017 F FY 2018 F FY 2019 F FY 2020 F FY 2021 F TV Time factor Market value of equity (BOP) 336, , , , , , , , , ,448 Change in equity -211,697-1,302 1,493 4,274 15,413 16,411 17,496 18,677 6,197 5,266 Market value of equity (EOP) 124, , , , , , , , , ,714 Net income 5,827 27,205 31,204 35,397 32,041 32,633 33,290 34,019 35,147 36,063 Return on equity (in %) 3.5% 21.8% 25.3% 28.3% 24.8% 22.6% 20.7% 19.1% 17.8% 17.7% 17.1% Est. excess of capital (increase in reg. capital base) 103,918 1,302-1,493-4,274-15,413-16,411-17,496-18,677-6,197-5,266 Capital charge -57,543-21,340-21,117-21,373-22,104-24,739-27,546-30,538-33,732-34,792 Cost of equity (in %) 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% 17.1% Residual income 52,203 7,166 8,594 9,750-5,476-8,518-11,752-15,197-4,782-3,995 0 Discount factor Present value of residual income (PV RE) 48,240 5,655 5,791 5,611-2,691-3,575-4,212-4,651-1, Market value of equity 336, % Present value of residual incomes 48, % Sensitivity analysis - cost of equity Present value of terminal value 0 0.0% Equity value of 100% share before any adjustments 384, % % 16.6% 17.1% 17.6% 18.1% 2% Investment in associates and subsidiaries 4,626 Fair value of investment property 2,903 Impairment charges (bankruptcy procedures) -72,250 Equity value of 100% share before discounts 319,792 Discount for lack of marketability 11.5% Discount for lack of control 12.2% Effective number of common shares 305,701 P/TBV before discounts 1.15 Value per share (in ) 798 P/TBV for equity value of 100% share 0.73 Note.* All the inputs for the model have been derived from the projections. The valuation model consists out of 3 stages distressed, developing & maturity phase. Calculation of add. regulatory capital required is presented in the Appendix V. The valuation model assumes an even distribution of cash-flow throughout the period (midyear discounting), due to the basis of value, which relates to the controlling interest. Est.market value of equity at the end of the period (EOP) is calculated as est. Adjusted book value of equity at the beginning of the period (BOP) plus net income. Capital charge is defined as adj. beginning of the period (BOP) book value of equity times cost of equity. Calculation of add. regulatory capital required is presented in the Appendix V, adjustment for the control in the 67

160 Appendix Y and estimation of marketability discount in the Appendix X. Other adjustments relate to investment in associates and subsidiaries and fair value of investment property, since the cash-flows do not reflect their value. The additional equity adjustments relates to the future tax effect, which is a result of the estimated CapEx gap, that has occured due to the relatively modest investing in the past. Please refer to the Appendix U for more information related to the impairment charges. 68

161 Appendix CC: Comparable companies method Comparable companies descriptions Table 32. Comparable companies description (1/4) Bank name Bank description Markets Operations Size Tier I Abanka Vipa Nova Kreditna Banka Maribor Bks Bank Erste Group Bank Raiffeisen Bank Internationa Abanka Vipa, d.d. provides personal and corporate banking solutions in Slovenia and internationally. Its personal banking solutions include personal accounts, e-banking, cards, credit and loans, savings, investment, insurance, safety-deposit boxes, and consumer money transfer. The company s corporate banking solutions include accounts, e-banking, cards, business financing, trade finance, and investment, as well as advice on spot/forward sales and purchases of foreign currency, currency conversion, options or orders. In addition, it offers investment banking services, including equity and precious metals trading, corporate finance advisory, asset management, and private banking; and treasury services, such as currency trading, interest rate derivative product, and fixed income products. Further, the company provides financial services, such as factoring; issuing guarantees and other commitments; lending, including consumer credit, mortgage credit, and financing commercial transactions; trading in foreign means of payment, including foreign exchange transactions; trading in financial derivatives; connection analyzing and provision of information on the creditworthiness of legal persons; mediation in the sale of insurance policies; issuing and managing instruments of payment, such as payment cards, travelers cheques, and bank drafts; safe custody services; services involving securities; managing pension funds; and performance of transaction services and trusteeship services. It has a strategic partnership with Zavarovalnica Triglav to provide bank assurance products. Abanka Vipa, d.d. was formerly known as Abanka, d.d. and changed its name to Abanka Vipa, d.d. in December 2002 as a result of the merger with Banka Vipa, d.d. The company was founded in 1955 and is based in Ljubljana, Slovenia. Nova Kreditna banka Maribor d.d., together with its subsidiaries, provides banking products and services in the Republic of Slovenia, Serbia, and Croatia. It offers retail banking products and services for individuals and sole proprietors, including current/demand accounts, short-term and long-term deposit accounts, and savings accounts; consumer loans, such as instant loans, bridge loans, car loans, and student loans, as well as housing loans and loans to sole proprietors; debit and charge cards; mobile payment and Internet banking services; and mutual funds, pension funds, and non-life and life insurance products. The company also offers corporate banking products and services for SMEs and corporations that include short-term and long-term deposit accounts, and current/demand accounts in domestic and foreign currencies; short-term loans, credit line facilities, overdraft facilities, and long-term loans to finance investments in infrastructure and fixed assets, such as equipment and buildings, as well as ancillary lending services; documentary operations consisting of guarantees and letters of credit; domestic, cross-border, and international payments; and factoring, Internet banking, cash management, and financial advisory services. In addition, it engages in treasury operations; correspondent banking and international long-term funding arrangement activities; and the provision of brokerage and portfolio management services to individuals and corporate clients. Further, the company offers real estate and moveable property leasing services; and real estate services, such as purchase and sale, real estate management, consulting, capital investment management, and property development and investment services. As of December 31, 2010, it operated 96 branch offices, including 15 full service branches, 75 limited branches, and 6 PBS branches; 278 ATMs; and 4,169 POS terminals. The company was founded in 1862 and is headquartered in Maribor, the Republic of Slovenia. BKS Bank AG, together with its subsidiaries, provides a range of banking services to retail, corporate, and business banking customers primarily in Austria. The company offers savings deposits, sight and time deposits, personal loans, home loans, credit cards, asset management, and online banking services. It also engages in the motor vehicle and movable property leasing business; and the acquisition, construction, renting, letting, and management of real estate. The company serves industry, retailing and wholesaling, gewerbe businesses, transport, public sector, private individuals, professions, and tourism sectors. It also has operations in Slovenia, Croatia, Slovakia, Italy, and Hungary. The company was founded in 1922 and is headquartered in Klagenfurt, Austria. Erste Group Bank AG provides various banking and other financial services. It offers savings accounts, asset management, consumer credit and mortgage lending, investment banking, securities and derivatives trading, portfolio management, project finance, foreign trade financing, corporate finance, capital market and money market services, foreign exchange trading, leasing, and factoring services. The company also provides various accounts, credit cards, saving and assessment products, financial security, and credit products to private clients. In addition, it offers corporate banking services, including financing, cash management solutions, and payments and account management services; investment banking services comprising mergers and acquisitions, equity and debt capital markets, specialized finance, and merchant banking services; real estate lending and leasing services; invests, develops, and constructs various real estate properties; and infrastructure financing services for various corporate customers. Further, the company provides private banking services; capital markets services, such as bonds, structured products, warrants, and interest and foreign exchange management services to retail and corporate clients; and custody services. The company offers its services to its customers through operating approximately 3,200 branches in the Czech Republic, Austria, Slovakia, Ukraine, Hungary, Romania, Croatia, and Serbia. Erste Group Bank AG was founded in 1819 and is based in Vienna, Austria. Raiffeisen Bank International AG provides corporate, retail, and investment banking services. It offers various financing products and services, including corporate finance, structured finance, corporate bonds, factoring, and leasing services; investment solutions comprising securities, money market investments, and tailor-made investment solutions; currency, interest, and commodity hedging services, as well as trustee transaction processing services; and trade and export finance services consisting of letters of credit/collection and guarantees. The company also provides investment banking services, such as equity capital markets, mergers and acquisitions/privatizations, securitization, and debt capital market and loan syndication services, as well as arranges Schuldscheins issued by national and international borrowers to corporate customers, and institutional and private investors. In addition, it offers payments and cash management services comprising traditional payment products in the areas of domestic payments, foreign payments, and EU payments; and electronic banking and e-business, international cash pooling, and special cash management solutions to commercial customers and financial institutions. Further, the company provides payment services; custody and fund services; and debit cards, credit cards, and prepaid cards. It primarily serves corporate customers, financial institutions and sovereigns, and retail customers. Raiffeisen Bank International AG operated 2,928 business outlets in central and eastern Europe. The company is based in Vienna, Austria. Raiffeisen Bank International AG is a subsidiary of Raiffeisen Zentralbank Österreich Aktiengesellschaft. Bank Fuer Tirol & Vorarlberg Bank für Tirol und Vorarlberg Aktiengesellschaft provides corporate and private banking products and services in Austria, Vienna, Switzerland, northern Italy, and southern Germany. It also engages in leasing activities; and treasury and trading activities. The company serves corporate clients, including small, medium, and large business customers, as well as accountants; and retail customers, such as private individuals, freelance professionals, and micro companies. As of December 31, 2011, it had 40 branch offices. The company was founded in 1904 and is headquartered in Innsbruck, Austria. Source: Comparable banks selection,

