2009 Annual Report. Make it simple. It s easy with UniCredit.

Transcription

1 2009 Annual Report Make it simple. It s easy with UniCredit.

2 Vision of Zagrebačka banka To be the best local bank within the UniCredit Group with above-market growth! By strengthening our leading position in Croatia and leveraging on synergies and strength of our Group we generate distinctive added value for our clients, employees and local communities. Mission of Zagrebačka banka We, the employees of Zagrebačka banka being part of the UniCredit Group, are committed to generating sustainable value for our customers. As the leading Croatian bank and European group, we are dedicated to developing the communities in which we live and to being a great place to work. We aim for excellence and consistently strive to be easyto-deal-with.

3 Times change, but commitments do not. We emerged from 2009 with a renewed sense of purpose and direction. What was important to us before is even more important today. Namely, our customers. Accordingly, we developed a new mission statement in 2009 to reinforce those principles and practices that we believe to be drivers of greater customer centricity. Emphasized in this mission is the desire to make banking as easy as possible for our customers by offering the kind of simple, straightforward solutions that can assist them in achieving their financial goals reliably and efficiently. This is what we call real-life banking. It means providing our clients with more than just financial services by giving them the right support at the right time and in the right way. It is about looking our customers in the eye, working closely with them to assess their real-life needs, and then using our expertise to deliver effective solutions through smooth and easy interactions. We believe that our rigorous dedication to simplicity and transparency will continue to advance excellence in all that we do. It will also maintain and grow the trust of our customers - a trust that is exemplified in the following pages. This year s report features photographs and personal stories from UniCredit Group customers across Europe, highlighting the concrete role that our company has played in their lives. Each of these individuals, who represent the foundation upon which we are structuring our shared future, has told us about a time we made their life easier Annual Report

4 Tomislav Lučić, AGROKOR dd Corporate Banking Client - Croatia «Zagrebačka banka has actively supported the development of our company and has assisted us in achieving our operational plans and strategic objectives with innovative, well-structured financial products and services in the corporate and retail segments alike. Thanks to the high level of cooperation we have achieved to date and the bank s overall capabilities in the local and regional markets, Agrokor has been able to accomplish even its most ambitious projects and goals.» It s easy with UniCredit.

5 Contents I Introduction 6 II Management Board Report of Condition 8 III Business description 19 IV Overview of the Croatian economy in V Operating and financial review 29 VI Management and corporate governance 37 VII Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements 54 VIII Independent auditors report to the shareholders of Zagrebačka banka dd 56 IX Financial statements 59 Group financial statements 60 Bank financial statements 66 Significant accounting policies 72 Notes to the financial statements 86 X Supplementary schedules for CNB 179 XI Supplementary EUR financial statements - unaudited 195 XII Shareholders information 204 Zagrebačka banka UniCredit Group 2009 Annual Report 5

6 Introduction Introduction The Management Board of Zagrebačka banka dd has pleasure in presenting its Annual Report to the shareholders of the Bank. The Management Board of Zagrebačka banka dd has pleasure in presenting its Annual Report to the shareholders of the Bank. This comprises summary financial information, management reviews, the audited financial statements, supplementary reports for the CNB and unaudited supplementary statements for the Group and the Bank in EUR. 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 2009 expressed in English. This report is also published in Croatian 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 conformity 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. The Bank s main 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 UPI poslovni sistem doo, Sarajevo Pominvest dd, Split ZABA TURIZAM doo, Zagreb Marketing Zagrebačke banke doo, Zagreb Zagreb nekretnine doo, Zagreb Zane BH doo, Sarajevo Istraturist dd, Umag Istra D.M.C. doo abbreviations UniCredit Bank BH Štedionica ZB Invest Centar Kaptol UPI poslovni sistem Pominvest ZABA TURIZAM MZB ZANE Zane BH Istraturist Istra D.M.C. associates Allianz ZB doo, Zagreb Allianz ZB doo, Zagreb abbreviations Allianz ZB - obligatory pension fund management company Allianz ZB - voluntary pension funds management company Annual Report Zagrebačka banka UniCredit Group

7 The central bank, the Croatian National Bank, is referred to as the CNB. In this report, the abbreviations HRK thousand, HRK million or HRK m, and HRK billion or HRK bn, EUR thousand, EUR million or EUR m, and EUR billion or EUR bn, and USD thousand, USD million or USD m and USD billion or USD bn represent thousands, millions and thousands of millions (billions) of Croatian kuna, Euro currency and US dollars respectively. Exchange rates The following exchange rates ruling at 31 December 2009 have been used to translate balances in foreign currency at that date: 1 EUR = HRK (31 December 2008: HRK 7.324) 1 USD = HRK (31 December 2008: HRK 5.156) Zagrebačka banka UniCredit Group 2009 Annual Report 7

