Zagrebačka banka dd Annual Report

Transcription

1 Zagrebačka banka dd 2015 Annual Report

2 Zagrebačka banka dd Contents Introduction... 3 Management Board Report of Condition... 5 Business description Overview of the Croatian economy in Operating and financial review Management and corporate governance Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements Independent auditor s report Financial statements Group financial statements Bank financial statements Significant accounting policies Notes to the financial statements Supplementary schedules for CNB Supplementary EUR financial statements - unaudited Other information Zagrebačka banka dd: 2015 Annual Report 2

3 Introduction The Management Board of Zagrebačka banka dd is pleased to present its Annual Report to the shareholders of the Bank. This comprises the Management Board s report of condition of the Bank and the Bank s subsidiaries, an operating and financial review, audited financial statements with an Independent auditor s report, unaudited supplementary reports for the CNB and supplementary statements for the Group and the Bank in EUR. The audited financial statements are presented for the Group and the Bank. Croatian and English language versions This document comprises the Annual Report of Zagrebačka banka dd for the year ended 31 December 2015 in English language. This report is also published in Croatian language for presentation to shareholders at the Annual General Meeting. Legal status The annual financial statements and the Report of Condition are hereby submitted to the Annual General Meeting, as required under the provisions of Article 276, paragraph 3 of the Companies Act, while the Report of the Supervisory Board is submitted to the Annual General Meeting as a separate document. The annual financial statements have been prepared in accordance with statutory accounting requirements for banks in Croatia and audited in accordance with International Standards on Auditing. Abbreviations In this Annual Report, Zagrebačka banka dd is referred to as the Bank or Zagrebačka banka, and Zagrebačka banka dd together with its subsidiaries and associates are referred to collectively as the Group or the Zagrebačka banka Group. In this Annual Report UniCredit Bank Austria AG is referred to as UniCredit Bank Austria, UniCredit Bank Austria AG Group is referred to as UniCredit Bank Austria Group, UniCredit SpA, Milano is referred to as UniCredit and UniCredit SpA Group is referred to as UniCredit Group. The Bank's subsidiaries and associates are referred to as follows: Subsidiaries UniCredit Bank dd, Mostar PRVA STAMBENA ŠTEDIONICA dd, Zagreb ZB Invest doo, Zagreb CENTAR KAPTOL doo, Zagreb POMINVEST dd, Split SUVREMENE POSLOVNE KOMUNIKACIJE doo, Zagreb ZAGREB NEKRETNINE doo, Zagreb ZANE BH doo, Sarajevo UniCredit Leasing Croatia doo, Zagreb LOCAT CROATIA doo, Zagreb BACAL ALPHA doo, Zagreb BACAL BETA NEKRETNINE doo, Zagreb ALLIB NEKRETNINE doo, Zagreb UniCredit Partner doo, Zagreb ZABA Partner doo, Zagreb UniCredit Leasing doo, Sarajevo Associates Allianz ZB doo obligatory pension fund management company, Zagreb Allianz ZB doo voluntary pension funds management company, Zagreb MULTIPLUS CARD doo, Zagreb UniCredit Broker doo, Sarajevo Abbreviations UniCredit Bank, Mostar Štedionica ZB Invest Centar Kaptol Pominvest Suvremene poslovne komunikacije ZANE ZANE BH UniCredit Leasing Croatia Locat Croatia BACAL ALPHA BACAL BETA ALLIB NEKRETNINE UniCredit Partner ZABA Partner UniCredit Leasing, Sarajevo Abbreviations Allianz ZB, obligatory pension fund management company Allianz ZB, voluntary pension funds management company MultiPlus Card UniCredit Broker Zagrebačka banka dd: 2015 Annual Report 3

4 Introduction (continued) Abbreviations (continued) The central bank, the Croatian National Bank, is referred to as the CNB. In this report, the abbreviations kuna and HRK are used for Croatian kuna. Further, the abbreviations HRK thousand, or HRK m, and HRK bn or HRK billion, EUR thousand, EUR million or EUR m, and EUR bn or EUR billion, and "USD thousand", USD million or USD m and USD bn or USD billion represent thousands, millions and billions of Croatian kuna, Euro and US dollars, respectively. Exchange rates The following exchange rates ruling at 31 December 2015 have been used to translate balances into foreign currency at that date: EUR 1 = HRK (31 December 2014: HRK) USD 1 = HRK (31 December 2014: HRK) Zagrebačka banka dd: 2015 Annual Report 4

5 Management Board Report of Condition Management Board Report of Condition of the Bank Ladies and Gentlemen, Esteemed Clients, Partners and Shareholders, It is my honour and pleasure to present you the Annual Report and financial statements of the Zagrebačka banka Group for the year Owing to our universal business model, sustainability of income and stable funding sources, in 2015 the Group maintained the level of credit activity and preserved the capital adequacy ratio at a high level of 20.47%. If the impact of legislative regulations relating to CHF loans had been excluded, the result of the Zagrebačka banka Group for the year 2015 would have been positive. Our priorities still remain: fostering economic and social progress, stimulating credit activity, providing consultancy services in devising unique business solutions for our clients, transformation of the business model, and introducing new digital technologies in our operations. Business environment Global economic growth has been stimulated by growth in domestic personal consumption, lower prices of energy commodities, expansionary monetary policy and a low interest rate environment. In the Eurozone, the European Central Bank supports economic recovery through the implementation of quantitative easing, thus ensuring a high level of liquidity in the market. According to the announcements of Fed, an interest rate increase trend is to be expected, which can result in less liquidity available and may trigger capital outflows in emerging markets. In the Republic of Croatia, after many years, the GDP increased by 1.6% in 2015, driven by an increase in export, industrial production, tourism, lower prices of energy commodities, rising personal consumption and moderate recovery in investments. Such developments create solid foundations for growth in the year The Croatian economy is faced with a variety of macroeconomic imbalances among which the public debt level and fiscal deficit are most prominent. In 2014, the European Commission enacted the Excessive Deficit Procedure and the Macroeconomic Imbalances Procedure for the Republic of Croatia, requiring clearly defined reforms by the Croatian Government. The Republic of Croatia partly implemented reforms in the area of the labour market, tax policy, social transfers and the healthcare sector, but other reforms failed to materialise. Furthermore, the decline in investments and employment in the past several years, and the increase of old population resulted in a lag in productivity growth and a low level of technological progress. The credit rating has been downgraded (BB- by S&P, Ba1- by Moody's and BB- by Fitch, with a negative outlook) and remains impacted by economic growth potential, a high level of indebtedness and dependence on external funding sources, the lack of reforms and fiscal consolidation. Macroeconomic imbalances resulted in high country risk premium. The 5Y CDS spread stands at around 300 bp, which is relatively high compared to countries in the CEE region. The Croatian banking sector remained stable, strongly capitalised and liquid. Commercial banks operating in the Croatian market are going through a transformation process to adjust to market and regulatory requirements. The lending activity is weakened, marked by deleveraging in the retail and corporate sector, while the public sector is still growing in loan volumes. In the corporate sector, an increasing trend of borrowing from abroad is noted, which is a trend that mitigates the decline in total debt in this sector. Non-performing loans in the banking sector are at the level of 16.6% with NPL coverage of 56.6%. The capital adequacy of the system stands at 21.0%, while the average return on equity is low and below the average yield on government bonds (the average yield on 5-year government bonds in the last five years is slightly above 5%). In 2015, the banking sector recorded a loss, mainly due to changes in the Consumer Credit Act on Swiss franc lending, and the overall capital adequacy of banks impacted by the changes in the Act declined by more than 3 percentage points. Zagrebačka banka dd: 2015 Annual Report 5

6 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Financial Highlights of the Group and the Bank In 2015, the Zagrebačka banka Group recorded HRK 148 million Loss after tax which is a significantly lower result than HRK 1,140 million Profit after tax in The reported result was affected by the application of the amendments to the Consumer Credit Act from September 2015, which govern the principle of the conversion of Swiss franc loans. The total estimated net conversion loss of HRK 1,560 million (pre-tax) was recognised in Impairment and other provisions. Furthermore, the net trading result was under the negative impact of the appreciation of the Swiss franc against Croatian kuna, and the amendments to the Consumer Credit Act from January 2015, which prescribed fixing the HRK/CHF exchange rate at HRK 6.39 for one Swiss franc for regular annuity loan repayments throughout the period of one year. If the aforementioned effects of regulatory amendments in relation to Swiss franc loans had been excluded, the Group s 2015 result would have been positive. However, thanks to our universal business model, income sustainability and stable funding sources, in 2015 the Group maintained the volume of credit activity, with the capital adequacy of Zagrebačka banka dd of 24.66%. Following the reorganisation at the level of the UniCredit Group, with the aim of further strengthening the management structure and optimum market positioning, there were several changes in the composition of the Zagrebačka banka Group: - Three new subsidiaries were either directly or indirectly included in the 2015 consolidated financial statements. In April 2015, Zagrebačka banka dd acquired the 100% stake in the companies UniCredit Leasing Croatia doo and Locat Croatia doo and as of 22 December 2015, UniCredit Bank dd Mostar acquired the 100% stake in the companies UniCredit Leasing doo Sarajevo and a non-controlling interest of 49% in UniCredit Broker doo Sarajevo. - During the third quarter of 2015, Zagrebačka banka dd acquired additional 33.67% shares in the subsidiary UniCredit bank dd, Mostar (by the end of 2015 Zagrebačka banka dd owned 99.30% of the shares, while the ownership share in 2014 was 65.63%). - The result of the sold subsidiary Istraturist dd is included in the comparative figures until September The strongest contribution to the consolidated Group results was made by Zagrebačka banka dd, UniCredit Bank dd, Mostar, UniCredit Leasing Croatia doo and Prva stambena štedionica dd. The Group s operating income amounted to HRK 5,015 million and is lower by HRK 101 million (-2.0%) compared to Despite the positive contribution of Net interest income and Net fee and commission income, the decrease in Operating income is significantly impacted by the decrease in Net trading and other income. Net interest income reached HRK 3,331 million which represents an increase of HRK 210 million (+6.7%) compared to 2014, while Net fee and commission income amounts to HRK 1,219 million and increased by HRK 46 million (+3.9%) compared to Net trading and other income amounted to HRK 465 million, decreased by HRK 357 million (-43.4%) compared to 2014, mainly due to the change in the scope of consolidation as well as the lower net trading result (primarily attributable to fixing the HRK/CHF rate at 6.39). Operating expenses amounted to HRK 2,567 million which represents an increase of HRK 14 million (+0.5%) compared to 2014, while the Group s Cost to income ratio ( C/I ratio ) remained favourable and in 2015 equalled 51.19% (2014: 49.9%). For impairment losses and other provisions the Group provided HRK 2,722 million, which is HRK 1,612 million (+145.2%) higher than in the previous year. The increase primarily relates to one-off other provisions related to the CHF loans conversion. By excluding the one-off CHF conversion loss effect, the increase in Impairment and other provisions is HRK 52 million (or +4.7%). As a continuation of prudent risk management approach, in Zagrebačka banka dd the non-performing loans coverage ratio in one year increased from 43% to 53.7% at the end of Zagrebačka banka dd: 2015 Annual Report 6

7 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Financial Highlights of the Group and the Bank (continued) The Group s total assets amounted to HRK 128,004 million and increased by HRK 7,889 million (+6.6%) compared to 2014, mainly following the increase in Deposits from customers and the changes in the scope of consolidation. Net loans to customers amounted to HRK 84,340 million and increased by HRK 3,253 million (+4.0%), mainly due to the acquisition of leasing companies in The volume of the Bank s loans did not change significantly, despite the continued deleveraging in all segments. The increase was realised in the public sector and small enterprises segment. Deposits from customers continue to represent the primary source of funding, they reached HRK 86,544 million by the 2015 year-end. The increase of HRK 10,572 million (+13.9%) compared to the end of 2014 was mainly realised in deposits from corporate clients (+HRK 7,952 million). Deposits from Retail clients were also higher by HRK 2,620 million. Deposits from banks and borrowings amounted to HRK 19,303 million. The decrease of HRK 3,621 million (-15.8%) compared to the end of the previous year is affected by lower funding needs, driven by the increase in Deposits from customers and steady loan volumes. Capital and reserves of the Group amounted to HRK 17,036 million, while the capital adequacy ratio of Zagrebačka banka dd remained strong, at 24.66%, even after the one-off effects on the 2015 result (31 December 2014: 25.64%). Strategic Business Areas' Performance Retail and SMEs The Bank continuously invests in new technologies, recognizes and closely monitors the clients needs. The retail and small and medium enterprises segment achieved good business results, thus reaffirming its leading market position. With a comprehensive range of products and services, we have further improved the quality of service to our customers while focusing on strengthening the advisory and partnership role, and supporting clients in meeting their needs, as well as in overcoming the difficult business environment. The market recognises and values the quality of our business model, which resulted in a stable loans market share of 25%; visible also in the growth of the retail deposits market share, which was 25% at the end of During 2015, we realised a number of business initiatives, which have been recognised and very well accepted by our customers. Digitalisation and modernisation: an increasing number of clients use the Bank s services via the Internet and mobile phones, which have been the primary channels for performing payment operations for quite some time now. 93% of total payments made by individuals are performed via e-zaba or m-zaba, and the use of other direct banking services via electronic channels is also on the rise. This is a result of almost 800,000 Internet and mobile banking services packages sold and the Bank s continuous investments in the simplicity and convenience of operations, aiming to be adjusted to new social and digital trends. Electronic business development goes beyond the banking business: in the last quarter of the year, the Bank supported the public services digitalisation project, thus allowing its users to access e-citizens (e-građani), a public Internet portal via their tokens. Zagrebačka banka dd: 2015 Annual Report 7

