Zagrebačka banka dd Annual Report

Transcription

1 Zagrebačka banka dd 2016 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 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: 2016 Annual Report 2

3 Introduction The Management Board of Zagrebačka banka dd is pleased to present its Annual Report. It 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 auditors report, unaudited supplementary reports for the CNB and supplementary financial 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 2016 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 S.p.A., Milano is referred to as UniCredit and UniCredit S.p.A. Group is referred to as UniCredit Group. The Bank's subsidiaries and associates are referred to as follows: Subsidiaries Abbreviations UniCredit Bank dd, Mostar UniCredit Bank, Mostar PRVA STAMBENA ŠTEDIONICA dd, Zagreb Štedionica ZB Invest doo, Zagreb ZB Invest CENTAR KAPTOL doo, Zagreb Centar Kaptol POMINVEST dd, Split Pominvest SUVREMENE POSLOVNE KOMUNIKACIJE doo, Zagreb 1 Suvremene poslovne komunikacije ZAGREB NEKRETNINE doo, Zagreb ZANE ZANE BH doo, Sarajevo ZANE BH UniCredit Leasing Croatia doo, Zagreb UniCredit Leasing Croatia LOCAT CROATIA doo, Zagreb Locat Croatia BACAL ALPHA doo, Zagreb BACAL ALPHA BACAL BETA NEKRETNINE doo, Zagreb 2 BACAL BETA NEKRETNINE ALLIB NEKRETNINE doo, Zagreb ALLIB NEKRETNINE UniCredit Partner doo, Zagreb UniCredit Partner ZABA Partner doo, Zagreb ZABA Partner UniCredit Leasing doo, Sarajevo UniCredit Leasing, Sarajevo Associates Abbreviations Allianz ZB doo, društvo za upravljanje obveznim mirovinskim Allianz ZB, obligatory pension fund management company fondom, Zagreb Allianz ZB doo društvo za upravljanje dobrovoljnim Allianz ZB, voluntary pension funds management company mirovinskim fondovima, Zagreb MULTIPLUS CARD doo, Zagreb MultiPlus Card UniCredit Broker doo, Sarajevo UniCredit Broker 1 Merged to ZAGREB NEKRETNINE doo in In 2016, the Group disposed the entire stake in BACAL BETA NEKRETNINE doo Zagrebačka banka dd: 2016 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, "USD thousand", USD million or USD m and USD bn or USD billion and "BAM thousand", BAM million or BAM m and BAM bn or BAM billion represent thousands, millions and billions of Croatian kuna, Euro, US dollars and Bosnian Convertible Mark, respectively. Exchange rates The following exchange rates ruling at 31 December 2016 have been used to translate balances into foreign currency at that date: EUR 1 = HRK (31 December 2015: HRK) USD 1 = HRK (31 December 2015: HRK) Zagrebačka banka dd: 2016 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, dear Colleagues, it is my pleasure to present you the Annual Report and financial statements of the Zagrebačka banka Group. Zagrebačka banka Group has realised the expected good result in the year The achieved results are based on the universal business model and responsible risk management approach. The capital adequacy ratio is at the level of 21.1%, thus the Group has a solid potential to support the loan activity in the upcoming periods as well. We have realised a majority of targets set, we are continuously improving business processes and introducing new digital technologies that enable us to provide fast, quality and personalised services to our clients tailored to their needs. Our lending and overall activity contributes to the economic and social prosperity, the achieved results provided an adequate return on capital invested by our shareholders. Business environment By observing the global business environment, we can say the realised economic growth has been solid, stimulated by personal consumption, lower prices of energy commodities, expansive monetary policy and low interest rates. The European Central Bank continued the policy of quantitative easing, ensuring high level of liquidity aimed at fostering growth. The US Federal Reserve raised its benchmark interest rates, which resulted in the increase of total interest rates. According to the announcements of FED, we can expect further increase in interest rates, which, coupled with geopolitical developments, may result in fragmentations and different levels of interest rates in the financial markets. In the Republic of Croatia, the realised GDP growth was 2.9%, driven by an increase in export, industrial production, tourism, stronger contribution of utilised EU funds, increase in personal consumption and moderate recovery in investments. We can be pleased with such developments as the difference compared to economic growth rates in peer Central and Eastern Europe economies is decreasing. The current credit rating of the Republic of Croatia is BB stable according to S&P, Ba2 negative by Moody s and BB stable by Fitch. Owing to the decrease of the public debt and fiscal deficit, the prerequisites for nearterm exit of the Republic of Croatia from the Excessive Deficit Procedure have been gradually created, also for the improvement of credit rating, which finally can positively reflect by the decrease in risk premium and funding costs. In 2014, the European Commission opened the Macroeconomic imbalance procedure for the Republic of Croatia, requiring clearly defined reform activities by the Croatian Government. After the visit of the European Commission representatives in 2016, the Republic of Croatia was not required to implement additional corrective measures. However, reforms aimed at management of public finances, modernisation of public administration, improvement of efficiency in the public sector, increase of labour activity and employment and the decrease of relatively high level of non-performing loans in banking sector remain a challenge. Following the last year s negative impacts of the amendments to Credit Consumer Act, in 2016 the Croatian banking sector achieved good business results. Commercial banks in Croatian market have been undergoing the process of transformation in order to adapt to complex regulations and even more strong competition. Growth has been realised in new loans in Retail and Corporate segments, while the total loan volumes decreased due to decrease in loans to public sector, sales of one part of non-performing loans and conversion of loans with foreign currency clause in Swiss francs. The trend in non-performing loans in the banking sector has been positive, they have decreased to 13.8% with provision coverage of 63.6%. The banking sector is well capitalised with the capital adequacy of the system of 22.53%. Zagrebačka banka dd: 2016 Annual Report 5

6 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) On the other hand, return on capital invested has been relatively low since the financial crisis, thus making the banking sector less attractive to the investors compared to other sectors. Nevertheless, banks have sufficient liquidity for increase in lending activity which, coupled with further development of capital market, with the utilisation of guarantee schemes and more efficient utilisation of EU funds can contribute to economic growth of the Republic of Croatia. Financial highlights of the Group Zagrebačka banka Group recorded a profit after tax of HRK 1,688 million in The Group realised good business results in the majority of its members. All members of the Group offer integrated financial services to our clients in the markets of the Republic of Croatia and the Federation of Bosnia and Herzegovina. Operating income of the Group amounted to HRK 5,588 million, increased by HRK 573 million (+11.4%), due to lower funding costs and higher Net trading and other income. Net interest income amounted to HRK 3,479 million, which is by HRK 148 million (+4.4%) higher compared to 2015, as a result of stable average volume of loans during the year and lower funding costs. Net fee and commission income amounted to HRK 1,269 million and is by HRK 50 million (+4.1%) higher compared to prior year, following the increase in payment transaction fees and fees from asset management, brokerage and consulting services. Net trading and other income amounted to HRK 840 million, an increase of HRK 375 million is the result of HRK 135 million gain from sale of stake in Visa Europe Limited, as well as higher net trading income compared to the previous year. Operating expenses amounted to HRK 2,534 million and decreased by HRK 33 million (-1.3%) mainly due to improvements in business processes. The Group s cost to income ratio ( C/I ratio ) has considerably improved and equals to 45.3% (2015: 51.2%). Profit before impairment and other provisions amounted to HRK 3,054 million, higher by HRK 606 million (+24.8%), as a result of the previously described movements in Operating income and Operating expenses. Impairment and other provisions amounted to HRK 915 million and have decreased by HRK 1,807 million. Return on asset (ROA) of the Group amounts to 1.32% (2015: -0.12%). Total assets of the Group amounted to HRK 128,328 million and have increased by HRK 324 million (+0.3%), mainly under the influence of Net loans to customers and optimisation of funding sources. Net loans to customers amounted to HRK 80,746 million, decreased by HRK 3,594 million (-4.3%) mainly due to loan repayment by the public sector and conversion of Swiss franc foreign currency clause loans in Zagrebačka banka dd. The increase in loan activity was mainly realised in Companies, as well as in the consumer financing segments. Deposits from customers represent primary source of funding and amounted to HRK 92,228 million at the end of the period. The increase of HRK 5,684 million (+6.6%) was realised in deposits from Companies and Individuals. Loans to deposits ratio amounts to 88.0%. Deposits from banks and borrowings amounted to HRK 12,864 million. The decrease of HRK 6,439 million (-33.4%) is a result of lower funding needs and an increase in Deposits from customers. Capital and reserves of the Group amounted to HRK 18,694 million and increased by HRK 1,658 million (+9.7%). The capital adequacy ratio was at a level of 21.1% (31 December 2015: 21.0%). Zagrebačka banka dd: 2016 Annual Report 6

7 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Financial highlights of the Group (continued) Strategic Business Areas' Results Retail and SMEs Retail and SME segment also achieved good business results, whereby our leading position is confirmed with stable market shares in the retail lending of 25% and market share in deposits of 25%. Besides expanding the offer of the existing products and services, we have upgraded the quality and speed while we placed special attention to the improvement of clients experiences. The project Client Obsession unique approach to the Client has been launched, as we identified that habits and needs of clients have changed, to which we responded by interactive and personalised relationship. Through Client Obsession, our goal is to achieve mutual trust and partnership. All members of the Bank s team have been additionally made aware of their role and their contribution in realisation of the common goals. Clients clearly show their appreciation of this approach, thus providing our employees additional incentive in their everyday work. The Bank paid special attention to young clients up to age of 29, by introducing the product Package for the youth ( Paket za mlade ). Services and benefits are suited to the needs and requests of the young, with special benefits for students. Within a number of initiatives and activities oriented to young clients, in May, the Bank introduced the web site with good quality, entertaining and useful content. New offer and approach resulted in the acquisition of new young clients and the increase of satisfaction of the existing ones. In 2016, more than 37 thousand clients contracted the package. Digitalisation and modernisation The Bank follows international trends and invests in new technologies. The number of digital channel users has been continuously growing and we currently have over 531 thousand of internet banking users and 316 thousand users of mobile banking. The number of digital payments is rising with mobile banking at the forefront with the annual increase of volume of 55%. We are focused to ensuring the highest possible availability of products and services through mobile and internet banking and to diversifying and simplifying payments. In order to accelerate payments, along with the existing mobile device structured invoices scanning service m-photo-pay ( m-foto-plati ), also a new fast scan ( Sken u tren ) service has been introduced for non-structured documents. In addition to a number of already available products and services of mobile and internet banking, we introduced the possibility to contract the preapproved cash loans with advanced electronic signature, to contract insurance and to trade in worldwide stock exchanges. Web sites of Group s members have been redesigned. Besides providing comprehensive information on products and services, web sites design is focused to meet the needs of the users and it allows them to easily find the offer that suits them. We have optimised the display of content on the mobile devices, where clients most often search the internet. The navigation has been facilitated, as well as the initiation of the contact with the Bank and Group s members. We increased the clients satisfaction and the capacity of setting up of new business relationships: the number of web users has been increased by 7%, while the number of meetings with the bankers initiated through web has been increased five times. New appliances, new concept of renovation of branch offices ( Branch of the future ) Aimed at accelerating, increasing efficiency and quality of services and realisation of the no paper concept, we have installed Signature Pad appliances and scanners of the new generation in 120 branch offices, thus achieving the automatization of signatures and documents archiving. We continued with the refurbishment of the branch offices, in several locations we installed new ATM-s from which also euros can be withdrawn, whereby the index of migration of transactions from the branch offices is significant. Zagrebačka banka dd: 2016 Annual Report 7