162 Comparable companies descriptions Table 33. Comparable companies description (2/4) Bank name Bank description Markets Operations Size Tier I Bank Zachodni Wbk Bre Bank Ing Bank Slaski Vseobecna Uverova Banka Kredyt Bank Bank Zachodni WBK S.A., together with its subsidiaries, engages in the provision of various banking products and services for personal customers, small and medium enterprises, and large companies. It offers regular and customised accounts, premium and foreign currency accounts, and savings and current accounts; term deposits; consumer loans and home mortgages, overdrafts, revolving and working capital loans, credit guarantees, and construction loans, as well as term-loans for commercial, residential, office, and warehouse facilities; payment cards comprising credit, debit, pre-paid cards, discount cards, and contactless payment gadgets; inbound and outbound payments services; and transactional banking services. The company also provides trade financing, cash management, and leasing services; mutual funds, including pension schemes and investment programs; factoring services for working capital finance; treasury instruments for companies to hedge f/x and interest rate risks; tourist, motor, and property insurance plans; and bancassurance products, such as payment protection covers, loan, and credit card insurances. In addition, it offers consultancy service to enterprises and corporations that are seeking equity; and assisting in mergers, acquisitions, and takeovers or share disposal; underwriting financing; brokerage services; and asset management services. As of December 31, 2011, the company operated 526 outlets in Poland. It also operates three corporate business centers, seven business banking centers, and seven regional offices. The company is headquartered in Wrocław, Poland. Bank Zachodni WBK S.A. is a subsidiary of Banco Santander, S.A. BRE Bank SA, together with its subsidiaries, provides banking and other financial services in Poland, the Czech Republic, and Slovakia. The company s Retail Banking segment offers current and savings accounts; term deposits; lending products consisting of retail mortgage loans, cash loans, car loans, overdrafts, credit cards, and other loans; debit cards; insurance products; and investment products and brokerage services to individuals and micro-businesses. Its Corporates and Financial Markets segment provides current accounts; multi-functional Internet banking services; cash management services and trade financing; term deposits; foreign exchange transactions; and short-term financing and investment loans, cross-border credit, project financing, and structured and mezzanine financing to small, medium, and large-sized companies, as well as public sector entities. This segment also offers investment banking products, including foreign exchange options, forward contracts, interest rate derivatives, and commodity swaps and options; debt origination services; treasury bills and bonds; non-government debt; medium-term bonds; buy sell back and sell buy back transactions; repo transactions; and leasing and factoring services. In addition, this segment is involved in treasury, financial markets, and financial institutions operations; and conducts market making in PLN denominated cash and derivative instruments. Further, the company engages in residential real estate development activities; and the provision of services, such as settlements, database servicing, electronic and paper archiving, and input of data to systems. As of December 31, 2011, it served approximately 14,000 corporate clients through 29 corporate branches and 19 corporate bureaus; and approximately 3.9 million retail clients through a network of 240 outlets. The company was founded in 1986 and is headquartered in Warsaw, Poland. BRE Bank SA is a subsidiary of Commerzbank Auslandsbanken Holding AG. ING Bank Slaski S.A., together with its subsidiaries, provides various banking products and services to individuals and institutional clients in Poland. Its retail banking products and services include credit products, such as overdraft on the savings and settlement accounts, loans related to cards, hire purchase loans, housing loans, mortgage loans, and contract loans granted by the building society; deposit products consisting of savings accounts, current accounts, and term deposits; structured products; ING fund units; brokerage services; and bank cards for individual customers and sole traders. The company s corporate banking products and services consist of loan products, such as working loans and investment loans; deposit products, including current accounts, term deposits and negotiated deposits, and savings accounts; financial market products in money and capital markets; trust services; capital market operations; and leasing and factoring services to strategic clients, large corporate entities, and mid-sized companies. In addition, the company provides Internet, phone, mobile, and SMS banking services; pension funds and investment advisory services; real estate leasing; and insurance products. It operates 595 cash deposit machines and 777 ATMs. The company is headquartered in Katowice, Poland. Bank is a subsidiary of ING Bank N.V. Vseobecná úverová banka, a.s. provides retail and commercial banking services. It offers various deposit products, including term deposits in EUR and foreign currency, flexi savings, saving accounts, bonus term deposits, Internet deposits, passbooks, mutual funds, current accounts, business accounts, fund accounts, and securities accounts. The company s loan portfolio comprises housing and consumer loans, credit cards, overdrafts, mortgage loans, business credit, loans for small businesses, commercial loans, loans for farmers, secured loans, entrepreneurship development support loans, trade finance, commercial real estate finance, financial lease, securities issues, and finance for municipalities. It also offers debit payment cards; domestic, international, and Western Union payment services; documentary payment services; cash services, including cash deposits and withdrawals, cash advances, travelers cheques, exchange services, and fast money; and safekeeping and custody services. In addition, the company offers insurance products and services, including life insurance, travel insurance, loan insurance, deposit product insurance, key person insurance, loan repayment capacity insurance, corporate VISA credit card travel insurance, and statutory insurance of motor vehicles; treasury products; and Internet and mobile banking, private banking services, ecommerce services for online retailers, and services for EFTPOS dealers. Further, it engages in consumer finance, asset management, factoring and forfeiting, non-banking credit provision, operational leasing, and pension fund management businesses. The company serves individuals, entrepreneurs, and companies. As of December 31, 2011, it had a network of 250 points of sale, including retail branches, corporate branches, and mortgage centers in Slovakia; and 1 branch in the Czech Republic. The company is based in Bratislava, the Slovak Republic. Vseobecná úverová banka, a.s. is a subsidiary of Intesa Sanpaolo S.p.A. Kredyt Bank SA provides a range of banking products and services to individual customers, business entities, and local authorities primarily in Poland. The company accepts deposits, such as call and term deposits; offers loans, bank guaranties, letters of credit, securities, checks and bills of exchange, and warrants; and issues bank securities, payment cards, and electronic money instruments. It also engages in bank settlement, forward financial operations, brokerage, lease, factoring, underwriting, forfeiting, and insurance agency activities; purchases and disposes debt; stores valuable items and securities; rents safe deposit boxes; and offers commissioned services relating to issuance of securities. In addition, the company provides a range of services comprising settlement services, derivatives, organizing syndicates, supporting investment projects, financing real estate transactions, financing foreign trade, and bulk payments; manages investments and pension funds; offers financial consulting and advisory services, as well as participates in the transactions of money market, bonds market, currency market, and interbank market. Further, it acts as a trustee in dealing with securities; as an intermediary and depositary for investment and pension funds; and as a payment agent for foreign investment funds, as well as engages in keeping accounting books and members registers for funds. The company serves individual and private banking customers; small, medium, and large companies; and state budgetary units at central and local levels. Kredyt Bank operates a network of 373 retail network units, including 99 branches and 274 affiliates, as well as other customer service outlets. The company was founded in 1990 and is headquartered in Warsaw, Poland. Kredyt Bank SA operates as a subsidiary of KBC Bank NV. Pko Bank Polski Powszechna Kasa Oszczednosci Bank Polski SA provides commercial banking services in Poland and internationally. It operates in three segments: Retail, Corporate, and Investment. The Retail segment s products and services comprise current and saving accounts, deposits, private banking services, investment products, credit and debit cards, consumer and mortgage loans, and corporate loans for small and medium-sized enterprises, and housing market customers. The Corporate segment s products and services consist of current and saving accounts, deposits, depositary services, currency and derivative products, sell buy back and buy sell back transactions, investment loans, and leases and factoring for corporate clients. The Investment segment is involved in investing and brokerage activities. The company was founded in 1919 and is headquartered in Warsaw, Poland. Source: Comparable banks selection,