8 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Retail and SMEs (continued) We have improved our branches in several cities to enable our clients operations in line with latest standards. In order to increase the bankers efficiency and according to the Bank's orientation towards a paperless office, we began with the preparations for equipping branches with a new generation of signature pads and scanners. We are the only financial institution with a continued two-way communication on five social networks (Facebook, Twitter, LinkedIn, YouTube and Google+), providing constant support and information to customers. For example, on Facebook we lead in the number of fans and the continuity and speed of communication in Croatia (during year the number of fans increased to 7,000 and now there are more than 41,000 in total). In the retail lending business, after several years of stagnation, the Bank recently recorded a trend of increase in the demand for new loans, which is one of the key positive business indicators in An increase was recorded in housing loans (+17%), student loans (+14%), car loans (+27%) and cash loans (+11%), which enabled retaining the leading position in housing lending and increasing the market shares in car loans and consumer financing. Since citizens expressed an increased interest in the protection against future unforeseen circumstances, as the first in the market, in July 2015 the Bank offered loans with a combination of fixed and variable interest rates for new housing loans in EUR and HRK. With the initiative "Come to the right door", in cooperation with real estate agencies, we have helped our clients to buy apartments under favourable loan terms. We have participated in all state and local programs for subsidized housing solutions. During 2015, interest rates on loans to citizens were promptly updated following the movement of the National Reference Rate ( NRS ). Since the first publication of the National Reference Rate on 7 December 2012, HRK 6M NRS1 decreased by 0.96 bp and for EUR by 1.13 bp, while HRK 6M NRS2 decreased 0.98 bp, and for EUR 1.23 bp. Without delay, the interest rates on loans to citizens were decreased accordingly. Zagrebačka banka has fulfilled its legal obligation to all clients, borrowers of CHF foreign currency clause loans who meet the conversion conditions stipulated by the regulation. In December 2015, the Bank began implementing the conversion and concluding amended loan agreements with clients. In 2015, the Bank recorded the increase of loans to small businesses, and thus, the trend of positive signals, which started in 2014, continued. Particularly noteworthy is tourism, which recorded a significant increase in small business loans for investment in tourism and the preparation for the tourist season (14% compared to last year). In the Small Business segment, the cooperation with the Croatian Chamber of Economy should be specially emphasised. Zagrebačka banka, together with the Tourism Sector of the Chamber of Commerce and regional chambers, held a series of workshops for entities in tourism on the topic of funding investment opportunities, co-financing projects from national and EU sources and funds. Positive trends in other sectors are the result of the increase in demand, due to the Croatian accession to the European Union and the greater availability of EU funds, and are further strengthened by an adequate supply of various types of credit lines, tailored specially for small and medium-sized enterprises considering their specific needs. In addition to grant assign support, businesses can use a series of lines of credit with an interest rate subsidized by the Croatian Government or the local and regional government units. Zagrebačka banka dd: 2015 Annual Report 8

9 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Retail and SMEs (continued) The deposit base is stable and increased by 5% on the Group level. In 2015, deposits on transaction accounts increased by 18% and the number of current accounts of individuals has increased as well. The Bank has maintained its leadership market share in 2015: the market share in term deposits was stable at 24%, while the market share in current accounts was 35%. Year 2015 was marked by a series of innovations and improvements in the card business. Zagrebačka banka dd is the first and only bank in Croatia that issued Maestro debit cards for clients whose regular accounts are blocked and which use the special purpose account for protected income. By issuing this card, we enabled them an easier managing of funds which are legally excluded from the enforcement procedure and thus proved that we are also a partner in difficult situations in life. At the end of 2015, the Bank introduced contactless payment card technology with individual clients. By issuing Maestro contactless cards, the Bank joined the trend which is present on the local and global market. The Mini fiscal cash register service allows both fiscal receipt and card payment, which is a great improvement for entrepreneurs and at the same time represents a new micro-entrepreneurs niche in card payments. Recognising our customers as well as the market needs, we enabled accepting cards as a means of collection to our customers who provide private accommodation services. It is a new service for this segment of clients, which provides them an advantage in attracting guests, extra security in charging for accommodation and an improvement in planning the bookings of their rental capacities. The offered package of services includes accepting payments through EFT POS terminals and via the Internet. Both private accommodation providers as well as their guests accepted the service very well. The Bank contracted the service of card payment in the original domestic currency on EFT POS terminals with a large number of clients. Corporate banking We retained our position of leading partner in financing large corporate customers and the Government. The total amount of loans to corporate customers at the end of 2015 amounted to HRK 44.8 billion, resulting in a market share of 30% (as of September 2015), while deposits of corporate clients at the end of 2015 amounted to HRK 20.9 billion with a market share of 30.6% (as of September 2015). The Bank continued to actively cooperate with international financial institutions and funds to ensure funding under better conditions to support entrepreneurs as well as projects in the sphere of renewable energy sources and energy efficiency improvements. In 2015, the Bank continued its cooperation with the European Investment Fund ( EIF ) by implementing two arrangements supported by the European Union, and also with the European Bank for Reconstruction and Development ( EBRD ) and the Green for Growth Fund in the area of energy efficiency improvements. Together with the Croatian Bank for Reconstruction and Development ( HBOR ), in 2015, the Bank introduced a new revolving loan facility model, which enabled an easier and faster access to HBOR s funds for our clients. First Calls for proposals from EU funds have been opened in the multiannual financial framework for the years , which offered substantial subsidies to small and medium-sized enterprises for investments in production, tourism and agriculture. The Bank has been continuously supporting its clients in project preparation and implementation by financing, providing information and advisory services, as well as a range of products customised in line with the requirements of specific Calls for proposals. Zagrebačka banka dd: 2015 Annual Report 9

10 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Corporate banking (continued) In 2015, we strongly contributed to increasing the public and entrepreneurs awareness on the importance of EU funds. In June, the Bank organised a conference which gathered more than three hundred participants, among which entrepreneurs clients of Zagrebačka banka, representatives from implementing bodies, local and international financial experts and consultants, with the main aim of presenting concrete information, advice and actual case studies on utilising funds from the EU and national sources. Being the Croatian subsidiary of the UniCredit Group, the Bank continued to coordinate and align sales efforts and improve its business activities with international customers operating in several countries, both in terms of customised products, as well as in terms of increase and better coordination of sales activities. In addition to the well-known potential of core markets in Italy, Austria and Germany, special focus has been placed on the macro region of Central and Eastern Europe. Investment banking and financial markets Zagrebačka banka maintained its leading market position in the investment banking industry in the Republic of Croatia and in Southeast Europe in 2015, which has been evidenced by a record number of a total of 12 closed transactions. This success was recognised by the leading online magazine Global Banking & Finance Review which awarded the Bank with the title Best investment bank in Croatia in In the Capital Markets segment, the Bank had a leading role in the majority high-profile benchmark transactions in 2015 including the following: the joint leading agent and subscription book entry keeper of the EUR 1.5 billion Republic of Croatia eurobond issue, two Republic of Croatia domestic bond issues (both in the amount of HRK 6 billion), USD 550 million Hrvatska elektroprivreda dd corporate eurobond issue, as well as the role of the leading agent and subscription book entry keeper in the HRK 510 million capital increase of Podravka dd through issuing and listing of new shares. In the Corporate Finance segment, the Bank took the role of advisor and was involved in virtually all major M&A transactions in 2015, both in Croatia and Southeast Europe, covering a wide range of industries, including telecommunications, media, consumer goods, tourism, banking and the pharmaceuticals industry. The Bank was acting as the M&A advisor in some of the most prominent transactions in the region, including the sale of the largest Croatian animal health production company Genera, the sale of a Croatian tourism company Hoteli Cavtat, and the sale of a cable TV operator company in Bosnia and Herzegovina, BHB Cable TV. Additionally, in cooperation with other UniCredit Corporate Finance Advisory teams based in Vienna and Ljubljana, the Bank s Corporate Finance department provided advisory services on the sale of the Albanian subsidiary of the leading European bank Credit Agricole, as well as advisory services on the sale of a leading Slovenian brewery, media company and non-alcoholic beverages producer. The Sales of the Treasury Products department preserved its role of undisputed market leader in derivative transactions which is a result of addressing clients specific needs aimed at managing foreign exchange and interest rate risks. Institutional Sales continues to distribute structured products (Certificates) through a private offering for Private banking clients. In the first half of 2015, clients were offered ZB Trader Global, a service for trading international securities through an online platform. Zagrebačka banka dd: 2015 Annual Report 10

11 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Social Responsibility 2015 My Zaba Start In 2015, Zagrebačka banka continued with the established My Zaba Start ( Moj Zaba Start ) project, including three contests - My Opportunity ( Moja prilika ) for innovative entrepreneurial and start-up projects; My Green Zone ( Moja zelena zona ) for green entrepreneurship; My Creative line ( Moja kreativna crta ) for creative industry - the Bank awarded the best ideas by incentives totalling HRK 1 million to 13 winning projects. By connecting various fields of the economy, and providing technical and financial assistance in the implementation of the best entrepreneurial ideas presented in the tenders, the project has been recognised as a breakthrough in corporate social responsibility and contribution to the stabilisation and strengthening of the Croatian economy. Zagrebačka banka dd rewards the most innovative and marketable entrepreneurial ideas in the field of green entrepreneurship, entrepreneurship in creative industries and innovative start-up concepts. In collaboration with a number of partners and ambassadors which are also successful entrepreneurs, this year once again we discovered new viable stories. Furthermore, all the finalists were offered specific education through business planning workshops in order to enable them to successfully manage their business processes and finances and meet the challenges of the market. Support to socially responsible entrepreneurship For the second year in a row, Zagrebačka banka and the UniCredit Foundation awarded grants to socially responsible entrepreneurs. In 2015, in partnership with Impact Hub Zagreb, a tender was initiated for brave individuals who address social or environmental issues in their entrepreneurial activities. The award fund was allocated to three projects, which than used the UniCredit Foundation Award funds as the capital to launch or continue their business operations. Supporting socially responsible entrepreneurs in the Republic of Croatia demonstrates that the Bank has recognised the importance of this perspective sector in terms of job generation, supplementing of the services of public interest and sustainable community development. Zagrebačka banka and culture Traditionally, we strongly support arts and culture by playing a significant role in organising large exhibitions, in the activities of various theatre and concert halls and in many other cultural endeavours. In 2015, we recognised and supported the most significant cultural institutions and projects at the micro, regional and national levels. The Bank also enabled yet another performance by the famous soloists of Arena di Verona in Zagreb. Involvement of Employees The traditional Gift Matching Program, organised by the UniCredit Foundation, has proved that the Bank s employees are ready to help those in need. The ninth year of this successful program was marked by 19 associations, 33 ambassadors and nearly 900 donors, who raised HRK 140 thousand which was doubled by the UniCredit Foundation. Several teams of employees took part in socially responsible activities by renovating facilities of a number of primary schools and the Goljak Special Hospital for Children with Neurodevelopmental and Motoric Disorders, thus contributing to build a better and more comfortable environment for those we love the most and supporting our community. Zagrebačka banka dd: 2015 Annual Report 11

12 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Social Responsibility (continued) Involvement of Employees (continued) The awareness of the importance of healthcare and recreation was additionally raised among the employees during the first ZABA Month of Sports and Recreation - 3, 2, 1... go. Built on the existing long-time Zabašport activities, through an internal campaign aimed at raising awareness of the benefits of physical activity in everyday life in the workplace, about 30 teams from all over Croatia were invited to participate in sports and recreational activities, with the most successful team spending an active sports weekend on the Zrmanja river. Activities for the academic community In 2015, the Bank continued to foster strategic partnerships and co-operation with major student associations and educational institutions, thus contributing to the overall development of future academic citizens, and increasing competitiveness and long-term sustainability of Croatia. We received the Golden Index Award for our special contribution to the academic community according to the perception of students from the top ten faculties in the Republic of Croatia. The award was presented as part of the project whereby the student association estudent expresses its appreciation to companies actively involved in improving the quality of studies and student life over the past year, by supporting the activities of student associations and participating in some of their projects. The key projects in which the Bank participated in 2015 were: the Case Study Competition (student teams develop solutions for business cases predefined by the sponsoring companies); SmartUp (student teams develop business plans aiming at presenting their business idea and attracting potential investors), Brainstormer (student teams compete in tasks which require "data mining" and the creation of mathematical models) and STARTER Conference (helping students to be better prepared for employment and to familiarise with the most favoured Croatian employers). With its commitment, the Bank contributed to the implementation of the project of the international summer school on intellectual capital and knowledge management - Dubrovnik Summer School, University of Zagreb Fair. Also, several development workshops were organised for students and presentations and were held on career fairs during the year. Zagrebačka banka dd: 2015 Annual Report 12

13 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Strategic Business Areas' Performance (continued) Social Responsibility (continued) Quality of Human Resources management practices Based on the organisational climate survey the People Survey, employees expressed a high level of satisfaction and a high level of commitment and dedication to work. This year the Commitment Index again reached a very high level of 89%. The Bank managed to attain the status of MAMFORCE COMPANY once again in 2015, which the Busy Mom Institute for Research and Education granted us for the successful implementation of family-conscious human resources management, enabling employees a better work-life balance. We are continuously dedicated in finding solutions which have a positive impact on the employees job satisfaction, their motivation and loyalty to the Bank. Employees trainings and strengthening of their competencies has always been in our focus Awards In 2015, Zagrebačka banka received a number of domestic and international awards for its operations, of which we single out the following: - Euromoney - Best Trade Finance Bank in Croatia, - Euromoney - Best Private Banking in Croatia, - Emeafinance - Best Bank in Croatia, - Global Finance - Best Trade Finance Group in Central and Eastern Europe, - Global Banking & Finance Review - Best Investment Bank in Croatia, - Croatian Association for Public Relations Grand Prix, for public relations in large companies - Image Campaign The First 100 Years. Zagrebačka banka dd: 2015 Annual Report 13

