Annual Report. Banking that matters.

Transcription

1 2017 Annual Report Banking that matters.

2

3 Banking that matters.

4 One Bank, One UniCredit. We are a simple, successful Pan European Commercial Bank, with a fully plugged-in CIB, delivering a unique Western, Central and Eastern European network to our extensive franchise of 25 million clients. Our strategy is long-term. We are transforming the Group through decisive actions to lay the groundwork for the future, changing the way we work to anticipate our clients medium-term evolution. Everything we do is designed to make UniCredit a true Pan European Winner.

5 Contents Chief Executive Officer s message 6 Introduction 8 Management Board Report of Condition 10 Business description 23 Overview of the Croatian economy in Operating and financial review 33 Management and corporate governance 39 Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements 50 Independent auditor s report 52 Financial statements 59 Group financial statements 60 Bank financial statements 65 Significant accounting policies 70 Notes to the financial statements 92 Supplementary schedules for CNB 213 Supplementary EUR financial statements - unaudited 230 Other information 238 Zagrebačka banka dd 2017 Annual Report 5

6 Chief Executive Officer s message We are transforming through decisive actions. Everything we do is designed to make UniCredit a true pan European Winner. Jean Pierre Mustier Chief Executive Officer Dear Shareholders, I would like to thank you for your ongoing support during our transformation. At UniCredit, we are taking decisive actions to become more competitive and build a strong, sustainable Bank, poised for future growth. We have executed on all our commitments in 2017, including a successful 13bn capital increase and the disposals of Pioneer Investments and Bank Pekao stakes. We concluded FINO Phase 1, with the sale of a 17.7bn portfolio. Everything we do is designed to make UniCredit a true pan European Winner. Our strategy is to be One Bank, One UniCredit: a simple, successful, pan European commercial bank, with a fully plugged in CIB, delivering a unique Western, Central and Eastern European network to our extensive client franchise. This strategy is long-term. What we are doing today to implement Transform our strategic plan - is laying the groundwork for the future. It is changing the way we work to anticipate our clients medium-term evolution, including their use of multiple channels Annual Report Zagrebačka banka dd

7 Our investments in digital aim to improve the customer experience as we continue to optimise our processes and our cost base. New commercial dynamics are driving how we train and develop our people. Our management is clear on this vision and their actions are underpinned by a strict long-term incentives structure based on the plan s key performing indicators. All our people are focused on the ongoing execution of Transform It is their energy, commitment and hard work which allows UniCredit to deliver tangible results. As presented to investors at the 2017 Capital Markets Day in December, our performance is fully on track and we have confirmed all the Transform 2019 key targets, with a better risk profile and an improved dividend payout. We have strengthened our capital position, resulting in a lower SREP Pillar 2 Requirement and an S&P upgrade to a BBB rating with a stable outlook. We have confirmed our 2019 CET1 ratio target whilst anticipating additional regulatory headwinds during the plan period. Post 2019, the CET1 ratio will remain above 12.5 per cent, thanks to an organic capital generation that will fully absorb the expected regulatory impacts. network with new service models for retail and SME customers as well as a strong multichannel strategy. Cost reductions are progressing according to plan. In two other core divisions, CEE and CIB, we have further strengthened our leadership positions while keeping a strong focus on risk. Finally, In terms of adopting a lean but steering centre, decisions taken at our latest EGM concerning, for example, a simplified share structure, position us as best in class in terms of European corporate governance. Finally, on behalf of the Board of Directors and the whole Group, I would like to extend a special thanks to Giuseppe Vita, whose successful tenure as the Chairman of UniCredit is coming to a close. Giuseppe s significant contributions over the past six years have been very precious to our development. His vision and support have enabled UniCredit to grow into one of the few truly pan European commercial banks. Sincerely, Jean Pierre Mustier Chief Executive Officer UniCredit S.p.A. In terms of asset quality, we signed binding agreements to reduce our stake in FINO to below 20 per cent. A more disciplined risk management strategy and underwriting processes are driving significant improvements in all our asset quality metrics. Finally, as announced, we are improving on our original Group Gross NPEs target, cutting a further 4.0bn by the end of The full rundown of the Non Core portfolio, which will occur by end 2025, is entirely self-funded. In terms of transforming our operating model, we have confirmed our overall revenues and cost targets. Our FTE and branch reductions are ahead of schedule and our digital and IT transformation is fully on track. We continue to maximise commercial bank value, with the ongoing transformation resulting in higher productivity. Our activities in Western Europe continue to benefit from the revamped Zagrebačka banka dd 2017 Annual Report 7

8 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 2017 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 Republic of 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 1 POMINVEST dd, Split SUVREMENE POSLOVNE KOMUNIKACIJE doo, Zagreb 2 ZAGREB NEKRETNINE doo, Zagreb ZANE BH doo, Sarajevo UniCredit Leasing Croatia doo, Zagreb LOCAT CROATIA doo, Zagreb BACAL ALPHA doo, Zagreb ALLIB NEKRETNINE doo, Zagreb UniCredit Partner doo, Zagreb ZABA Partner doo, Zagreb UniCredit Leasing doo, Sarajevo 3 ABBREVIATIONS UniCredit Bank, Mostar Štedionica ZB Invest Centar Kaptol Pominvest Suvremene poslovne komunikacije ZANE ZANE BH UniCredit Leasing Croatia Locat Croatia BACAL ALPHA ALLIB NEKRETNINE UniCredit Partner ZABA Partner UniCredit Leasing, Sarajevo 1 Please refer to Note 43 Events after the reporting period 2 Merged to ZAGREB NEKRETNINE doo in Merged to UniCredit Bank dd, Mostar in Annual Report Zagrebačka banka dd

9 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 2017 have been used to translate balances into foreign currency at that date: EUR 1 = HRK (31 December 2016: HRK) USD 1 = HRK (31 December 2016: HRK) Zagrebačka banka dd 2017 Annual Report 9

10 Management Board Report of Condition of the Bank and the Group It is my pleasure to present you the Annual Report and financial statements of the Zagrebačka banka Group. 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 realised solid financial result in 2017, given the stable operating result and efficient cost management. The capital adequacy ratio is at the level of 22.4%, 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. Following positive environment trends we have increased loan activity in retail and private sector. By introducing digital technologies we increased the number of clients and users of mobile and internet banking. Proactive approach to risk management enabled the Group to amortise to a considerable extent the negative effects related to difficulties in business operations of a large domestic company Annual Report Zagrebačka banka dd