8 Management Board Report of Condition Management Board Report of Condition of the Bank While the business environment remained very demanding and challenging throughout 2009, the Zagrebačka banka Group performed well, preserved the confidence of its customers and maintained its market position, thus reaffirming its strong foundations: Ladies and Gentlemen, dear Customers, Partners and Shareholders, During 2009, Croatia witnessed a strong contraction of economic activity induced by a pronounced illiquidity and the escalation of the confidence crisis which hit the global financial market in late 2008 and early The resulting slowdown of credit activity due to scarce and expensive sources of funds and the negative risk perception, particularly with regard to countries in transition and businesses operating there, caused the crisis to spill over from the financial into the real sector and resulted in a fast decline in demand, especially in export-oriented segments of the economy. Due to growing unemployment, reduced consumption, falling investment activity and lack of confidence, the recession quickly spilled over and affected all other economic sectors. So, after almost a decade of strong and uninterrupted growth, Croatia was faced with a real-life stress test whose consequences are still difficult to ascertain. Notwithstanding such adverse circumstances, the Croatian banking sector has remained stable and made a significant contribution to preserving the general economic stability. Nevertheless, the Croatian banks also shouldered the burden of an unfavourable macroeconomic environment in that provisioning costs grew substantially and profitability dropped during last year. While the business environment remained very demanding and challenging throughout 2009, the Zagrebačka banka Group performed well, preserved the confidence of its customers and maintained its market position, thus reaffirming its strong foundations: - we have remained market leaders and expanded our extensive distribution network - we have preserved our income generating capacity as a result of applying a universal, well-diversified business model - we have retained excellent access to primary sources of funding thanks to our strong capital base and the reputation of a leading and stable financial institution - we have maintained above-average portfolio quality compared to the rest of the banking sector, which is a result of our focus on proactive risk monitoring and management. The Zagrebačka banka Group occupies the leading market position in terms of capital, total assets, loans, deposits and assets under management, it serves over 1.5 million customers and stands out among its competitors as an innovative, strong and modern financial institution committed to its role as a partner and advisor, and to generating high customer satisfaction. Group and Bank operating results in 2009 In the year ended 31 December 2009, the Zagrebačka banka Group Annual Report Zagrebačka banka UniCredit Group

9 made net profit of HRK 1,394 million, which is HRK 142 million, or 9.2%, less than the year before due to higher impairment charges. The growth of impairment charges is a result of slower economic activity, scarce liquidity in the real sector, growing unemployment and, consequently, lower disposable personal income. Operating profit before impairment and loss provisions amounted to HRK 2,349 million, which is 8.2% more than the year before and a result of efficient cost management. Particular attention was paid to increasing operational efficiency, while at the same time raising the level of service quality. Total operating costs amounted to HRK 2,662 million, which is HRK 205 million, or 7.2%, less than the previous year. Total Group assets grew by 3.8% reaching HRK 108 billion at the end of the year. Net loans to customers amounted to HRK 68.6 billion, which is HRK 2.3 billion or 3.5% more than the year before. The Group continued its lending activities in all business segments. Net loans to corporate customers, including the Government, rose by HRK 3.1 billion, or 9.8%, whereas net loans to individuals decreased HRK 0.8 billion or 2.3% compared to the previous year. Customer deposits went up by HRK 1.3 billion, or 2%, reaching HRK 64.1 billion by the end of the year. Zagrebačka banka made profit after taxation of HRK 1,216 million in the year ended 31 December 2009, which is HRK 178 million, or 12.8%, less than in Such decrease in the Bank s net profit is a result of impairment charges being HRK 358 million higher than the year before. Operating profit before impairment and loss provisions was HRK 2,074 million, which is 6.9% more than the year before. This is a result, on the one hand, of higher trading income which off-set the fall in net interest and fee and commission income, and much lower operating expenses (-8.6%), on the other hand. On 31 December 2009, Bank total assets amounted to HRK 92.8 billion, up 3.8% from Net loans to customers reached HRK 59.7 billion, which is HRK 2.7 billion, or 4.8%, more than the year before. Customer deposits totalled HRK 53.9 billion, which is an increase of HRK 0.6 billion, or 1.2%, over the previous year. Bank capital and reserves amounted to HRK 14.1 billion, the capital adequacy ratio being 19.09%, well above the minimum prescribed capital adequacy ratio of 10%. Zagrebačka banka UniCredit Group 2009 Annual Report 9