14 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Outlook for 2016 Global economic growth will continue to be positively impacted by the increase in personal consumption, anticipated investments and the relatively high demand for commodities and services in the international market. Central banks continue to support economic recovery by ensuring a high level of liquidity in the market and keeping interest rates at relatively low levels. GDP growth is expected to continue also in the Republic of Croatia in 2016, driven by the solid demand by trade partners, the increase in personal consumption, a more efficient utilisation of European structural and investment funds and by standardly substantial contribution from the tourist season. The fiscal policy will remain a strong tool for encouraging the economic recovery. It is expected that the Croatian Government will produce a budget oriented to decrease in the public debt and the deficit, and that it will largely initiate the necessary reforms. The Croatian banking sector is stable, with a high level of liquidity and capital adequacy. On the other hand, the clients creditworthiness and the level of non-performing loans still represent considerable constraints for the growth of credit activity. In addition to what was mentioned earlier, we believe that the possible solutions contributing to the economic growth are capital market development, increase in utilisation of funds from financial institutions (EBRD, EIB, World Bank) and fostering of export. The Zagrebačka banka Group has continuously realised good business results thanks to the universal business model, good reputation, excellent access to primary funding sources and a high level of capital. We do not depart from the four main strategic principles which represent the basis of our corporate governance - commitment to customers, a balanced business model, diversification and accessibility, and focus on the fundamentals of stable and sustainable banking operations; supplemented also by responsible risk taking and management. In the upcoming period we will foster innovation and the implementation of new digital technologies and services. Special focus will be placed on providing consultancy services in identifying business opportunities and devising joint solutions for clients facing difficulties in their operations. The Bank will continue strengthening its presence in international and regional markets. In all business segments it will stimulate credit activity accompanied by adequate risk assessment. We are also aware of our social role, and therefore we shall continue to provide incentives to economic and social progress and promote socially responsible business practices. On behalf of the entire Management Board, let me express my gratitude to all our clients, business partners and shareholders for our excellent co-operation, wishing that it will continue in the years to come. I also wish to thank all colleagues, the President and Members of the Supervisory Board for their commitment to our successful performance. My special appreciation goes to all employees of the Group - through their exceptional contribution and dedicated professional work they enabled the long-term sustainability, the position and reputation of the Zagrebačka banka Group. Miljenko Živaljić Chairman of the Management Board Zagrebačka banka dd: 2015 Annual Report 14

15 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries UniCredit Bank dd, Mostar Business review UniCredit Bank dd Mostar (hereinafter under this heading the "Bank ) provides the full set of banking financial services in Bosnia and Herzegovina, including corporate banking, retail banking, financial institutions, international operations, and investment banking services. The Bank s sales network is covering the entire territory of Bosnia and Herzegovina and is divided into 10 regions, which are further divided into branches. At the end of 2015, the Bank had 79 branch offices and largest ATM network on the territory of Bosnia and Herzegovina (260 ATMs at the end of 2015). In challenging macroeconomic and political environment, the Bank continuously maintains its leading position on local market (measured by the size of assets, profit, loans and deposits). During the year, the Bank further increased its leading position in relation to competitors. The Bank is continuously oriented on improving the quality of services, and recognising and meeting clients needs, by focusing on product simplification and on improvement in efficiency of the processes. The Bank actively contributes to the development of the local banking sector, through its active engagement the Bank promotes an innovative approach to transparent communication, reporting, implementation of standards and sharing of knowledge accumulated through extensive experience. Following the reorganization on Group level, on the acquisition date 22 December 2015, the Bank acquired 100% shares in UniCredit Leasing doo, Sarajevo (finance and operating lease activities) and 49% stake in UniCredit Broker doo, Sarajevo (insurance intermediation activities). According to statutory financial statements, realised profit after tax was BAM 79.6 million, which is an increase of BAM 18.1 million (+29.6%) compared to the previous year. The increase in profit after tax is a consequence of increase in all significant revenue categories, lower impairment provisions on loans and receivables, and operating costs which slightly increased. Operating income for 2015 amounted to BAM million, which is BAM 15 million higher than the revenues in the previous year (+7.2%). Net interest income in 2015 amounted to BAM million, which is BAM 13.7 million (+9.9%) higher compared to previous year. The share of net interest income in total Bank s revenues is 68.6%. Despite the trend of decrease in market interest rates, volume of loans significantly increased. Also, a decrease in interest expenses was realised by optimising pricing and structure of deposits. At the same time, the Bank retained clients trust and the volume of current accounts and deposits had double-digit growth. The net fee and commission income amounts to BAM 58.5 million, an increase of BAM 0.8 million (+1.4%) compared to prior year is mainly as a result of increase in fees for current and transaction accounts, card operations fees and the increase in income from payment operations, as a result of larger volume of transactions. Operating expenses amounted to BAM million, which is BAM 1.4 million (+1.2%) higher compared to previous year, as a result of higher staff costs, increase in deposit insurance expenses and increase in other administrative expenses. Total impairment losses and provisions amounted to BAM 11.7 million, which represents BAM 6.5 million (-35.8%) decrease compared to previous year. Total assets as at 31 December 2015 amounted to BAM 4,375.7 million which represents an increase of BAM million (+10.4%) compared to the end of the previous year, mainly due to increase in current accounts and deposits. Zagrebačka banka dd: 2015 Annual Report 15

16 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) UniCredit Bank dd, Mostar (continued) Business review (continued) The increase compared to end of the previous year was realised on ALM positions which increased by BAM million (+19.6%) compared to the previous year, and on loans and receivables from clients which increased by BAM million (+5.6%). Current accounts and deposits from customers amounted to BAM 3,316.9 million and were increased by BAM million (+12%) compared to the end of the previous year. The growth was mainly realised by increase in retail deposits. Current accounts, savings and term deposits of individuals represent 65.2% of deposits. Current accounts and deposits from banks at the end of 2015 amounted to BAM million, they increased by BAM 32.4 million (+33.9%) compared to the previous year. The Bank's equity amounted to BAM million and compared to the end of the previous year increased by BAM 79.4 million, as a result of the current year profit. The capital adequacy ratio calculated in accordance with local methodology was is 15.2% (minimum regulatory requirement was 12%). Exposure to risks The nature of operations did not significantly change in 2015, and the most important types of risk to which the Bank is exposed are credit risk, market risk and operational risk. Market risk includes currency risk and interest rate risk. During 2015, the Bank improved the existing risk management system, risk management policies, procedures, work procedures and limits. The Bank is exposed to credit risk as a result of its credit operations and placements of funds. Credit risk is regularly assessed on a portfolio basis, on the level of exposures to individual customers, on the level of groups of related parties and against the prescribed limits which are set in relation to the Bank s regulatory capital. Furthermore, the Bank regularly analyses borrowers creditworthiness, timely identifies potentially risky customers and executes structured relationship management in order to maximise the recovery of receivables. In order to minimise credit risk, the Bank implements a collateral policy which defines the treatment of collaterals in the credit risk underwriting and monitoring process. The Bank is exposed to liquidity risk in financing activities and assets and liabilities management activities. The Bank has an access to a diverse funding base, including various types of retail, corporate and bank deposits, borrowings, subordinated debt, issued debt securities, share capital and reserves. These enhance funding flexibility and limit overdependence on limited sources of funds, as well as generally ensure better cost management of funding. Foreign currency risk is the risk of losses caused by adverse exchange rate movements. Foreign currency exposures arise from credit, deposit-taking, investment and trading activities. The exposure is monitored daily in accordance with regulations and internal limits set by the UniCredit Group, on the currency level and on the level of total assets and liabilities denominated in, or linked to foreign currency. In Bosnia and Herzegovina, the local currency is fixed to EUR; therefore, there is no exposure to risk of change of local currency with respect to EUR exchange rate. The Bank is exposed to interest rate risk to the extent to which its interest-bearing assets and liabilities mature, or their respective interest rates change at various times or in different amounts. On a day-to-day level, market risk exposure is monitored by Value-at-Risk model and by daily supervision of basis point movements. In order to ensure the optimum operational risk management, the Bank has established its own system based on standards and principles defined by the local regulator, the UniCredit Group and the Basel Committee. The system in place enables the identification, measurement, assessment and monitoring of operational risk and it is aimed at its optimum management at all hierarchical levels across the Bank. Zagrebačka banka dd: 2015 Annual Report 16

17 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) UniCredit Leasing Croatia doo Business review UniCredit Leasing Croatia doo (hereinafter under this heading: the Company ) became a member of Zagrebačka banka Group in April 2015, when Zagrebačka banka dd acquired the entire equity stake from related company UniCredit Leasing SpA. UniCredit Leasing Croatia doo is the largest leasing company in Republic of Croatia per size of assets. The main activities of the Company is provision of finance and operating lease services to individuals and legal entities. In 2015, the Company s result of operations is profit after tax of HRK 43.7 million which is HRK 3.7 million (- 7.9%) less than In comparison to the previous business year, profit after tax is a result of the increase in net interest income from finance lease which amounted to HRK 81 million (+1.3%), lower income from operating lease and other income which amounted to HRK 210 million (-8.4%), lower depreciation and amortization expenses which amounted to HRK 122 million (-7.8%) and lower operating expenses which amounted to HRK 106 million (- 1.7%). Despite the decrease in market demand for leasing financing, continuous decrease in volume of leasing portfolio and revenues, and the repeated loss of the entire leasing sector in Republic of Croatia in 2015, the profit after tax of the Company for the year is a result of activities which were focused to maintain the portfolio quality, realise budgeted net interest income and to control operating expenses and adequately provide for risks. Total assets amounted to HRK 3,158 million (2014: HRK 3,258 million) which is HRK 100 million lower than the balance at the end of 2014, mainly due to the continuing deleveraging trend and due to decrease in volume of finance lease receivables and equipment placed under operating leases. In 2015 UniCredit Leasing Croatia doo concluded 5,332 new contracts (2014: 5,485 new contracts) with total value of HRK 731 million (HRK 749 million). Out of total, 60% new contracts are financial leasing, and 40% operating leasing. Personal vehicles, equipment and delivery vehicles represent the major portion of the new contracts volume. 1 The portion of 2015 result of the company UniCredit Leasing Croatia doo which is included in the consolidated financial statements of Zagrebačka banka Group for 2015 amounted to HRK 34.6 million. This amount relates to the result of the Company in the period after it was acquired by the Group in April Zagrebačka banka dd: 2015 Annual Report 17

18 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) UniCredit Leasing Croatia doo (continued) Business review (continued) Risk exposure The most significant risks to which the Company is exposed in its operations are market, liquidity and credit risk. Significant market risks to which the Company is exposed are currency and interest rate risk. Currency risk arises from financial and operating lease receivables which are linked to EUR and CHF. This risk is managed by obtaining funding in the same corresponding currency and by hedge accounting. Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. In order to reduce the mismatch of interest positions, the Company manages its exposure to interest rate risk by monitoring its interest rate gap, by aligning maturities of assets with maturities of sources of finance. In order to manage the liquidity risk, the Company analyses its cash position by forecasting its cash outflows and cash inflows. Liquidity management measures include prevention and elimination of potential causes of insolvency (short-term plans to bridge liquidity gaps, utilisation of available overdraft). The Company is exposed to credit risk, mainly out of its exposure to finance and operating lease receivables. At origination, the Company analyses the risk profile of customers and seeks to conclude transactions with customers of sound credit rating. Furthermore, depending on the assessment of risk of each individual exposure, the Company may decide to obtain additional collateral and guarantees (in addition to the leased asset). Special attention is also placed on monitoring of the quality of leased assets and their subsequent marketability. Development plan The Company s main focus for upcoming period is to continue satisfying customers needs and maintain and improve profitability. In order to increase efficiency and to align to the decision-making rules on Zagrebačka banka Group level, the Company will implement the new system for approval and monitoring of leasing exposures. In order to mitigate the impact of the unfavourable business environment, the Company is continuously focused on process and cost-efficiency improvements and investing in human resources and their development. Zagrebačka banka dd: 2015 Annual Report 18

19 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) Prva stambena štedionica dd Business review Prva stambena štedionica dd (hereinafter under this heading: the Company or Štedionica ) is a credit institution which collects deposits with state incentives from individuals and grants housing loans in Republic of Croatia. As at 31 December 2015, the Company s total assets amounted to HRK 2.6 billion (2014: HRK 2.5 billion) and during 2015 assets increased by 4.9% (increase 3.6% in 2014). The previous year was marked by deleveraging trends in housing loans, with increase in competition in offering of loans with fixed interest rate. Despite a challenging market, the balance of gross loans to individuals and unincorporated businesses is stable and amounted to HRK 1,560 million at the end of the year (2014: HRK 1,549 million), which represents 0.7% increase, also supplemented by increase in the market share. After years of recession and multiple changes in regulatory and state incentives framework, the system was stabilized in 2015 after introduction of variable rate on state incentives; also a fixed amount of incentive, predetermined in advance for each year was introduced, which resulted in increased number of new savings contracts compared to Due to continued synergy from cooperation with Zagrebačka banka dd, Štedionica achieved good sales results in the savings segment in 2015 and the deposits increased by 1.4% which further strengthened its leading market position. Apart from new savings and loans, special attention was brought to preserving the credit quality of loan portfolio and collection of overdue receivables. These effects produce good results and, as in previous years, the share of non-performing loans in the total portfolio is low, less than 2%. During 2015, the focus was also on improvement in business processes and increase in efficiency to reduce operational expenses. Despite challenging macroeconomic environment, net interest income increased and result in 2015 is profit after tax in the amount of 23.5 million (2014: HRK 24.4 million). Development plan In 2016, improvements in economic environment in Republic of Croatia is expected, however, high unemployment rates will continue to affect savings capacity of the population and will further impose extended efforts to maintain the volume and quality of the loan portfolio. Also, the increased efforts to collection of overdue receivables are expected to continue. In a continued cooperation with Zagrebačka banka, Prva stambena štedionica plans to retain the position of market leader by executing a pro-active business strategy which is focussed on identification and creation of business opportunities and on the development of products which adequately satisfy clients needs. Zagrebačka banka dd: 2015 Annual Report 19