8 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) In the retail lending business, after several years of stagnation, the trend of increase in the demand for new loans that started last year has continued. Total new sale of loans to citizens recorded growth of 23%. Particular sales increase has been achieved in housing loans (+37%) and cash loans (+11%), which enabled the Bank to retain the leading position in housing and to increase the market share in cash loans. We continued with the initiative Come to the right door - we are helping our clients to buy apartments under favourable loan terms. We have also participated in state and local programs for subsidized housing lending (POS and POS+ programmes). Also during 2016, 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 cumulatively decreased by 1.28 bp and for EUR by 1.78 bp, while HRK 6M NRS2 decreased by 1.23 bp and for EUR by 1.86 bp. Without delay, the interest rates on loans to citizens were decreased accordingly. Zagrebačka banka has also fulfilled its legal obligation to all clients, borrowers of CHF foreign currency clause loans who meet the conversion conditions stipulated by the regulation. By the end of 2016 the conversion has been carried out for a majority of cases. With its service model, the Bank has been the leading partner to small businesses, with a stable market share of 24.4%. During the year, the number of new loans to small businesses increased by 14%, thus continuing the positive trend from Particularly noteworthy are long-term investment loans, which have increased by 19% thanks to the improvement of the overall economic and investment environment. In the tourism sector, the Bank recorded considerable increase in small business loans for investment in tourism and the preparation for the tourist season (47% increase compared to the year 2015). We continued the cooperation with the Croatian Chamber of Economy and its Tourism Sector and held a series of workshops for entities in tourism on the topic of investment funding, co-financing projects from national and EU sources and funds. Furthermore, we organised a number of workshops and trainings in co-operation with local entrepreneurial and start-up incubators, thus continuing to strengthen our advisory role to clients. Positive trends have been present also in other sectors to which we offer a wide range of credit lines, taking into account the specific needs of small and medium size entrepreneurs. Particularly noteworthy is financing of craftsmen, where the increase by 27% is recorded compared to the year The Bank continues the partnership with the members of the Croatian Chamber of Trades and Crafts throughout the Republic of Croatia. Excellent co-operation has been realised also with the local self-government units in providing subsidized loans to small entrepreneurs and craftsmen. The deposit base is stable and during the year it increased by 5%. Deposits on transaction accounts of clients recorded an increase of 26%, while the number of current accounts of individuals has increased as well. In 2016 the Bank has again maintained its leadership market position, with the market share in term deposits and current accounts of 25% and 35%, respectively. The Bank continued to develop its card business in line with the latest global trends. Special emphasis was put to the increase of presence of Mastercard and Visa products on the Internet and migration to contactless payment cards and POS appliances that accept contactless payment cards. The Bank was particularly focused to the security of card payments, as well as to providing additional value to clients by ensuring discounts, exclusive benefits and reward points through MultiPlusCard loyalty programme. Furthermore, the Bank has been oriented to digitalisation, placing special attention to new services and simplification of access to the existing ones. Zagrebačka banka dd: 2016 Annual Report 8

9 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) We upgraded the channels for card acceptance by introducing mobile card reader, which in combination with smart phone or tablet allows for payment by cards at any location. Payment made by cards directly at the points of sale recorded growth of 11.4%, while the number of transactions carried out by the Bank s card via internet increased by 35%. It has been enabled for the clients to pay by payment cards in instalments with no interests and fees at 17 thousand points of sale. The market share in card payments on EFT POS terminals has increased by more than 3%. We have paid special attention to the tourist sector and its needs, by continuing with contracting of services which enable tourists to pay by cards of foreign issuers in their domicile currency. As mentioned, during the year the Bank introduced specially designated ATMs which allow clients the withdrawals of euro banknotes. We continue to be the only bank in the Republic of Croatia to issue the cards for the special purpose protected income accounts for clients whose regular accounts are blocked, thus allowing the clients in difficulties to have fast and easy access to funds standing in the account. Corporate, investment and private banking We retained the leading market position, holding a large market share in business operations with Corporate clients. The total amount of the Bank s loans to corporate customers amounted to HRK 43.3 billion, with a market share of 31.0% (as of December 2016), which increased by 35 bp since the beginning of the year despite the challenging circumstances. Corporate clients deposits amounted to HRK 23.3 billion with a market share of 29.6% (as of December 2016). These solid market shares and large client base ensure strong platform for growth in the upcoming period also. In 2016, the government and large corporate clients sector continued to represent significant segment of operations, where we participate in all major transactions in the market. After the period of stagnation, loans to middle-size companies recorded considerable growth. We financed important projects in growing potential industries. As a part of international UniCredit network, we are easily carrying out financial transactions and we provide flexibility in operation to international clients. By setting up the separate specialised centre, we have additionally expanded and strengthened this segment of operation in all regions. Our specialised sales support centres organised within Global transaction banking provide fast and simple realisation of needs in clients daily business operations. We successfully responded to challenges of introduction of SEPA standard and rolled out Trade Finance initiative at e-zaba. During the year we expanded the existing and contracted the new co-operations with the international financial institutions including the European Investment Bank ( EIB ), the European Investment Fund ( EIF ) and the European Bank for Reconstruction and Development ( EBRD ), which were primarily oriented to ensuring funding and guarantee schemes under favourable conditions. In partnership with the European Investment Fund ( EIF ), the Bank enabled the guarantee scheme within InnovFin EU Finance for Innovators programme. The long-standing co-operation with the European Bank for Reconstruction and Development ( EBRD ) continued also in 2016, primarily through the lending model which includes investment and working capital credit line frames. Zagrebačka banka dd: 2016 Annual Report 9

10 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) During the year, within the Operating programme Competitiveness and cohesion ( Konkurentnost i kohezija ) - a programme fostering infrastructure investments transport and traffic, energy and power industry, environment protection and ICT and aimed at providing support to development of entrepreneurship and research activities a total of 1.9 billion kuna in subsidies were made available to entrepreneurs through several tenders. The Bank additionally strengthened its leading position in this segment; it financed more than a third entrepreneurial projects that received grants from EU funds within the major tenders for small and medium-sized enterprises, as it made available to clients a number of products and services tailored specifically to suit the terms and conditions of the tenders and clients special needs. Furthermore, with the purpose of sharing knowledge and experience and strengthening of business relationships, during the year the Bank provided advisory services to a number of the local and regional selfgovernment units on the planned projects and possibilities of participation in EU tenders for non repayable grants. For the second consecutive year we supported the ELITE programme through which UniCredit co-operates with the London Stock Exchange Group and which is intended for development of medium-sized companies. In 2016 we included four corporate clients in this unique initiative. Investment banking closed the year with a large number of successfully executed transactions, thus confirming its position of the leading bank in the investment banking industry in the Republic of Croatia and in South-eastern Europe. During 2016, we participated in major activities on the capital market in the Republic of Croatia. Extremely important transactions have been executed, with our Investment Banking having a leading role. Overall, the Bank participated in six projects of total value of HRK 12.4 billion. This year also, Zagrebačka banka was a joint leading agent and subscription book entry keeper of the Republic of Croatia bond issues (two issues, in the amount of HRK 6 billion and HRK 4 billion) and it participated in the historically largest corporate bond issue in the Croatian market issue of the first tranche of bonds of Zagrebački holding in the amount of HRK 1.8 billion. The Bank had the agent role in listing the shares of the Zagreb Stock Exchange which represents a significant breakthrough in the development of Croatian capital market. Likewise, the Bank also realised the new issue of Atlantic Group domestic bonds in the amount of HRK 200 million, and early repurchase of a part of the issue of the bonds issued by Croatian Post. In the Corporate finance segment, Investment Banking continued the strong trend from the previous year and provided advisory services to clients in several large transactions of mergers and acquisitions, covering a large scope of industries, including energy industry, food processing industry, tourism, manufacturing industry and oil industry. The Bank also participated as a financial advisor in some of the most prominent transactions in the region. We preserved the position of the market leader in derivative transactions, which is a result of responding to clients specific needs, aimed at decreasing foreign exchange and interest rate risks. Likewise, we successfully continued to distribute structured products through a private offering (Certificates) for Private banking clients. In 2016, the market share of the Bank s brokers was continually growing, as a result of the increase in the number of users of ZB Trader Global service and specialised trading service which we provide to the leading companies. Excellent performance of the Private Banking was recognised for the second consecutive year by the financial magazine Euromoney, which awarded the Bank with the title Best Private Banking in Croatia. This year the Bank was presented with the award in the same category also by the financial magazine The Banker. Zagrebačka banka dd: 2016 Annual Report 10