11 Business environment At the global level, relatively strong economic growth has been stimulated by the increase in trade, investments and personal consumption, by expansive monetary policy, liquidity available and low interest rates. The US Federal Reserve continued to increase interest rates, while the European Central Bank retained the policy applied previously. Interest rates in Europe are still at their historical low. Following several years of such approach, in 2017 the Eurozone and EU member states from the Central and Eastern Europe recorded the highest growth rates in the past ten years. In the Republic of Croatia, the realised GDP growth was 2.8%, driven by an increase in export, good tourist season, positive contribution of utilisation from EU funds, increase in personal consumption and moderate recovery in investments. We can be relatively pleased with these developments as we are even more approaching to peer economies in Central and Eastern Europe. The Government of the Republic of Croatia and the Croatian National Bank introduced the Eurostrategy, the public debate document on joining the Eurozone, a strategic goal of the economic policy. The opportunity for this opened as fiscal position of the Republic of Croatia improved, by the decrease in the general government s deficit below 1% of GDP and the decrease in the public debt ratio which is almost at the level of 80% of GDP, thus enabling the European Council to close the Excessive Deficit Procedure for the Republic of Croatia. The credit rating of the Republic of Croatia has been improved, at first by the increase in outlook and then with the increase of rating at the beginning of The rating is now BB positive according to S&P, Ba2 stable per Moody s and BB + stable according to Fitch. The risk premium of the Republic of Croatia considerably lowered in 2017 which decreased borrowing costs. The year was challenging for the Croatian banking sector, largely due to difficulties in business operations of the large domestic company that will reflect on the banks financial results. A moderate growth in new loans to Retail and Corporate segments has been recorded, while total loan volumes decreased due to deleveraging of the public sector and the sale of a part of non-performing loans. Commercial banks in the Croatian market are in the process of transformation in order to adapt to complex regulations and change in business models which require new digital technologies. Banks have sufficient capital and liquidity available for the increase in credit activity which, coupled with further development of capital markets, use of guarantee schemes and more efficient utilisation of EU funds may contribute to the increase in investments and economic growth. Financial highlights of the Group Zagrebačka banka Group recorded operating result of HRK 2,749 million in The profit after tax is HRK 1,044 million, impacted by the increase in impairment losses on placements to companies. The total volume of loans decreased due to the sale of part of non-performing portfolio and deleveraging in public sector. New loans to retail and corporate segments are increasing, environment trends are positive. The Group realised solid business results in majority of its members, the major contributors were Zagrebačka banka dd, UniCredit Bank dd Mostar, UniCredit Leasing Croatia doo and Prva stambena štedionica dd. 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 amounted to HRK 5,351 million, decreased by HRK 237 million (-4.2%): Net interest income amounted to HRK 3,471 million, as result of stable average volume of loans during the period as well as lower funding costs. Zagrebačka banka dd 2017 Annual Report 11

12 Management Board Report of Condition of the Bank and the Group Net fee and commission income amounted to HRK 1,341 million which is HRK 72 million (+5.7%) higher, due to the increase in payment transaction and credit card fees. Net trading and other income amounted to HRK 539 million, decreased by HRK 301 million (-35.8%). The prior year result has been positively impacted by net gain from sale of share of Visa Europe Limited and higher trading result. Operating expenses amounted to HRK 2,602 million, increased by HRK 68 million (+2.7%). The Group s cost to income ratio ( C/I ratio ) equals 48.6%. Profit before impairment and other provisions amounted to HRK 2,749 million. The decrease of HRK 305 million (-10.0%) is a result of the previously described movements in Operating income and Operating expenses. Impairment and other provisions amounted to HRK 1,505 million, they have increased by HRK 590 million, mainly due to the increase in impairment losses on placements to companies. Total assets of the Group amounted to HRK 126,893 million and have decreased by HRK 1,435 million (-1.1%), mainly under the influence of optimisation of funding sources. Net loans to customers amounted to HRK 77,626 million, decreased by HRK 3,120 million (-3.9%). The total volume of loans is lower due to the sale of part of non-performing portfolio and deleveraging in public sector. Positive trends were realised in loans to retail segment. Deposits from customers represent primary source of funding. At the end of the year they amounted to HRK 95,249 million and have increased by HRK 3,021 million (+3.3%). Loans to deposits ratio amounts to 81.5%. Deposits from banks and borrowings amounted to HRK 8,822 million. The decrease of HRK 4,042 million (-31.4%) is a result of lower funding needs. Capital and reserves of the Group - at HRK 18,111 million. The capital adequacy ratio - at 22.4% (31 December 2016: 21.6%). Strategic Business Areas Results Retail and SMEs In business operations with Retail clients and SMEs we have achieved good results and confirmed the leading position in market share in loans and deposits. We are placing special attention to clients and their satisfaction. By Client Obsession approach we have strengthened the culture of obtaining feedback. With personalised and interactive relationship, simple and open communication the Bank values and recognises the feedback received from clients in order to improve operations and processes. Every new client receives onboarding, a support programme whereby we assign a banker who regularly contacts him to establish the satisfaction with services. We were the first in the market enabling initiation of the business relationship through mobile phone. We support digitally oriented clients by communication with e-branch e-banker. The increase in proportion of young clients has continued as a result of the innovative services that we provide them: account opening and contactless payment through mobile phone, free Package for the young, the web site www. tkokaze.hr and newsletter. The number of clients whose regular income is paid on the account they opened with us has been increased as well. Digitalisation and modernisation We invest in digitalisation and modernisation of the sales network and distribution channels in order to increase the availability of products and services. Account opening for new clients is now simple and fast through mobile phone, with no need to visit the branch office, with guaranteed security and compliance with all legal requirements. Mobile banking is automatically activated as well Annual Report Zagrebačka banka dd

13 Clients recognise the advantages of digital channels, we have 550 thousand users of internet banking and 360 thousand users of mobile banking, which is an annual increase of 9%. The transactions executed through digital channels have been growing continuously, with mobile banking at the forefront with the annual increase in number of financial transactions of 42%. We continued with the digitalisation in branch offices: the set of services and documents digitally signed or scanned and automatically archived expanded. All branch offices have free Wi-Fi. In a large number of branch offices the digital system of promotion on display monitors has been introduced. 110 ATMs have been replaced by new modern devices, which now make up half of the network. We expanded the business operations on the Kvarner region by opening of the branch office on the island of Krk. We have refurbished four branch offices in line with the new standard. We optimised the business operations by mergers of branch offices. In the retail lending business the trend of increase in demand has continued. We retained the leading position in the market with the annual increase in sale of 2%. We have been particularly successful in the sales of housing loans (+7%). Cash loans increased by 5%. In housing loans the year has been marked by the APN program for loans with government subsidies, we were market leader with the market share of 35%. We continued the successful initiative Come to the right door and participation in the programs of subsidised housing lending (POS and POS +). We are proud to be recognised by our clients as a point of reference in housing lending which enables the development of a long-term quality relationship. We have decreased interest rates on loans to citizens following movements of the National Reference Rate ( NRS ). Since the first NRS publication on 7 December 2012, HRK 6M NRS1 cumulatively decreased by 1.72 bp and for EUR by 2.42 bp, while HRK 6M NRS2 cumulatively decreased by 1.56 bp and for EUR by 2.44 bp. In our offer and service model we are the leading partner to small businesses with stable market share of 24%. Our market share in operations with newly founded business increased by 2.3%. New loans to small businesses increased by 12%, particularly the long-term investment loans that are 20% higher, as a result of the recovery of investments and availability of credit lines under favourable conditions. The deposit base is stable. The increase of 0.4% is in line with the market, the Bank has maintained its leading market position and the market share is 25.2%. With respect to the structure, the funds on transaction accounts balances increased, while overall term deposits have been decreasing. A notable trend is an increase in term deposits with maturities exceeding 12 months, as well as the trend of allocation of assets in other investment forms (investment funds, life insurance). We have been developing card business operations in line with the latest trends. We are the first bank in the market that enabled contactless payments integrated in the mobile banking application. The payments in instalments, with no interests and charges are enabled on over 18,600 points of sale. We continued to upgrade card acceptance channels, whereby the number of contactless payments points of sale has grown significantly. Market share in acceptance of cards is on the increase. Corporate, investment and private banking The year 2017 was marked by the extraordinary circumstances related to the difficulties of a large domestic company and the negative influence to a wider client base. However, this year again we realised good results and retained the leading market position. We hold the market share of 30% in corporate loans and deposits, which firmly proves the continuity in the stability of business operations. We are traditionally engaged in the major transactions in business operations with large corporate clients and the government sectors. We have successfully increased the volumes and shares in the middle-size companies segment. Our specialised centres organised within Global transaction banking provide fast and simple Zagrebačka banka dd 2017 Annual Report 13