163 Table 34. Comparable companies description (3/4) Comparable companies descriptions Bank name Bank description Markets Operations Size Bank Pekao Bank Pekao is a commercial bank, together with its subsidiaries, provides banking and financial services to individuals, small and medium-sized enterprises, and corporate customers in central and eastern Europe. Its deposit products current accounts, overnight deposits, term deposits, certificates of deposits, negotiable deposits, auxiliary accounts, special fund accounts, and escrow accounts. The company offers private banking solutions, including revolving credit line, payment card, insurance package, electronic banking, and asset management services for individuals. It also provides financial consultancy, banking packages, electronic banking, daily operations financing, investment financing, financing with European Investment Fund guarantee, deposit products, payment cards, structural funds, transaction and hedging products, lease financing, commercial property financing, and factoring services for enterprises. In addition, the company offers a range of banking products for supporting on-going business operations; electronic banking services; cash management products and services; deposit and investment products; treasury products; financing for large investment projects; and trade financing for corporate customers. Further, it provides custodial services for Polish and international financial institutions, custodian and investment banks, insurance companies, mutual and pension funds, and non-financial institutions; and brokerage services for capital market products and services, such as stocks, derivatives, and bonds. Additionally, the company is involved in business consulting, pension funds management, transferable agent, lease services, real estate development, real estate management, and call center businesses. The company was founded in 1929 and is headquartered in Warsaw, Poland. Bank Polska Kasa Opieki Spółka Akcyjna is a subsidiary of UniCredit S.p.A. Komercni Banka Bank Millennium Komercní banka, a.s., together with its subsidiaries, provides retail, corporate, and investment banking services primarily in the Czech Republic. The company s Retail Banking segment provides current and savings accounts, term deposits, building savings, pension insurance, overdrafts, credit card loans, personal loans, and mortgages to individuals. Its Corporate Banking segment offers current accounts, term deposits, revolving loans, business loans, mortgages, foreign currency and derivative products, syndicated and export financing, and guarantee transactions. The company s Investment Banking segment engages in trading with financial instruments. Komercní banka, a.s. provides its services through a network of approximately 395 branches and 677 ATMs, as well as through Internet, telephone, and mobile phone banking channels. The company was founded in 1990 and is headquartered in Prague, the Czech Republic. Komercní banka, a.s. is a subsidiary of Societe Generale Group. Bank Millennium S.A., together with its subsidiaries, provides various banking and financial products and services primarily in Poland. The company offers current, custody, and escrow accounts; credit, charge, and debit cards; term, standard, negotiated, and automatic overnight deposits; cash credit and current account overdraft facility; factoring services; and finance and operating leasing solutions. It also provides investment, working capital, current account, revolving, and mortgage loans; deposit boxes; mutual funds; accident insurance; structures products; tax advisory services; and trade financing products comprising letter of credit, bank guarantee, and documentary collection. In addition, the company engages in the management of investment funds; and provision of brokerage services, including purchasing and sale of securities, such as shares and bonds. Further, Bank Millennium S.A. offers treasury products consisting of spot, forex, FX forward, FX swap, FX option, forward rate agreement, interest rate swap, and cross currency interest rate swap products; and custody services. The company provides its services through a network of 447 outlets, as well as Internet banking, telephone banking, and a network of ATMs. The company was formerly known as BIG Bank GDANSKI and changed its name to Bank Millennium S.A. in The company was founded in 1989 and is based in Warsaw, Poland. Bank Millennium S.A. is a subsidiary of Banco Comercial Portugues S.A. Bank Ochrony Srodowiska Bank Ochrony Srodowiska S.A. provides banking products and services in Poland. It primarily engages in accumulating cash funds, lending, and clearing services, as well as offers financial advisory and consulting services. The company is based in Warsaw, Poland. Bank is a subsidiary of National Environmental Protection and Water Management Fund. Source: Comparable banks selection,