10 Management Board Report of Condition Management Board Report of Condition of the Bank (Continued) Results by key business segments Retail Zagrebačka banka offers an array of products and services aimed at meeting the needs and changing life styles of its customers, and it sets high standards with regard to the quality of service provided to all customer segments (Mass Market, Affluent and Small Business) throughout Croatia. Innovation is one of the Bank s key qualities. Full implementation of the Customer Relationship Management (CRM) tool in 2009 has enabled further major improvements in the field of customer relationship management and higher sales efficiency. This new tool allows relationship managers to view all relevant data about customers and their business relationship with the Bank on a single screen and so enables an individualised customer approach. The Internet banking and mobile banking facilities, as well as the Bank website, have been upgraded and redesigned with the goal of increasing customer satisfaction. Despite adverse circumstances prevailing in the economic environment, increased credit risks and general uncertainty, the Bank has continued its lending activities. In 2009, it offered possibilities of debt rescheduling and debt restructuring to those customers who had temporary difficulties with regular debt servicing or where potential difficulties in that regard were anticipated. In addition, it has offered a loan insurance product covering the risk of unemployment and temporary inability to work due to illness. In its efforts to make its services more accessible to its customers, the Bank opened seven new branch offices and outlets and a private banking office in The Bank has the largest and most accessible ATM network in Croatia, and there are 24-hour zones with self-service machines available to customers where they can execute transactions or get information at any time. During 2009, deposits from retail customers including individuals and unincorporated businesses grew by 2.2% reaching HRK 37.3 billion at the year end, thus demonstrating their strong confidence in the Bank. Total gross loans to retail customers amounted to HRK 29.8 billion, with housing loans accounting for more than a half of the total loan portfolio. Small Business banking Particular attention is paid to the small business segment, so there are 47 Small Business centres offering modern banking services tailored to suit the specific needs of those customers. In addition to a wide range of cash management and financing products and services, the Bank has continued its successful cooperation with HBOR in providing credit lines to support viable entrepreneurial projects and models. By launching new products, such as the MC go! business credit card, the Start up account package designed for entrepreneurs starting up a new business and the USB key which allows Internet banking users to access the facility from different locations, the Bank has improved its service quality and increased customer satisfaction. In particular, various options to make banking transactions within the 24-hour service zones and the unique benefits offered by account packages have helped our customers to improve their efficiency. By applying a proactive and innovative approach to designing banking products and services, the Bank has ensured more flexibility, better accessibility, greater variety and higher service quality to its customers. Corporate banking As described earlier, the general business environment in Croatia in 2009 was marked by a strong decline in economic activity and a liquidity squeeze. Therefore, we have paid special attention and allocated additional resources in order to help our customers overcome those difficult and complex circumstances by providing them with individualised advisory support and bespoke financial solutions. Total net loans to corporate customers, including the Government, amounted to HRK 31.4 billion on 31 December 2009, which is HRK 3.5 billion or 12.7% more than at the end of Deposits from corporate customers reached HRK 16.6 billion by the end of the year. The Bank s market share in corporate loans and deposits grew by 25.6% and 24.3%, respectively. Such a strong increase clearly shows not only the customers confidence in the Bank, but also our commitment to serve their needs and our solid credit activity in spite of difficult operating conditions. We have achieved a balanced growth by increasing the volume of loans and deposits, and services provided to the public and private sectors likewise. With regard to dealings with the Government and large corporates, the Bank provided strong financial support to this customer segment throughout the year, and particularly in the first half in order to protect the liquidity and stability of the system. The Bank continued to support the private sector as well and has intensified its business activity in the segment of medium-sized companies in all regions of Croatia. Corporate customers of Zagrebačka banka again expressed the highest levels of satisfaction with the Bank and its services. Financial markets and investment banking In the Financial Markets and Investment Banking (MIB) segment, Zagrebačka banka has consolidated its position as the leading Annual Report Zagrebačka banka UniCredit Group

11 investment bank in Croatia. This was acknowledged also by the Euromoney magazine, which proclaimed Zagrebačka banka the best investment bank in Croatia in With regard to Capital Markets, the Bank arranged some major transactions last year, including the EUR 750 million Eurobond issue for the Croatian Government, the Eurobond issue for the Agrokor Group worth EUR 400 million, and the issue of commercial bills of Hospitalija, Zagreb-Montaža, Konstruktor-Inženjering, IGH and ŽITO. It should be noted that the Eurobond issue for the Croatian Government, in which the UniCredit Group/Zagrebačka banka participated as the issue co-leader, is the first example of a domestic bank being given a leading role in the transaction of such size and importance outside the domestic market. In the Corporate Finance segment, the Bank advised the owner in the transaction involving the sale of the Getro retail chain. During 2009 the Bank participated in a number of other major transactions and assumed the leading position in the region in this business segment. Particularly important in this segment are advisory services provided to the Government of Montenegro in the process of privatisation of a minority interest in the state owned electricity company (EUR million) and advisory services provided to the Government of Albania in the process of privatisation of a minority interest in AMC, the country s leading mobile operator (EUR 48.2 million). Furthermore, the Bank successfully completed a number of smaller-scale transactions in this business domain. While the conditions in the domestic market remained very challenging throughout the year, including growing competition and significantly reduced economic activity in the corporate sector, MIB has been able to consolidate its leading market position by focusing its efforts on strengthening business relations with institutional and corporate clients. As a result, the revenues of Customer Treasury Desk rose by 35% compared to Also, Customer Treasury Desk advises corporate customers on hedging against market risks, so the sales of derivative instruments, and particularly the ones intended for hedging against interest rate risk, grew considerably in the reporting year. stagnant investment activity will continue to have a negative impact on the creditworthiness of individuals and of the real sector. In order to boost economic growth, the Bank will focus on encouraging credit activity and gradually reducing both lending and deposit interest rates, while applying adequate risk assessment mechanisms and ensuring further profitability growth. We will remain committed to addressing the needs our customers, delivering excellent service quality and applying sustainable and stable business models which provide solid foundations on which to build trust and long-term relations with our customers. I wish to extend my sincere thanks to all our clients, business partners and shareholders for the confidence they have placed in us. Also, let me thank the members of the Management Boards and the Supervisory Boards of the Bank and the Group entities for their commitment, professionalism and valued contribution to the last year s successful performance of Zagrebačka banka and the Zagrebačka banka Group. Franjo Luković Chairman of the Management Board In 2009, the Bank launched an e-trading platform for individuals. It is a user-friendly application which gives users direct access to the Zagreb Stock Exchange. As a result, the Bank has significantly increased its business capacity and made its position in the brokerage market even stronger. Expectations for 2010 The year 2010 will be another challenging and difficult year for the banking sector and the economy as a whole. Market conditions will remain harsh, and the Croatian economy is expected to recover only gradually and slowly. GDP growth is not expected to begin before the fourth quarter, while rising unemployment, higher tax burden and Zagrebačka banka UniCredit Group 2009 Annual Report 11