14 Management Board Report of Condition of the Bank and the Group realisation of clients needs. We introduced SEPA direct debit services, smart safe-deposit boxes in cash management, Bank Payment Obligation international trade service and continued with the digitalisation of the transactional operations. All the above has been recognised by the clients and partners and acknowledged through awards: Euromoney Best Cash Management and Trade Finance Bank and Best Transaction Banking Provider in the Republic of Croatia in 2017; Global Finance Best Trade Finance Bank in the Republic of Croatia in Within Special Banking Arrangements through the co-operation with the financial institutions, we have expanded our offer by contracting two new lines. Following the multi-year co-operation with the Croatian Bank for Reconstruction and Development, we are offering ESIF-Growth and Expansion Loans with preferential terms and conditions for financing from the EU funds. We are the only bank in the market and one of the seven banks in the European Union which signed with the European Investment Bank the agreement on the co-operation in the programme Private Finance for Energy Efficiency, through which we support projects for energy efficiency improvements. We have fully implemented the guarantee scheme InnovFin SME for innovative entrepreneurs, enabled in co-operation with the European Investment Fund. We continued the quality co-operation with the European Bank for Reconstruction and Development and with the European Fund for Southeast Europe. With respect to financing from the EU funds, we offered MojEUfond web application that enables easier, faster and more efficient recognition of the opportunities for co-financing of investments from EU funds in the Republic of Croatia. The service is a significant breakthrough in the market, as a continuation of the multi-year support in co-financing projects from the EU funds. We support our clients in implementation of their projects by providing products tailored specifically to suit the terms and conditions of the tenders. We continuously include clients in Elite & UniCredit CEE Lounge programme. The aim of the programme is to provide support to small companies and SMEs in preparation for the next stage in their growth by increasing the participants awareness of capital markets funding possibilities, also enabling them direct access to investors. In 2017, five of our clients joined the Elite programme. Investment banking maintained its position of the market leader in the Republic of Croatia and Southeast Europe, which was recognised also by the financial magazine Global Banking & Finance review by granting us the award Best investment bank in Croatia in During the year, we executed seven transactions in the capital markets in total value of HRK 28 billion. We were a joint leading agent and subscription book entry keeper of the Republic of Croatia bond issues (four issues in the domestic market of total value of HRK 17.3 billion and the issue of eurobond listed on the Luxembourg Stock Exchange of total value of EUR 1.25 billion). We conducted the issue of the second tranche of corporate bonds of Zagrebački holding in the amount of HRK 500 million. The Bank had the joint agent and subscription book entry keeper role in the capital increase of the company Arena Hospitality Group dd in the amount of HRK 788 million. Public offering included also the offering to international investors and it represents the largest public offering of shares in the Republic of Croatia since 2007, it is among top three issues of shares with the international offering in the European hotel sector since In the Corporate finance sector, we took advantage of the increase in mergers and acquisitions activities in the Republic of Croatia and Southeast Europe for contracting mandates for consultancy services in several major transactions. We keep expanding our presence, following the historically large number of successful transactions, knowledge of local market and our expertise in a number of industries. Within Markets segment, we continuously develop treasury services with the emphasis on the solutions for the clients protection from market risks. The volume of distribution of private offerings of structured products to clients of Private Banking has been growing. We recorded the increase in the number of users of ZB Trader HR and the ZB Trader Global services. Following another year in the environment of low interest rates, the clients of Private Banking turned to alternative solutions to enable them to preserve the value of their financial assets. Private Banking was the relevant partner and advisor by providing support in management of personal Annual Report Zagrebačka banka dd

15 finances and by offer of innovative products and services. We ensured the prerequisites for Guided Open Architecture investment platform being the first bank to introduce it in the domestic market. For the third year in a row, we were awarded the title Best Private Banking in Croatia by the Euromoney financial magazine. Social Responsibility 2017 My Zaba Start For the fourth year in a row, we conducted the project My Zaba Start which rewards the most innovative and marketable ideas. The aim of the project is to provide support through three contest categories: Entrepreneurship, Culture and science and Society. The Bank granted HRK 1 million of subsidies to the initiatives of small entrepreneurs, educational and cultural institutions, associations and companies. For the contest finalists we organised workshops for strengthening organisation capacities, business planning and business plans writing, promotion of projects through internal and external communication channels and social media networking. My Zaba Start remains a breakthrough in socially responsible operating of business by providing expert and financial support in realisation of the best projects applied for the initiative. Employees ambassadors of values of the Bank and the Group The engagement of the employees in the socially responsible projects has been substantial. Within the eleventh Gift Matching Programme, 870 employees donated HRK 160 thousand to nonprofit associations. All the donations doubled by UniCredit Foundation, which affirms the importance of the humanitarian activities and the culture of donating which we foster. 3,2,1 go! With the third and the most successful Month of Sports and Recreation 3, 2, 1 go! we promoted the importance of the team spirit and care for health and recreation of employees. Over 500 employees participated in the team sport activities which promote healthy lifestyle. Our Five Fundamentals principles Major emphasis has been placed on values on which we form the basis of our business operations. The employees of the Bank and the Group gathered in order to open a dialogue in teams on the principles of corporate governance. 300 teams participating in workshops used the opportunity to reflect on personal and team values. Creative team solutions devised in the workshops have been collected in the Our Five Fundamentals employees book which we use as inspiration in daily challenges. Activities for the academic community We foster strategic partnership with student associations and educational institutions, thus contributing to the competitiveness and longstanding sustainability. After the successful first ZABA Banking Academy, a six-month paid internship program in Retail for final-years students, this year the program was launched also in other segments of the Bank. We continued the co-operation with the association of young programmers DUMP from Split. We received the Golden index award in the category of large companies for Expert support and organisation of projects. With this award, the student association estudent expresses its appreciation to companies which contributed to the improvement of the quality of studies and student life. The Bank participated in the University of Zagreb Fair ( Smotra Sveučilišta u Zagrebu ), in Solidarity in the Field ( Kopačka solidarnosti ) (humanitarian indoor football tournament organised by students) and it supported the development of the Guide for Freshmen. We actively participated in numerous projects on faculties and career fairs, where our representatives held several presentations. Quality of Human Resources management practices Based on the organisational climate survey the People Survey, employees expressed a high work satisfaction and a high level of commitment and dedication. The Commitment Index is at a high level of 84%. Zagrebačka banka dd 2017 Annual Report 15