11 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Social Responsibility Social responsibility is a part of our corporate culture. Means by which the Group supports socially responsible operations are many apart from investing in the community and providing donations, the Group employs more than five thousand employees, which places us between the largest employers in the Republic of Croatia. Other than our contribution to the economy, we significantly influence to the increase in competencies, competitiveness and internationalisation of business activities My Zaba Start In 2016 Zagrebačka banka continued with the project My Zaba Start ( Moj Zaba Start ). The project included two contests Start app for the best application development projects and Start IT up for best IT solutions to the predefined challenge. In designing new services, the Bank considers needs of clients and the industry and anticipates the areas which could be useful and applicable in the future. This brings a new orientation towards the project intended for start-up companies, small and medium-sized enterprises, as well as for associations and individuals. Within the two contests, six best projects were awarded by donations totalling over HRK 0.5 million. Through My Zaba Start project the intention is to reward the most innovative and marketable entrepreneurial ideas, which by the implementation of the innovative solutions have the goal of launching the new projects and development of the existing projects. In collaboration with a number of partners and ambassadors, all being successful entrepreneurs, we brought to light some new quality stories. My Zaba Start represents a breakthrough in corporate social responsibility by connecting different industries and providing expert and financial assistance in realisation of the best entrepreneurial projects which applied for the contest. Support to socially responsible entrepreneurship For the third year in a row, Zagrebačka banka and the UniCredit Foundation awarded grants to socially responsible entrepreneurs. In 2016, in partnership with Impact Hub Zagreb a tender was initiated for all interested whose entrepreneurial activities contribute to resolution of social problems. The UniCredit Foundation Award fund was allocated to three projects and further additional funds were distributed to the wining projects, also based on the employees preferences. Systematic support to socially responsible entrepreneurs confirms our support to this sector that is particularly relevant for supplementing the services of the public interest and for sustainable community development. Activities of Zagrebačka banka for the community We continue the long tradition of provision of support to projects and initiatives of the social importance. Among others, we provided support to the hospital Klinički bolnički centar Zagreb by granting donation for the purchase of diagnostic medical equipment. Employees ambassadors of values of the Bank and the Group Employees willingly contribute to strategic and socially responsible projects and again in 2016 in a large number participated in the Gift Matching Program organised by the UniCredit Foundation. This has been the tenth year since the Program was launched and this year the largest number of employees participated - 48 ambassadors promoted 33 associations, and almost 1000 employees raised over HRK 170 thousand which will be doubled by the UniCredit Foundation. The awareness of the importance of healthcare and recreation was additionally raised among the employees with the second Month of Sports and Recreation - 3, 2, 1... go!. As a continuation of Zabašport sportclub activities, teams of employees participated in sports activities aimed at raising awareness of the benefits of healthy lifestyle. Zagrebačka banka dd: 2016 Annual Report 11

12 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Activities for the academic community In 2016 also, the Bank continued to foster strategic partnerships and co-operation with major student associations and key educational institutions, thus contributing to the overall competitiveness and longstanding sustainability. The program ZABA Banking Academy was launched, being a six-month paid internship program for final-year students, in collaboration with the majority of Faculties of Economics. We signed the Agreement on cooperation with the association of young programmers DUMP from Split. We received the two Golden index ( Zlatni index ) awards in the categories of large companies: Internships ( Stručne prakse ) and Expert support and organisation of projects ( Stručna potpora i organiziranje projekata ). The awards were 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. The key projects in which the Bank participated in 2016 were: Case Study Competition (student teams develop solutions for business cases predefined by the sponsoring companies), Brainstormer (student teams compete in tasks which require "data mining" and the creation of mathematical models), STARTER Conference (helping students to better prepare for employment and to familiarise with the most favoured Croatian employers) and App Star Contest (leading student competition in the Republic of Croatia in the development of mobile and web applications). Zagrebačka banka participated in the University of Zagreb Fair ( Smotra Sveučilišta u Zagrebu ) (the event attracting future students from all over Croatia), in Solidarity in the Field ( Kopačka solidarnosti ) (humanitarian indoor football tournament organised by students) and it supported the development of the Guide for Freshmen ( Vodič za brucoše ). We actively participated in projects of faculties and career fairs, where the Bank s representatives held several presentations. Quality of Human Resources management practices Based on the organisational climate survey the People Survey, this year also 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 84%). The Bank managed to attain the status of MAMFORCE COMPANY once again in 2016, and also we were awarded the Certificate Employer Partner ( Poslodavac Partner ) for excellence in human resources management. We are continuously dedicated in finding solutions which have a positive impact on the employees job satisfaction, their motivation and loyalty to the Bank. We consider employees trainings and strengthening of their competencies the key element of success and corporate governance Awards In 2016, Zagrebačka banka received a number of awards for its operations, of which we single out the following: - Euromoney Best Private Banking in Croatia, - Euromoney Ranked first in subcategories Best Banking Services Overall and Best Bank for Financing, - The Banker Best Private Banking in Croatia. Zagrebačka banka dd: 2016 Annual Report 12

13 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank (continued) Outlook for 2017 Our banking sector is stable and well-capitalised, while favourable developments in the financial markets ensure stable and accessible funding sources. However, challenges that remain relate to increase in lending activity, compliance with regulations and re-defining of business models of certain banks. Owing to positive macro-economic developments, we have solid prerequisites for further economic growth also in Fiscal position of the state improved, with expected further decreases in deficit and in the share of public debt in GDP. The encouraging trends present are especially those in the level of realised investments, in the balance of payments, in the increase in utilisation of EU funds, in the decrease in unemployment and increase in disposable income and consumer spending. The challenges ahead of us are surely activities oriented to removing of the macro-economic imbalances and increasing of the credit rating of the Republic of Croatia. In the upcoming period, the key is to continue reforms, support investments, continue privatisation, enhance role of capital markets and ensure stable and harmonised legal framework. Zagrebačka banka Group is a part of UniCredit Group of a unique commercial bank which provides integrated business service to its clients in Western, Central and Eastern Europe. In the upcoming period we will further leverage on the synergies arising from belonging to UCI Group: knowledge sharing, use of best practices and uniform service to international clients. We will actively support lending activity and in co-operation with domestic and international financial institutions we will search favourable funding sources. Together with our customers, we will seek and propose optimal solutions in preparation and realisation of entrepreneurial projects. Major changes in global environment call for fast transformation of business models in all industries, including also the banks. The regulatory framework and customers needs are becoming even more demanding. Based on creativity, innovation and new technologies we can generate added value. To accomplish this the following is needed: the change in the way of thinking, agility and the new profile of managers and employees. Therefore, investment in education, training and recruitment of the young remains high on our list of priorities. We have clearly set strategy therefore I am convinced that all of us together will jointly ensure the continuity of good business results and achievement of the planned goals in the upcoming years. On behalf of the entire Management Board, let me express my gratitude to all our clients, partners and shareholders for co-operation, wishing that it will continue in the years to come. I thank to all colleagues from UniCredit Group, the President and Members of the Supervisory Board for commitment to our joint success. My special appreciation goes to all employees of the Group, through their exceptional contribution and dedicated professional work they enabled the long-term sustainability and high reputation of Zagrebačka banka Group on financial market. Zagrebačka banka dd: 2016 Annual Report 13

14 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 in this business review section: the Bank ) provides the full set of banking and financial services in the Federation of Bosnia and Herzegovina, including corporate banking, retail banking, financial institutions, international operations, and investment banking services. The business network covers the entire territory of the Federation of Bosnia and Herzegovina within 9 regions which are further covered through branches. At the end of 2016 the Bank had 78 branches and the largest ATM network throughout the Federation of Bosnia and Herzegovina (256 ATMs at the end of 2016). The Bank further strengthened its leading position in relation to competitors, focusing on clients, continuously upgrading processes and services which result in more efficient and simplified business relationship management and by developing business consultancy services including individual approach and an offer of comprehensive banking products. By being continuously oriented to improving service quality, recognising and meeting clients needs, and focusing on simplification of products and better efficiency of the processes, the Bank maintained and further strengthened its leading market position. According to 2016 surveys, clients of the Bank once again confirmed that they appreciate the unique quality of service and rewarded the Bank s focus on improvement of the client satisfaction. The Bank s development strategy is digitally oriented, tailored to customers needs and market practices and to development of new technologies. According to the statutory financial statements, net profit amounted HRK million and increased by HRK 7.3 million (+ 2.4%) compared to the previous year. The result is primarily impacted by higher revenues realised in all major operating segments which are offset with the impairment losses and provisions, as well as with increased operating costs resulting from the efficiency improvement activities and new products development. In 2016 the Bank s operating income amounted to HRK million, representing an increase of HRK 46.2 million (+ 5.3%) compared to the previous year. Net interest income represents 68.2% of the total income of the Bank and amounted to HRK million, and increased by HRK 27.7 million (+ 4.8%) compared to the previous year. The increase in interest income is the result of increased volumes of loans and receivables from clients and securities. The decrease in interest expense (-10.9%) is a result of funding optimisation - at the same the Bank managed to retain the confidence of clients and the volume of clients current accounts and deposits increased (+ 7.9%). Net income from fees and commissions in the amount of HRK represents growth of HRK 12.7 million (+5,6%) due to increase in income from current and transaction account fees, product packages and credit card fees, also due to higher income of payment transaction fees as the volume of transactions was higher. Total operating expenses in 2016 amounted to HRK million, which is HRK 5.0 million (+1.1%) higher compared to the previous year. In 2016, impairment losses and provisions amounted to HRK 67 million, which represents an increase of HRK 21.9 million (+48.3%) compared to the previous year. Zagrebačka banka dd: 2016 Annual Report 14

15 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) As of 31 December 2016, the Bank s assets amounted to HRK 18,215.2 million, with represents an increase in the amount of HRK 1,306.5 million (+7.7%), mainly as a result of the increase in ALM positions of HRK million (+10.1%) and the increase in loans and receivables from customers of HRK million (+6.3%). Total current accounts and deposits from clients at the end of 2016 amount to HRK 13,830.1 million and have increased by HRK 1,012.8 million (+7.9%), mostly as a result of the increase in retail deposits which represent 67.8% of total deposits from customers. Current accounts and deposits from banks at the end of 2016 amounted to HRK million and have increased by HRK million (+46.0%). The Bank's equity amounts to HRK 2,748.2 million and remained at the same level. The capital adequacy ratio calculated in accordance with local methodology was 15.7% at 2016 year-end (minimum regulatory requirement was 12.0%) which represents an increase of 0.5% compared to the previous year. Exposure to risks The nature of operations has not been significantly changed in 2016, and the most significant risks to which the Bank is exposed are: credit risk, market risk and operational risk. Market risk includes currency risk and interest rate risk. During 2016, the Bank upgraded the existing risk management system, policies and procedures, operational instructions and limits. The Bank is exposed to credit risk through activities of lending and placing funds. Exposure to credit risk is regularly monitored per portfolios, individual clients, groups of related parties, and in relation to the limits which are set in relation to the Bank's regulatory capital. Also, the Bank regularly analyses the creditworthiness of borrowers and timely identifies potentially risky customers and manages commercial relationships with them in order to maximize collection. In order to mitigate credit risk, the Bank also actively applies applicable rules with respect to collaterals. The Bank is exposed to liquidity risk within the activities of the asset and liability management and has access to various funding sources that include retail deposits, corporate deposits and deposits from banks, borrowings, issuance of subordinated debt, bonds, share capital and reserves. A variety of available funding sources enables flexibility, decreases funding limitations and generally enables lower financing costs. Foreign currency risk is the risk of losses caused by the adverse exchange rate movements, arises from lending, funding, and trading activities. It is monitored daily in accordance with regulations and internally set limits of UniCredit Group, for each currency and in total for all assets and liabilities denominated in foreign currencies or indexed to foreign currencies. In Federation of Bosnia and Herzegovina, the local currency is linked to the EUR, therefore, there is no currency risk arising from movement of the domestic currency against the EUR. The Bank's operations are influenced by the interest rate risk, to the extent to which interest-bearing assets and liabilities mature, or the interest rates are reset in different intervals or in different patterns. On a daily basis, exposure to market risk is monitored by Value-at-Risk models and by daily monitoring of movements in the risk base. In order to optimize the management of operational risk, the Bank has established its own system which is based on standards and principles defined by the local regulator, UniCredit Group and the Basel Committee. An adequate system for identifying, measuring, assessing and monitoring of operational risk has been established in order to optimize operational risk management throughout the Bank. Zagrebačka banka dd: 2016 Annual Report 15