12 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries UniCredit Bank dd, Mostar Business review Throughout 2009, the UniCredit Bank dd. Mostar continued to strengthen its position of a reliable partner for individual and corporate customers, and the Government. The Bank has managed to maintain positive financial results despite the global economic and financial crisis and constrained economic opportunities in the country and has succeeded in preserving a sound equity base and strong liquidity levels, offering its customers more favourable business conditions. In 2009 the Bank made profit before taxation in the amount of BAM 34.5 million, which is 15.0% less than the year before. Profit after taxation went down by 10.1% to BAM 29.4 million. Total operating income amounts to BAM 180,7 million, which is BAM 9,9 million less compared to 2008 and is mainly due to a decrease in net interest income and a fall in income from sale of investment securities. Net interest income totalled BAM million, which is 2% less than in A decrease in net interest income is primarily due to a fall in credit volume and an increase in finance expenses which could not be reassigned to interest rates on approved loans. Net fee and commission income amounted to BAM 46.9 million, which is 1.5% less than the year before. Operating expenses were reduced 4.6%, to BAM million as a result of efficiant cost control. Impairment losses on loans to and receivables from customers amounted to BAM 22,8 million which is 30.3% higher compared to 2008 as a result of the prevailing economic environment which caused deterioration of credit portfolio. On 31 December 2009, total assets amounted to BAM 3.4 billion, which is 4.6% more than in the previous year. Net loans to customers amounted to BAM 2,026 billion, which is 5.5% less than in the end of previous year with loans to individuals accounting for BAM million and loans to corporate clients to BAM 893 million. Deposits from customers increased by BAM million or 10.5% by the end of the year reaching BAM 2,294 million, out of which BAM 1,204 million refers to deposits from individuals and BAM 1,090 million on deposits from corporate clients. An increase in deposits from individuals and corporate clients shows that customer confidence in the banking sector has been restored. The ATM and POS networks were further expanded in 2009 and by the end of the year there were 199 ATMs and 5,000 POS terminal installed. UniCredit Bank has the most extensive ATM network in Bosnia and Herzegovina, and its customers have free and easy access to their accounts 24 hours a day. UniCredit Bank today serves over 930,000 customers through a network comprising 96 branches and outlets nationwide. Risk exposure Risk management is carried out by implementing a system which includes risk management policies, programmes, work procedures and limits. They are continuously up-dated and adjusted in accordance with changes in legal regulations and changes in business activities dictated by market developments and emergence of new products. The UniCredit Group standards in risk management are consistently adopted and applied. At the Group level, a comprehensive risk management system is in place based on policies, procedures and risk limits acceptable to the Group. The main risks to which the bank is exposed to include: credit risk, liquidity risk, market risk and operational risk. The bank is exposed to credit risk as a result of its credit operations. Credit risk is managed according to the bank s applicable programmes and policies as well as other internal regulations enacted by the Supervisory Board, Management Board and Credit Committee. The exposure to individual customers, groups of associated entities and industries is checked against the prescribed limits set in relation to the Bank s regulatory capital. Credit risk management also involves regular analysis of borrowers abilities to discharge their liabilities, timely identification of potentially risky customers and structured relationship management, along with maximisation of recovery of the bank s receivables from the borrowers/debtors, quality legal support in those cases where litigation is in progress, and cost-efficient management of foreclosed properties. In order to minimise credit risks, the bank applies Collateral Policy. It defines how individual collateral instruments should be treated in the credit risk underwriting process. Liquidity risk arises in the process of funding the bank s business activities and managing its liquidity positions. Liquidity risk management is ensured through compliance with the applicable legal regulations, internal regulations aimed to maintain necessary levels of liquidity reserves and asset-liability matching. Liquidity limits are defined in accordance with the policies compliant with the relevant legal regulations and those enacted by the UniCredit Group. Liquidity limits are subject to daily monitoring. Currency risk exposure is a result of the bank s lending and deposit operations, as well as trading activities. It is monitored on a daily basis according to the legally prescribed limits as well as those set by the UniCredit Group for individual currencies and in absolute Annual Report Zagrebačka banka UniCredit Group