164 Table 35. Comparable companies description (4/4) Comparable companies descriptions Bank name Bank description Markets Operations Size Tier II Banco Desio E Della Brianza Banco di Desio e della Brianza S.p.A., together with its subsidiaries, provides various commercial banking services in Italy and internationally. It offers loans and deposits; financial, banking, and payment services; insurance products in the field of life and non life branches; asset management products; and debit and credit cards. The company also provides documentary credit, leasing and factoring, credit brokerage, and investment banking services. It serves households, artisans, producing families, professionals, financial and non financial companies, and private social institutions, as well as small, medium, and large enterprises. The company operates 171 branches. Banco di Desio e della Brianza S.p.A. is based in Desio, Italy. Ringkjoebing Landbobank A/S Ringkjøbing Landbobank A/S provides banking products and services in Denmark. It offers on demand, at notice, and time deposit accounts. The company also provides loans and guarantees for various sectors/businesses, including the cattle farming, pig farming, and other agriculture, hunting, and forestry; fishing; mink production; industry and raw materials extraction; energy supply; building and construction; trade; transport, hotels, and restaurants; information and communication; financing and insurance; and real estate. In addition, it offers financing for wind turbines; and engages in securities trading, asset management, and payment handling activities. The company was founded in 1886 and is headquartered in Ringkøbing, Denmark. Spar Nord Bank A/S Spar Nord Bank A/S provides various banking products and services to business and retail customers in Denmark. Its products and services include savings products, nonlife insurance, life insurance, and pension plans; loans and credits; and credit and debit cards. The company s trading and financial market activities focuses on forex and securities, including hedging and managing the transactions made by the local bank s customers; asset management; and share investment and bonds, as well as products and advice associated with export and import. It also offers foreign payments and trade finance services; and wholesale services to small and medium-sized financial institutions. The company serves approximately 250,000 customers with 69 local banks. Spar Nord Bank A/S is headquartered in Aalborg, Denmark. Banque Cantonale Vaudois-Reg Banque Cantonale Vaudoise, together with its subsidiaries, engages in retail banking, corporate banking, wealth management, and trading businesses in the Canton of Vaud, Switzerland. Its retail banking services comprise current accounts, savings accounts, payment cards, mortgages, investment funds, consumer loans, and private pensions. As of December 31, 2008, the company operated 68 retail locations and a network of 173 ATMs. Its corporate banking services include products for financing needs of working capital, investment, construction loans, and international trade finance, as well as instruments to hedge exchange-rate and interest-rate risk. The company s wealth management services include private and institutional asset management services. Banque Cantonale s trading business focuses on investment and hedging products, such as equities, bonds, currencies, derivatives, and structured products, as well as operates as a market-maker and offers arbitrage trading on currencies, fixed-income products, and equity derivatives. In addition, it provides a range of fund administration, custody, and securities lending/borrowing services to fund managers and banks. The company was founded in 1845 and is headquartered in Lausanne, Switzerland. Banca Popolare Di Sondrio Credito Emiliano Spa Banca Popolare di Sondrio, together with its subsidiaries, provides banking and other financial services to families, professionals, small and large companies, and public institutions in Italy. The company s deposit products include savings deposits, certificates of deposit, bonds, repo transactions, bank drafts, current accounts, and time deposit accounts. Its loan products portfolio comprises foreign currency loans, advances, discounted portfolio, artisan loans, agricultural loans, mortgage loans, long-term loans, non-performing loans, personal loans, and other unsecured loans. The company is also involved in trading floating-rate Italian government securities, fixed-rate Italian government securities, bank bonds, bonds of other issuers, and variable-yield securities and mutual funds. In addition, it engages in managing and financing guarantees, and domestic and international trade receivables; manages hotel facilities; and rents a condominium. Further, the company offers leasing and payment, collection and payment, credit and debit cards, treasury management, securities custody and administration, custodian bank, securities placement, asset management, insurance products, portfolio management, consultancy, factoring, tax collection, and multilateral trading systems management services. As of December 31, 2011, it had 323 branches. Banca Popolare di Sondrio was founded in 1871 and is headquartered in Sondrio, Italy. Credito Emiliano S.p.A., together with its subsidiaries, provides commercial banking services primarily in Italy. The company offers various deposit and loan products, as well as wealth management and financing services. It also provides domestic clearing services for payments and collections, including cheques, electronic data reports, check truncation, drafts and promissory notes, electronic collections, credit transfers, SETIF, F24 payments, cash management, cash letter, and electronic documental storage and document management; and credit cards, leasing and factoring, insurance, and corporate banking services. The company is headquartered in Reggio Emilia, Italy. As of December 31, 2011, Credito Emiliano S.p.A. operates as a subsidiary of Credito Emiliano Holding S.p.A. Sydbank A/S Sydbank A/S, together with its subsidiaries, provides various banking services to corporate and retail customers in primarily Denmark and Germany. It offers various deposits, and loans and advances. The company also provides wealth and financial advisory, and private banking services to personal and individual clients; digital information and trading systems in connection with securities and foreign exchange trading; and advisory and management services to instance investment funds and hedge funds, pooled pension plans, funds, and institutional clients, as well as customized portfolio management agreements to wealthy clients. In addition, it offers corporate banking services to corporate and investment clients; advisory services to corporate clients for instance succession, the acquisition and sale of enterprises, the raising of subordinated loan capital, initial public offerings, and share issues; and leasing services to corporate and retail clients for equipment, machinery, and cars. Further, the company provides online banking services; and advice and settlement services comprising documentary credit, debt collection, and guarantees, as well as export finance to corporate clients. It has 102 branches in Denmark and 5 branches in the northern part of Germany. Sydbank A/S is Source: Comparable banks selection,

165 Table 36. Market price data and free float of comparable companies Company name Country Currency Free Stock price as at float Jun 30, weeks stock price Market low ( ) high ( ) cap (m) Book value of equity (m) P-B ratio Tier I Abanka Vipa Dd Slovenia EUR n/a x Nova Kreditna Banka Maribor Slovenia EUR n/a x Bks Bank Ag Austria EUR n/a x Erste Group Bank Ag Austria EUR n/a , , x Raiffeisen Bank Internationa Austria EUR n/a , , x Bank Fuer Tirol & Vorarlberg Austria EUR n/a x Bank Zachodni Wbk Sa Poland EUR 5.8% , , x Bre Bank Sa Poland EUR 30.3% , , x Ing Bank Slaski Sa Poland EUR 19.9% , , x Vseobecna Uverova Banka As Slovakia EUR n/a , x Kredyt Bank Sa Poland EUR 20.0% x Pko Bank Polski Sa Poland EUR 56.4% , , x Bank Pekao Sa Poland EUR 40.7% , , x Komercni Banka As Czech EUR n/a , , x Bank Millennium Sa Poland EUR 34.1% , , x Bank Ochrony Srodowiska Sa Poland EUR 43.4% x Tier II Banco Desio E Della Brianza Italy EUR 30.6% x Ringkjoebing Landbobank A/S Denmark EUR n/a x Spar Nord Bank A/S Denmark EUR n/a x Banque Cantonale Vaudois-Reg Switzerland EUR 32.7% , , x Banca Popolare Di Sondrio Italy EUR 100.0% , , x Credito Emiliano Spa Italy EUR 23.1% , x Sydbank A/S Denmark EUR n/a , x Source: Comparable banks selection, 2012; Financial data of comparable banks, Figure 40. Influence of ROE on the P/B multiples 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x y = x R² = Kredyt Bank Sa; 7.0%; 1.2x Bank Handlowy W Warszawie Sa; 13.1%; 2.0x Ing Bank Slaski Sa; 13.0%; 1.6x Komercijalna Banka Ad Beograd; 10.6%; 0.3x Raiffeisen Bank International; 12.3%; 0.5x Bank Zachodni Wbk Sa; 16.7%; 2.2x 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Note.* Only chosen banks have been presented. Source: Comparable banks selection, 2012; Financial data of comparable banks,