16 Management Board Report of Condition of the Bank and the Group We held the status of MAMFORCE COMPANY in 2017 as well. We were awarded the title Top Employer at the local and European level, which confirms the high standards and quality of human resources management processes. We are continuously finding solutions that 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 2017, the Bank received the following awards for its operations: - Euromoney Best Bank in Cash Management - Euromoney Best Bank in Croatia - Euromoney Best Trade Finance Bank in Croatia - Euromoney Best Trade Finance Group in the Central and Eastern Europe In addition to the above, the Bank was presented with a number of awards for its marketing and digital campaigns. Outlook for 2018 Our banking sector is stable, well-capitalised, while favourable conditions in the financial markets ensure stable and accessible sources of funding. However, challenges that remain relate to increase in lending activity, decrease in the share of nonperforming loans, 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 The encouraging trends present are 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 for sure activities oriented to the improvement of the credit rating, carrying out of further reforms, continuation of privatization, improvement of investment climate, increase of investments, and ensuring the stable and harmonised legal framework. With its results Zagrebačka banka Group confirms it is a part of the successful Pan-European commercial banking group UniCredit, with the simple business model and a fully plugged in Corporate and Investiment Banking, dedicated to its clients through the unique Western, Central and Eastern European network. In the upcoming period, we will consistently carry out our Transform 2019 strategy oriented to sustainable income generation, introduction of new technologies and increase in productivity. The Bank will be even more agile, dedicated to the needs of our clients leveraging on its market position and the existing competitive advantages. The strenght and value od One Bank, One UniCredit is based on our employees, sustainability of the business model, relationship towards clients and contribution to the economic and social progress. On behalf of the entire Management Board, I express my gratitude to all clients, partners and shareholders for co-operation, wishing that it would continue in the years to come. I thank all the colleagues from UniCredit Group, the President and Members of the Supervisory Board for commitment to our joint success. My special appreciation goes to all the employees who enabled through their exceptional contribution and dedicated professional work the long-term sustainability and high reputation of Zagrebačka banka Group in financial market. Miljenko Živaljić, MSc Chairman of the Management Board Annual Report Zagrebačka banka dd

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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, investment banking and financial lease services. The business network at the end of 2017 covers the entire Federation of Bosnia and Herzegovina, within 9 regions, 76 branches and the largest network of ATMs (264). The Bank has maintained and further strengthened its leading market position, by focusing on clients through individual approach, by offering comprehensive banking products, being continuously oriented on improving service quality through simplification of products and increase in efficiency. According to 2017 surveys, the Bank s clients reaffirmed their appreciation of the Bank s unique quality of service and rewarded its dedication to client satisfaction. The Bank s development strategy is digital, tailored to customers needs and market demand. According to the statutory financial statements, net profit amounted to HRK million and has increased by HRK 30.7 million (+10.0%) compared to the previous year. Such result is driven by higher net interest income, higher net income from fees and commissions, higher operating costs - as new offerings are developed and efforts are invested to increase efficiency and lower provisions. In 2017 the Bank s operating income amounted to HRK million, increased by HRK 23.6 million (+2.6%). Net interest income which represents 67% of the total income amounted to HRK million and increased by HRK 10.5 million (+1.7%). Interest income decreased despite higher loan volumes, as interest rates were lower. The decrease in interest expense (-13.7%) is a result of funding optimisation. The Bank managed to retain clients confidence - volume of current accounts and deposits increased (+13.7%). Net income from fees and commissions was HRK million, increase of HRK 16.6 million (+5,7%) is realised mainly in product packages fees, credit card fees and payment transaction fees. The total operating expenses amounted to HRK million, being HRK 19.4 million (+4.2%) higher. In 2017, impairment losses and provisions amounted to HRK 34.2 million, decreased by HRK 30.6 million (-34.1%). The Bank s assets amounted to HRK 20,102.9 million as at 31 December The increase of HRK 1,994.2 million (+11.0%) is a result of the increase in structural and liquidity management positions of HRK million (+11.4%), increase in loans and receivables from customers of HRK million (+7.1%) and HRK million increase in financial lease receivables (after the legal merger with UniCredit Leasing d.o.o., Sarajevo). Total current accounts and deposits from clients amounted to HRK 15,639.4 million at the end of The increase of HRK 1,890.2 million (+13.7%) was realised in retail and corporate segments. Current accounts and deposits from banks remained at the same level, at the end of 2017 they amounted to HRK million (+0.1%). The Bank s equity was HRK 2,943.3 million. The capital adequacy ratio was 16.4% (+0.7%). Exposure to risks The most significant risks to which the Bank is exposed are credit risk, market risk and operational risk. Market risks are currency risk and interest rate risk. In 2017 the Bank upgraded the existing risk management system, policies and procedures, operational instructions and limits. The Bank is exposed to credit risk through lending and placing of 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 with respect to regulatory capital. The Bank regularly analyses the creditworthiness of borrowers, 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 contracts collaterals. The Bank is exposed to liquidity risk within its asset and liability management. It 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 in general enables lower financing costs Annual Report Zagrebačka banka dd

19 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 currency is linked to the EUR, therefore there is no currency risk arising from movement of the domestic currency against EUR. The Bank s operations are exposed to 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. Daily, the exposure to market risk is monitored by Value-at- Risk models and by 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. UniCredit Leasing Croatia doo Business review UniCredit Leasing Croatia doo (hereinafter under this heading: the Company ) is the largest leasing company in the Republic of Croatia per size of assets. Its main activity is to provide finance and operating lease services for individuals and legal entities. In 2017 the Company s profit after tax was HRK 61.8 million (HRK 18.3 million or +42% increase compared to the previous year). Major statement of profit or loss items: net interest income from finance lease HRK 81 million (+3,0%), income from operating lease and other income HRK 248 million (+25,0%), depreciation and amortisation HRK 149 million (+32,4%), operating expenses HRK 107 million (+11,4%) and income tax expense HRK 16,9 million (-4,3%). Growth in sales was strong, twice the market, due to focus on the customers needs, good market positioning and adequate quality of services and products. The company maintained its portfolio quality, monitored net interest income realisation, increased efficiency, controlled expenses and set adequate provisions. Total assets amounted to HRK 3,823 million (2016: HRK 3,281 million). The increase of HRK 542 million is a result of increase in sales (increase in volume of finance lease receivables and equipment under operating leases). In 2017 the Company concluded 12,088 new contracts (2016: 8,143 new contracts) with the total financing value of HRK 1,783 million (HRK million). 54% relates to finance and 46% to operating lease. Vehicles and equipment represent the major portion of the new volume with an emphasis on the tourism sector. Development plan Our target is to be the leading leasing company to customers, per employee satisfaction and per new value created - in a sustainable manner. In the upcoming period a special focus will be on supporting the investments of SMEs within joint programs with Croatian Bank for Reconstruction and Development, European Bank for Reconstruction and Development, European Investment Fund and Croatian Agency for SMEs, Innovations and Investments. We expect a full launch of Mobility Concept (new operating lease product for cars financing with all related services included). New significant volumes in financing of boats are also expected. We will work to expand the strategic partner network and continue cooperation with Zagrebačka banka in product distribution. The focus will also be on optimization of processes and reducing levels of non-performing lease portfolio. We will continue in our efforts on meeting the Group and regulatory requirements. A further human resource development focus will be on increasing competences and motivation of our employees. Exposure to risks The most significant risks the Company is exposed to in its operations are market, liquidity and credit risk. Significant market risks the Company is exposed to 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 continuously prepares cash flow projections i.e. forecasts its cash outflows and inflows. Liquidity risk management measures include prevention and elimination of potential causes of insolvency e.g. through short-term plans to bridge liquidity gaps or utilization of available overdraft. The Company is exposed to credit risk through finance and operating lease receivables. At origination, the Company analyses the creditworthiness 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 Zagrebačka banka dd 2017 Annual Report 19