13 amounts for all sources of funds and liabilities denominated in foreign currencies or indexed to them. The bank is exposed to interest rate risk to the extent to which interest-earning assets and interest-bearing liabilities become due, or their respective interest rates change at various times or in different amounts. Value-at-Risk method is applied for the purpose of day-to-day monitoring of overall market risk exposure, basis point movements and loss warnings, which limits the maximum position of interest rate risk by currency and period. Compliance with the limits set by the UniCredit Group is monitored on a daily basis. In order to ensure an optimum degree of operational risk management, the bank has established its own system based on the standards and principles defined by the local regulator, the UniCredit Group, the Basel Committee and the EU Directives. Prva stambena štedionica Business review Prva stambena štedionica is a financial institution which accepts deposits from domestic individual clients under housing savings agreements and grants housing loans with government subsidies. Štedionica was established in 1998 as the first such institution in Croatia, and by the end of 2009 it remained the market leader with an average share in total assets of over 31% (November 2009). On 31 December 2009, the company s total assets amounted to HRK 2.0 billion or 3% less than the year before. About 26 thousand savings deposits matured in 2009, and some of those were withdrawn as the customers chose not to take out a housing loan. However, Štedionica has offered its customers a number of benefits and expanded its product range, so it was able to conclude 34 thousand new housing savings agreements. Despite deposit disbursements and deferred payment of the Government subsidies, deposit market share of Štedionica has increased to 30%. Compared to 2008, demand for housing loans has significantly diminished due to the anticipated strong fall in housing prices, reluctance on the part of individuals to take out new loans and the uncertainty with regard to their ability to keep their jobs and receive salaries, which was caused by the recession. In spite of all that, loans to customers totalled HRK 948 million at the end of the year, which represents a 7% rise compared to 2008, with the corresponding loan market share increasing to 31,8%. In the year ended 31 December 2009, Štedionica made profit after taxation of HRK 23.4 million, which is the best result achieved since the establishment. Development plan The company s business activities in 2010 will be carried out in unfavourable conditions and they will be focused on stabilising the deposit base and maintaining the existing profitability levels. The company is committed to preserving its leading market share in housing deposits by developing and implementing a segmentationbased approach to those clients whose savings contracts expire and by attracting new clients. Risk exposure In performing its business operations, Štedionica is exposed to credit, liquidity and market risks. The market risk involves currency and interest rate risks. The company has a risk management system incorporated in its business policies and procedures, and it has adopted appropriate risk limits. Štedionica is exposed to credit risk through its lending and investment activities. Counterparty risk is monitored on a continuous basis. The company s policy is to do business with customers of good credit standing, and appropriate collateral is required where necessary. While exposure to individual customers has increased, the largest credit risk exposure is towards the Croatian Government. Liquidity risk arises in funding the business activities and managing the liquidity positions. The main sources of funds are deposits from individuals and shareholders funds. Štedionica tries to ensure uninterrupted funding from deposits with various maturities. The exposure to exchange rate risk is a result of the company s foreign currency transactions or transactions indexed to a foreign currency. It performs its business activities in such a way as to minimise mis-matching between assets and liabilities denominated in or indexed to a foreign currency. Štedionica is exposed to interest rate risk to the extent to which interest-earning assets and interest-bearing liabilities become due, or their respective interest rates change at various times or in different amounts. A majority of interest-earning assets and all interestbearing liabilities have a fixed interest rate. ZB Invest Total assets under management (AuM) of public investment funds managed by ZB Invest stood at HRK 4.24 billion at the end of 2009, which is HRK million more than the year before. AuM of ZB Invest grew at a rate of 24.7%, whereas the overall sector measured a growth of AuM of 22.4%. As a result, the market share of ZB Invest has increased 0.69 percentage points to 37.3% by the end of Zagrebačka banka UniCredit Group 2009 Annual Report 13

14 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries (Continued) The strong decline in capital markets, which began in 2008 caused by the global economic crisis, continued into the first quarter of However, the market situation and, consequently, AuM stabilised in the subsequent quarters. The investors shifted from more risky forms of investment (such as equity and balanced funds) to more conservative ones (such as money-market and fixed-income funds). In such circumstances, ZB Invest was able to retain and even strengthen its dominant market position. Money-market funds grew by HRK million during the year, reaching HRK 2.54 billion at the year end, so they contributed most strongly to the growth of AuM measured in ZB Invest holds a 42.1% market share in the segment of money-market funds. Regarding the investor structure of ZB Invest public investment funds, individual investors still prevail and account for about 76% of total AuM. Total number of investors grew to over 72,000 investors at the end of the year. Last year ZB Invest received a prestigious award for its successful business operations. The professional association of investment fund management companies of the Croatian Chamber of Economy proclaimed it the best management company and ZB Bond the best fixed-income fund in In addition to public investment funds, ZB Invest also offers the services of managing individual securities portfolios after having met demanding legal and regulatory requirements with regard to the alignment with the Capital Market Act last year. In spite of a major decrease in assets relative to the pre-crisis times, ZB Invest has been able to preserve high profitability levels thanks to its strong focus on cost management. Thus, ZB Invest made net income in the amount of HRK 32.9 million in 2009, with net profit amounting to HRK 15.3 million. Istraturist Business review Istraturist is the leading tourist company in terms of accommodation and service quality provided at hotels, tourist resorts and camping sites. The improvements accomplished by Istraturist have transformed the image of the town of Umag, which is perceived today as a high-quality tourist destination. The international tennis tour ATP Croatia Open Umag, which Istraturist has successfully organised for twenty successive years, strongly contributes to the attractive image of the destination. Last year, the eight-year investment cycle worth HRK 880 million was completed, so that 72% of all facilities now have a four-star or five-star ranking. The accommodation capacities of Istraturist include 1,444 units at four-star and five-star hotels and apartment sites, 3,373 accommodation units at four-star camping sites and 1,848 units at other facilities. In Croatia, the Istraturist properties stand out as unique and innovative, so for the second successive year the Sol Garden Istra hotel and the Park Umag camping site were proclaimed the best facilities in Croatia in their respective categories. Also, ADAC awarded the Park Umag camping site the Superplatz title for the second time in succession, thus ranking the Umag camping among the best ones in Europe. In 2009, Istraturist categorised the Coral Hotel, its first five-star hotel, thus adding to the quality of its offer. Operating results In the year ended 31 December 2009, Istraturist made net profits in the amount or HRK 37.6 million, as a result of sustainable operating profit and reduced financial expenditures. In the reporting year, Istraturist registered 1.8 million overnights, which is 3% less than the year before. Given the slower economic activity, lower disposable income and higher unemployment in all major tourist-generating markets, the results are considered satisfactory. Operating revenues amounted to HRK million, 2% down from the same period last year. The distribution channels have been restructured and the share of direct channels has increased. As a result, prices of all have been increased, which had a positive impact on total revenues. Operating expenses totalled HRK million and they remained at the previous year s level. Costs of materials and personnel expenses have been reduced. Throughout the year, the company improved its business efficiency, while at the same time retaining high service quality. Net financial revenues and expenses have had a positive impact on the overall result. Financial revenues amounted to HRK 9.3 million as a result of foreign exchange gains of HRK 6.5 million and other revenues totalling HRK 2.8 million. Compared to the previous year, financial expenses were significantly reduced and amounted to HRK 22 million as a result of lower interest expenses and foreign exchange losses on borrowings. Assets On 31 December 2009, the company s assets totalled HRK 1,286 million. Equity amounted to HRK 733 million, which is more than the year before as a result of net profit. The company s total liabilities were HRK 550 million, which is HRK 70.3 million, or 11.2%, less than the year before as a result of reduced liabilities under borrowings Annual Report Zagrebačka banka UniCredit Group