166 Table 37. Summary of comparable companies income statement (1/2) m Gross income Net Interest Income Imapirment charges for loan losses Personnel expense EBT Adjusted earnings Company name LTM Ended Currency FY 2010 FY 2011TM 6/2012 FY 2010 FY 2011TM 6/2012 FY 2010 FY 2011TM 6/2012 FY 2010 FY 2011TM 6/2012 FY 2010 FY 2011TM 6/2012 FY 2010 FY 2011TM 6/2012 Tier I Abanka Vipa Dd 06/12 EUR n/a n/a n/a n/a Nova Kreditna Banka Mari 06/12 EUR n/a n/a Bks Bank Ag 06/12 EUR n/a 36 n/a Erste Group Bank Ag 06/12 EUR 8,273 8,048 7,735 5,418 5,561 5,527 2,021 2,267 2,309 2,264 2,324 2,324 1, Raiffeisen Bank Internatio 06/12 EUR 6,765 7,024 7,022 3,578 3,667 3,602 1,194 1,064 1,059 1,453 1,540 1,540 1,287 1,373 1,423 1,087 1,105 1,191 Bank Fuer Tirol & Vorarlbe 06/12 EUR n/a n/a n/a n/a Bank Zachodni Wbk Sa 06/12 EUR Bre Bank Sa 06/12 EUR , Ing Bank Slaski Sa 06/12 EUR Vseobecna Uverova Banka 06/12 EUR n/a n/a n/a Kredyt Bank Sa 06/12 EUR Pko Bank Polski Sa 06/12 EUR 2,719 2,884 2,902 1,634 1,853 1, ,022 1,163 1, Bank Pekao Sa 06/12 EUR 1,971 2,026 1,996 1,030 1,111 1, Komercni Banka As 06/12 EUR 1,358 1,421 1, Bank Millennium Sa 06/12 EUR Bank Ochrony Srodowiska 06/12 EUR n/a 15 n/a Tier II Banco Desio E Della Brianz 06/12 EUR Ringkjoebing Landbobank 06/12 EUR Spar Nord Bank A/S 06/12 EUR Banque Cantonale Vaudoi 06/12 EUR Banca Popolare Di Sondrio 06/12 EUR n/a Credito Emiliano Spa 06/12 EUR 1,052 1,057 1, Sydbank A/S 06/12 EUR n/a High 8,273 8,048 7,735 5,418 5,561 5,527 2,021 2,267 2,309 2,264 2,324 2,324 1,324 1,373 1,423 1,087 1,105 1,191 Average 1,304 1,327 1, Median Low Gorenjska banka n/a n/a n/a n/a n/a Source: Financial data of comparable banks,

167 Table 38. Summary of comparable companies income statement (2/2) in % Net interest income/gross income Net interest income growth CIR ratio EBT/Avg. equity EBT/Avg. assets Company name FY 2009 FY 2010 FY /09 09/10 10/11 LTM growth FY 2010 FY /2012 FY 2008 FY 2009 FY 2010 FY 2011 FY 2008 FY 2009 FY 2010 FY 2011 Tier I Abanka Vipa Dd Nova Kreditna Banka Maribor Bks Bank Ag Erste Group Bank Ag Raiffeisen Bank Internationa Bank Fuer Tirol & Vorarlberg Bank Zachodni Wbk Sa Bre Bank Sa Ing Bank Slaski Sa Vseobecna Uverova Banka As Kredyt Bank Sa Pko Bank Polski Sa Bank Pekao Sa Komercni Banka As Bank Millennium Sa Bank Ochrony Srodowiska Sa Tier II Banco Desio E Della Brianza Ringkjoebing Landbobank A/S Spar Nord Bank A/S Banque Cantonale Vaudois-Reg Banca Popolare Di Sondrio Credito Emiliano Spa Sydbank A/S High Average Median Low Gorenjska banka Source: Financial data of comparable banks,