20 Management Board Report of Condition Management Board Report of Condition of the Bank s subsidiaries (Continued) the leased asset). Special attention is also placed on monitoring of the quality of leased assets until final settlement of lease contracts liabilities. 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 2017, the Company s total assets amounted to HRK 2.64 billion (2016: HRK 2.56 billion). In 2017 deleveraging trend in housing loans segment has continued, with strong competition in fixed interest rate loans offering. Consequentially the balance of gross loans to individuals and unincorporated businesses decreased by HRK 106 million (-7.0%) compared to 2016 when they amounted to HRK 1,445 million. However, the Company has retained its leading market position. Thanks to the continuing synergy effect arising from cooperation with Zagrebačka banka dd, Štedionica continued to realise good sales results in the savings segment in 2017 and increased its deposit base by 4.0%. The Company is dedicated to maintaining the quality of its loan portfolio. As in previous years, share of non-performing loans in the total loan portfolio remained low at the level of 2.52%. By focusing on efficiency operating expenses decreased by 10% compared to In 2017 a profit after tax of HRK 21.4 million was realized (2016: HRK 24.7 million). Development plan Economic recovery and positive environment trends are expected to continue in As a continuation of efforts initiated in the previous years, a broadening of synergy effects with Zagrebačka banka dd is foreseen, through active customer relationship, increase in cost efficiency and improvement in processes and risk management. Exposure to risks Štedionica manages risks by performing operations in accordance with adequate operating policies and procedures and regulatory framework and limits. Štedionica is primarily exposed to credit, liquidity, market and operational risks. Štedionica is subject to credit risk through its lending and investment activities, risk of default is monitored on a continuous basis. Through initial credit risk assessment Štedionica ensures approval of loans to clients with good creditworthiness, covered with adequate collateral instruments. Liquidity risk arises from the funding structure. Major sources of funding are deposits from individuals and shareholders equity. Funding stability is maintained through diversification of maturities of deposits from individuals. Exposure to currency risk is a result of the Company s transactions in foreign currencies or linked to foreign currencies. The Company s is minimizing the mismatch between assets and liabilities denominated in foreign currencies or linked to foreign currencies. A special attention is placed to management of the Company s significant exposure to interest rate risk, as the majority of interestearning assets and interest-bearing liabilities have fixed interest rates. ZB Invest doo Business review ZB Invest doo (hereinafter under this heading: the Company ) is an investment fund management company. It manages fourteen Open- Ended Investment Funds with Public Offering ( UCITS funds), 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. Besides aforementioned, its UCITSs represent the base for a number of Unit- Linked insurance policies. Financial markets overview Financial markets in 2017 were characterized by continuous growth in stock indices worldwide. US indices were setting new record levels while surge in prices were observed for emerging markets indices. Due to harmonized growth in the leading economies and absence of major market shocks, relatively low volatility prevailed throughout the year. After the initial strong performance, positive sentiment on Zagreb Stock Exchange was highly influenced by the difficulties in business operations of the large domestic company. Despite stricter FED s monetary policy, prevailing were low interest rates conditions in Europe that benefited bond prices. Economic growth and positive indicators coupled with successful tourist season positively impacted on the decline in risk premium and strong performance of domestic bonds. Domestic money market witnessed record liquidity Annual Report Zagrebačka banka dd

21 The decline in interest rates on bank deposits has positively influenced investors to allocate portion of their savings to financial markets via investment funds. Main interests of investors were fixed income and equity funds with the exposure to the US and emerging markets. Operating result and main indicators Revenues of the Company were stable in 2017 and amounted to HRK 57.0 million (2016: HRK 50.3 million). Management fee that amounted to HRK 56.8 million (2016: HRK 49.9 million), represents the major revenue item. The Company has realised adequate profitability with net profit after tax of HRK 14.7 million (2016: HRK 12.9 million). Total assets were stable and amounted to HRK 35.1 million at 2017 year-end (2016: HRK 31.3 million). These are mainly short-term liquid assets. Total capital and reserves amounted to HRK 26.8 million (2016: HRK 24.9 million). Issued share capital and other reserves amounted to HRK 12.1 million (minimum capital requirements in accordance with Investment Funds Act were HRK 4.1 million). 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 an attractive range of funds and other investment products and services, in a simple and transparent way. Exposure to risks The Company places special attention to risk management in its operations. Its 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 is 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 Total assets under the management of the Company at the end of 2017 amounted to HRK 5.2 billion (2016: HRK 5.15 billion), mostly arriving from synergies with Zagrebačka banka dd network. Market share in the total UCITS assets at the end of 2017 amounted to 24.57%, which confirmed the Company s position as one of the leading investment fund management companies on the domestic market. At the end of 2017, the structure of assets under management was 45% long-term funds, 43% money market funds and 12% clients portfolios (2016: 37% long-term funds, 54% money market funds and 9% clients portfolios). The assets structure per investor type: 69% retail, 22% institutional and 9% corporate investors (2016: 57.5% retail, 31.5% institutional and 11% corporate investors). The change in the structure of funds and investors types indicates the trend of a longer term savings mainly from individual investors, which favourably impacts the stability of assets under management. Development plan Being one of the leading asset management companies, the Company will continue to be devoted to providing professional asset management high-quality services for its clients and investors, enabling them to maintain as sustainable yields as possible, in compliance with predefined and agreed investment strategies. The main preconditions of a business continuity are transparent reporting Zagrebačka banka dd 2017 Annual Report 21

22 Banking that matters. In this era of unprecedented change customers are looking for companies they can trust and that can play a tangible positive role in their everyday lives. UniCredit has a simple and successful Pan European Commercial banking model delivering relevant solutions to the real needs and wants of today s customers Annual Report Zagrebačka banka dd