16 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 S.p.A. UniCredit Leasing Croatia doo is the largest leasing company in the Republic of Croatia per size of assets. The main activity of the Company is to provide finance and operating lease services to individuals and legal entities. In 2016, the Company s profit after tax amounted to HRK 43.5 million representing a decrease of HRK 0.2 million (-0.4%) compared to Profit after tax realized in amount HRK 43.5 million is the result of the stable net interest income from finance lease which amounted to HRK 79 million (-1.9%), lower income from operating lease and other income which amounted to HRK 198 million (-6.1%), lower depreciation and amortisation expenses amounting to HRK 113 million (-7.4%), lower operating expenses which amounted to HRK 96 million (-9.3%) and higher income tax expense which amounted to HRK 18 million (+41.3%). This year was marked with strong growth of new sales volume, with further growth tendency as a result of the adequate positioning in the market. Focus on the new sales, continuity of activities on maintaining the quality of lease portfolio, focus on the realisation of planned net interest income, control over operating expenses and adequate provisioning costs have resulted in net profit realised on the level of 2015, also affected by the change in the income tax rate. Total assets amounted to HRK 3,218 million (2015: HRK 3,158 million) representing an increase of HRK 123 million in comparison with 2015, mainly due to increase in sales in the volumes of finance lease receivables and equipment under operating leases increased. In 2016 UniCredit Leasing Croatia doo concluded 8,143 new contracts (2015: 5,332 new contracts) with total value of HRK 1,210 million (HRK 731 million). Out of the total, 63% new contracts relate to finance lease and 37% to operating lease. Personal vehicles, commercial vehicles and equipment represent the major portion of the new contracts volume. Exposure to risks 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 linked to EUR. 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 and 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, utilization of available overdraft). Zagrebačka banka dd: 2016 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 (continued) Exposure to risks (continued) 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 the upcoming period is to fulfil customers needs by spreading the range of the products, with special focus on supporting investments of small and medium entrepreneurs through joint programs with Croatian Agency for SMEs, Innovations and Investments, CBRD and EBRD. Focus will also be placed on implementation of Mobility Concept in financing vehicles and boats, on cooperation with strategic partners and continuity of cooperation with Zagrebačka banka in distribution of lease products. The effects of the expected pressure on the reduction in the interest margin will be mitigated through these activities. The Company will continue to be focused on reducing the levels of non-performing lease contracts in the portfolio, to reduce costs of absorbed capital and ensure effective funding of the portfolio. The continuous focus is also on further development of human resources, with the aim of optimising the number of employees in correlation to the expected growth of the business and in order to increase the level of necessary competences and motivation of employees. Zagrebačka banka dd: 2016 Annual Report 17

18 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 whose main activities include collecting deposits with state incentives from individuals and granting housing loans in the Republic of Croatia. As at 31 December 2016, the Company s total assets amounted to HRK 2.56 billion (2015: HRK 2.61 billion) was characterised by deleveraging trend in housing loans, with increased competition in fixed interest rate loans offering. The Company has retained the leading market position despite the decrease in the balance of gross loans to individuals and unincorporated businesses by HRK 115 million (-7.0%) compared to the end of the previous year when they amounted to HRK 1,560 million. Thanks to continued synergy effect arising from cooperation with Zagrebačka banka dd, Štedionica continued to realise adequate sales results in the savings segment in 2016 and has maintained its leading market position despite the slight decrease in the deposit base (-1.0%). Apart from focusing its main operating activities of collecting savings deposits and granting loans, the Company is dedicated to preserve the quality of the loan portfolio and to collect overdue receivables. As in previous years, the share of non-performing loans in the total loan portfolio is at the low 2.7% level. Despite the challenging macroeconomic environment, net interest income increased. During 2016, the focus was also on the increase in efficiency resulting in the decrease in operating expenses of 9% compared to In 2016 a profit after tax of 24.7 million was realized representing 5% increase compared to the previous year (2015: HRK 23.5 million). Development plan In 2017, improvements in the economic environment and positive trends are expected in the Republic of Croatia. However, continued high unemployment rate will still affect savings capacity of the population. Therefore the Company is focused on competitiveness, on maintaining the volume and quality of the loan portfolio, as well as on efficient collection of overdue receivables. In the upcoming period the Company will maintain the leading market position through proactive approach, by the continuous focus on its products fine tuning and their alignment to clients needs, through active risk management, process and cost optimisation and by synergy with Zagrebačka banka. Zagrebačka banka dd: 2016 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 (continued) Exposure to risks In performing its business operations Štedionica is primarily exposed to credit, liquidity, market and operational risks. Market risk, amongst others, involves currency and interest rate risks. Business operations are performed in accordance with Company s operating policies and procedures, within the regulatory framework and the appropriate risk limits. Štedionica is exposed to credit risk through its lending and investment activities. Furthermore, counterparty risk is monitored on a continuous basis while the initial credit risk assessment ensures the approval of loans to clients with good credit rating. The adequate collaterals are contracted as well. The liquidity risk arises in relation to the funding of business activities. The main funding sources are deposits from individuals and shareholders equity. Liquidity is maintained through diversification of maturities of funding sources in relation to expected timing of realization of assets. The exposure to currency risk is a result of the Company s foreign currency or foreign currency linked positions. The Company s goal is to minimize the mismatch in assets and liabilities denominated in foreign currencies. 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 an investment fund management company that manages thirteen Open-Ended Investment Funds with a Public Offering (hereinafter under this heading: UCITS ), one privately offered Alternative Investment Fund (hereinafter under this heading: AIF ) and considerable number of discretionary managed clients portfolios. The aim of the Company is to offer to its investors and clients a complete and contemporary range of instruments and services for savings and investments on capital markets. Beside aforementioned, its UCITSs represent the base for a number of Unit- Linked insurance policies. Total assets under the management of the Company at the end of 2016 amounted to HRK 5.15 billion (2015: HRK 3.73 billion) representing the growth of 37.8% in 2016, mostly resulting from synergies with Zagrebačka banka dd network. At the end of 2016 the structure of the asset under management was as follows: 54.4% money market funds, 37.1% long-term funds and 8.5% clients portfolios (2015: 54.0% money market funds, 35.4% long-term funds and 10.6% clients portfolios). Market share of the Company in the total UCITS assets at the end of 2016 amounted to 25.47%, which confirmed the Company's position as one of the leading investment fund management companies on the domestic market. At the end of 2016 total number of investors was over 59 thousand. Assets structure per investor type was as follows: 54% retail, 12% corporate and 34% institutional investors (2015: 73% retail, 5% corporate and 22% institutional investors). Zagrebačka banka dd: 2016 Annual Report 19

20 Management Board Report of Condition (continued) Management Board Report of Condition of the Bank s subsidiaries (continued) ZB Invest (continued) Financial markets overview Capital markets in 2016 were marked by strong correction in the beginning of the year (amid the increased negative sentiment following the sharp decline in oil prices and a slowdown of Chinese economic growth), several political events that caused strong, but short-term market corrections (Brexit, US elections and referendum in Italy) and by significant recovery which raised American indices to record high levels. After many years, bolstered by an excellent tourist season and improved macroeconomic indicators, positive sentiment returned to the Zagreb Stock Exchange. Bond prices continued to benefit from expansionary monetary policy in Europe, but the continuation of high liquidity led to further decline in market interest rates and yields. The Impact of decline in interest rates on bank deposits positively affected investors savings decisions, i.e. to invest part of their assets on capital markets through investment funds. Investors interests and preferred choices were less volatile bond and balanced funds. Operating result and main indicators Revenues of the Company were stable in 2016 and amounted to HRK 50.3 million (2015: HRK 51.5 million). The major part of revenues is management fee that amounted HRK 49.9 million (2015: HRK 51.0 million). The Company realised adequate profitability and net profit after tax amounted to HRK 12.9 million (2015: HRK 14.7 million). Total assets of the Company were stable and amounted to HRK 31.3 million at the end of (2015: HRK 32.1 million). Assets of the Company are mainly short-term liquid assets. Total capital and reserves amounted to HRK 24.9 million (2015: HRK 26.8 million). Capital and reserves amounted to HRK 12 million (minimum capital requirements in accordance with Investment Funds Act were HRK 3.6 million). Development plan Being one of the leading asset management companies, the Company will continue to be devoted to professional asset management and high-quality services for its clients and investors, enabling them to maintain as sustainable increase of the value of their financial assets as possible, in compliance with predefined and agreed investment strategies. The main preconditions of a business continuity is transparent reporting and investors protection with full compliance to all regulatory requirements and standards of Zagrebačka banka dd and Unicredit Group. The Company aims to provide its clients and investors with options to save and invest in attractive range of funds and other investment products and services in a simple and transparent way. Exposure to risks The Company has been placing special attention to risk management in its operations. Implemented risk management system is based on the UniCredit Group risk management standards. The most important risks that 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). Other members of the Group Good results are also realised by the majority of the remaining Group s members. Zagrebačka banka dd: 2016 Annual Report 20