15 Risk exposure The most significant risk to which the company is exposed to is currency risk since 74% of total income is generated in foreign markets. Currency risk is also associated with long-term borrowings denominated in or linked to foreign currencies. Istraturist occasionally uses derivatives in order to hedge against these risks. ZANE Business review ZANE is a real estate company. The company provides property valuation and real estate agency services, along with consultancy services in property development. In the challenging environment marked by the economic crisis, in the year ended 31 December 2009, the company made profit after taxation in the amount of HRK 693 thousand. Nevertheless, ZANE was able to preserve its leading market position and good business relationships with its clients. Throughout the year, the company paid special attention to cost management in order to minimise negative effects of the business environment. At the end of 2009, the company s total assets amounted to HRK 20.6 million. Cash in hand and investments in money-market funds and fixed assets account for a majority of total assets, whereas equity (i.e. share capital and reserves) accounts for a major part of its liabilities. Development plan In 2010, the company will continue its activities aimed at implementing the adopted development strategy in order to position itself as a competence centre for all real-estate related activities within the Zagrebacka banka Group. Centar Kaptol Centar Kaptol is the majority owner of the Centar Kaptol shopping/ business complex in the Zagreb city centre. The company is responsible for managing and renting the properties in its ownership, and the largest portion of its revenues is generated by letting shopping and office facilities, and the cinema. put to a commercial use. In the changed business environment characterised by lower rents, the turnover rent has been introduced so in addition to a minimum rent, the company also charges a percentage of total turnover. The company successfully closed the financial 2009 and made profits of HRK 4.5 million. In 2009, Centar Kaptol again received the Superbrand award as one of the best Croatian brands. In 2010, the company will try to improve its competitiveness among the growing number of shopping centres by launching new marketing actions and campaigns and by attracting new popular brands to Centar Kaptol. Pominvest Business review Pominvest owns business premises of 5, sqm located in Split and elsewhere in Dalmatia. It rents its business premises to other Group entities as well as other clients, and provides maintenance services for those properties. As at 31 December 2009, the assets of Pominvest amounted to HRK 26.8 million, comprising mostly long-term tangible assets (HRK 21.8 million). Equity (capital and reserves) amounted to HRK 25.9 million. The company made profits after taxation of HRK 1.6 million in A majority of rental income of Pominvest is generated through its business relationship with Zagrebačka banka and Zagrebačka banka Group entities. Rental income and income from maintenance services totalled HRK 6.1 million and accounted for the largest portion of total income (92%). Risk exposure The company s business operations can be described as stable, and it is not exposed to any major risks, as noted also in the auditor s report. Despite negative impacts of the global financial crisis and reduced consumption in 2009, 96% of all facilities in the shopping mall were Zagrebačka banka UniCredit Group 2009 Annual Report 15

16 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries (Continued) Marketing Zagrebačke banke Business review The primary business activity of MZB is publishing, e-newsletters and web along with pre-production and production of promotional materials. MZB closed the financial 2009 with a loss in amount of HRK 572 thousand. As at 31 December 2009, the company s assets amounted to HRK 3.8 million, with cash in hand and receivables from customers accounting for a majority of that amount. Equity (capital and reserves) amounted to HRK 2.6 million. Risk exposure The company s business operations can be described as stable, as the company is not exposed to any major risks. Franjo Luković Chairman of the Management Board Annual Report Zagrebačka banka UniCredit Group

17 Zagrebačka banka UniCredit Group 2009 Annual Report 17

18 Christian Hagn, Hagn & Dr. Ruebesamen Rechtsanwälte Retail Client - Germany «I ve been a customer of HypoVereinsbank - UniCredit Group for many years. I especially value their trust and reliability as well as the quality of their consultation services and I have always counted on these values. I am more than satisfied, and I would highly recommend them to any new customers.» It s easy with UniCredit Annual Report Zagrebačka banka UniCredit Group