23 Business description Zagrebačka banka dd 2017 Annual Report 23

24 Business description 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 70,000 active corporate clients and small businesses and approximately 1.7 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 2017 and during 2017 are presented below: Fully consolidated subsidiaries COMPANY ADDRESS COUNTRY OF DOMICILE INDUSTRY GROUP OWNERSHIP % UniCredit Bank dd, Mostar Kardinala Stepinca bb Federation of Bosnia Banking Mostar and Herzegovina PRVA STAMBENA ŠTEDIONICA dd Samoborska 145 Republic of Croatia Banking Zagreb ZB Invest doo Samoborska 145 Republic of Croatia Fund management Zagreb CENTAR KAPTOL doo 4 Nova Ves 17 Republic of Croatia Property investment Zagreb POMINVEST dd Gundulićeva 26a Republic of Croatia Property management Split SUVREMENE POSLOVNE KOMUNIKACIJE doo 5 Savska cesta 28 Republic of Croatia Publishing Zagreb ZAGREB NEKRETNINE doo Nova Ves 17 Republic of Croatia Real estate agency Zagreb ZANE BH doo Branilaca Sarajeva 20 Federation of Bosnia Real estate agency Sarajevo and Herzegovina ZABA Partner doo Augusta Cesarca 2 Republic of Croatia Insurance broker Zagreb UniCredit Leasing Croatia doo Heinzelova 33 Republic of Croatia Leasing Zagreb LOCAT CROATIA doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business Zagreb BACAL ALPHA doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business Zagreb ALLIB NEKRETNINE doo Damira Tomljanovića Gavrana 17 Republic of Croatia Real estate business Zagreb UniCredit Partner doo Damira Tomljanovića Gavrana 17 Republic of Croatia Trading activities Zagreb UniCredit Leasing doo 6 Ložionička 7 Federation of Bosnia Leasing Sarajevo and Herzegovina 4 Please refer to Note 43 Events after the reporting period 5 Merged to ZAGREB NEKRETNINE doo in Merged to UniCredit Bank dd, Mostar in Annual Report Zagrebačka banka dd

25 Equity accounted associated companies COMPANY ADDRESS COUNTRY OF DOMICILE INDUSTRY GROUP OWNERSHIP % Allianz ZB doo, društvo za Heinzelova 70 Republic of Croatia Obligatory pension 49.0 upravljanje obveznim Zagreb fund management mirovinskim fondom Allianz ZB doo, društvo za Heinzelova 70 Republic of Croatia Voluntary pension 49.0 upravljanje dobrovoljnim Zagreb fund management mirovinskim fondovima MULTIPLUS CARD doo Ivana Lučića 2a Republic of Croatiaa Advertising and Zagreb marketing services UniCredit Broker doo Obala Kulina bana 15 Federation of Bosnia Insurance broker Sarajevo and Herzegovina Branch network map ZAGREBAČKA BANKA GROUP - NUMBER OF BRANCHES (END OF YEAR) Republic of Croatia Federation of Bosnia and Herzegovina Total Number of branches Zagreb 32 Slovenia 15 Zagrebačka banka dd 2017 Annual Report 25

26 Strengthen and optimise capital. Following a 13 billion capital increase, we confirmed a 2019 fully loaded CET1 ratio target above 12.5 percent and an organic capital generation that will fully absorb the expected regulatory impacts: our capital position is stronger and in line with best in class G-SIFIs Annual Report Zagrebačka banka dd

27 Overview of the Croatian economy in 2017 Zagrebačka banka dd 2017 Annual Report 27

28 Overview of the Croatian economy in 2017 Overview of the Croatian economy in 2017 Macroeconomic indicators for the Republic of Croatia Gross domestic product, billion HRK, in current prices Gross domestic product, % change (0.1) (0.6) (2.2) (0.3) (1.4) (7.4) 2.1 GDP per capita, in EUR ,115 10,597 10,244 10,281 10,315 10,474 10,510 10,474 11,169 Private consumption, % change (1.6) (1.9) (3.0) 0.3 (1.5) (7.5) 1.2 Public consumption, % change (0.9) (0.8) (0.4) (0.6) 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 (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) 11.8* Consumer prices, % change 1.1 (1.1) (0.5) (0.2) General government budget balance (% GDP) (0.5)* (0.9) (3.3) (5.1) (5.3) (5.3) (7.8) (6.2) (6.0) (2.8) Balance of payments current account balance (% GDP) 3.9* (0.1) (0.7) (1.1) (5.1) (8.8) External debt (% GDP) 81.5* 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 Solid growth of the Croatian economy continued in 2017 Positive trends continued in the Croatian economy throughout 2017, resulting in solid growth of GDP of 2.8%. The main drivers of growth were with strong personal consumption and exports of goods and services. In addition to favorable performance in goods exports, continuously strong contribution to growth again came from another new record tourism season. Investment growth was still somewhat subdued due to difficulties in the business operations of the large domestic company as well as of its suppliers. Nevertheless, the growth is on solid foundations, with further deleveraging in the public and private sectors and significantly reduced fiscal deficit, in favorable international environment. Partly, significant growth in disposable household income and personal consumption is caused by the reduction of personal income tax at the beginning of the year. However, the expected major reforms were absent, due to the Government s focus on the difficulties in the business operations of the large domestic company. The three-year positive trend following a deep recession confirms that the long-term period of economic downturn is behind. The growth rate of gross domestic product in 2017 was retained at 2.8%. However, the real GDP level is still 4% lower than before the crisis. All GDP components grew, especially domestic demand, due to increasing disposable income of households. Investment activity recovery was weak, partly because of the difficulties in business operations of a large domestic company and partly because of slower-than-expected implementation of projects financed from EU funds. Consequentially, public consumption grew considerably slower than other segments of the economy. However, this resulted in a primary fiscal surplus and a tightening of general government deficit to a level of 0.5% of GDP. The trend of an increase in the employment at a rate of more than 2% continued, with the usual increase in employment in the middle of the year, in tourism, catering and accompanying activities. The extension of the tourist season in 2017 and increased activity in construction resulted in an increase in employment also in the last quarter. The rate of registered unemployment fell much faster than expected due to increased emigration to EU countries. The number of registered unemployed in 2017 was down by 20.8%, while at the same time the registered unemployment rate decreased from 14.7% to 12.2%. Positive trends in the real sector led to a significant increase in current public revenues and indirectly to the decrease of the general government s deficit. The considerable was also a positive contribution from the decrease in interest on public debt. The current account deficit was in a significant surplus (3.9% of GDP), following the increase in service turnover surplus from tourism, as well as the increase in inflows from EU funds and the increase in remittances. Finally, a stronger financing support from EU funds has led to an increase in investment of 3.4%. However, the investment activity level is still significantly lower compared to the period before the financial crisis (23%), its increase is a precondition for higher economic growth in upcoming years Annual Report Zagrebačka banka dd