20 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) Prva stambena štedionica dd (continued) Business review (continued) Risk exposure In performing its business operations, Štedionica is primarily exposed to credit, liquidity, market and operational risks. Market risk involves currency and interest rate risks. Business operations are performed within the appropriate risk limits, and though its business policies and procedures the Company incorporated a sound risk management system. Štedionica is exposed to credit risk through its lending and investment activities. Furthermore, counterparty risk is monitored on a continuous basis and the initial credit risk assessment ensures the approval of loans to clients with good credit rating, as well as contracting the adequate collaterals. The liquidity risk arises in relation to the funding of business activities. The main funding sources are deposits from individuals and shareholders funds. Liquidity risk is reduced by matching the maturities of funding sources to expected timing of realisations of assets. The exposure to currency risk is a result of the Company s foreign currency transactions, or transactions linked to a foreign currency. The Company s goal is to minimise the mismatch in foreign currency denominated assets and liabilities. Štedionica is exposed to interest rate risk to the extent to which interest-earning assets and interest-bearing liabilities mature, or their respective rates change at various times or in different amounts. The majority of interest-earning assets and all interest-bearing liabilities have fixed interest rate which significantly exposes the Company to the interest rate risk, therefore a special attention is placed on the management of interest rate risk. ZB Invest doo Business review ZB Invest doo (hereinafter under this heading: 'the Company') is a leading investment fund management company on the local market which is managing twelve UCITS investment funds, one privately offered alternative investment fund and a number of discretionary managed individual client portfolios. Since 2015, as a leader in the local market, the Company manages first four UCITS open-end investment funds with public offering established for definite period of time. Total assets under management of the Company amounted to HRK 3.73 billion at the end of 2015 (end of 2014: HRK 3.79 billion) which represents 23.94%, i.e. the largest market share in UCITS funds sector in Republic of Croatia. After fifteen years of successful business operations, the Company manages to retain the position of the leading investment funds manager in the local market. Market environment The last year was marked by increased volatility and ultimately it ended positively only for developed European stock markets shares. The period of increased liquidity was continued, with low interest rates on deposits and reduced yields on the market. Furthermore, the impact of decrease in capital markets during and after 2008 is still present in the investors perception which is still affecting the volume of assets under management. Zagrebačka banka dd: 2015 Annual Report 20

21 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) ZB Invest (continued) Business review (continued) Operating results and main indicators The Company maintained a sound profitability and realised profit after tax in the amount of HRK 14.7 million which represents a slight increase compared to the profit after tax realised in the previous year (2014: HRK 14.6 million). In 2015, operating income of the Company was stable and reached HRK 51.5 million (2014: HRK 51.1 million). The major component of the Company's total income was management fee income, in the amount of HRK 51.0 million (2014: HRK 50.7 million). Total assets of the Company did not change significantly and as at 31 December 2015 amounted to HRK 32.1 million (2014: HRK 32.0 million). Short-term liquid assets represent major portion of Company s assets. Total equity amounted to HRK 26.8 million (2014: HRK 26.7 million). Capital and reserves amounted to HRK 12.1 million (minimum capital requirements in accordance with the Investment Funds Act were HRK 3.5 million). At the end of 2015, the number of individual investors in funds managed by the Company exceeded 58,000. The investors structure was as follows: 73% individual, 5% corporate and 22% institutional investors (2014: 73% individual, 7% corporate and 20% institutional investors). Development plan As one of leading asset management companies, the Company will continue to provide high-quality professional asset management services to its clients and investors, enabling them appropriate earnings in accordance with predefined investment strategies. The aim of the Company is to provide its clients investment opportunities in an attractive range of asset management and other investment products and services. At the same time, the main precondition for business continuity is transparent reporting and protection of clients, as well as full compliance with legal requirements. Risk exposure The Company is paying special attention to risk management in its operations. The implemented risk management system is based on the risk management standards defined at the UniCredit Group level. The most important risks the Company is exposed to are credit risk, market risk, liquidity risk and operational risk (the Company was not significantly exposed to liquidity and market risks on the reporting date). Other members of the Group Other members of the Group also recorded good business and financial results in the year Miljenko Živaljić Chairman of the Management Board Zagrebačka banka dd: 2015 Annual Report 21

22 Business description Zagrebačka banka dd is a licensed bank operating in the Republic of Croatia and the holding company for the Zagrebačka banka Group. The Zagrebačka banka Group is a Croatian based financial services group which provides a full range of corporate and retail banking services for customers in Croatia. The Group serves close to 68,000 active corporate clients and small businesses and approximately 1.6 million active retail clients. The Bank provides a full range of banking services, including corporate, retail banking, international financing, investment banking and corporate finance services. Subsidiaries and associates The Bank s subsidiaries and associated companies as at 31 December 2015 and during 2015 are presented below: Fully consolidated subsidiaries Company Address Country of domicile UniCredit Bank dd, Mostar PRVA STAMBENA ŠTEDIONICA dd ZB Invest doo CENTAR KAPTOL doo POMINVEST dd SUVREMENE POSLOVNE KOMUNIKACIJE doo ZAGREB NEKRETNINE doo ZANE BH doo ZABA Partner doo UniCredit Leasing Croatia doo LOCAT CROATIA doo BACAL ALPHA doo BACAL BETA NEKRETNINE doo ALLIB NEKRETNINE doo UniCredit Partner doo UniCredit Leasing doo Industry Group ownership % Kardinala Stepinca bb Mostar Bosnia and Herzegovina Banking 99.3 Savska Zagreb Croatia Banking Ivana Lučića 2a Zagreb Croatia Fund management Nova Ves Zagreb Croatia Property investment Gundulićeva 26a Split Croatia Property management 88.7 Savska cesta Zagreb Croatia Publishing Nova Ves Zagreb Croatia Real estate agency Branilaca Sarajeva 20 Bosnia and Sarajevo Herzegovina Real estate agency Augusta Cesarca Zagreb Croatia Insurance broker Heinzelova Zagreb Croatia Leasing Damira Tomljanovića Gavrana Zagreb Croatia Real estate business Damira Tomljanovića Gavrana Zagreb Croatia Real estate business Damira Tomljanovića Gavrana Zagreb Croatia Real estate business Damira Tomljanovića Gavrana Zagreb Croatia Real estate business Damira Tomljanovića Gavrana Zagreb Croatia Trading activities 80.0 Ložionička Sarajevo Bosnia and Herzegovina Leasing 99.3 Zagrebačka banka dd: 2015 Annual Report 22

23 Business description (continued) Equity accounted associated companies Company Address Country of domicile Industry Group ownership % Allianz ZB doo, društvo za upravljanje obveznim mirovinskim fondom Allianz ZB doo, društvo za upravljanje dobrovoljnim mirovinskim fondovima MULTIPLUS CARD doo, UniCredit Broker doo Nike Grškovića Zagreb Croatia Ivana Lučića 2a Zagreb Croatia Ivana Lučića 2a Zagreb Croatia Obala Kulina bana Sarajevo Obligatory pension fund management 49.0 Voluntary pension fund management 49.0 Advertising and marketing services 25.0 Bosnia and Herzegovina Insurance broker 48.7 Branch network map Zagrebačka banka Group - number of branches (end of year) Croatia Bosnia and Herzegovina Total Zagrebačka banka dd: 2015 Annual Report 23

24 Overview of the Croatian economy in 2015 Macroeconomic indicators for Croatia Gross domestic product, billion HRK, in current prices 332.0* Gross domestic product, % change 1.6* (0.4) (1.1) (2.2) (0.3) (1.7) (7.4) 2.1 GDP per capita, in EUR 10,362* 10,156 10,225 10,301 10,451 10,479 10,472 11,169 Private consumption, % change 1.2* (0.7) (1.9) (3.0) 0.3 (1.5) (7.5) 1.2 Public consumption, % change 0.6* (1.9) 0.3 (1.0) (0.3) (1.6) 2.1 (0.7) Investment, % change 1.6* (3.6) 1.4 (3.3) (2.7) (15.2) (14.4) 9.2 Exports of goods and services, % change 9.1* (0.1) (14.1) 0.8 Imports of goods and services, % change 8.6* (3.0) 2.5 (2.5) (20.4) 4.0 Industrial production, % change (1.8) (5.5) (1.2) (1.4) (9.2) 1.2 Construction industry, % change (0.6)* (7.3) (4.7) (12.6) (11.3) (17.0) (6.2) 13.6 Tourism (night stays), % change (3.7) 2.0 Unemployment rate (ILO), (% of economically active population) 16.5* Consumer prices, % change (0.5) (0.2) General government budget balance (% GDP) (4.0)* (5.7) (5.4) (5.3) (7.5) (6.0) (5.9) (2.7) Balance of payments current account balance (% GDP) 4.7* (0.0) (0.7) (1.1) (5.1) (8.8) External debt (% GDP) 106.6* Money supply (M1), % change, end of period (14.6) (4.6) Exchange rate HRK:EUR, year average Exchange rate HRK:EUR, end of period Sources: State Bureau of Statistics, Croatian National Bank, Ministry of Finance * Crostat flash estimate and estimate by the Chief Economist of Zagrebačka banka In 2015 the Croatian economy started to recover Negative tendencies from the year 2014 finally stopped, and the year 2015 was marked by the beginning of the recovery of the Croatian economy, reflected in GDP growth, reduced unemployment, and even in the gradual revival of employment at the end of the year. The initial impetus for that, at the beginning of the year unexpected turnaround, came from the strong growth in exports of goods and services due to favourable developments in the region, the continuing trend of increased growth in all countries significant for the Croatian export and tourism. On the other hand, the tax burden on wages reduced, encouraging the growth in private consumption. However, favourable impact of a strong decrease in the prices of petroleum products also should not be neglected. Still, the first positive developments after a long deep crisis, which are reflected in the significant growth in industrial production and a slight revival of investments are not sufficient to conclude that the long period of the economic decline or stagnation is definitely over. The outdated model of economic growth based on the excessive dependence of the private sector on public sector consumption and investments, mainly financed through deficit and debt is not yet finally abandoned, which is visible through the still present weakening of construction activity. As a result of the need to reduce the general government deficit (in accordance with the targets set in the Excessive Deficit Procedure by the European Commission) a further reduction of public spending is expected. It is also to see whether the competitiveness of the private sector can continue to improve at the same pace to ensure growth in exports, and whether it will be sufficient to keep momentum in GDP growth without reforms being initiated. Zagrebačka banka dd: 2015 Annual Report 24

25 Overview of the Croatian economy in 2015 (continued) In such circumstances, the gross domestic product of the country in 2015 grew 1.6% yoy, after six year long recession (during which it fell 12.5% cumulatively). The growth was broad-based, in all components of GDP, including also the domestic demand, first time after long lasting recession. Equally strong impact on the overall growth came from personal consumption and the export of goods and services, while small initial increase in investment activity also made its contribution. Public spending in an election year slightly grew too in 2015, despite both the urgent need and the communicated goal to cut the fiscal deficit within the EDP. The downward trend in the number of employees stopped in the middle of the year, largely due to a significant increase in seasonal employment in tourism, catering and supporting activities. However, after the end of the tourist season, employment, though with slightly smaller intensity, continued its growth until the end of the year and after many years of negative trend positive yoy rates of employment have been recorded (in some months even above 1%). Decrease in the rate of registered unemployment was even higher - from 19.4% in December 2014 to 17.9% in December 2015, bearing in mind that, due to the liberalization, Croatian workers were allowed to apply for jobs in most of EU countries. Positive developments in the last year were reflected also in a significant increase in public revenues, and indirectly also in reduction of the general government deficit, partly due to the reduction of interest burden of servicing of the accumulated debt, due to favourable conditions in the international financial markets. The estimated positive current account balance strongly increased (even at 4.7% of GDP), due to a significant increase in the surplus in services trade (record income from tourism) and reduced deficit on the merchandise account, but primarily, as a result of one-off effect of conversion of Swiss francs loans (which significantly reduced the income of foreign owners of major Croatian banks). Investments in the year 2015 increased slightly, by an estimated 1.6%, and thus still stand at almost a one third lower level than in the pre-crisis period, in real terms. However, a good utilization of the opportunities provided by EU funds resources is still missing, due to insufficient institutional capacity. Also, certain announced major projects remain far from actual materialization (especially in the field of transport infrastructure and energy commodities), partly due to slow implementation of tenders for EU funds. Neither private investments have not significantly increased, which is partly a consequence of a small amount of FDI, which suggests that the mood of investors and the general investment climate in the country still did not significantly improve. Personal consumption has, as already mentioned, due to the reduction of the tax burden on salaries and pensions and the continuing deflationary trends in the past year significantly increased (in real terms by 1.2%), but is still about 12% lower than before the crisis. The turnover in retail trade increased significantly (2.4%), but this is partly attributable to a record increase in visits and spending by foreign tourists. Despite the increase in personal consumption, household sector deleveraging is still continuing. Reinforced positive trends in industrial production continued in 2015, primarily due to a significant increase in foreign demand. Industrial activity growth has accelerated from 1.2% in 2014 to 2.7%. However, its level is still some 15 percentage points lower than in It is encouraging that the accelerated growth of total industrial production occurred despite a significant reduction in the production of electricity (by 5.7%). Manufacturing increased by 3.8%, with the largest contribution of the most important, the food industry, which increased by 4.1%. A significant increase was also made by the wood, chemical and pharmaceutical industries, and the manufacture of leather products. Exceptionally high growth was achieved in shipbuilding (about 40% as a result of a strong recovery after the completion of a long process of restructuring), but its share in the overall industry has been significantly reduced in the previous periods. The lack of significant investment activity continues to drag the construction industry to the low level of activity (which further decreased by estimated 0.6% to the year 2014), but the seasonally adjusted data indicate that the downward trend stopped at the end of the year, especially in the construction segment. In the area of civil engineering, due to the mentioned lack of significant infrastructural projects and their delays, the trend is still negative. Tourism, thanks to increased investment, instability in some other Mediterranean markets and favourable weather conditions throughout most of the season, posted record results with an increase in the number of overnight stays of 7.7% (7.4% by foreign tourists) and foreign exchange revenue in the industry probably exceeded the level of 8 billion euros. Thanks to these developments, the trend of real GDP in the first three quarters of last year was positive, with a significant acceleration of growth in the third quarter. According to all indications, growth is also continued in the last quarter of Zagrebačka banka dd: 2015 Annual Report 25