168 Table 39. Summary of comparable companies statement of financial position (1/2) m Average total assets Average shareholders' equity Average tangible equity Average net loans Average customer deposits Company name LTM Ended Currency FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 LTM growth FY 2010 FY /2012 LTM growth Tier I Abanka Vipa Dd 06/12 EUR 4,572 4,422 4, ,244 3,382 3, % 2,302 2,516 2, % Nova Kreditna Banka Maribo 06/12 EUR 5,826 5,841 5, ,241 4,325 4, % 3,610 3,739 3, % Bks Bank Ag 06/12 EUR 6,277 6,347 6, ,555 4,724 4, % 3,417 3,513 3, % Erste Group Bank Ag 06/12 EUR 203, , ,696 12,912 12,576 13,271 11,570 11,766 12, , , , % 114, , , % Raiffeisen Bank Internationa 06/12 EUR 103, , ,137 7,370 9,566 9,684 7,606 9,527 9,412 63,086 78,617 82, % 50,106 62,190 67, % Bank Fuer Tirol & Vorarlberg 06/12 EUR 8,676 9,051 9, ,749 6,077 6, % 4,932 5,127 5, % Bank Zachodni Wbk Sa 06/12 EUR 13,305 13,428 13,991 1,559 1,661 1,746 1,548 1,656 1,732 8,671 8,741 9, % 10,327 10,553 10, % Bre Bank Sa 06/12 EUR 21,252 22,462 22,392 1,375 1,775 1,983 1,309 1,698 1,900 14,024 15,135 16, % 10,723 11,493 11, % Ing Bank Slaski Sa 06/12 EUR 15,450 15,969 16,795 1,309 1,433 1,574 1,282 1,403 1,487 8,218 9,329 10, % 11,750 11,910 12, % Vseobecna Uverova Banka A 06/12 EUR 10,306 10,945 10,991 1,015 1,080 1, ,009 1,045 6,284 7,018 7, % 6,938 7,376 7, % Kredyt Bank Sa 06/12 EUR 10,243 10,190 10, ,005 7,097 7, % 5,981 6,386 6, % Pko Bank Polski Sa 06/12 EUR 40,508 42,822 44,987 5,188 5,257 5,316 4,831 4,882 4,938 31,332 33,637 35, % 32,046 33,224 34, % Bank Pekao Sa 06/12 EUR 32,861 33,377 34,028 4,778 4,934 5,030 4,638 4,800 4,903 20,925 21,949 23, % 24,401 24,251 24, % Komercni Banka As 06/12 EUR 27,130 28,752 30,105 2,776 3,048 3,133 2,541 2,831 3,256 15,314 16,837 16, % 21,217 21,748 22, % Bank Millennium Sa 06/12 EUR 11,411 11,636 12, ,031 1, ,024 1,063 9,008 9,562 10, % 8,319 8,668 9, % Bank Ochrony Srodowiska Sa 06/12 EUR 3,391 3,671 3, ,555 2,657 2, % 2,688 2,820 2, % Tier I Banco Desio E Della Brianza 06/12 EUR 8,236 8,261 8, ,446 6,662 6, % 4,636 4,388 4, % Ringkjoebing Landbobank A/ 06/12 EUR 2,429 2,404 2, n/a n/a n/a 1,828 1,821 1, % 1,534 1,640 1, % Spar Nord Bank A/S 06/12 EUR 8,860 9,238 9, n/a n/a n/a n/a 4,239 4,184 4, % Banque Cantonale Vaudois- 06/12 EUR 26,303 29,832 31,953 1,867 2,082 2,019 1,874 2,080 2,007 18,510 21,708 22, % 17,411 20,084 21, % Banca Popolare Di Sondrio 06/12 EUR 24,868 27,783 28,591 1,823 1,833 1,856 1,840 1,877 1,901 20,066 22,867 23, % 16,777 17,834 18, % Credito Emiliano Spa 06/12 EUR 28,219 30,548 30,317 1,826 1,727 1,823 1,463 1,360 1,458 18,546 19,807 19, % 12,177 12,031 12, % Sydbank A/S 06/12 EUR 20,725 20,440 19,688 1,254 1,286 1,301 1,252 1,285 1,299 n/a n/a 10, % 8,926 8,792 8, % High 203, , ,696 12,912 12,576 13,271 11,570 11,766 12, , , , % 114, , , % Average 27,753 30,191 31,158 2,194 2,348 2,430 2,169 2,340 2,443 19,064 20,738 20, % 16,478 17,496 18, % Median 13,305 13,428 13,991 1,254 1,286 1,301 1,267 1,322 1,379 8,671 9,329 10, % 8,926 8,792 9, % Low 2,429 2,404 2, ,828 1,821 1, % 1,534 1,640 1, % Gorenjska banka 1,959 1,964 1, ,232 1,264 1,245 n/a 1,123 1,201 1,225 n/a Source: Financial data of comparable banks,

169 Table 40. Summary of comparable companies statement of financial position (2/2) in % Equity/Assets Tangible Equity/Assets Customer Loans/Assets Deposits/Assets Customer loans/deposits Tier 1 Capital Ratio (%) Company name FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 FY 2010 FY /2012 Tier I Abanka Vipa Dd Nova Kreditna Banka Maribor n/a n/a n/a Bks Bank Ag Erste Group Bank Ag Raiffeisen Bank Internationa Bank Fuer Tirol & Vorarlberg Bank Zachodni Wbk Sa n/a n/a n/a Bre Bank Sa Ing Bank Slaski Sa n/a n/a n/a Vseobecna Uverova Banka As Kredyt Bank Sa Pko Bank Polski Sa Bank Pekao Sa Komercni Banka As Bank Millennium Sa Bank Ochrony Srodowiska Sa n/a n/a n/a Tier II Banco Desio E Della Brianza Ringkjoebing Landbobank A/S n/a n/a n/a Spar Nord Bank A/S n/a n/a n/a n/a n/a n/a Banque Cantonale Vaudois-Reg Banca Popolare Di Sondrio Credito Emiliano Spa Sydbank A/S n/a n/a n/a n/a High Average Median Low Gorenjska banka n/a Source: Financial data of comparable banks,

170 Table 41. Adjustments of comparable companies multiples Company name HQ Risk free rate (in %) Levered beta* Equity risk premium (in %) Risk and Size Adjusted country risk premium (in %) Size premium (in %) Firm specific risk premium (in %) Growth Cost of Comparable's market equity (in %) growth (in %) Adjustment factor for growth, risk & size (in %) Profitability avg. ROE (in %) Adjustment factor for profitability (in %) Tier I Abanka Vipa Dd Slovenia Nova Kreditna Banka Maribor Slovenia Bks Bank Ag Austria Erste Group Bank Ag Austria Raiffeisen Bank Internationa Austria Bank Fuer Tirol & Vorarlberg Austria Bank Zachodni Wbk Sa Poland Bre Bank Sa Poland Ing Bank Slaski Sa Poland Vseobecna Uverova Banka As Slovakia Kredyt Bank Sa Poland Pko Bank Polski Sa Poland Bank Pekao Sa Poland Komercni Banka As Czech Bank Millennium Sa Poland Bank Ochrony Srodowiska Sa Poland Tier II Banco Desio E Della Brianza Italy Ringkjoebing Landbobank A/S Denmark Spar Nord Bank A/S Denmark Banque Cantonale Vaudois-Reg Switzerland Banca Popolare Di Sondrio Italy Credito Emiliano Spa Italy Sydbank A/S Denmark High Average Median Low Gorenjska Banka Source: Beta for Eastern European banks, 2012; Beta for Western European banks, 2012; European Central Bank, Statistical Data Warehouse, 2012b; Government bonds, 2012; A. Damodaran, The implied equity risk premium, 2012b; Morningstar, Ibbotson SBBI 2012 Valuation Yearbook,