29 Personal consumption has continued its growth that started in the previous year, as real disposable income of households in low inflation environment increased, as personal income tax decreased at the beginning of the year. The increase in average net earnings in real terms exceeded 4%. However, the level of personal consumption is still 7% lower than the pre-crisis level. Retail trade turnover has increased considerably in the real terms (+ 4.4%), which is largely due to the record-breaking foreign tourists consumption. In such environment, the trend of households deleveraging is decelerating. Due to low investment activity growth, industrial production grew much slower (+1.4%) than in The manufacturing industry was a major contributor, while mining and quarrying of crude oil, as well as gas and electric power generation industries again noted a decrease. Within manufacturing, the fastest growth was in the production of intermediate products (+5.4%). The revitalization of construction industry continued in 2017 at 1.2% growth rate, despite further delay in the realization of some major infrastructural projects. The increase in building construction was 6.7% while civil engineering decreased by 4.2%. Tourism recorded an increase in the number of total nights spent by 10.6% (+11.3% foreign tourists nights) due to increased investments in quality and capacity expansion, instability in distant Mediterranean markets and significant activities aimed to prolong the season duration. Foreign currency tourism revenue increased by 10.5%, to 9.5 billion euros. Significant current account surplus is the result of a surplus of service account and increased inflow of remittances An estimated surplus in the current account balance reached 1.9 billion euros, or 3.9% of GDP was the fifth consecutive year that ended in surplus. It is significantly larger than EUR 1.2 billion in 2016, but still less than EUR 2.0 billion in For six consecutive years, the surplus was realized on the goods and services subaccount, primarily due to the significant surplus in the service exchange segment (+ 7.5% increase compared to 2016). The overall positive was partially offset by the estimated deficit in the goods trade segment which increased by 11.6% (induced by growth in import caused by the increase in personal spending). Significant contributors to overall surplus of the current account balance in 2017 were the increase in government revenue from EU funds and other sources (+ 90.2% in the first nine months of 2017) and the increase in remittances from overseas workers (+3.2%). Despite the absence of major reforms, the consolidated general government deficit further decreased in 2017, the primary surplus has been achieved for the third consecutive year The year began by the new government reducing tax burdens for employees and retirees, reducing the income tax rates as well as the VAT rates for several commodities, primarily in agricultural production. At the same time, VAT rates on catering services increased to a regular rate level. Due to the absence of further public sector reforms, public finances largely depended on the revenue side. Revenue growth was higher than expected, following the trends in employment and increases in personal consumption and investment activity. Therefore, despite the increase in public spending for 2.0% in real terms, the consolidated general government deficit further decreased to some 0.5% of GDP. Such performance is strongly supported by decrease in financial expenditure. Republic of Croatia seized the opportunity of historically low levels of interest rates in international financial markets. Furthermore, European Commission (hereinafter: EC ) abrogated the Excessive Deficit Procedure ( EDP ), decreasing the risk premium for the Republic of Croatia and stimulating sovereign credit rating improvements. The central government was also enjoying favorable terms and liquidity in the domestic market. However, EC still recommended initiating radical structural reforms in the public sector, in particular in public administration and health system, in order that the positive fiscal situation becomes sustainable. Per our estimates, the general government debt slightly increased in the nominal terms by the end of 2017, to HRK 290 billion, while its share in GDP decreased from 82.7% to 80.4%. During the year, the Ministry of Finance issued four domestic bonds with maturities from 5 to 15 years in total value of HRK 17.3 billion with much lower yields than in previous years. Two euro bonds in the total value of EUR bn were issued in the international market, with maturities of 10 and 12 years and interest rates of 3% and 2.75%. The latter was linked to debt restructuring efforts in road sector. Zagrebačka banka dd 2017 Annual Report 29

30 Overview of the Croatian economy in 2017 Overview of the Croatian economy in 2017 (Continued) With the modest growth in energy prices deflationary pressures ceased; dominant 2017 inflation drivers were moderate increases in food products prices In 2017 consumer prices in the Republic of Croatia increased by 1.1% on average, mainly due to the stimulus generated by the increase in the price of imported energy during the late 2016 and early The current year-on-year increase in prices reached 1.2% in December 2017 with increase in food prices of 2.2%. Core inflation (prices excluding prices of energy products and food products) has increased by 1.4% in the year. Continuation of trends in the labor market - decline in unemployment, partly due to increased emigration Registered unemployment has decreased significantly in 2017 (by 49,254). However, despite increased emigration and increased employment growth, the total number of unemployed remains relatively high - at the end of 2017 there were 187,363 unemployed. The registered unemployment rate decreased from 14.7% to 12.2%. The ILO unemployment rate decreased from 13.1% in 2016 to an estimated 11.8% in During the third quarter, the unemployment rate decreased to 10.2%. The number of employees per Croatian Pension Insurance Institute register was 2.4% higher at the end of December 2017 (yoy). The number of employed persons in legal entities increased by 2.9%, in crafts by 1.5%, while the number in freelance professions and individual farmers continues to decrease (-2.1% and - 0.7%, respectively). With the economy revival, real gross wages increased by 2.8% in 2017, while the real net wages increase was higher - 4.2% (largely due to tax relief). The Central bank continues its efforts to stimulate bank lending to the real economy, while preserving prices and exchange rate stability In 2017 the CNB continued to expand monetary policy by efforts to maintain high liquidity in the banking system without jeopardizing the stability of the exchange rate, with the goal to increase placements to the real sector in order to support the economic growth. In addition to continuing regular weekly reverse repurchase operations, CNB also initiated one structural repo operation. By this measure (of HRK 530 million, with closing interest rate of 1.2%) CNB supported high level of long-term kuna liquidity. This increased excess liquidity on banks accounts with the CNB and supported decrease in interest rates to new historic lows. According to the first indications currently available (transaction statistics excluding write-offs and sales of portfolios), the central bank s main objective to increase bank placements to real sector has partly been achieved. However, the full effect is hampered by the corporate sector s low demand for loans, due to slow investment growth. CNB s foreign currency transactions contributed to the increase in kuna liquidity, mostly by the banks sales of foreign currency, in order to lower the appreciation pressures on the kuna exchange rate. Throughout five interventions CNB bought a total of EUR 947 million from banks. CNB additionally bought further EUR 810 million in individual purchases from banks in In the last months of 2017, the exchange rate of the kuna versus euro slightly increased to the level of 7.51 kunas per euro (by 0.6% more than at the end of 2016). However, during the year a kuna s appreciation was stronger (especially in summer). Thus, comparing full year averages, kuna actually appreciated by 0.9% in Such appreciation pressures forced the central bank to react on the market throughout the year. By buying foreign currencies on the local market, CNB s international reserves reached EUR 15.7 billion at the end of 2017 (increase of EUR 2.2 billion or +16.2% compared to the end of the previous year). In , total loans of commercial banks decreased by 4.5% or HRK 11.7 billion. Loans to government (central, local and social security funds) mostly decreased, by HRK 11.2 billion or 21.9%, following the restructuring of the road sector debt and government s preference for borrowings on capital markets. Non-financial corporate loans decreased by HRK 1.2 billion or 1.4%, while loans to households increased by HRK 1.5 billion (+1.2%). The nominal movements were affected by the exchange rate, but even more importantly, by 7 Data source: CNB Monetary Statistics, February Annual Report Zagrebačka banka dd