26 Overview of the Croatian economy in 2015 (continued) The balance of payments current account surplus has increased mainly due to one-off effect of the conversion of loans in Swiss francs and the significant increase in the surplus on goods and services account The balance of payments current account surplus in the year 2015 increased compared to the year 2014, not only due to the significant increase in revenues from exports of goods and services, but also for the one-off effect of Swiss franc loans conversion. In this way income of foreign owners of majority of the banking system significantly reduced. Remittances slightly increased, as well as inflows based on the use of EU funds. Revenues generated on the basis of merchandise exports have increased substantially in the first three quarters (+9.3%), as well as revenues from the export of services (+9.1%). Expenditures for imports of goods increased by 6.6% and imports of services by 8.5% for the first nine months of 2015, the surplus on account of goods and services increased by million euros (or even 31.2 %). Despite the opposite expectations, public spending increased in the last year; consolidated general government deficit was reduced during the year 2015, reforms in the public sector still missing In an election year, the government did not take significant steps in the direction of stronger reform efforts in the public sector (the efforts which would result in increased efficiency while reducing expenditures), and trends in public finances mainly depended on the developments on the revenue side. In the year 2015 revenues were significantly better than a year ago as the recession ended and overall as well as financial condition in the economy improved, and some one-off measures (such as transferring part of the second-pillar assets of the workers on privileged pensions to the central government budget). The historically low level of interest rates in the international financial markets had a positive effect and contributed to the stability of public finances. This further mitigated the increase in expenditures for the repayment of interest regarding the accumulated public debt and enabled more convenient borrowings for financing the current general government deficit, which is unsustainable in the long run. In the year 2015, the government, despite commitments under the EDP (Excessive Deficit Procedure), in an election year abandoned restrictive fiscal policy and reduced the tax burden on income from work and pensions. In this way, it missed opportunity to additionally reduce the general government deficit in much more favourable international circumstances. However, owing to the growth of the economy, increased revenues contributed to the reduction of the fiscal deficit, which is estimated at around 4.0% of GDP (ESA2010), which is still significantly less than that recorded in the year 2014 (5.7%). It is possible that the fiscal deficit will be slightly lower, bearing in mind that it is likely that consumption of the public sector were significantly reduced in the period after the announcement of parliamentary elections. However, unfavourable is the fact that the deficit reduction came more after giving up the realization of certain planned investments, or their prolongation rather than due to actual savings achieved through rationalization of spending and a fundamental reform of the public sector. In those circumstances, public spending, in our assessment, in real terms over the past year increased by about 0.6% yoy. In 2015, consolidated central government budget revenues have increased by 7.8% and expenditures by 3.5% compared to the According to preliminary estimates from Ministry of Finance, the full year deficit of consolidated central government (on cash base) last year reached the amount of about 9.6 billion. In significant increase in public revenues largely contributed the increase of revenue collected from VAT (+6.3%) and excise duties (+8.4%). To the growth of revenues also contributed the one-time transfer of part of the second-pillar assets of the workers on privileged pensions to the state budget in the amount of about 1.3 billion HRK. Total tax revenues grew by 7.7%, with increase in revenues from tax on income (the part that belongs to central government) and tax on profit of 17.7% yoy. Significant increase is also recorded in revenues from EU assistance sources due to increased use of funds (+88.2%), as well as in income from property (+4.0%). Within the overall increase in public expenditure in 2015 of 3.5%, a significant increase was recorded in expenses for interest (+7.0%), and in particular expenditure for goods and services (+30.4%) and subsidies (+18.8%). Compensation of employees has declined by 14.8% and social benefits by 8.0%. Zagrebačka banka dd: 2015 Annual Report 26

27 Overview of the Croatian economy in 2015 (continued) General government debt continued to grow strongly, exceeding by our estimate at the end of 2015 the amount of HRK 288 billion or 86.6% of GDP. During the year the Ministry of Finance issued two bonds on the domestic market and only one on the international market. Bond with a maturity of 10 years in the amount of HRK 6 billion with an interest rate of 4.5% was placed on July 9, while bond with a maturity of 11 years in the same amount with a coupon of 4.25% was issued on 14 December. Bond with a maturity of 10 years in the amount of EUR 1.5 billion with an interest rate of 3% was released on 11 March. The foreign bonds in the amount of EUR 750 million, and two bonds on the domestic market, in the amount of EUR 350 million and HRK 5.5 billion were due in last year. Due to excess liquidity in the domestic market during 2015, the low interest rates on treasury bills further reduced (the 364-day kuna from 1.50% to 1.47%, 182-day from 0,60% to 0,55 %), and slightly increased for the 91-day, from 0.28% to 0.43%. For 364-day bills in euro interest rates were reduced from 0.45% to 0.40% and for 91-day from 0.30% to 0.20%. Total indebtedness based on treasury bills in 2015 was reduced by HRK 1.75 billion or 5.8%. In the year 2015 the overall level of consumer prices fell due to further deflationary pressures and still low level of domestic demand, but also as a consequence of the reduction of prices of energy commodities, raw materials and food products In 2015, consumer prices in Croatia on average decreased by 0.5% compared to the previous year. In December, they were lower by 0.6% compared to the end of 2014, primarily due to the continued reduction of domestic demand. The prices excluding energy commodities and food products increased in the last twelve months by 0.3% (core inflation). Food prices declined by 0.2%, and significantly reduced the prices of housing (including energy and water) (-0.7%) and transport (-6.0%), mainly due to a strong decline in prices of liquid fuels during the year. In contrast to the prices of goods, which decreased by 0.8%, prices of services at the same time remained unchanged compared to the end of the year With initiated economic recovery favourable trends in the labour market emerging, unemployment began to decline while the number of employees gradually rose, real level of average wages increased significantly due to the reduction of the tax burden Registered unemployment fell during 2015 to 31,295 people, or 9.9%. However, the total number of unemployed is still very high - even 285,468 people. The registered unemployment rate decreased from 19.4% to 17.9%. ILO unemployment rate derived from labour force surveys, also decreased from 17.3% in the year 2014 to an estimated 16.5%in the year The number of employees recorded positive trends after six years - according to the Pension fund register, the number of employees at the end of December 2015 was 1.2%higher than year ago. The number of workers employed in legal entities increased by as much as 1.7%, while employment in crafts and free lances was declining still (-3.8% and -0.4%), as well as the number of registered farmers (-5.0%). With the revival of the economy, an increase in real gross wages in 2015 by 1.7% on average was recorded. Real net wages rose even faster (3.7%) due to the reduced income tax burden. Monetary policy tried to initiate lending to the real sector, introducing reverse repo auctions, while managed to preserve the stability of prices and exchange rate CNB during the year 2015 continued the expansionary monetary policy in effort to preserve high liquidity in the banking system without endangering the stability of the exchange rate. It tried to induce the increase of investments in the real sector in order to revive economic activity. This policy has resulted in keeping interest rates at exceptionally low levels in low inflation environment, thus facilitating costs of government borrowing in the domestic market. But the main goal - to increase bank lending to real sector - in the year 2015 was not achieved, mainly due to the limited demand for loans as the corporate sector investment activity is still weak. During the first nine months of last year CNB attempted to boost the financing of the economy by purchasing compulsory bills from banks in order to achieve positive growth of loans to the corporate sector. However, due to weak bank lending to businesses purchase of compulsory CNB bills in that period was modest. Zagrebačka banka dd: 2015 Annual Report 27

28 Overview of the Croatian economy in 2015 (continued) From September 30, the central bank started to conduct weekly reverse repo auctions to facilitate conversion of loans in Swiss francs to loans denominated in euros, following implementation of the Consumer Credit Act changes introduced in the third quarter, and a total of 14 such operations carried out in the open market. In the first six auctions, a fixed repo rate was 0.8% and 0.5% in last eight. CNB was placing some HRK 350 million per auction. In the last reverse repo auction in 2015 it accepted all the bids received from banks in the amount of HRK 158 million at a fixed repo rate of 0.5%. By decision of the CNB Council from December 15th, the requirement for banks to maintain the foreign exchange component of reserve requirements was abolished, and enabled the maintenance of the total foreign exchange reserve requirements in banks accounts. Such solution allowed the banks conduct a more flexible and effective management of foreign currency liquidity, which is an additional incentive to reduce regulatory costs. Banks were allowed to manage more freely the amount of HRK 3.8 billion, or EUR million and USD 4.7 million, which was the allocated foreign exchange component of reserve requirements. Increased liquidity without significant increase in placements contributed to the strengthened depreciation pressures on local currency. Therefore, central bank intervened in the FX market by selling EUR million to banks in three auctions throughout the year. HRK/EUR reached the level of 7,635 kuna per euro by the end of the year, which is 0.3% less than at the end of the year 2014, while reaching levels above 7.71 kuna per euro in some periods. The average exchange rate in the year 2015 was 7.61 kuna per euro, which also represents a slight appreciation of 0.3% compared to the average in the year Gross international reserves at the end of 2015 amounted to EUR 13.7 billion, an increase of EUR 1 billion yoy. Total loans of banks in 2015 decreased by 2.0% or about HRK 5.7 billion 2, with corporate loans declining most significantly (more than HRK 4.7 billion or 5.2%), while loans to households decreased by more than HRK 1.9 billion (1.5%). Loans to the government (central, local and social security funds) rose by HRK 1.2 billion or 2.1%. It is necessary to understood that those changes in the nominal loan growth were impacted with moderate appreciation of kuna against the euro, but more importantly, a sharp depreciation of the Swiss franc. In other words, with exchange rate effect excluded, the decrease of total loans, especially loans to individuals would be larger. Total deposits in banking system, in 2015, increased by HRK 11.1 billion, or 4.2%, while retail deposits grew by about HRK 5.1 billion, or 2.7%. It is interesting, however, that while time deposits decreased by 1.5% or HRK 2.3 billion, a vista deposits grew by as much as 18.1%, or HRK 7.4 billion. Decline in terms deposits was driven mostly by two effects: introduction of interest income tax in the year 2015 and declining trend in deposit rates as banks started to cut funding costs, while households continued to deleverage using also its savings. On the other hand, a vista deposits were affected by larger income of households and especially after the strong tourist season. Deposit growth of the corporate sector in 2015 reached even 21.8%, or HRK 9.5 billion, but this is largely a result of one-off inflow after the Croatian company Adris sold its tobacco business to foreign investor at price of almost HRK 4 billion. Simultaneously, deposits of the government sector fell by HRK 1.6 billion or 7.1%. Banking sector recorded a loss mainly due to new legislation relating to conversion of CHF denominated loans According to the unaudited aggregated data from the CNB, banking sector assets decreased by 0.4% in 2015, primarily due to the decline in loans to customers as the result of new legislation relating to conversion of CHF denominated loans. In addition, decline in volumes of loans was further affected by several one-off transactions in the government and financial institutions segments (large repayments of loans), coupled with the continuation of the deleveraging process and still low demand for loans. At the same time, banks allocated their excess liquidity, generated by strong growth in deposits from clients, primarily deposits from non-financial corporations, in reduction of their liabilities (received loans), especially exposure to foreign loans getting into position of net positive foreign assets. 2 Data source: CNB bulletin tables, 31 Dec 2015 Zagrebačka banka dd: 2015 Annual Report 28

29 Overview of the Croatian economy in 2015 (continued) According to the aggregate statistical report from CNB 3, Croatian banking sector has accumulated a loss in amount of HRK 4.3 billion in 2015, predominantly due to changes of the Consumer Credit Act relating to conversion of CHF denominated loans, but accompanied with other balance sheet adjustment activities in some of the banks, significantly increasing the impairments losses in balance sheet of the banks. Although such development negatively affected capital position of banks, with capital adequacy for the largest banks decreased by more than 3 percentage points, Croatian banking sector capital adequacy ratio remained high and, according to the latest data available from CNB on 31 December 2015, amounted to 20.98% additionally confirming the already high capitalisation level of the Croatian banking sector. When above mentioned negative effect of new legislation excluded, banks would have recorded growth in profitability compared to the same period in 2014, mainly as a result of considerable reduction in expenses in respect of loan loss provisions and the decrease in interest expenses as a result of additional corrections of interest rates in respect of deposits carried out in the year The share of non-performing loans declined to 16.6% as at 31 December 2015 (at the end of 2014 it amounted to 17.06%) mainly backed by restructuring of the loan portfolio of some of the banks as well as by the economic recovery which took some place in the year Simultaneously, NPL coverage ratio is improving, reaching 56.6% at the end December (compared to 51.3% at the 31 December 2014). 3 Data source: CNB aggregated quarterly report on credit institutions, 31 December 2015 Zagrebačka banka dd: 2015 Annual Report 29