171 Table 42. Comparable companies multiples Company name Country Basic firm data Avg. employees as at Dec 31, 2011 Total assets (LTM) ( 'm) Basic accounting data Total equity (LTM) ( 'm) LTM customer loan growth (in %) Est. dividend yield (in %) Unadjusted multiples - Total equity value as a multiple of Adjusted multiples - Total equity value as a multiple of Unadjusted earnings (EBT) Book Tangible Risk, Size, Growth Profitability Adjusted earnings (EBT) Adj. EBT (for imp.) Book LTM 6/ F 2013 F 2014 F value book value Adj. (in %) Adj. (in %) LTM 6/ F 2013 F 2014 F LTM 6/2012 value Tangible book value Tier I Abanka Vipa Dd Slovenia n/a 4, n/a n/a n/a n/a n/a 0.2x 0.2x n/a n/a n/a n/a 10.3x 0.4x 0.4x Nova Kreditna Banka Maribor Slovenia n/a 5, n/a n/a 9.9x 4.2x 0.2x 0.2x n/a n/a 11.4x 4.9x n/a 0.5x 0.5x Bks Bank Ag Austria 1, , n/a 14.4x n/a n/a n/a 0.8x 0.9x x n/a n/a n/a 17.5x 0.7x 0.7x Erste Group Bank Ag Austria 40, , , n/a 4.8x 3.8x 3.0x 0.5x 0.5x n/a 4.8x 3.7x 3.0x 5.4x 0.5x 0.5x Raiffeisen Bank Internationa Austria 13, , , x 3.7x 3.8x 3.4x 0.5x 0.5x x 3.6x 3.8x 3.3x 3.2x 0.3x 0.3x Bank Fuer Tirol & Vorarlberg Austria n/a 9, n/a 6.9x n/a n/a n/a 0.6x 0.6x x n/a n/a n/a 8.6x 0.5x 0.5x Bank Zachodni Wbk Sa Poland 3, , , x 9.9x 8.8x 7.8x 2.2x 2.2x x 9.6x 8.5x 7.6x 10.0x 0.9x 0.9x Bre Bank Sa Poland 180, , , x 8.4x 8.5x 7.5x 1.4x 1.5x x 8.4x 8.6x 7.5x 7.4x 0.8x 0.8x Ing Bank Slaski Sa Poland 64, , , x 9.5x 9.0x 7.7x 1.5x 1.6x x 9.5x 9.0x 7.7x 9.1x 0.9x 0.9x Vseobecna Uverova Banka As Slovakia 2, , , n/a 4.5x n/a n/a n/a 0.6x 0.6x x n/a n/a n/a 4.3x 0.3x 0.3x Kredyt Bank Sa Poland n/a 10, x 12.9x 10.4x 7.0x 1.1x 1.2x x 13.6x 11.0x 7.4x 7.9x 1.0x 1.0x Pko Bank Polski Sa Poland 7, , , x 8.6x 8.3x 7.5x 1.9x 2.0x x 8.1x 7.8x 7.0x 7.8x 0.8x 0.9x Bank Pekao Sa Poland 12, , , x 10.8x 10.4x 9.5x 1.9x 1.9x x 10.1x 9.8x 8.9x 11.0x 1.0x 1.0x Komercni Banka As Czech n/a 30, , x 7.8x 7.8x 7.3x 1.6x 1.6x x 7.8x 7.8x 7.3x 8.3x 0.7x 0.7x Bank Millennium Sa Poland 2, , , x 7.9x 7.8x 6.8x 1.0x 1.0x x 7.9x 7.8x 6.8x 6.8x 0.7x 0.7x Bank Ochrony Srodowiska Sa Poland , n/a 13.2x n/a n/a n/a 0.6x 0.7x x n/a n/a n/a 13.4x 1.3x 1.5x Valuation range based on Tier I peers Upper border x 8.5x 8.5x 7.3x 1.0x 1.1x 9.3x 8.3x 8.5x 7.3x 8.7x 0.7x 0.7x Lower border x 8.4x 8.0x 6.5x 0.9x 0.9x 8.8x 8.2x 8.1x 6.5x 8.3x 0.7x 0.7x Tier II Banco Desio E Della Brianza Italy , x n/a n/a n/a 0.3x 0.3x x n/a n/a n/a 3.9x 0.3x 0.3x Ringkjoebing Landbobank A/S Denmark n/a 2, x 7.3x 6.9x 6.2x 1.3x n/a x 4.8x 4.5x 4.1x 10.1x 0.5x n/a Spar Nord Bank A/S Denmark , n/a x 6.8x 5.0x 3.9x 0.4x 0.4x x 4.4x 3.2x 2.6x n/a 0.8x 0.8x Banque Cantonale Vaudois-RegSwitzerland 1, , , x 11.1x 10.7x 10.4x 1.8x 1.8x x 6.5x 6.3x 6.1x 19.0x 0.6x 0.6x Banca Popolare Di Sondrio Italy n/a 29, , n/a 8.3x n/a n/a n/a 0.8x 0.8x x n/a n/a n/a 6.6x 0.7x 0.6x Credito Emiliano Spa Italy 3, , , x 4.4x 4.1x 3.8x 0.5x 0.7x x 3.5x 3.3x 3.0x 6.0x 0.4x 0.5x Sydbank A/S Denmark n/a 19, , x 8.6x 5.1x 4.2x 0.7x 0.7x x 5.0x 3.0x 2.4x n/a 0.5x 0.5x Valuation range based on Tier I and Tier II peers Upper border x 8.4x 8.1x 6.9x 1.0x 1.0x 7.9x 7.8x 7.8x 6.5x 8.8x 0.7x 0.7x Lower border x 8.2x 7.5x 6.3x 0.8x 0.7x 7.8x 7.2x 6.8x 5.6x 8.1x 0.7x 0.7x Note.* Data refers to June 30 th, if not marked otherwise. NMF stands for Not meaningful ratio. Source: Financial data of comparable banks,

172 SBI TOP Index value Appendix DD: Comparable transactions method The comparable transactions method has been based on a sample of very similar transactions related to the case bank or its competitors. All the transactions are very similar according to the operational characteristics of the target, however they have occurred at different point in time. Therefore the calculated multiples have been additionally adjusted for the market mood of the domestic market at different points in time. The charts below present both adjustments for time. Figure 41. The stock prices of European banks, December June Index value (1991=100) Dec 1991 Dec 1995 Dec 1999 Dec 2003 Dec 2007 Dec 2011 Euro STOXX TMI Banks Note.* Stock prices as at the valuation date are on the historically lowest levels. Source: Euro Stoxx TMI Banks Index, 2012 Figure 42. The Slovenian equity market index, June June Jun 03 Jun 05 Jun 07 Jun 09 Jun 11 SBI TOP Index Abanka stock Index (100= ) Abanka share Index (100= ) Note.* The Slovenian equity market index is presented with the SBI TOP Index. The share of Abanka (close competitor of Gorenjska banka) could be understood also as a proxy for the banking industry. Source: SBI TOP Index,