19 Business description Zagrebačka banka UniCredit Group 2009 Annual Report 19

20 Business description Business description Zagrebačka banka is a licensed bank operating in 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 around 66,000 active corporate clients, and around 2.0 million active retail clients. Subsidiary and associated companies operations The Bank s subsidiaries and associated companies as at 31 December 2009 are shown below: The Bank provides a full range of banking services, comprising corporate and retail banking, international financing, investment banking and corporate finance services. Fully consolidated subsidiaries Company address Country of Industry Group domicile ownership % UniCredit Bank dd, Mostar Kardinala Stepinca bb Bosnia and Banking Mostar Herzegovina Prva stambena štedionica dd Savska 62 Croatia Banking Zagreb ZB Invest doo Ivana Lučića 2a Croatia Fund management Zagreb Centar Kaptol doo Nova Ves 17 Croatia Property investment Zagreb UPI poslovni sistem doo, Sarajevo Branilaca Sarajeva 20 Bosnia and Property management Sarajevo Herzegovina Pominvest dd Gundulićeva 26a Croatia Property management Split ZABA TURIZAM doo Paromlinska 2 Croatia Investment Zagreb Marketing Zagrebačke banke doo Savska cesta 28 Croatia Publishing Zagreb Zagreb nekretnine doo Nova Ves 17 Croatia Real estate agency Zagreb Zane BH doo Branilaca Sarajeva 20 Bosnia and Real estate agency Sarajevo Herzegovina Istraturist dd Jadranska 66 Croatia Tourism Umag Istra D.M.C. doo Jadranska 66 Croatia Organisation of the Umag ATP tournament 71.8 Equity accounted associated companies Company address Country of Industry Group domicile ownership % Allianz ZB doo, Zagreb Nike Grškovića 31 Croatia Obligatory pension Zagreb fund management Allianz ZB doo, Zagreb Ivana Lučića 2a Croatia Voluntary pension Zagreb fund management Annual Report Zagrebačka banka UniCredit Group

21 Branch network map Zagrebačka banka Group number of branches Croatia Bosnia and Herzegovina Total Number of branches Slovenia 24 Zagrebačka banka UniCredit Group 2009 Annual Report 21

22 Dace Markeviča Uralchem Trading Sia Corporate Banking Client - Latvia «Uralchem Trading has the assurance that every time, even when it comes to fairly simple banking transactions like payments, UniCredit Bank will look for and find mutually beneficial solutions. The bank s professional staff always offers helpful advice on successful business operations, thereby laying the foundation for mutual trust and a long-term partnership.» It s easy with UniCredit Annual Report Zagrebačka banka UniCredit Group

23 Overview of the Croatian economy in 2009 Zagrebačka banka UniCredit Group 2009 Annual Report 23

24 Overview of the Croatian economy in 2009 Overview of the Croatian economy in 2009 Macroeconomic indicators for Croatia Gross Domestic Product, % change (6.0)* GDP per capita, in EUR 10,200* 10,814 9,769 Private Consumption, % change (8.5)* Public Consumption, % change 1.8* Fixed Investment, % change (11.0)* Exports of Goods and Services, % change (15.5)* Imports of Goods and Services, % change (18.6)* Industrial Production, % change (9.2) Construction Industry, % change (6.2)* Tourism (nightstays), % change (1.4) Unemployment Rate (ILO), % change 9.4* Consumer Prices, % change General Government Balance (% GDP) (3.9)* (0.8) (2.3) Current Account Balance, (% GDP) (5.6)* (9.4) (8.6) External Debt, (% GDP) 96.7* Money Supply (M1), % change, end of period (14.6) (4.6) 19.3 Exchange Rate HRK: EUR, average Exchange Rate HRK: EUR, end of period Sources: Central Bureau of Statistics, Croatian National Bank, Ministry of Finance * Estimates of the Chief Economist of Zagrebačka banka Full impact of the global financial crisis on the Croatian economy seen in 2009 The full impact of the global financial crisis was felt in Croatia in 2009, when economic growth contracted an estimated 6% in real terms. The economy shrank by 6.5% yoy in 1H 2009, but in seasonally adjusted terms on a qoq basis returned to mild growth during 2Q That said, both private consumption and gross fixed capital spending remained negative in the first three quarters on a seasonally adjusted qoq basis, suggesting continued weak domestic demand heading into Indeed private consumption which fell almost 10% yoy in 1H 2009 is expected to have contracted 8.5% in 2009 as credit growth to household fell in response to generally tight external financing conditions and generally tight monetary policy settings at home. In addition, increased uncertainty as unemployment rose and the imposition in August 2009 of a 1 percentage point increase in valued added tax and a solidarity tax for net income above HRK 3,000 per month dented demand for loans. The administrative employment data suggest over 50,000 mainly private sector job losses in 2009, while the internationally comparable unemployment data also revealed a drop in the participation rate and employment rate. We expect the unemployment rate on this measure to average 9.4% in 2009, up from 8.4% a year earlier. Retail trade turnover in real terms contracted by over 15% yoy in Investment activity which turned negative in 4Q 2008 continued to contract in 2009, falling 11.9% yoy in the first three quarters of Meanwhile the construction activity index was in negative territory for most of 2009 and is expected to have contracted over 6% for the full year. Infrastructure investment slowed down in 2H 2009 as projects were completed and others scaled back as the government sought to rein in the fiscal deficit. Industrial production contracted 9.2% in Inflationary pressures waned as domestic demand remained weak While base effects associated with fuel and energy prices along with falling food prices in 2H 2009 helped keep the headline consumer price index down, data on core inflation revealed a continuous fall since April 2009 until the end of the year. This clearly suggests the combination of weak domestic demand and a stable currency (especially after 1Q 2009) influenced the moderation in inflation to only 1.9% yoy in December and 2.4% for the whole year. This was notwithstanding an average increase of over 17% in tobacco prices, 4.6% in alcohol prices and almost 7% in other regulated prices. Given expected weak domestic demand in 1H 2010, the outlook for inflation in 2010 is for a further moderation in inflationary pressures despite a 15% increase in gas prices at the beginning of the year. Real gross wages fell slightly in This was in part because the government rescinded its decision to increase public sector salaries by 6% in April. This decision as well as rising unemployment eliminated any risk that wage dynamics could add to inflationary pressures. The currency was exposed to depreciation pressures, especially in 1Q 2009, but as Easter heralded the onset of the main tourist season and concerns about the ability of various sectors of Annual Report Zagrebačka banka UniCredit Group