30 Operating and financial review Group results Zagrebačka banka Group achieved net loss after tax for the period in the amount of HRK 148 million, which is significantly lower result than HRK 1,140 million Profit after tax in The Group s result was affected by the application of the amendments to the Consumer Credit Act from September 2015 which govern the principle of the conversion of Swiss franc loans. The total estimated net conversion loss of HRK 1,560 million (pre-tax) was recognised in impairment and other provisions. The net trading result was under the adverse impact of the appreciation of the Swiss franc against HRK, as well as the application of the amendments to the Consumer Credit Act from January 2015, which prescribed fixing the HRK/CHF exchange rate at HRK 6.39 for one Swiss franc for regular annuity loan repayments throughout the year. If the aforementioned effects of regulatory amendments in relation to CHF loans had been excluded, the Group s 2015 result would have been positive. Thanks to the universal business model, the sustainability of income and stable funding sources, in 2015 the Group maintained the volume of credit activity at capital adequacy of Zagrebačka banka dd of 24.66%. Following the reorganisation on the UniCredit Group level, with the aim of further strengthening of the management structure and optimal positioning in the market. During 2015, there were several changes in the composition of Zagrebačka banka Group: - Three new significant subsidiaries were either directly or indirectly included in the 2015 consolidated financial statements. In April 2015, Zagrebačka banka dd acquired the 100% stake in the companies UniCredit Leasing Croatia doo and Locat Croatia doo and as at 22 December 2015, UniCredit Bank dd, Mostar acquired the 100% stake in the company UniCredit Leasing doo, Sarajevo and a non-controlling interest of 49% in UniCredit Broker doo, Sarajevo. - During the third quarter of 2015, Zagrebačka banka dd acquired additional 33.67% shares in the subsidiary UniCredit Bank dd, Mostar (by the end of 2015, Zagrebačka banka dd owned 99.30% of the shares, while the ownership share in 2014 was 65.63%). - The result of the sold subsidiary Istraturist dd Umag is included in the comparative figures until September The strongest contribution to the consolidated Group results was made by Zagrebačka banka dd, UniCredit Bank dd, Mostar, UniCredit Leasing Croatia doo and Prva stambena štedionica dd. Return on asset (ROA) of the Group amounts to -0.12% (2014: +0.95%). The Group s operating income amount to HRK 5,015 million and is lower by HRK 101 million (-2.0%) compared to Despite positive contribution of net interest income and net fee and commission income, the decrease in operating income is significantly impacted by the decrease in net trading and other income Net interest income reached HRK 3,331 million which represents an increase of HRK 210 million (+6.7%) compared to 2014, mainly under the impact of lower funding costs due to repricing of deposits and lower volume of deposits from banks and borrowings. Net fee and commission income increased by HRK 46 million (+3.9%) compared to 2014, following the increase in custody, brokerage and consulting fees, payment transaction fees and credit card fees. Zagrebačka banka dd: 2015 Annual Report 30

31 Operating and financial review (continued) Group results (continued) Net trading and other income was HRK 465 million, decreased by HRK 357 million (-43.4%) compared to 2014, mainly due to: the change in the scope of consolidation (the subsidiary Istraturist dd was sold in 2014 and the income from subsidiaries UniCredit Leasing Croatia doo and Locat Croatia doo was included in consolidation in 2015), and the lower net trading result, mainly due to fixing the HRK/CHF rate at Operating expenses amounted to HRK 2,567 million which is an increase of HRK 14 million (+0.5%) compared to 2014, while the Group s Cost to income ratio ( C/I ratio ) remained favourable and equalled 51.19% in 2015 (2014: 49.9%). Profit before impairment and provisions was HRK 2,448 million, lower by HRK 115 million (-4.5%) compared to 2014, mainly due to the previously described adverse changes in net trading and other income. With regard to total impairment losses and other provisions the Group secured an amount of HRK 2,722 million, which is HRK 1,612 million, (+145.2%), more than the previous year. The increase primarily relates to one-off other provision related to CHF loan conversion. Excluding the one-off CHF conversion loss effect, the increase in Impairment and other provisions is HRK 52 million (+4.7%). Group s assets and liabilities The Group s total assets amounted to HRK 128,004 million and increased by HRK 7,889 million (+6.6%) compared to the end of the previous year, mainly following the increase in deposits from customers and the changes in the scope of consolidation: Net loans to customers amounted to HRK 84,340 million and increased by HRK 3,253 million (+4.0%), mainly due to the acquisition of leasing companies in Despite the continued deleveraging in all segments, the volume of net loans did not change significantly. The increase was realised in public sector and small enterprises segments. Deposits from customers continue to represent the primary source of funding, they reached HRK 86,544 million by the 2015 year-end. The increase of HRK 10,572 million (+13.9%) compared to end of 2014 was mainly realised in deposits from corporate clients (HRK 7,952 million). Deposits from retail clients were also higher by HRK 2,620 million. Deposits from banks and borrowings amounted to HRK 19,303 million. The decrease of HRK 3,621 million (-15.8%) compared to the end of the previous year is affected by lower funding needs, driven by the increase in deposits from customers and steady loan volumes. Capital and reserves of the Group amounted to HRK 17,036 million, while the capital adequacy ratio of Zagrebačka banka dd remained strong, at 24.66%, even after one off impacts on 2015 result (31 December 2014: 25.6%). Zagrebačka banka dd: 2015 Annual Report 31

32 Operating and financial review (continued) Operating results of Zagrebačka banka dd In 2015, Zagrebačka banka dd recorded loss after tax in amount of HRK 519 million. Significantly lower result compared to the HRK 1,166 million profit after tax in the previous year was primarily affected by the previously mentioned effects related to loans in Swiss francs (net conversion expenses HRK 1,559 million before tax and fixing the Swiss franc against HRK at the level of HRK 6.39 for one Swiss franc since January 2015). The result for 2015 is also lower due to positive impact of last year's one-off profit before tax from sale of subsidiary Istraturist Umag dd in the amount of HRK 428 million, realized in November Return on asset (ROA) of the Bank amounts to -0.49% (2014: +1.14%). Income and expenses In year 2015, the Bank s operating income amounted to HRK 3,835 million, which is HRK 348 million (-8.3%) less than the previous year. Despite positive contribution from net interest income and net fee and commission income, decrease in operating income is significantly impacted by decrease in net trading and other income. Net interest income The Bank achieved net interest income for the year 2015 in the amount of HRK 2,636 million, which is HRK 76 million (+3.0%), higher than in In the year 2015, the trend of interest rate decrease continued on the market and the Bank generated interest income of HRK 5,718 million, which is HRK 59 million (-1.0%), less than the previous year. At the same time, interest expense reached HRK 3,082 million, mainly as a result of lower funding costs due to repricing of deposits and a lower volume of deposits from banks and borrowings. The pressure on interest margins also continued in Net fee and commission income The Bank generated net fee and commission income in the amount of HRK 945 million, which is HRK 40 million, or 4.4% higher than in Fee and commission income reached HRK 1,127 million, which is HRK 72 million (+6.8%) higher, following the increase in fees and commissions from asset management, brokerage and consulting services, as well as fees and commissions for payment and credit card transactions. Fee and commission expenses in the amount of HRK 182 million are HRK 32 million (+21%) higher than the previous year. Zagrebačka banka dd: 2015 Annual Report 32

33 Operating and financial review (continued) Operating results of Zagrebačka banka dd (continued) Net trading and other income Net trading profit and other income amounted to HRK 254 million, decreased by HRK 464 million (- 64.6%) compared to 2014, mainly due to: the one-off effect of the sale of the subsidiary Istraturist dd (HRK 428 million recorded in 2014), and the lower net trading result, primarily attributable to fixing the HRK/CHF rate at Operating expenses amounted to HRK 1,851 million and increased by HRK 168 million (+10.0%) compared to The major drivers of increase were the contribution payable to the Single Resolution Fund (introduced in 2015), increased administrative and marketing costs, as well as staff costs. The Bank s cost to income ratio ( C/I ratio ) remained favourable and equalled 48.3% in 2015 (2014: 40.2%). Total impairment and other provisions amounted to HRK 2,646 million and they have increased by HRK 1,623 million (+158.7%) compared to previous year. The increase primarily relates to significant one-off provision related to CHF loan conversion. Excluding the one-off CHF conversion loss effect, the increase in Impairment and other provisions is HRK 64 million (+6.3%) compared to Impairment losses on loans and receivables from customers amounted to HRK 1,019 million and they represented 38.5% in total impairment and other provisions (2014: 992 million or 97.0% of the total provisions). As a continuation of prudent risk management approach, the non-performing loans coverage by provisions in one year increased from 43% to 53.7% at the end of Bank s assets and liabilities Bank s assets Total assets of the Bank amounted to HRK 105,992 million and increased by HRK 3,561 million (+3.5%) compared to the end of the previous year, mainly following the increase in deposits from customers: Net loans to customers of the Bank amounted to HRK 69,632 million (-0.2%). Despite the continued deleveraging in all segments, the volume of net loans did not change significantly. The increase was realised in public sector and small enterprises segments. Deposits from customers continue to represent the Bank s primary source of funding, they reached HRK 71,522 million by the 2015 year-end. The increase of HRK 9,319 million (+15.0%) compared to end of 2014 was mainly realised in deposits from corporate clients (HRK 7,557 million). Deposits from retail clients were also higher by HRK 1,762 million. Deposits from banks and borrowings amounted to HRK 15,103 million. The decrease of HRK 6,809 million (-31.1%) compared to the end of the previous year is affected by lower funding needs, driven by the increase in deposits from customers and steady loan volumes. Capital and reserves of the Bank amounted to HRK 14,796 million, while the Bank s capital adequacy ratio remained strong, at 24.66%, even after the correction for the 2015 result (31 December 2014: 25.64%). Zagrebačka banka dd: 2015 Annual Report 33

34 Operating and financial review (continued) Bank s assets and liabilities (continued) Bank s assets (continued) For the purpose of analysis, the assets are broken down into five categories; their importance and trends in comparison to the previous year are presented below: The structure of assets Property and equipment, investment property, intangible and other assets; 2% 2015 Investments in subsidiaries and associates; 2% Investments in securities and derivatives; 9% ALM assets; 21% Loans to and receivables from customes; 66% The structure of assets comparison to the previous year (in ) 80,000 70,000 60,000 50,000 69,632 69, ,000 30,000 20,000 10,000 0 Loans to and receivables from customes 22,119 19,269 ALM assets 10,022 10,698 Investments in securities and derivatives 2,545 2,091 1, Property and equipment, investment property, intangible and other assets Investments in subsidiaries and associates Zagrebačka banka dd: 2015 Annual Report 34

35 Operating and financial review (continued) Bank s assets and liabilities (continued) Bank s assets (continued) During 2015, the strongest increase was recorded in ALM assets and investment in subsidiaries and associates. Loan portfolio diversification and spread between corporate, Government and retail customers did not change significantly compared to end of previous year. Loans to and receivables from customers represent the main portion of the Bank s statement of financial position and account for 65.7% of total assets (2014: 68.1%). Structure of loans to and receivables from customers: % % Gross loans to and receivables from Companies, similar organisations and Government 48, , Individuals and unincorporated businesses 29, , Impairment allowance Total 77, , Companies, similar organisations and Government (5,797) 71.0 (5,390) 72.0 Individuals and unincorporated businesses (2,366) 29.0 (2,094) 28.0 Net loans to and receivables from Total (8,163) (7,484) Companies, similar organisations and Government 42, , Individuals and unincorporated businesses 26, , Total 69, , Gross loans to and receivables from companies, similar organisations and the Government have increased by HRK 879 million, reaching HRK 48,464 million by the year-end. Individuals and unincorporated businesses decreased by HRK 359 million compared to the previous year and on 31 December 2015, amounted to HRK 29,331 million. The major part of this loan portfolio relates to housing loans. With a market share of 31.1% (2014: 31.0%), the Bank remains the market leader in housing lending in Croatia. The impairment allowance increased by HRK 679 million, with an increase in provisions for loans to companies, similar organisations and government of HRK 407 million and increase in provisions to individuals and unincorporated businesses by HRK 272 million (consequentially, provision coverage for loans in mentioned categories also increased). The Bank continuously monitors quality of assets and continuously increases coverage ratio for impaired loans since The Bank initiated a number of non-performing loans management activities and is strongly focused on early identification of problem loans, collection, debt settlements and restructuring. Zagrebačka banka dd: 2015 Annual Report 35

36 Operating and financial review (continued) Bank s assets and liabilities (continued) Bank s assets (continued) ALM assets Total ALM assets account for 20.9% of total assets (2014: 18.8%), amounting to HRK 22,119 million as at 2015 year-end and have increased by HRK 2,850 million (+14.8%) compared to the 2014 year-end. These assets can be broken down as follows: Cash and cash equivalents 5,779 3,070 Obligatory reserve with the CNB - in HRK 5,883 5,482 - in foreign currency 1,151 1,096 Compulsory CNB Treasury Bills - 1,001 Loans to and receivables from banks 9,306 8,620 22,119 19,269 Throughout the year, the Bank maintained the necessary liquidity levels and complied with all monetary regulations imposed by the CNB. Zagrebačka banka dd: 2015 Annual Report 36

37 Operating and financial review (continued) Bank s assets and liabilities (continued) Bank s liabilities and equity Structure as at 31 December 2015: Other liabilities, financial liabilities at fair value through profit and loss and provisions for liabilities and charges; 4% Equity; 14% Current accounts and deposits from companies, similar organisations and government; 24% 2015 Borrowings and current accounts and deposits from banks ; 14% Current accounts and deposits from individuals and uncorporated bussines; 44% The diagram below presents the changes in the Bank s liabilities and equity compared to previous year: (in ) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,268 44,506 15,103 21,912 Current accounts and Borrowings and deposits from current accounts and individuals and deposits from banks uncorporated bussines 25,254 17,697 16,399 14,796 Current accounts and deposits from companies, similar organisations and government Equity ,571 1,917 Other liabilities, financial liabilities at fair value through profit and loss and provisions for liabilities and charges Zagrebačka banka dd: 2015 Annual Report 37