21 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 financial services group which provides a full range of corporate and retail banking services for customers in the Republic of Croatia and Federation of Bosnia and Herzegovina. The Group serves close to 69,000 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 2016 and during 2016 are presented below: Fully consolidated subsidiaries Company Address Country of domicile Industry Group ownership % UniCredit Bank dd, Mostar PRVA STAMBENA ŠTEDIONICA dd ZB Invest doo CENTAR KAPTOL doo POMINVEST dd SUVREMENE POSLOVNE KOMUNIKACIJE doo 3 ZAGREB NEKRETNINE doo ZANE BH doo ZABA Partner doo UniCredit Leasing Croatia doo LOCAT CROATIA doo BACAL ALPHA doo ALLIB NEKRETNINE doo UniCredit Partner doo UniCredit Leasing doo BACAL BETA NEKRETNINE doo 4 Kardinala Stepinca bb Mostar Bosnia and Herzegovina Banking 99.3 Samoborska Zagreb Croatia Banking Samoborska 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 Trading activities 80.0 Ložionička 7 Bosnia and Sarajevo Herzegovina Leasing 99.3 Damira Tomljanovića Gavrana Zagreb Croatia Real estate business Merged to ZAGREB NEKRETNINE doo in In 2016 the Group disposed the subsidiary BACAL BETA NEKRETNINE doo Zagrebačka banka dd: 2016 Annual Report 21

22 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) Republic of Croatia Federation of Bosnia and Herzegovina Total Zagrebačka banka dd: 2016 Annual Report 22

23 Overview of the Croatian economy in 2016 Macroeconomic indicators for Croatia Gross domestic product, billion HRK, in current prices * Gross domestic product, % change (0.4) (1.1) (2.2) (0.3) (1.7) (7.4) 2.1 GDP per capita, in EUR 10,929 10,436 10,146 10,225 10,301 10,451 10,479 10,472 11,169 Private consumption, % change (1.6) (1.9) (3.0) 0.3 (1.5) (7.5) 1.2 Public consumption, % change 1.7 (0.3) (0.8) 0.3 (1.0) (0.3) (1.6) 2.1 (0.7) Investment, % change (2.8) 1.4 (3.3) (2.7) (15.2) (14.4) 9.2 Exports of goods and services, % change (0.1) (14.1) 0.8 Imports of goods and services, % change (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 2.9 (0.7) (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) Consumer prices, % change (1.1) (0.5) (0.2) General government budget balance (% GDP) Zagrebačka banka dd: 2016 Annual Report 23 (1.8) (3.3) (5.4) (5.3) (5.3) (7.8) (6.2) (6.0) (2.7) Balance of payments current account balance (% GDP) (0.1) (0.7) (1.1) (5.1) (8.8) External debt (% GDP) 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 Recovery of the Croatian economy significantly accelerated in 2016 Positive trends from 2015 have further strengthened by dynamic GDP growth during 2016, driven by strong growth in domestic demand and a record tourist season. In a deflationary environment, real disposable income of households, employment and private consumption have increased while we finally witnessed a revival in investment activity. Besides merchandise exports, which sparked the economic recovery during 2015, better use of available funds from the European Union contributed substantially to economic growth, as well as the gradual removal of obstacles to doing business. However, further implementation of thorough reforms will be necessary to permanently increase competitiveness of the economy for its stronger step forward in the direction of the export-oriented economy. Significant achievement is the fact that the economic recovery began on a sound basis, with balanced growth in all segments thanks to the gradual increase in labour productivity and employment, accompanied by reducing fiscal deficit without additional borrowings. Positive trends which appeared raise hope that a lengthy period of the economic decline or stagnation is completed, and that the outdated model of economic growth based on the excessive dependence of the private sector of the economy on consumption and on investment of the public sector based on borrowing and mainly financed through fiscal deficit has finally been abandoned. The growth of gross domestic product in 2016 accelerated to 2.9%, but the overall economic activity still remains 8.4% below the 2008 pre-crisis level. The growth is recorded in all components of GDP, with the crucial role of domestic demand as a result of the increase in households disposable income. After a long period, investment activity has also shown signs of revival and public spending has also increased in real terms, partly due to deflationary environment, despite simultaneous reduction of the fiscal deficit within the Excessive Deficit Procedure (EDP). Somewhat weaker impact on growth which came from the foreign merchandise demand, due to significantly slower growth in merchandise exports and increased merchandise imports, was partially offset by results of record tourist season and thanks to increased surplus in the services account the overall contribution of the foreign sector to growth was positive.

24 Overview of the Croatian economy in 2016 (continued) Positive trends reflected in the continuing growth in the number of employees, especially in the middle of the year, largely due to a significant increase in seasonal employment in tourism, catering and supporting activities. The prolongation of the tourist season and increased construction activity led to continuation of employment growth towards the end of the year. The unemployment rate decreased much faster than expected due to increased emigration to the other EU countries. The number of registered unemployment also decreased in 2016 by 17.1%, while at the same time the registered unemployment rate fell from 17.6% in December 2015 to 14.8% in December Positive developments in the last year were reflected in a significant increase in current 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 continuing favourable conditions in the international financial markets. Current account balance recorded again the significant surplus (3.0% of GDP), due primarily to a significant increase in the surplus in services trade (record revenues from tourism), an increase in the inflow of EU funds and the significant growth of remittances from Croatian workers abroad. The increase in inflows from EU funds, as well as the generally optimistic atmosphere encouraged investment growth after a long time by an estimated 4.6%. However, their level is still almost 30% lower compared to the period before the financial crisis and there is plenty of room for their further acceleration through increased use of EU funds, more dynamic attracting of foreign direct investment and, in particular, strengthening of the domestic private sector investment. Personal consumption in the past year significantly accelerated its growth initiated by reducing the tax burden of salaries and pensions in early 2015 thanks to an increase in real disposable income of households in a deflationary environment, accompanied by an increase in employment and wages. Its 2016 level is, however, still about 10% lower than the level recorded before the crisis. The turnover in retail trade increased in real terms much more (+4.4%), but this is largely a result of record spending of foreign tourists. It is noticeable that household sector deleveraging process has still not been completely arrested during 2016 despite the increase in disposable income and private consumption. During 2016, the rapid growth of industrial production has been additionally accelerated due to primarily strong growth in domestic demand, while the slightly positive impact of increase in foreign demand is still present. The growth rate is continuously increasing year after year (1.2% in 2014; 2.7% in 2015; to 5.3% in 2016) and all areas recorded positive numbers in last year except mining and extraction of raw petroleum and natural gas. The growth was almost uniformly present in all major segments, with somewhat more pronounced dynamics in production of capital goods (+6.2%), intermediary product (+5.9%) and energy (+5.8%). Manufacturing increased by 5.6%, with the fastest growing production of electrical equipment (+22.2%), chemical (+12.9%) and pharmaceutical (+11.2%) industry and machinery & equipment production (+8.6%). A significant increase was also recorded by the electronic, textile, paper industry and production of motor vehicles. Substantially lower production was recorded in last year only in metal production and production of wearing apparel. The acceleration of investment activity in the past year finally prompted the revival of construction that, nevertheless the realization of some major infrastructure projects being further postponed, recorded in 2016 increase of 2.9%. Boost for the growth came from an increase in buildings construction of 8.9%, while the civil engineering works were further reduced by 2.3%. Thanks to increased investment in quality and capacity expansion, instability in some other Mediterranean markets and significant activities aimed at the extension of the main season, tourism again reported record results with an increase in the number of overnight stays of 9.0% (+9.6% foreign tourists) and the foreign exchange revenue in the industry exceeding again the level of EUR 8 billion. Thanks to these developments, the trend of real GDP in the last year was positive, with a significant acceleration of growth in the third and fourth quarter. Zagrebačka banka dd: 2016 Annual Report 24

25 Overview of the Croatian economy in 2016 (continued) Significant surplus of the balance of payments - resulting from the increase in the surplus in the services account and the increased inflow of remittances According to estimates, the balance of payments current account surplus reached 3.0% of GDP in 2016, thus making it the fourth consecutive year which posted surplus. However, it will be much lower compared to the year 2015, due to the absence of one-time conversion effect that in the mentioned year contributed significantly to the reduction of income of foreign owners of the majority of domestic banks. The sub-account of goods and services will record the surplus for the fifth year in a row, mainly due to significant increase in the surplus in services segment (+8.4% in the first nine months of 2016), although at the same time the deficit in merchandise trade segment increased by 6.1%. Revenues from exports of goods grew by only 3.2%, while growth of imported goods were higher (+4.4%), due to an increase in investment and personal consumption. The increase in government revenues from EU funds and other sources, which reached 54% in the first nine months of 2016, along with markedly increased workers remittances from abroad (+9.3%) significantly contributed to overall CA surplus, which in the first nine months of last year reached the amount of EUR 1.9 billion. Despite the absence of radical reforms, consolidated general government deficit further reduced in 2016; primary surplus recorded for the second consecutive year Due to the specific political situation, the year 2016 started with a temporary financing and ended with the new government in office. In such situation there was no time for significant steps in the direction of radical reforms in the public sector (which ought to result in increasing efficiency with reduced expenditures), and the trends in public finances mainly depended on the developments on the revenue side. Thanks to the strong growth in employment and personal consumption, as well as the revival of investment activity, growth of current revenues was higher than expected and the year despite the increase in public spending in real terms by an estimated 1.4% ended with a consolidated general government deficit decreased from 3.3% of GDP in 2015 to around 1.8% of GDP in In 2015 there were no major repayments of accumulated debt, and the historically low level of interest rates in the international financial markets had also a positive effect on the stability of public finances, without planned borrowing on the international market. Due to unfavourable conditions in the international market at that moment (as a result of country s non-investment rating grade), and partly due to lower financial needs than originally planned, the government increasingly borrowed in the domestic market, where there was no shortage of liquidity. The government in 2016, as well as in previous (election) year, despite commitments under the EDP framework (Excessive Deficit Procedure), missed to further reduce the general government deficit. However, owing to the higher economic growth, increasing revenues contributed to the reduction of the fiscal deficit, which is estimated at around 1.8% (ESA2010), or considerably less than 2% of GDP on a cash basis, excluding the debt of the public sector (mainly health care system). In 2016, it achieved a significant primary surplus, estimated at 1.6% of GDP (2015: 0.3% of GDP). In such circumstances public spending increased by 1.7% yoy in real terms during In the first ten months of 2016, consolidated central government budget revenues increased by 8.3% and expenditures by only 1.2% compared to the same period of Notable increase in public revenues was largely contributed by the increase of revenue collected from VAT (+4.0%) and excise duties (+6.7%). Total tax revenues grew by 6.2%, with the rise in revenues collected from tax on income (the part that belongs to central government) and corporate tax on profit amounted to even +17.2% compared to the previous year. Significant rise is also recorded in revenues from EU assistance sources due to increased use of funds (+78.9%), as well as in income from property (+48.9%). Within the overall increase in public expenditure in 2016 of 1.2%, only expenses for goods and services recorded considerable rise (+2.7%), while the expenses for interest (-3.4%) and subsidies (-4.3%) were even reduced. At the same time, social benefits increased by 0.3%. According to our estimates, at the end of 2016, general government debt increased only slightly in nominal terms, to about HRK 292 billion, but its share in GDP was reduced from 86.7% to 84.8%. During the year the Ministry of Finance issued one bond in the amount of HRK 6 billion with the maturity of 5 years and the interest rate of 2.75%, in the domestic market, while at the same time the bond in the amount of HRK 3.5 billion was due. In 2016, due to excess liquidity in the domestic market, the low interest rates on treasury bills of the Ministry of Finance were further reduced, while total indebtedness based on treasury bills increased (+HRK 0.38 billion, +1.3%). Zagrebačka banka dd: 2016 Annual Report 25