25 the economy to rollover their external obligations eased, the EUR/HRK ended the year below end 2008 levels at Current account deficit narrows as imports head sharply lower Apart from lower capital inflows, the global recession also impacted heavily on the Croatian economy via the trade channel in Exports of goods fell 21.5% in 2009 to EUR7.5bn while imports of goods fell 26.9% to EUR15.2bn. This saw the merchandise trade deficit narrow by over EUR3.5bn to EUR7.7bn, with imports of motor vehicles for example almost halving to EUR910mn in Meanwhile tourism revenues are expected to fall by over EUR1bn, with the net revenues in 3Q 2009 the lowest since 2004, a clear reflection of the impact of the global recession on Croatia s main export industry. Overall, we estimate the current account deficit narrowed from 9.4% of GDP in 2008 to 5.6% of GDP in 2009 and expect it to narrow further in 2010 on account of weak domestic demand which will reduce the deficit of goods and services further. Over this period foreign direct investment inflows covered less than half of the current account deficit, amounting to an estimated EUR1.2bn, or 2.7% of GDP. Although the net inflow of medium and long-term loans was unsurprisingly sharply down on previous years, fears that especially some private sector borrowers would not be able to roll over their external obligations proved unfounded. In the end gross foreign indebtedness rose an estimated EUR3bn in 2009 with the government issuing a EUR750mn Eurobond in May and a USD1.5bn bond in October. Thus, foreign debt rose to an estimated 96.7% of GDP or EUR43.5 billion at the end of Fiscal adjustment still required Slowing growth unsurprisingly adversely affected the government s revenue projections and led to numerous supplementary budgets, tax increases and the abolition in April of a previously granted 6% increase in public sector salaries. As a result we expect a widening of the budget deficit to an estimated 3.9% of GDP in The government has managed to agree a freezing of public sector salaries in 2010 and an air of cooperation between the ruling coalition and main opposition parties became apparent as we entered the new year. The hope is that this new found desire for cooperation yields concrete reform initiatives which are key to reducing the public spending in the medium term and generating productivity gains. The government accessed international markets twice in 2009 as well as benefiting from the loosening of domestic monetary conditions in order to finance its obligations. A new development was the issuance of over EUR1bn in 12-month euro-linked treasury bills during the final three quarters of By the end of 2009 gross public debt increased to over 40% of GDP according to our estimates. Monetary conditions remained tight for most of 2009 to ensure currency stability In early 2009 the central bank continued to provide FX liquidity to banks by reducing the foreign assets to foreign liabilities ratio from 28.5% in two steps to 20% during February and also abolished the special reserve requirement. Previously, it had tightened kuna liquidity conditions on 2 January by increasing the share of FX mandatory reserves deposited in kuna from 50% to 75%. The reason for this was that the currency was exposed to noticeable depreciation pressures during 1Q In late November the central bank also abolished the 1% monthly credit growth limit to the private sector and households. In January and February the central bank intervened once each time selling Euros to the market in the total amount of EUR513mn. In late February the central bank purchased EUR331mn from the market and in 4Q in three further interventions purchased a further EUR505mn, thus releasing HRK3.7bn in liquidity into the market in the final quarter of the year. FX reserves rose by EUR1.3bn in Following the second purchase of Euros during the month in the amount of EUR80mn on 22 October, money market rates fell sharply remaining at record low levels right up until the time of writing in late January In part the improved liquidity conditions were also the result of the government issuing a USD1.5bn bond in the US in November and progressively converting a part of the proceeds at the central bank to meet upcoming domestic obligations. Thus after extremely high local currency interest rates since the beginning of 2009, 4Q 2009 saw very low interbank rates. Overall, by maintaining very tight interbank market conditions in place for most of 2009 the central bank managed to keep the EUR/ HRK stable, thus avoiding the occurrence of balance sheet effects which would have complicated economic conditions even more. In 2010 as long as the EUR/HRK is not exposed to undue depreciation pressures we expect monetary conditions to remain relatively loose; the aim being to stimulate credit growth and thus output growth. Asset growth slows in response to tighter external financing conditions The only major change in the structure of the Croatian banking sector in 2009 was the nationalisation of Hypo Alpe-Adria-Bank International AG by the Republic of Austria in mid-december, which Zagrebačka banka UniCredit Group 2009 Annual Report 25