38 Operating and financial review (continued) Bank s assets and liabilities (continued) Bank s liabilities and equity (continued) Current accounts and deposits from customers Current accounts and deposits from customers amounted to HRK 71,522 million at 2015 year-end (2014: HRK 62,203 million), representing an increase of HRK 9,319 million (or +15.0%), and represent more than half of the Bank s total liabilities and equity (67.5%, 2014: 60.7%). Increase is primarily a result of HRK 7,557 million (+42.7%) increase in current accounts and deposits from companies, similar organisations and the Government which amounted to HRK 25,254 million at the year-end. Current accounts and deposits from individuals account for 64.7% of total deposits from customers (2014: 71.5%). Current accounts and deposits from banks and borrowings The decrease in current accounts and deposits from banks and borrowings continued in 2015, primarily as a result of the increase in current accounts and deposits from customers. Current accounts and deposits from banks and borrowings amounted to HRK 15,103 million, which is HRK 6,809 million (or -31.1%) less than the balance at the end of the previous year (during 2014, the decrease in this position was HRK 4,341 million or -16.5%). Deposits from banks amounted to HRK 8,687 million as of 31 December 2015 and they decreased by HRK 1,582 million (-15.4%). The balance of borrowings decreased by HRK 5,227 million (-44.9%), to HRK 6,416 million). Equity The Bank s share capital is denominated in HRK and comprises ordinary shares listed on the Zagreb Stock Exchange. The capital and liquidity positions were satisfactory during the year In comparison to the previous year, and mostly a consequence of 2015 result, equity of the Bank decreased by HRK 1,603 million (-9.8%) and amounted to HRK 14,796 million on 31 December Equity represents 14.0% of total Bank s funding sources (2014: 16.0%). In May 2015, the Bank paid dividend in the amount of HRK 1,153 million. Capital adequacy ratio reached 24.66% as at 31 December 2015 (31 December 2014: 25.64%). Zagrebačka banka dd: 2015 Annual Report 38

39 Management and corporate governance Declaration of application of the Code of Corporate Governance In accordance with Article 272p of the Companies Act, the Management Board of Zagrebačka banka declares that Zagrebačka banka dd applies the Code of Corporate Governance, as jointly prepared by the Croatian Financial Services Supervisory Agency ( HANFA ) and the Zagreb Stock Exchange ( ZSE ). The 2015 Annual Questionnaire which reflects the state and the practice of Corporate Governance is enclosed and forms an integral part of the Declaration, in relation to the recommendations contained in the Code of Corporate Governance, with explanations of certain discrepancies. Information regarding the internal control and risk management mechanisms can be found in this Annual Report, under the heading: Notes to the financial statements (Note 38 - Risk Management). Information on the Bank s shareholders can be found in this Annual Report, under the heading: Notes to the financial statements (Note 31a) - Share capital). UniCredit Bank Austria AG, being the single largest shareholder in the Bank, is a member of the international banking group UniCredit SpA and consequently, the Bank is a member of the same banking group. The rules governing the appointment and removal of the members of the Management Board are contained in the Bank s Articles of Association. In accordance with them, the Chairman and members of the Management Board are appointed by the Supervisory Board, their term of office being four years, subject to previous approval by the Croatian National Bank. When appointing members of the Management Board, the Supervisory Board first designates the Chairman and gives that person the mandate to request the appointment of other members of the Management Board. The Chairman of the Management Board has the power and duty to request the removal of any member of the Management Board if reasons for such removal arise, as stipulated in the law and the Articles of Association. At the same time, the Chairman will request that a new member of the Management Board be appointed. The Supervisory Board resolves the removal of a member of the Management Board. The removal of the Chairman of the Management Board is decided upon by the Supervisory Board following a proposal by the Chairman of the Supervisory Board. The procedure for making amendments to the Articles of Association is defined in Articles 79 and 80 of the Articles of Association. A proposal for amendment can be submitted by the Management Board, Supervisory Board or by a shareholder or shareholders holding at least 10% of the Bank s voting shares. Proposals for amendments to the Articles of Association are submitted to the Supervisory Board which can adopt such proposals and pass them on to the General Meeting for adoption. The respective scopes of powers of the Supervisory Board and the Management Board are defined in the Articles of Association, in accordance with the relevant provisions of the Companies Act and the Credit Institutions Act. While the Management Board may not issue new shares of the Bank, it is authorised to approve the Bank s acquisition of its own ordinary shares for the purpose of their allocation to the Bank s employees. The Bank s shares can be allocated to employees in accordance with the decision of the General Meeting concerning the employees shares of the Bank s profit for a particular year. Zagrebačka banka dd: 2015 Annual Report 39

40 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire All questions contained in this Questionnaire pertain to the period of one year for which the annual financial statements are prepared. 1. Did the Company accept the application of the Corporate Governance Code or did it accept its own policy of corporate governance? Yes. The Company applies the Corporate Governance Code. 2. Does the Company have adopted principles of corporate governance within its internal policies? Yes. 3. Does the Company announce within its annual financial reports the compliance with the principles of ' comply or explain'? Yes. 4. Does the Company take into account the interest of all shareholders in accordance with the principles of Corporate Governance Code while making decisions? Yes. 5. Is the company in a cross-shareholding relationship with another company or other companies? (If yes, explain) No. 6. Does each share of the company have one voting right? (If not, explain) Yes. 7. Does the company treat all shareholders equally? (If not, explain) Yes. 8. Has the procedure for issuing power of attorney for voting at the general assembly been fully simplified and free of any strict formal requirements? (If not, explain) Yes. 9. Has the company ensured that the shareholders of the company who, for whatever reason, are not able to vote at the assembly in person, have proxies who are obliged to vote in accordance with instructions received from the shareholders, with no extra costs for those shareholders? (If not, explain) Yes. Zagrebačka banka dd: 2015 Annual Report 40

41 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 10. Did the management or Management Board of the company, when convening the assembly, set the date for defining the status in the register of shares, which will be relevant for exercising voting rights at the general assembly of the company, by setting that date prior to the day of holding the assembly and not earlier than 6 days prior to the day of holding the assembly? (If not, explain) Yes. 11. Were the agenda of the assembly, as well as all relevant data and documentation with explanations relating to the agenda, announced on the website of the company and put at the disposal of shareholders on the company's premises as of the date of the first publication of the agenda? (If not, explain) Yes. 12. Does the decision on dividend payment or advance dividend payment include information on the date when shareholders acquire the right to dividend payment, and information on the date or period during which the dividend will be paid? (If not, explain) Yes. 13. Is the date of dividend payment or advance dividend payment set to be not later than 30 days after the date of decision making? (If not, explain) Yes. 14. Were any shareholders favoured while receiving their dividends or advance dividends? (If so, explain) No. 15. Are the shareholders allowed to participate and to vote at the general assembly of the company using modern communication technology? (If not, explain) No, there was no recorded need for such form of participation and voting. 16. Have the conditions been defined for participating at the general assembly by voting through proxy voting (irrespective of whether this is permitted pursuant to the law and articles of association), such as registration for participation in advance, certification of powers of attorney etc.? (If so, explain) Yes, pursuant to the Companies Act, the Articles of Association prescribes that anyone intending to participate in the General Meeting has to advise the Company in advance of such his/her intention, which ensures better management of technical aspects of the General Meeting. Zagrebačka banka dd: 2015 Annual Report 41

42 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 17. Did the management of the company publish the decisions of the general assembly of the company? Yes. 18. Did the management of the company publish the data on legal actions, if any, challenging those decisions? (If not, explain) No, as there were no legal actions. 19. Did the Supervisory or Management Board adopt a decision on the master plan of its activities, including the list of its regular meetings and data to be made available to Supervisory Board members, regularly and in a timely manner? (If not, explain) Yes. 20. Did the Supervisory or Management Board pass its internal code of conduct? (If not, explain) Yes. 21. Is the Supervisory Board composed of, i.e. are non-executive directors of the Management Board mostly independent members? (If not, explain) No, in that respect, the company follows the Corporate Governance Rules of the banking and financial services group to which it belongs; the Group exercises its own supervisory powers in accordance with the legal regulations applicable to it. 22. Is there a long-term succession plan in the company? (If not, explain) Yes. The purpose of succession planning is to ensure the continuity of quality management of individual business areas within the company, while at the same time improving the quality of human resources. Management succession planning is carried out through timely recognition of needs for successors, their identification and preparation to assume the respective powers and duties through systematic implementation of development activities and acquisition of necessary experience. Sound succession planning is based on: a) permanent and structured management of performance and development of future managers; b) employee segmentation and segmentation management in order to ensure consistent application of the relevant criteria; c) on-going and structured executive development planning; d) co-operation with top management of individual organisational units to identify future business needs and potential successors at all management levels; e) implementation of development and selection programme for the employees with high performance and potentials, i.e. Growing Resources with managerial potential. Zagrebačka banka dd: 2015 Annual Report 42

43 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 22. Is there a long-term succession plan in the company? (If not, explain) (continued) The efficiency of such approach is reflected in the fact that in 2015 the Bank satisfied the major part of its succession needs for managerial levels from so defined internal resources. 23. Is the remuneration received by the members of the Supervisory or Management Board entirely or partly determined according to their contribution to the company? (If not, explain) No. In most cases remuneration is excluded because in line with the rules of the Group of which the Company is a member, the majority shareholder s representatives on the Supervisory Board waive their right to any kind of remuneration, while the remuneration for other members is established in an amount considered to be fair. 24. Is the remuneration to the members of the Supervisory or Management Board determined by a decision of the general assembly or in the articles of association of the company? (If not, explain) Yes. It is established by a decision of the General Meeting. 25. Have detailed records on all remunerations and other earnings of each member of the Supervisory or Management Board received from the company or from other persons related to the company, including the structure of such remuneration, been made public? (If not, explain) Yes. Information on cost reimbursement and remuneration paid by the Company is disclosed in the relevant decision of the General Meeting. 26. Does every member of the Supervisory or Management Board inform the company of each change relating to their acquisition or disposal of shares of the company, or to the possibility to exercise voting rights arising from the company s shares, not later than five trading days, after such a change occurs? (If not, explain) Yes. The obligation of the members of the Supervisory Board to inform the company of the above is aligned with the Capital Market Act. 27. Were all transactions involving members of the Supervisory or Management Board or persons related to them and the company and persons related to it clearly presented in reports of the company? (If not, explain) No. There are no transactions relevant within the meaning of the above. Zagrebačka banka dd: 2015 Annual Report 43

44 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 28. Are there any contracts or agreements between members of the Supervisory or Management Board and the company? No. 29. Did they obtain prior approval of the Supervisory or Management Board? (If not, explain) See the answer under Are important elements of all such contracts or agreements included in the annual report? (If not, explain) See the answer under Did the Supervisory or Management Board establish the appointment committee? Yes. The Nomination Committee has been established. 32. Did the Supervisory or Management Board establish the remuneration committee? Yes. The Remuneration Committee has been established. 33. Did the Supervisory or Management Board establish the audit committee? Yes. The Audit Committee has been established. 34. Was the majority of the committee members selected from the group of independent members of the Supervisory Board? (If not, explain) No. See the answer under Did the committee monitor the integrity of the financial information of the company, especially the correctness and consistency of the accounting methods used by the company and the group it belongs to, including the criteria for the consolidation of financial reports of the companies belonging to the group? (If not, explain) Yes. 36. Did the committee assess the quality of the internal control and risk management system, with the aim of adequately identifying and publishing the main risks the company is exposed to (including the risks related to the compliance with regulations), as well as managing those risks in an adequate manner? (If not, explain) Yes. Zagrebačka banka dd: 2015 Annual Report 44

45 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 37. Has the committee been working on ensuring the efficiency of the internal audit system, especially by preparing recommendations for the selection, appointment, reappointment and dismissal of the head of internal audit department, and with regard to funds at his/her disposal, and the evaluation of the actions taken by the management after findings and recommendations of the internal audit? (If not, explain) Yes, quarterly reports of the Internal Audit presented to the Audit Committee contain a section on professional improvement and training of the Internal Audit employees. Furthermore, the Audit Committee gives the recommendation to the Supervisory Board for the selection, appointment, reappointment and dismissal of the Head of Internal Audit based on the performed fit and proper procedure. Potential constraints and difficulties regarding the budget for those activities are also discussed in this section of the report. 38. If there is no internal audit system in the company, did the committee consider the need to establish it? (If not, explain) There is an internal audit function within the Bank. 39. Did the committee monitor the independence and impartiality of the external auditor, especially with regard to the rotation of authorised auditors within the audit company and the fees the company is paying for services provided by external auditors? (If not, explain) Yes. 40. Did the committee monitor nature and quantity of services other than audit, received by the company from the audit company or from persons related to it? (If not, explain) No, under the Credit Institutions Act the Company is prohibited from being provided such services by its external auditors. 41. Did the committee prepare rules defining which services may not be provided to the company by the external audit company and persons related to it, which services may be provided only with, and which without prior consent of the committee? (If not, explain) No. It is stipulated by the Law. 42. Did the committee analyse the efficiency of the external audit and actions taken by the senior management with regard to recommendations made by the external auditor? (If not, explain) Yes, the Audit Committee gives instructions to Internal Audit as regards the monitoring of the implementation of the external auditors recommendations. Through the quarterly reports Internal Audit then regularly reports on their implementation. 43. Did the audit committee ensure the submission of high quality information by dependent and associated companies, as well as by third parties (such as expert advisors)? (If not, explain) Yes, the Audit Committee had available the information by dependent and associated companies, however the submission of information by third parties in 2015 was not applicable. Zagrebačka banka dd: 2015 Annual Report 45