26 Overview of the Croatian economy in 2016 (continued) Continued deflationary pressures generated by low prices of imported energy, raw materials and food products In 2016, consumer prices in Croatia decreased by an average 1.1%, compared to the previous year, thus making 2016 the third consecutive year with a deflationary environment. However, by the year-end the deflationary trend ceased and in December prices increased (+0.2%) minimally compared to the end of 2015, stemming mainly from the rise of crude oil price and growing domestic demand. Core inflation (prices excluding energy and food products) in the last twelve months was also slightly positive, +0.4%. Favourable trends in the labour market - unemployment is falling rapidly, partly due to increased emigration Registered unemployment has been reduced during 2016 (by 48,851 persons), which is considerably more than in However, despite increased emigration and increased employment growth, the total number of unemployed remains at a high level at the end of 2015 there were 236,617 registered unemployed. The registered unemployment rate decreased from 17.6% to 14.8%. ILO unemployment rate derived from labour force surveys, also decreased from 16.3% in 2015 to an estimated 13.1% in During the third quarter the unemployment rate fell to only 10.9%. The positive trends concerning the number of employees from previous year continued and have been additionally strengthened, and so - according to the records of Pension fund register - the number of employees at the end of December 2016 was 1.9% higher than a year ago. The number of workers employed in legal entities increased by as much as 2.3%, while employment in crafts and free lances was still declining (-2.0% and -2.4%), as well as the number of registered farmers (-5.7%). With the revival of the economy, an increase in real gross wages in 2016 by 3.2% on average was recorded, while real net wages rose by 2.7%, thanks largely to the decrease in the general level of consumer prices. Continuation of expansive monetary policy continues in an effort to stimulate bank lending to the real economy, while preserving stability of prices and exchange rate During the year 2016, the CNB continued to pursue the expansionary monetary policy, trying to maintain high liquidity in the banking system without jeopardizing the stability of the exchange rate, and thereby influence the increase of investments in the real sector to support revival of economic activity. To this end, in addition to continuing the implementation of regular weekly reverse repo auctions, the CNB began to hold also quarterly structural repo operations. With this new measure, the CNB supported high HRK liquidity by offering banks funds with a four-year maturity. The implementation of the four auctions in 2016 through the measure created a long-term HRK liquidity in the amount of HRK million, with the last one acquiring an interest rate of 1.4%. This policy in deflationary conditions has resulted not only in excess liquidity in bank accounts with the central bank, but also in reducing interest rates to historically low levels. According to early signs, the main goal of the central bank - to increase bank lending to real economy - has been partially achieved (according to transactions statistics, which excludes write-offs and sales of loans portfolios), but its full achievement has been impeded by a weak demand for loans due to corporate sector s relatively weak investment activity. The increase in HRK liquidity has been bolstered by the foreign exchange transactions of the CNB, mainly the purchase of foreign exchange from banks in order to weaken appreciation pressures on the domestic currency. In four interventions, the CNB bought a total of EUR million from banks, EUR million from the Ministry of Finance and sold EUR million to the European Commission. Therefore, in 2016 there was a net purchase of foreign currency in the total amount of EUR million, which created additional liquidity of HRK 5.4 billion. At the end of 2016, the HRK/EUR exchange rate dropped to a level of HRK per EUR, which was 1% less than at the end of 2015, while during the year even stronger appreciation of the domestic currency was recorded. Thus, according to the average exchange rate, HRK appreciated for the entire 2016 slightly more in comparison to 2015 average, by 1.1%. During the last months of 2016 HRK started to strongly depreciate against US dollar, whereas the exchange rate had previously largely followed its appreciation tendency against EUR, because of expectations associated with a faster rise in interest rates in the United States, while at the end of the year the exchange rate was 2.5% higher than at the end of At the end of 2016, according to preliminary data, gross international reserves of the CNB amounted to EUR 13.5 billion, which represents a decrease of about EUR 193 million in comparison to the end of the previous year. Zagrebačka banka dd: 2016 Annual Report 26

27 Overview of the Croatian economy in 2016 (continued) In , total loans of commercial banks decreased by 5.8% or about HRK 15.9 billion, with corporate loans reduced the least (HRK 1.7 billion or 1.9%), while loans to households decreased by slightly less than HRK 6.9 billion (-11.4%). Loans to the government (central, local and social security funds) also decreased by HRK 6.6 billion or 11.4%. It is noteworthy that the stated nominal change of loans is affected by moderate appreciation of the HRK against EUR, but more importantly by the sale of part of the non-performing loan portfolio of the banks, and in particular by the effects of the conversion of household loans indexed to the Swiss franc to loans denominated in EUR and HRK. In other words, if there was no impact of the abovementioned effects, the decrease in total loans and loans granted to certain sectors would be much less pronounced, and probably would even lead to increase instead of decrease (in particular for loans to households and the corporate sector). According to estimates by the CNB total banks loans rose slightly in 2016 by around 1.4%, as a result of the recovery in lending to the corporate sector and households. In 2016 total deposits in the banking system increased by HRK 9.0 billion (+3.3%) and retail deposits by about HRK 1.8 billion (+1.0%). Term deposits decreased by 7.0% or HRK 10.1 billion (partly due to the moderate, 1.8%, appreciation of the HRK against EUR), while demand deposits increased by HRK 11.9 billion (+24.8%) at the same time. Reduced propensity to term deposits can be interpreted by psychological effect of introducing taxation of interest income, but even more markedly by strong declining trend in interest rates on term deposits. On the other hand, the strong growth of the demand deposits was positively affected by growing households disposable income, especially during the record-breaking tourist season. Deposit growth of the corporate and government sectors in 2016 amounted to HRK 4.9 billion (+9.3%) and HRK 0.2 billion (+0.9%), respectively. Banking sector restored profitability backed mainly by lower provisions and one-off capital gain from sale of Visa Europe Ltd According to the unaudited aggregated data from the CNB, banking sector assets decreased by 1.2% in 2016, primarily due to the decrease in loans to customers as the result of sales of non-performing loan portfolios by some banks and CHF loan conversion. In addition, decline in volumes of loans was further affected by several one-off repayments in the government segment. At the same time, banks allocated their excess liquidity, generated by growth in deposits from clients, primarily deposits from non-financial corporations, to reduction of their liabilities, especially funding from foreign borrowers. According to the aggregate statistical report from the CNB 6, Croatian banking sector has recorded a net profit in the amount of HRK 5.1 billion in 2016, a strong improvement compared to the last year which was heavily burdened with new legislation relating to conversion of CHF denominated loans, accompanied with additional balance sheet adjustments in some of the banks, significantly increasing the amount of impairment losses. Profitability of the banking sector in 2016 has been mostly driven by significant reduction in expenses in respect of loan loss provisions, favourable one-off effect of sale of VISA Europe Ltd. shares to VISA Inc. and other capital gains as well as growth in net interest income as a result of additional corrections of interest rates in respect of deposits carried out during Such result contributed to the growth in capital adequacy ratio of the Croatian banking sector, increasing to 22.53% as at 31 December 2016, up from 20.98% recorded as at 31 December 2015, thus additionally confirming the already high capitalisation level of the Croatian banking sector. The share of non-performing loans declined to 13.8% as at 31 December 2016 (at the end of 2015 it amounted to 16.6%) mainly backed by sale of the loan portfolio of some of the banks. At the same time, non-performing loans coverage ratio is improving, reaching 63.6% at the end of December (compared to 56.9% as at 31 December 2015). 5 Data source: CNB bulletin tables, 31 December Data source: CNB aggregated quarterly report on credit institutions, 31 December 2016 Zagrebačka banka dd: 2016 Annual Report 27

28 Operating and financial review Group s results The overview of Group s results and comments on major trends in financial statements was provided previously within this Annual Report. Operating results of Zagrebačka banka dd In 2016, Zagrebačka banka dd recorded a profit after tax of HRK 1,709 million. Return on asset (ROA) of the Bank amounts to 1.63% (2015: -0.49%). Income and expenses Operating income amounted to HRK 4,667 million, increased by HRK 832 million (+21.7%), due to lower funding costs and higher Net trading and other income. Net interest income amounted to HRK 2,729 million, which is by HRK 93 million (+3.5%) higher compared to 2015, as a result of stable average volume of loans during the year and lower funding costs. Net fee and commission income amounted to HRK 987 million and is by HRK 42 million (+4.4%) higher compared to prior year, following the increase in payment transaction fees and fees from asset management, brokerage and consulting services. Net trading and other income amounted to HRK 951 million, an increase of HRK 697 million is the result of HRK 371 million higher dividend income, HRK 135 million gain from sale of stake in Visa Europe Limited, as well as higher net trading income compared to the previous year. Operating expenses amounted to HRK 1,772 million and decreased by HRK 79 million (-4.3%) mainly due to improvements in business processes. The Bank s cost to income ratio ( C/I ratio ) has considerably improved and equals to 38.0% (2015: 48.3%). Profit before impairment and other provisions amounted to HRK 2,895 million, higher by HRK 911 million (+45.9%), as a result of the previously described movements in Operating income and Operating expenses. Impairment and other provisions amounted to HRK 769 million and have decreased by HRK 1,877 million. The Bank s assets and liabilities Total assets of the Bank amounted to HRK 105,128 million and have decreased by HRK 864 million (- 0.8%), mainly under the influence of Net loans to customers and optimisation of funding sources: Net loans to customers of the Bank amounted to HRK 65,612 million, decreased by HRK 4,020 million (- 5.8%) mainly due to loan repayment by the public sector and conversion of Swiss franc foreign currency clause loans. The increase in loan activity was mainly realised in Companies, as well as in the consumer financing segments. Deposits from customers continue to represent the Bank s primary source of funding, and amounted to HRK 76,293 million at the end of the period. The increase of HRK 4,771 million (+6.7%) compared to end of 2015 was realised in deposits from corporate clients (HRK 2,087 million). Deposits from retail clients were also higher by HRK 2,684 million. Deposits from banks and borrowings amounted to HRK 8,593 million. The decrease of HRK 6,510 million (-43.1%) is a result of lower funding needs and the increase in Deposits from customers. Capital and reserves of the Bank amounted to HRK 16,484 million and have increased by HRK 1,688 million (+11.4%). The capital adequacy ratio was increased to a level of 26.1% (31 December 2015: 24.7%). Zagrebačka banka dd: 2016 Annual Report 28