173 Table 43. The valuation by using the comparable transaction method Target Target Country Acquirer Deal status Announce Date Close Date Acquired Acquired Change of Stake stake (in %) control Implied equity value ( '000) Net transaction value ( '000) Unadjusted multiples - Implied equity Tangible Book value book value Earnings Pro-forma earnings Adj. factor (SBI TOP) (in %) Adjusted multiples - Implied equity Tangible Book value book value Earnings Pro-forma earnings Adj. factor (EuroStoxx TMI Banks) (in %) Adjusted multiples - Implied equity Tangible Book value book value Earnings Pro-forma earnings Tier I - Comparable transactions with shares of the case firm Gorenjska banka Slovenia n/a n/a 1 Apr 2012 n/a Minority 0.2 No 215, x 0.65x NMF NMF x 0.56x NMF n/a x 0.56x NMF NMF Gorenjska banka Slovenia Sparkasse Closed 24 Apr 2012 n/a Minority 6.0 No 324,788 19, x 0.97x NMF NMF x 0.83x NMF NMF x 0.97x NMF NMF Gorenjska banka Slovenia n/a Closed* 10 Dec 2010 n/a Minority 0.1 No 364, x 0.98x 10.8x 13.5x x 0.62x 6.82x 8.56x x 0.52x 5.67x 7.13x Gorenjska banka Slovenia n/a Closed* 1 Dec 2010 n/a Minority 0.2 No 369, x 1.00x 10.9x 13.7x x 0.61x 6.72x 8.45x x 0.56x 6.13x 7.71x Gorenjska banka Slovenia n/a Closed* 30 Nov 2010 n/a Minority 0.8 No 369,529 3, x 1.00x 10.9x 13.7x x 0.62x 6.74x 8.47x x 0.59x 6.43x 8.08x Gorenjska banka Slovenia n/a Closed* 15 Oct 2010 n/a Minority 0.1 No 364, x 0.98x 10.8x 13.5x x 0.61x 6.72x 8.44x x 0.48x 5.22x 6.56x Gorenjska banka Slovenia n/a Closed* 10 Dec 2009 n/a Minority 0.1 No 364, x 1.03x 8.6x 8.8x x 0.54x 4.51x 4.65x x 0.43x 3.54x 3.65x Gorenjska banka Slovenia n/a Closed* 30 Nov 2008 n/a Minority 0.0 No 662, x 1.81x 12.5x 12.0x x 0.96x 6.63x 6.37x x 1.05x 7.21x 6.92x Gorenjska banka Slovenia Sava Closed 29 Jun Jun 2007 Minority 4.6 No 490,275 22, x 1.44x 11.1x 10.9x x 0.33x 2.55x 2.50x x 0.32x 2.46x 2.41x Tier II - Comparable transactions in Slovenia Banka Koper Slovenia Intesa Sanpaolo Closed 18 Dec Dec 2008 Minority 5.0 No 273,056 13, x 1.25x 11.33x n/a x 0.74x 6.70x n/a x 0.77x 6.95x n/a Banka Koper Slovenia Intesa Sanpaolo Closed 1 Mar Apr 2007 Minority 8.3 No 299,461 24, x 1.48x 8.98x n/a x 0.44x 2.66x n/a x 0.28x 1.72x n/a Banka Koper Slovenia Intesa Sanpaolo Closed 1 Feb Feb 2007 Minority 8.3 No 300,476 24, x 1.48x 9.01x n/a x 0.46x 2.78x n/a x 0.29x 1.74x n/a Banka Celje Slovenia NLB Closed 31 Dec Dec 2006 Minority 10.4 No 195,385 20, x 1.21x 11.85x n/a x 0.65x 6.35x n/a x 0.24x 2.39x n/a Comparable transactions with shares of the case firm Max 1.80x 1.81x 12.46x 13.72x x 0.96x 6.82x 8.56x x 1.05x 7.21x 8.08x Average 1.09x 1.10x 10.79x 12.32x x 0.63x 5.81x 6.78x x 0.61x 5.24x 6.07x Median 0.99x 1.00x 10.92x 13.53x x 0.61x 6.72x 8.44x x 0.56x 5.67x 6.92x Min 0.64x 0.65x 8.57x 8.83x x 0.33x 2.55x 2.50x x 0.32x 2.46x 2.41x All comparable transactions Max 1.80x 1.81x 12.46x 13.72x x 0.96x 6.82x 8.56x x 1.05x 7.21x 8.08x Average 1.17x 1.18x 10.61x 12.32x x 0.61x 5.38x 6.78x x 0.54x 4.50x 6.07x Median 1.03x 1.03x 10.92x 13.53x x 0.61x 6.63x 8.44x x 0.52x 5.22x 6.92x Min 0.64x 0.65x 8.57x 8.83x x 0.33x 2.55x 2.50x x 0.24x 1.72x 2.41x Note.* The deal statuses marked with * are assumed to be close and relate to offer prices. Where there is no transaction close date, the transactions have been adjusted as they would occur at the announce date. Source: Comparable transactions selection and related transaction financial data, 2012; Medijski pregled za dne , 2012; Javno zbiranje ponudb za nakup delnic Gorenjske banke, d.d., 2012; Sparkasse v prodajo šestih odstotkov Gorenjske banke, 2012; Sparkasse druga največja v Gorenjski banki,

174 Appendix EE: Estimation of value created by merging with Abanka Personnel expense Table 44. Excess labour estimation '000 Employees Expense Total Management Abanka Gorenjska banka ,082 Administration Abanka Gorenjska banka ,673 Business network Offices - Abanka Jesenice - Cesta maršala Tita 39a Tržič - Cankarjeva 1a Kranj - Nazorjeva ulica Offices - Gorenjska banka Ljubljana - Dalmatinova ulica ,898 Rebranding expense Table 45. Rebranding expense estimation '000 Est. number Expense Total Offices Gorenjska banka Abanka ,230 ATM machines Gorenjska banka Abanka Total rebranding expense 2,300 Excess facilities Table 46. Excess facility estimation Business network Est. size (m2) Est. price ( '000)/m2* Total Offices - Abanka Jesenice - Cesta maršala Tita 39a Tržič - Cankarjeva 1a Kranj - Nazorjeva ulica Offices - Gorenjska banka Ljubljana - Dalmatinova ulica Total excess facilities 1,010 Note.* Totals have been calculated based on the capitalisation method. Cost of equity used in the formula has been estimated as in Appendix W. The growth has been estimated aligned with long-term inflation forecast as determined from ViewsVire in the amount of 2.5%. Source: Consumer price inflation, 2012; Comparable real estate transactions,

175 Appendix FF: Sensitivity analysis Figure 43. Defining Monte Carlo parameters Normal distribution Triangular distribution Probability Probability Parameter Parameter sensitized (mean, std. deviation): Loan growth: Overdrafts (-1.5%, 3.5%) Loan growth: Consumer and other loans (-1.0%, 2.4%) Loan growth: Housing loans (10.0%, 21.0%) Loan growth: Small and medium enterp. (1.0%, 6.5%) Loan growth: Corporate (-2.8%, 12.2%) Dividend yield (0.86%, 0.53%) Net fee & commissions as % of sales (0.85%, 0.15%) Net interest spread (1.18%, 0.3%) Parameter Parameter sensitized (min., mean, max.): Growth rate in terminal value (2.0%, 2.5%, 3.0%) Cost of equity (16.10%, 17.10%, 18.10%) Table 47. Correlation matrix Growth rate in terminal value Cost of equity Overdrafts Housing loans Consumer and other loans Corporates Small and medium enterprises Net interest spread Dividend yield Net fee and commision income as % deposits Growth rate in terminal value Cost of equity Loan growth: Overdrafts Loan growth:housing loans Loan growth: Consumer and other loans Loan growth: Corporates Loan growth: Small and medium enterprises Net interest spread (IEA yield - IBL cost) Dividend yield Net fee and commision income as % deposits Note.* Real correlation factors could significantly vary from the factors presented above. The values presented in the matrix have been assumed based on common sense relation. 83

176 Appendix GG: Financial statements of Gorenjska banka Figure 44. Income statement (I-VI 2012; I-VI 2011) Source: Gorenjska banka d.d., Semi-annual income statement, 2012c. 84

177 Figure 45. Statement of financial position (June 30th, 2012) Source: Gorenjska banka d.d., Semi-annual statement of financial position, 2012d. 85

178 Appendix HH: Key accounts management projections Figure 46. Management projections for year (table continues)

179 (continued) Source: Gorenjska banka d.d., General Meeting, , 2012a. 87