46 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 44. Was the documentation relevant for the work of the Supervisory Board submitted to all members on time? (If not, explain) Yes. 45. Do Supervisory Board or Management Board meeting minutes contain all adopted decisions, accompanied by data on voting results? (If not, explain) Yes. 46. Has the Supervisory or Management Board evaluated their work in the preceding period, including evaluation of the contribution and competence of individual members, as well as of joint activities of the Board, evaluation of the work of the committees established, and evaluation of the company s objectives reached in comparison with the objectives set? No. 47. Did the company publish a statement on the remuneration policy for the management, Management Board and the Supervisory Board as part of the annual report? (If not, explain) Yes. The Company s remuneration policy is outlined below: REMUNERATION POLICY FOR THE MANAGEMENT BOARD AND SUPERVISORY BOARD MANAGEMENT BOARD Key elements of the Management Board remuneration The Management Board remuneration policy is part of the overall remuneration system of Zagrebačka banka dd Group, as regulated in the relevant decisions of the Bank s responsible bodies. The remuneration model is based on performance assessment, market developments and is in line with the business strategies and stakeholders' interests. In order to ensure competitiveness and efficiency of remuneration, as well as transparency and internal fairness, principles of ethical and sustainable conduct and operation define the basic principles of the Compensation Policy, and those are the following: clear and transparent management, compliance with regulatory requirements and principles of proper business conduct, continuous following of market trends and practices, sustainable remuneration of sustainable performance and motivation and employees retention, with special emphasis on talents and key resources. Zagrebačka banka Group undertakes all the measures in order to ensure that the members of the Management Board do not apply personal strategies of risk protection and that they do not enter into contracts of insurance against the loss of income or insurance against the adverse outcome in respect of risks taken. Zagrebačka banka dd: 2015 Annual Report 46

47 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 47. Did the company publish a statement on the remuneration policy for the management, Management Board and the Supervisory Board as part of the annual report? (If not, explain) (continued) Components of remuneration of the Management Board members An appropriate proportion between the variable and fixed component of the overall remuneration is set out in such a way that the variable component does not exceed the amount of the fixed component of the overall remuneration and/or with the majority consent of the shareholders, in such a way that variable pay can be set out up to double amount of fixed part of the overall remuneration. Exceptionally, for the employees who carry out the activities of control functions, fixed pay amounts to no less than two thirds of overall remuneration of the respective employee. The amount of overall remuneration of individual Management Board members is determined by taking into account their respective areas of competence, their track record in managing particular business lines, and the Bank as a whole. In keeping with the above and based on the market developments prevailing at a time, the Bank s financial standing and individual performance of the Management Board members, their remuneration is regularly reviewed on an annual basis and, if necessary, the amount of the overall remuneration is adjusted accordingly. The fixed pay reflects the professional experience, responsibility and complexity of the job, demonstrated excellence and the quality of contribution to business results made by individual member of the Management Board. Fixed pay makes up a substantial part in the overall remuneration and allows for the possibility that the variable component is not paid to the employee, i.e. compensation for professional experience, complexity and responsibility ensure the independence of the employee in respect of variable pay. The importance of fixed component of remuneration is reflected in such a way that it has impact on the decrease of risk of proneness to excessive risk-bearing conduct, on discouraging the initiatives aimed at achievement of short-term results which might endanger mid-term and long-term business sustainability and performance. The monthly pay is agreed for the entire term of office of the Management Board members. In addition to the monthly pay, the Management Board members are entitled to variable incentives as a reward for their successful performance. Variable component of remuneration includes each performance related payment. The aim of variable remuneration is to reward achievements by relating remuneration directly to short-term, mid-term and long-term performance results, taking into account also the level of risk. The variable component depends on the Zagrebačka banka Group performance and performance of the UniCredit Group, the performance of individual business lines within the respective scope of competence of the Management Board members, and their individual performance and it will not be paid exclusively under the condition of the duration of the contractual relationship until the set date. The remuneration is based on achievement of the specifically defined business targets (quantitative and qualitative) which are clearly defined for a given business year and based on the targets of Zagrebačka banka Group, taking into account the sustainable performance through a multi-year period, with the strong focus on the appropriate and efficient risk management. The variable pay of the Management Board members who perform the activities of the control functions depends on the achieved goals related to their functions, irrespective of the performance of the business areas falling under their scope of competence. Zagrebačka banka dd: 2015 Annual Report 47

48 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 47. Did the company publish a statement on the remuneration policy for the management, Management Board and the Supervisory Board as part of the annual report? (If not, explain) (continued) Remuneration of the Management Board members The incentive system for the Management Board members is an important element of the Bank's sustainable remuneration within the sustainable performance approach, which supports the vision and the mission of the Bank and is aligned with the applicable local and international regulatory requirements. The right to payment and the amount of remuneration depend on the established overall budget for remuneration, performance of the Zagrebačka banka Group/UniCredit Group and the risk factor range, assessment of realisation of overall individual performance (through which are considered previously set and agreed individual goals and behaviours) and reviewed the ratio of fixed and variable pays for individual member of the Management Board. As motivation for achieving the long-term strategic targets and key financial performance indicators for the Zagrebačka banka Group and UniCredit Group, and in order to encourage loyalty and retention of the Management Board members, those incentives are paid out in several annual instalments over a predefined period, through cash payment and allocation of financial instruments (the Bank's ordinary shares). In line with the long-term interests of the Zagrebačka banka Group, we will undertake all the measures in order to retain the instruments, the deferred and non-deferred variable remuneration, as stipulated by separate by-laws on remuneration system for this group of employees. In this respect we will take into account the length of the assessment period, the length of the deferral period, the impact of the employee on the risk profile of the credit institution, the accuracy of risk adjustments in performance measurement and remuneration determination, the time needed for the materialization of certain relevant risks and other elements, where appropriate and as deemed necessary by the Zagrebačka banka Group in the Republic of Croatia. In cases when the Management Board Member participated in the activities which resulted in considerable losses for the Zagrebačka banka Group or if the Management Board Member failed to meet the stipulated or internally set standards of appropriateness, the malus clause and/or clawback clause are applied. Regulation of remuneration of the Management Board members In order to ensure that the remuneration of the Management Board members is in line with the uniform remuneration policy and with the Bank s overall financial position, the Remuneration Committee has been set up within the Bank, consisting of three members being appointed from among the members of the Supervisory Board. Upon the substantiated proposal of HR Management, the Remuneration Committee draws up and presents to the Supervisory Board a proposal of the remuneration scheme for the Management Board members and their performance targets for a given financial year, it defines the amount and components of the remuneration for the Management Board members and submits to the Supervisory Board draft contracts of service of the Management Board members stipulating their individual rights and obligations during their term of office. Zagrebačka banka dd: 2015 Annual Report 48

49 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 47. Did the company publish a statement on the remuneration policy for the management, Management Board and the Supervisory Board as part of the annual report? (If not, explain) (continued) SUPERVISORY BOARD The Supervisory Board members are entitled to a compensation for their attendance at and participation in the physical meetings and video-conferences. Besides, the Supervisory Board members are entitled to the reimbursement of their travel and other expenses in connection with Supervisory Board meetings they attend. In addition to the compensation for attending Supervisory Board meetings and the reimbursement of related costs, the Supervisory Board members are entitled to one-off annual remuneration in accordance with the Decision of the General Meeting for each financial year. The proposal of the annual remuneration is submitted to the General Meeting for decision, and it may vary depending on the Bank s performance in the financial year concerned. In principle, all Supervisory Board members are paid equal portions of the aggregate remuneration amount as proposed to the General Meeting. The amounts paid to the Chair and Deputy Chair of the Supervisory Board are higher 25% and 12.5%, respectively, than the amounts paid to other Supervisory Board members. In the proposal of the aggregate amount of the annual remuneration for the Supervisory Board members, it can also be proposed that the Supervisory Board members be compensated for their extra work on the Supervisory Board committees. So, the remuneration for the Supervisory Board members who are at the same time members or Chairs of other Committees of the Supervisory Board may be up to 7.5% higher than the remuneration paid to the Supervisory Board members who are not the Chair or Deputy Chair of the Supervisory Board, or member or the Chair of either of the Committees of Supervisory Board. In accordance with the rules of the banking group of which the Bank is a member, the one-off annual remuneration is not paid to those Supervisory Board members who represent the Bank s majority shareholder, i.e., those members of the Supervisory Board who cannot be considered independent of the majority shareholder. 48. Is the statement on the remuneration policy for the management or executive directors permanently available on the website of the company? (If not, explain) Yes. The statement is made available on the Company s website as an integral part of the Annual Report and also in the public disclosure in line with the requirements of the Credit Institutions Act and the Regulation (EU) No 575/ Are detailed data on all earnings and remunerations received by each member of the management or each executive director from the company published in the annual report of the company? (If not, explain) No. The annual report contains information on the Company s aggregate costs in respect of the overall remuneration for the Management Board members. Zagrebačka banka dd: 2015 Annual Report 49

50 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 50. Are all forms of remuneration to the members of the management, Management Board and Supervisory Board, including options and other benefits of the management, made public, broken down by items and persons, in the annual report of the company? (If not, explain) No. In the section of the annual financial statements, notes to the financial statements, related party transactions, the amount of pay for the business year is reported on an aggregate basis and it is split by the type of remuneration. The amount and the types of variable pay for the business year are reported separately divided by types of variable pay the Bank applies, i.e. cash and the Bank's ordinary shares. 51. Are all transactions involving members of the management or executive directors, and persons related to them, and the company and persons related to it, clearly presented in reports of the company? (If not, explain) No. Those could involve only standard day-to-day transactions performed on terms and conditions generally applicable to the bank s customers; the transactions were not specifically referred to in the Company s reports. 52. Does the report to be submitted by the Supervisory or Management Board to the general assembly include, apart from minimum information defined by law, the evaluation of total business performance of the company, of activities of the management of the company, and a special comment on its cooperation with the management? (If not, explain) Yes. 53. Does the company have an external auditor? Yes. 54. Is the external auditor of the company related with the company in terms of ownership or interests? No. 55. Is the external auditor of the company providing to the company, him/herself or through related persons, other services? No. That is prohibited under the laws governing the operations of credit institutions. 56. Has the company published the amount of charges paid to the independent external auditors for the audit carried out and for other services provided? (If not, explain) No, the external auditors audited the annual financial statements at a price quoted in the contract made every year for the respective year. Furthermore, in accordance with subordinate legislation which regulate the content of the audit of credit institutions, information on amounts of remuneration are reported regularly to the Croatian National Bank. Zagrebačka banka dd: 2015 Annual Report 50

51 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 57. Does the company have internal auditors and an internal audit system established? (If not, explain) Yes. 58. Are the semi-annual, annual and quarterly reports available to the shareholders? Yes. 59. Did the company prepare the calendar of important events? Yes. 60. Did the company establish mechanisms to ensure that persons who have access to or possess inside information understand the nature and importance of such information and limitations related to it? Yes. 61. Did the company establish mechanisms to ensure supervision of the flow of inside information and possible abuse thereof? Yes. 62. Has anyone suffered negative consequences for pointing out to the competent authorities or bodies in the company or outside, shortcomings in the application of rules or ethical norms within the company? No. 63. Did the management of the company hold meetings with interested investors, in the last year? No. Considering that the Company belongs to the Group, such meetings are not held on regular basis. 64. Do all the members of the management, Management Board and Supervisory Board agree that the answers provided in this questionnaire are, to the best of their knowledge, entirely truthful? Yes. Zagrebačka banka dd: 2015 Annual Report 51

52 Management and corporate governance (continued) In accordance with the Companies Act and its Articles of Association, the Bank has a Supervisory Board and Management Board. The two boards are separate and no individual may be a member of both boards. Under Croatian Law, individual members of the Supervisory Board and Management Board must exercise the standard of care of a diligent and prudent businessman in carrying out their duties. They must take into account a broad range of considerations, including the interests of the Bank, its shareholders, employees, creditors and customers. Supervisory Board The principle function of the Supervisory Board is to supervise the Management Board. It is also responsible for appointing and removing members of the Management Board. The Supervisory Board has nine to eleven members, depending on the decision of the Shareholders' Meeting, elected by shareholders at the Shareholder's meeting for a period of four years. The members of the Supervisory Board during 2015 were: Erich Hampel Chairman UniCredit Bank Austria AG Prof Jakša Barbić, PhD Deputy Chairman Independent member Franco Andreetta Deputy Chairman Independent member Robert Zadrazil Member UniCredit Bank Austria AG Fabrizio Onida Member Independent member Emilio Terpin Member Independent member Christoph Metze Member Allianz SE München Jürgen Kullnigg Member UniCredit Bank Austria AG Savoula Demetriou Member Allianz SE München Gianfranco Bisagni Member UniCredit Bank Austria AG (End of the term of office on 30 June 2015) Francesco Giordano Member UniCredit Bank Austria AG (End of the term of office on 31 May 2015) Management Board The Management Board is responsible for managing the business of the Bank and each member of the Management Board is responsible for a portfolio of operational and support functions. Pursuant to the Bank s Articles of Association, the Management Board may consist of five up to nine members, the final number to be approved by the Supervisory Board upon the proposal of the Chairman of the Management Board. Prior approval of the CNB must be obtained with respect to candidates for the position of the Chairman and members of the Management Board. The members of the Management Board who served during 2015 and as of the date of signing of this Report were as follows: Miljenko Živaljić Chairman (Chairman as of 6 February 2015) Franjo Luković Chairman (End of term of office on 5 February 2015) Romeo Collina Deputy Chairman (Term of office from 6 February 2015 to 29 February 2016) Marko Remenar Member Daniela Roguljić Novak Member (End of term of office on 31 December 2015) Nikolaus Maximilian Linarić Member Dijana Hrastović Member (Beginning of the term of office on 6 February 2015) Lorenzo Ramajola Member (Beginning of the term of office on 6 February 2015) Milivoj Goldštajn Member (End of term of office on 5 February 2015) Sanja Rendulić Member (End of term of office on 5 February 2015) None of the above Management Board members perform significant business activities outside the Group. Zagrebačka banka dd: 2015 Annual Report 52

53 Management and corporate governance (continued) Organisation chart Organisation chart of the Bank as of February 2016: Zagrebačka banka dd: 2015 Annual Report 53