29 Operating and financial review (continued) Operating results of Zagrebačka banka dd (continued) The Bank s assets and liabilities (continued) The structure of the Bank s assets 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: Other assets; 2% 2016 Investments in subsidiaries and associates; 2% Investments in securities and derivatives; 9% ALM assets; 25% Loans to and receivables from customes; 62% The structure of the Bank s assets comparison to the previous year (in ) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,612 69,632 Loans to and receivables from customes 25,892 22,119 ALM assets 9,470 10,022 Investments in securities and derivatives 2,545 1,674 2,517 1,637 Other assets Investments in subsidiaries and associates Zagrebačka banka dd: 2016 Annual Report 29

30 Operating and financial review (continued) Operating results of Zagrebačka banka dd (continued) The Bank s assets and liabilities (continued) The structure of the Bank s assets (continued) Loans to and receivables from customers represent the main portion of the Bank s statement of financial position and account for 62.4% of total assets (2015: 65.7%). Structure of loans to and receivables from customers: % % Gross loans to and receivables from Corporate entities and state and public sector 46, , Individuals and unincorporated businesses 27, , Impairment allowance Total 74, , Corporate entities and state and public sector (6,140) 72.5 (5,797) 71.0 Individuals and unincorporated businesses (2,332) 27.5 (2,366) 29.0 Total (8,472) (8,163) Net loans to and receivables from Corporate entities and state and public sector 40, , Individuals and unincorporated businesses 25, , Total 65, , Gross loans and receivables from corporate entities and state and public sector have decreased by HRK 2,175 million, reaching HRK 46,289 million by the year-end. Individuals and unincorporated businesses decreased by HRK 1,536 million compared to the previous year, on 31 December 2016 they amounted to HRK 27,795 million. The major part of this loan portfolio relates to housing loans. With a market share of 31.9% (2015: 31.1%), the Bank remains the market leader in housing lending in Croatia. The impairment allowance increased by HRK 309 million, with an increase in provisions for loans to corporate entities and state and public sector of HRK 343 million and decrease in provisions to individuals and unincorporated businesses by HRK 34 million (consequentially, provision coverage for loans increased). The Bank continuously monitors quality of assets and continuously increases coverage ratio for impaired loans since The Bank executes 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: 2016 Annual Report 30

31 Operating and financial review (continued) Operating results of Zagrebačka banka dd (continued) The Bank s assets and liabilities (continued) The structure of the Bank s assets (continued) ALM assets The total ALM assets account for 24.6% of total assets (2015: 20.9%). These assets can be broken down as follows: Cash and cash equivalents 9,923 5,779 Obligatory reserve with the CNB - in HRK 5,540 5,883 - in foreign currency - 1,151 Loans to and receivables from banks 10,429 9,306 25,892 22,119 Throughout the year, the Bank maintained the necessary liquidity levels and complied with all monetary regulations imposed by the CNB. Due to regulatory change effective since January 2016, there is no more requirement to maintain the foreign exchange component of the obligatory reserve with CNB, but directly with other banks. The Bank s equity and liabilities The structure of Bank s equity and liabilities as at 31 December 2016: 2016 Other liabilities; 3% Current accounts and deposits from individuals and uncorporated bussines; 47% Equity; 16% Current accounts and deposits from corporate entities, state and public sector; 26% Borrowings and current accounts and deposits from banks; 8% Zagrebačka banka dd: 2016 Annual Report 31

32 Operating and financial review (continued) Operating results of Zagrebačka banka dd (continued) The Bank s assets and liabilities (continued) The Bank s equity and liabilities (continued) The structure of Bank s equity and liabilities comparison to the previous year (in ) 60,000 50,000 48,952 46, ,000 30,000 27,341 25,254 20,000 10,000 8,647 15,103 16,484 14,796 3,704 4,571 0 Current accounts and deposits from individuals and uncorporated bussines Borrowings and current accounts and deposits from banks Current accounts and deposits from corporate entities, state and public sector Equity Other liabilities Current accounts and deposits from customers Current accounts and deposits from customers represent more than half of the Bank s total liabilities and equity (72.6%, 2015: 67.5%). They amounted to HRK 76,293 million at 2016 year-end (2015: HRK 71,522 million), which represents an increase of HRK 4,771 million (or +6.7%). Increase is primarily a result of HRK 2,684 million (+5.8%) increase in current accounts and deposits from Individuals which amounted to HRK 48,952 million at the year-end. Current accounts and deposits from Individuals represent 64.2% of total deposits from customers (2015: 64.7%). Current accounts and deposits from banks and borrowings Current accounts and deposits from banks and borrowings amounted to HRK 8,593 million, which is HRK 6,510 million (or -43.1%) less than the balance at the end of the previous year (during 2015, the decrease in this position was HRK 6,809 million or -31.1%). Deposits from banks amounted to HRK 4,861 million as of 31 December 2016 and they decreased by HRK 3,826 million (-44.0%). The balance of borrowings decreased by HRK 2,684 million (-41.8%), to HRK 3,732 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 throughout the year The equity of the Bank increased by HRK 1,688 million (11.4%) and amounted to HRK 16,484 million on 31 December The Bank s Equity represents 15.7% of total funding sources (2015: 14.0%). Capital adequacy ratio reached 26.14% as at 31 December 2016 (31 December 2015: 24.66%). Zagrebačka banka dd: 2016 Annual Report 32

33 Management and corporate governance Declaration of application of the Code of Corporate Governance In accordance with Article 272p of the Companies Act, and Article 22 of the Accounting Act, the Management Board of Zagrebačka banka dd declares that the Bank applies the Code of Corporate Governance, as jointly prepared by the Croatian Financial Services Supervisory Agency ( HANFA ) and the Zagreb Stock Exchange ( ZSE ). The Code of Corporate Governance is published on the website of HANFA and ZSE. The 2016 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. UniCredit S.p.A. is the largest shareholder in the Bank. The Bank is a member of the banking group UniCredit (Group), and as a Group member, it has to act, to the extent permitted by the applicable legal regulations, in line with the guidelines issued by UniCredit S.p.A., as the holding company, in meeting its supervisory and coordinating duties. Information on the Bank s shareholders can be found in this Annual Report, under the heading: Notes to the financial statements (Note 32 a) - Share capital). In order to reduce the risks in the financial reporting process, the Group and the Bank established an adequate system of internal controls and risk management which is secured through a clear segregation of duties of the participating organizational units as it is regulated by internal policies and procedures. Adequate and effective internal controls that are integrated into the business processes and activities have been established. 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 39 - Risk review and management). General Meeting The Bank s shareholders exercise their rights in the General Meeting of the Bank. The General Meeting of the Bank takes decisions on the issues regulated by the law and the Bank s Articles of Association. The General Meeting is convened by the Bank s Management Board and it has to be convened at the request of the Supervisory Board, the Bank s Management Board or shareholders, in line with the law. A shareholder intending to participate in the General Meeting either in person or through a proxy is required to file a written attendance application with the Bank Management Board on the fifth day prior to the date of the General Meeting at the latest. Share transfers made in the period from the fifth day prior to the General Meeting until the end of the General Meeting shall give no right to attend the General Meeting. Each HRK of the nominal amount of a voting share, that is each ordinary share, shall carry one vote at the Bank s General Meeting. Management Board and Supervisory Board The authorities of the Management Board and the Supervisory Board of the Bank are regulated by the applicable legal regulations and the Bank s Articles of Association. The procedure of appointment, i.e election, as well as the removal of the members of the Management Board and Supervisory Board is stipulated by the Companies Act, the Credit Institutions Act and the Bank s Articles of Association. Zagrebačka banka dd: 2016 Annual Report 33

34 Management and corporate governance (continued) Declaration of application of the Code of Corporate Governance (continued) Management Board and Supervisory Board (continued) Management Board In line with the provisions of the Bank s Articles of Association, the Bank s Management Board is comprised of five to nine members, and the decision on the final number of the Management Board members is made by the Supervisory Board. The Chairman and members of the Bank s Management Board are appointed by the Supervisory Board, their term of office being four years, subject to previous approval by the Croatian National Bank. Composition, duties and responsibilities of the Management Board are stipulated by the Articles of Association, the Policy of the Target Structure of the Management Board of Zagrebačka banka dd, the Regulation on the Organisational Setup of Zagrebačka banka dd, the Decision on macro-organisation of Zagrebačka banka dd and the Decision on Distribution of Powers and Responsibilities of the Management Board Members of Zagrebačka banka dd. Members of the Management Board of the Bank have to meet the requirements for performing the function of the member of the Management Board, as stipulated by the Companies Act, the Credit Institutions Act and the relevant subordinate regulations, global rules defined at the level of UniCredit Group and the Bank s by-laws. The members of the Management Board have to possess adequate collective knowledge, skills and experience required to direct the business of the Bank independently without undue influence from other persons, and in particular to understand the Bank's activities and the main risks. The suitability of the individual member of the Management Board of the Bank for performing the respective function, represents the extent to which the relevant person meets the stipulated requirements, which should ensure professional, lawful, safe and stable performance of activities within his/her scope of competence. The Management Board is responsible for the management of the Bank s operations, and each member of the Management Board is responsible for a specific number of business functions and support functions. Each member of the Management Board has a scope of powers and responsibilities, which are granted to him/her by the special decision of the Management Board, in line with the law, the Bank s Articles of Association, the Rules of Procedure of the Management Board and other Bank s by-laws. The Bank s Management Board conducts business operations of the Bank and manages its assets. It is responsible and authorised to undertake all the activities and take all the decisions which it considers necessary for successful conduct of the Bank s business operations. Members of the Bank's Management Board are employed with the Bank, on a full-time basis. The decision on the removal of a member of the Management Board is made by the Supervisory Board. Members of the Management Board during 2016: Miljenko Živaljić Chairman Claudio Cesario Deputy Chairman (Beginning of the term of office on 8 June 2016) Lorenzo Ramajola Member Marko Remenar Member Albert Angersbach Member (Beginning of the term of office on 8 June 2016) Stefano Gison Member (Beginning of the term of office on 8 June 2016) Dijana Hrastović Member Romeo Collina Deputy Chairman (End of term of office on 1 March 2016) Nikolaus Maximilian Linarić Member (End of the term of office on 8 June 2016) 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. Zagrebačka banka dd: 2016 Annual Report 34

