Our vision is to be One Bank, One UniCredit. Everything we do to implement our vision is based on our Five Fundamentals.

Transcription

1 2016 Annual Report

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3 We are a simple pan-european commercial bank with a fully plugged in Corporate & Investment Banking, delivering our unique Western Central and Eastern European network to our extensive client franchise. We offer local expertise as well as international reach. We accompany and support our 25 million clients globally, providing them with unparalleled access to our leading banks in 14 core markets as well as to another 18 countries worldwide. Our vision is to be One Bank, One UniCredit. Everything we do to implement our vision is based on our Five Fundamentals. Our top priority, every minute of the day, is to serve our customers the very best we can (Customers First). To do this, we rely on the quality and commitment of our people (People Development), and on our ability to cooperate and generate synergies as One Bank, One UniCredit (Cooperation & Synergies). We take the right kind of risk (Risk Management) whilst being very disciplined in executing our strategy (Execution & Discipline).

4 One Bank, One UniCredit. A shared vision based on Five Fundamentals. As a strong pan-european Group with leading banks in 14 core markets, and operations in another 18 countries, we perfectly embody our vision to be One Bank, One UniCredit. A simple pan-european commercial bank enriched by multiple cultures where everybody shares the same vision and are guided by our Five Fundamentals: Customers First, People Development, Execution & Discipline, Cooperation & Synergies and Risk Management.

5 Contents Introduction 6 Management Board Report of Condition 8 Business description 25 Overview of the Croatian economy in Operating and financial review 37 Management and corporate governance 43 And Approval of the Annual Financial Statements 56 Independent auditor s report 58 Financial statements 65 Group financial statements 66 Bank financial statements 71 Significant accounting policies 76 Notes to the financial statements 100 Supplementary schedules for CNB 233 Supplementary EUR financial statements - unaudited 252 Other information 260 Zagrebačka banka dd 2016 Annual Report 5

6 Introduction Introduction The Management Board of Zagrebačka banka dd is pleased to present its Annual Report. 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 UniCredit Bank dd, Mostar PRVA STAMBENA ŠTEDIONICA dd, Zagreb ZB Invest doo, Zagreb CENTAR KAPTOL doo, Zagreb POMINVEST dd, Split SUVREMENE POSLOVNE KOMUNIKACIJE doo, Zagreb 1 ZAGREB NEKRETNINE doo, Zagreb ZANE BH doo, Sarajevo UniCredit Leasing Croatia doo, Zagreb LOCAT CROATIA doo, Zagreb BACAL ALPHA doo, Zagreb BACAL BETA NEKRETNINE doo, Zagreb 2 ALLIB NEKRETNINE doo, Zagreb UniCredit Partner doo, Zagreb ZABA Partner doo, Zagreb UniCredit Leasing doo, Sarajevo ABBREVIATIONS UniCredit Bank, Mostar Štedionica ZB Invest Centar Kaptol Pominvest Suvremene poslovne komunikacije ZANE ZANE BH UniCredit Leasing Croatia Locat Croatia BACAL ALPHA BACAL BETA NEKRETNINE ALLIB NEKRETNINE UniCredit Partner ZABA Partner UniCredit Leasing, Sarajevo 1 Merged to ZAGREB NEKRETNINE doo in In 2016, the Group disposed the entire stake in BACAL BETA NEKRETNINE doo Annual Report Zagrebačka banka dd

7 ASSOCIATES Allianz ZB doo, društvo za upravljanje obveznim mirovinskim fondom, Zagreb Allianz ZB doo društvo za upravljanje dobrovoljnim mirovinskim fondovima, Zagreb MULTIPLUS CARD doo, Zagreb UniCredit Broker doo, Sarajevo ABBREVIATIONS Allianz ZB, obligatory pension fund management company Allianz ZB, voluntary pension funds management company MultiPlus Card UniCredit Broker 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, HRK million 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 7

8 Management Board Report of Condition of the Bank banka Group has Zagrebačka realised the expected good result in the year The achieved results are based on the universal business model and responsible risk management approach. Miljenko Živaljić Chairman of the Management Board 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 Annual Godišnje izvješće Report za Zagrebačka Zagrebačka banka banka dd UniCredit Group

9 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 near-term 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 nonperforming 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%. 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. Zagrebačka banka dd 2016 Annual Report 9

10 Management Board Report of Condition of the Bank 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%). 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% Annual Report Zagrebačka banka dd

11 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-photopay ( m-foto-plati ), also a new fast scan ( Sken u tren ) service has been introduced for nonstructured 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. 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. Zagrebačka banka dd 2016 Annual Report 11

12 Management Board Report of Condition of the Bank 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 Annual Report Zagrebačka banka dd

13 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. During the year, within the Operating programme Competitiveness and cohesion ( Konkurentnost i kohezija ) - a programme fostering infrastructure investments Zagrebačka banka dd 2016 Annual Report 13

14 Management Board Report of Condition of the Bank 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 HRK 1.9 billion 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 self-government 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. 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 Annual Report Zagrebačka banka dd

15 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 mediumsized 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. Activities for the academic community In 2016 also, the Bank continued to foster strategic partnerships and co-operation with major student Zagrebačka banka dd 2016 Annual Report 15

16 Management Board Report of Condition of the Bank associations and key educational institutions, thus contributing to the overall competitiveness and long-standing sustainability. The program ZABA Banking Academy was launched, being a six-month paid internship program for finalyear students, in collaboration with the majority of Faculties of Economics. We signed the Agreement on co-operation 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. 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 Annual Report Zagrebačka banka dd

17 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. 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. Miljenko Živaljić, MSc Chairman of the Management Board 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, Zagrebačka banka dd 2016 Annual Report 17

18 Management Board Report of Condition 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. As of 31 December 2016, the Bank s assets amounted to HRK 18,215.2 million, which 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 Annual Report Zagrebačka banka dd

19 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. 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. Zagrebačka banka dd 2016 Annual Report 19

20 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries (Continued) 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). 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 nonperforming 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. 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. 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 Annual Report Zagrebačka banka dd

21 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). 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). Zagrebačka banka dd 2016 Annual Report 21

22 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries (Continued) 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 Miljenko Živaljić, MSc Chairman of the Management Board Annual Report Zagrebačka banka dd