35 Management and corporate governance (continued) Declaration of application of the Code of Corporate Governance (continued) Management Board and Supervisory Board (continued) Supervisory Board In line with the provisions of the Bank s Articles of Association, the Supervisory Board is composed of nine or eleven members. The decision on the number of the Supervisory Board members is made by the General Meeting. The members of the Supervisory Board are appointed by the General Meeting, their term of office being four years, subject to previous approval by the Croatian National Bank. Members of the Supervisory Board of the Bank have to meet the requirements for performing the function of the member of the Supervisory Board, as stipulated by the Companies Act, the Credit Institutions Act and the relevant subordinate regulations, global rules defined at the level of UniCredit Group and the Bank s by-laws. The members of the Supervisory Board have to possess adequate collective knowledge, skills and experience required to supervise the business of the Bank independently without undue influence from other persons, and in particular to understand the Bank's activities and the main risks. The suitability of the individual member of the Supervisory Board of the Bank for performing the respective function, represents the extent to which the relevant person meets the stipulated requirements, which should ensure professional, lawful, safe and stable conduct of operations within his/her scope of competence. Within the Supervisory Board, the following committees have been founded: the Audit Committee, the Remuneration Committee, the Nomination Committee and the Risk Committee. The members of the respective Committees are appointed from the members of the Supervisory Board to the term of office corresponding with the current term of office of the Supervisory Board members. The scope of competence and work of the respective Committees is governed by the Rules of Procedures of individual Committee, in line with the relevant legal regulations. The General Meeting of the Bank may remove the member of the Supervisory Board before the expiry of the current term of office to which he/she is appointed, provided that legal and statutory reasons to such effect are met. In line with the provisions of the Articles of Association, the proposal for removal may be made by the Supervisory Board or at least five of its members, or the Bank's shareholders holding at least 10% of the total number of voting shares at the time of submitting the proposal. Members of the Supervisory Board during 2016: Erich Hampel Chairman Jakša Barbić Deputy Chairman Franco Andreetta Deputy Chairman Fabrizio Onida Member Emilio Terpin Member Christoph Metze Member Savoula Demetriou Member Aurelio Maccario Member (Beginning of the term of office on 22 January 2016) Romeo Collina Member (Beginning of the term of office on 1 September 2016) Mirko Davide Georg Bianchi Member (Term of office from 22 January to 1 December 2016) Robert Zadrazil Member (End of the term of office on 25 April 2016) Jürgen Kullnigg Member (End of the term of office on 20 October 2016) Zagrebačka banka dd: 2016 Annual Report 35

36 Management and corporate governance (continued) Declaration of application of the Code of Corporate Governance (continued) Management Board and Supervisory Board (continued) Description of the diversity policy Zagrebačka banka dd, as a member of UniCredit Group applies the Group standards of diversity when selecting the members of the Management Board and the Supervisory Board, as stipulated by the Group policies on structure, composition and remuneration of managerial bodies of the UniCredit Group members and the Group policy on gender equality. Among the key standards and responsibilities, of all the relevant functions and employees, stand continuous efforts to increase the number of women holding managerial functions, which is the reason why the Group fosters the role of women in managerial positions, as well as monitoring and reporting on the presence of women in processes of corporate governance. The standard of professional and age diversity is also present when performing assessment and selecting members of the Management and the Supervisory Board, as well as valuing of international business experience. Amendments to the Articles of Association 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 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 of the Bank for adoption. Zagrebačka banka dd: 2016 Annual Report 36

37 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: 2016 Annual Report 37

38 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 six 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 yes, 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 yes, 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: 2016 Annual Report 38

39 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 based on performance and potentials for future development and promotion and management of this process 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: 2016 Annual Report 39

40 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 2016 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 s business performance? (If not, explain) No. In most cases consideration 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 consideration 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: 2016 Annual Report 40

41 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: 2016 Annual Report 41

42 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 indicated in the quarterly Internal Audit 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 Internal Audit monitors the implementation of the external auditors recommendations. Through the quarterly reports, Internal Audit then reports to the Audit Committee and the Supervisory Board on the implementation of the external auditors recommendations. 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 2016 was not applicable. Zagrebačka banka dd: 2016 Annual Report 42

43 Management and corporate governance (continued) Code of Corporate Governance Annual questionnaire (continued) 44. Was the documentation relevant for the work of the Supervisory or Management 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: 2016 Annual Report 43

44 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, i.e. by way of exception, in accordance with the legal regulations, the variable component may be set out up to the double amount of the fixed component of the overall remuneration, with the majority consent of the shareholders. Exceptionally, for the Management Board members who carry out the activities of control functions, fixed pay shall amount to no less than two thirds of overall remuneration of the respective Management Board member. 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: 2016 Annual Report 44

45 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: 2016 Annual Report 45

46 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 For their participation at the Supervisory Board meetings, the members of the Supervisory Board are entitled to consideration, which is determined in the gross amount and paid once a year. Besides, the Supervisory Board members are entitled to the reimbursement of the net amount of their travel and other expenses in connection with Supervisory Board meetings they attend. In principle, all Supervisory Board members are paid equal portions of the aggregate consideration 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 consideration 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 consideration 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 consideration 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 consideration 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 and public disclosure contain information on the Company s aggregate costs in respect of the overall remuneration for the Management Board members. Zagrebačka banka dd: 2016 Annual Report 46

47 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: 2016 Annual Report 47

48 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: 2016 Annual Report 48

49 Management and corporate governance (continued) Organisation chart Organisation chart of the Bank as of February 2017: AUDIT COMMITEE Supervisory Board Internal Audit Compliance Identity & Communications Management Board office Chairman of the Management Board & Chief Executive Officer Vice-Chairman of the Management Board & General Manager Human resources Legal Customer Experience & Marketing Complaints Management RISK MANAGEMENT & CONTROL (CRO) RETAIL BANKING (RET) CORPORATE, INVESTMENT AND PRIVATE BANKING (CIPB) FINANCE MANAGEMENT (CFO) GLOBAL BANKING SERVICES (GBS) Underwriting Business Relationship Management Commercial Strategy BC Financial Institutions Planning & Controlling Operations Monitoring Product Development and Management GTB Corporate Network Accounting & Regulatory Reporting ICT Special Credits Card Business Financing Regional/ Business centres Finance Organization & Logistics Corporate centers Strategic Risk Management and Risk Control Multichannel Markets Private Banking Shareholdings Security Market, Liquidity and Operational Risk, Risk Integration and Internal Validation Call Center Regional Offices Investment Banking International Clients Private Banking Centers Macroeconomic and Market Analysis Procurement & General Services IND centers SB centers Corporate Special Solutions Branches Small Business Centers Zagrebačka banka dd: 2016 Annual Report 49

50 Management and corporate governance (continued) Shareholdings of the Supervisory and Management Board members The table below presents shares in the Bank held by members of the Management Board and Supervisory Board and by companies whose interests are represented by members of the Supervisory Board as at 31 December Number of ordinary shares Companies represented on the Supervisory Board UniCredit S.p.A. 270,523,430 Allianz SE 37,523,195 Members of the Supervisory Board Erich Hampel - Jakša Barbić 110,770 Franco Andreetta - Romeo Collina - Fabrizio Onida - Emilio Terpin - Christoph Metze - Aurelio Maccario - Savoula Demetriou - Members of the Management Board Miljenko Živaljić 120,577 Claudio Cesario - Lorenzo Ramajola - Marko Remenar - Albert Angersbach - Stefano Gison - Dijana Hrastović 16,811 Corporate governance The duties, responsibilities and authority of the members of the Management and Supervisory Boards are contained in the Companies Act and clarified within the Bank's Articles of Association. The Management Board meets weekly, and the Supervisory Board meets as required, but at least once every quarter. Employees As at 31 December 2016 the Group employed 5,531 people throughout head office, the branch network and in subsidiaries (of which 4,250 are in Croatia) while the Bank employs 4,017 employees. The policy of continuous learning and the internal mobility of existing employees are performed in order to meet the changing requirements of the Bank and the Group, while simultaneously aims to encourage all employees to increase efficiency through maximising usage of their potential and improvement of their long-term necessary competencies. Employees of the Bank recognise the possibilities for the realisation of their professional careers and in turn display their commitment to the Bank through high levels of loyalty and professionalism. Zagrebačka banka dd: 2016 Annual Report 50

51 Management and corporate governance (continued) Rewarding The Bank s top management and key employees whose professional activities have a material impact on the Bank s risk profile are included in the incentive system, under which rewards for the business year are paid in instalments throughout a period of several years, in terms of cash and financial instruments, with which the Bank s strategy and long-term sustainable growth is supported. The Bank s strategy is also supported by an annual incentive scheme in which all employees of the Bank have a right of participation, based upon pre-determined standards and criteria. Employees are rewarded in the stated incentive schemes in accordance with results achieved on three levels: individual employee performance, the performance of the organisational unit and Zagrebačka banka Group/ UniCredit Group as a whole. Reward schemes are continuously reviewed and improved and are aligned with local/european regulatory demands. These incentive schemes promote adequate and efficient risk management, but do not encourage taking on risks that go beyond the acceptable level for the Bank. Substantial shareholdings The following enterprises held in excess of 1.5% of the share capital of the Bank at 31 December 2016: UniCredit S.p.A % Allianz SE (Germany) 11.72% Annual General Meeting The audited financial statements will be presented to shareholders at the Annual General Meeting. Zagrebačka banka dd: 2016 Annual Report 51

52 and approval of the annual financial statements Independent auditor s report Zagrebačka banka dd: 2016 Annual Report 52

53 Independent auditor s report Zagrebačka banka dd: 2016 Annual Report 53

54 Independent auditor s report (continued) Zagrebačka banka dd: 2016 Annual Report 54

55 Independent auditor s report (continued) Zagrebačka banka dd: 2016 Annual Report 55

56 Independent auditor s report (continued) Zagrebačka banka dd: 2016 Annual Report 56

57 Independent auditor s report (continued) Zagrebačka banka dd: 2016 Annual Report 57