31 sales of part of the non-performing loan portfolio that continued also throughout this year. In 2017 the banks sold HRK 8.4 billion of non-performing loans (HRK 6.2 billion in NFC segment). It is likely that sales of bad portfolios will continue in the upcoming periods as well. The total deposits in the banking system increased by HRK 8.2 billion (+2.6%) in More than 90% of the increase was on current and giro accounts of corporate sector. Retail deposits grew by HRK 1.1 billion (+0.6%) while the deposit structure changed: sight deposits increased by HRK 14.5 billion (+24.1%), the term deposits decreased by HRK 13.4 billion (-10.0%). Reduced inclination to term deposits is driven by declining trend in interest rates on term deposits, also influenced by a psychological effect after introduction of interest income tax. On the other hand, the strong growth in demand deposits was positively affected by growing households disposable income, especially during the record-breaking tourist season. Banking sector s profitability heavily affected by higher provisions According to the preliminary aggregate CNB s statistical report, in the first nine months of 2017 domestic banking sector recorded a net profit in the amount of HRK 3.6 billion. This is a decrease of HRK 1.5 billion (-29.4%) compared to the previous year, mostly driven by significant increase in loan provisions. Moreover, operating income was also lower, as in 2016 sector realised net gain on sale of shares in VISA Europe Ltd. to Visa Inc. In the revenue structure, the fees and commissions income increased its share as net interest income grew very modestly, mostly due to strong decrease on the interest expense side. Capital adequacy ratio of the Croatian banking sector has increased and as at 31 December 2017 amounts to 23.20% (22.97% as at 31 December 2016). By the end of September 2017, the share of non-performing loans decreased to 11.4% (13.8% at the end of 2016) mainly due to sales of bad loan portfolios. Non-performing loans coverage slightly decreased to 61.5% by the end of September 2017 (63.7% as at 31 December 2016), mostly as sold portfolios were highly covered and new non-performing loans inflows with relatively lower coverage rate. Zagrebačka banka dd 2017 Annual Report 31

32 Improve asset quality. We addressed Italian legacy issues through the sale of a 17 billion portfolio (FINO) and proactive bad loans management. A more disciplined risk management strategy and underwriting processes are driving significant improvements in all our asset quality metrics Annual Report Zagrebačka banka dd

33 Operating and financial review Zagrebačka banka dd 2017 Annual Report 33

34 Operating and financial review 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 2017, Zagrebačka banka dd recorded a profit after tax of HRK 839 million. Return on asset (ROA) of the Bank amounts to 0.82% (2016: 1.63%). Operating income amounted to HRK 4,242 million, decreased by HRK 425 million (-9.1%): Net interest income amounted to HRK 2,722 million, as a result of stable average volume of loans during the year as well as lower funding costs. Net fee and commission income amounted to HRK 1,045 million which is HRK 58 million (+5.9%) higher, due to the increase in payment transaction and credit card fees. Net trading and other income amounted to HRK 475 million, decreased by HRK 476 million (-50.1%). The prior year result has been positively impacted by higher dividend income, net gain from sale of share of Visa Europe Limited and higher trading result. Operating expenses amounted to HRK 1,802 million, increased by HRK 30 million (+1.7%). Cost to income ratio ( C/I ratio ) equals 42.5%. The Bank s assets and liabilities Total assets of the Bank amounted to HRK 102,184 million and have decreased by HRK 2,944 million (-2.8%), mainly under the influence of optimisation of funding sources. Net loans to customers amounted to HRK 61,893 million, decreased by HRK 3,719 million (-5.7%). The total volume of loans is lower due to the sale of part of non-performing portfolio and deleveraging in public sector. Positive trends were realised in loans to retail segment. Deposits from customers represent primary source of funding. At the end of the year they amounted to HRK 77,550 million and have increased by HRK 1,257 million (+1.6%). Loans to deposits ratio amounts to 79.8%. Deposits from banks and borrowings amounted to HRK 5,002 million. The decrease of HRK 3,591 million (-41.8%) is a result of lower funding needs. Capital and reserves - at HRK 15,698 million. The capital adequacy ratio - at 27.75% (31 December 2016: 26.18%). The structure of the Bank s assets For the purpose of analysis, the assets are broken down into four categories; their importance and trends in comparison to the previous year are presented below: 2017 Profit before impairment and other provisions amounted to HRK 2,440 million. The decrease of HRK 455 million (-15.7%) is a result of the previously described movements in Operating income and Operating expenses. Impairment and other provisions amounted to HRK 1,434 million, they have increased by HRK 665 million, mainly due to the increase in impairment losses on placements to companies. Loans and receivables from customers, 61% Structural and liquidity management assets, 35% Investments in subsidiaries and associates, 2% Other assets, 3% Annual Report Zagrebačka banka dd

35 The structure of the Bank s assets comparison to the previous year (in HRK million) 70,000 60,000 50,000 65,612 61, ,000 30,000 35,757 35,362 20,000 10,000 - Loans to and receivables from customers Structural and liquidity management assets 1,6371,637 2,897 2,517 Investments in subsidiaries and associates Other assets Loans and receivables from customers represent the main portion of the Banks s assets and account for 60.5% of total assets (2016: 62.4%). Structure of loans and receivables from customers: % % Gross loans to and receivables from Corporate entities and state and public sector 40, % 46, % Individuals and unincorporated businesses 26, % 27, % Total 67, % 74, % Impairment allowance Corporate entities and state and public sector (4,720) 82.3% (6,140) 72.5% Individuals and unincorporated businesses (1,016) 17.7% (2,332) 27.5% Total (5,736) 100.0% (8,472) 100.0% Net loans to and receivables from Corporate entities and state and public sector 36, % 40, % Individuals and unincorporated businesses 25, % 25, % Total 61, % 65, % The total volume of gross loans is lower due to the sale of part of non-performing portfolio and deleveraging in public sector. Gross loans and receivables from corporate entities and state and public sector have decreased by HRK 5,507 million. They amounted to HRK 40,782 million at 2017 year-end. The Bank continuously monitors quality of assets and continuously increases coverage ratio for impaired loans since It is strongly focused on early identification of problem loans, collection, debt settlements and restructuring. Gross loans and receivables from individuals and unincorporated businesses decreased by HRK 948 million, due to the sale of one part of non-performing portfolio. They amounted to HRK 26,847 at 2017 year-end. Zagrebačka banka dd 2017 Annual Report 35

36 Operating and financial review Operating and financial review (Continued) Structural and liquidity management assets Structural and liquidity management assets represent 35.0% of total assets (2016: 33.64%). Structure of these assets is as follows: Cash and cash equivalents 14,292 9,923 Obligatory reserve with the CNB 5,525 5,540 Loans and receivables from banks 6,407 10,429 Investments in securities and derivatives 9,533 9,470 35,757 35,362 Throughout the year, the Bank maintained the necessary liquidity levels and complied with regulations. The Bank s equity and liabilities The structure of Bank s equity and liabilities as at 31 December 2017: 2017 The structure of Bank s equity and liabilities comparison to the previous year (in HRK million) 60,000 50,000 40,000 30,000 20,000 10, ,177 48,952 Current accounts and deposits from individuals and unincorporated bussines 28,373 27,341 Current accounts and deposits from corporate entities, state and public sector 8,593 5,002 3,934 Borrowings and current accounts and deposits from banks 3,758 Other liabilities Current accounts and deposits from customers ,698 16,484 Equity Current accounts and deposits from customers represent 75.9% (2016: 72.6%) of the total equity and liabilities. They amounted to HRK 77,550 million at 2017 year-end (2016: HRK 76,293 million) which represents an increase of HRK 1,257 million (+1.65%). The increase in current accounts and deposits from corporate entities, state and public sector amounted to HRK 1,032 million (+3.8%), while the increase in current accounts and deposits from individuals and unincorporated businesses amounted to HRK 225 million (+0.5%). Current accounts and deposits from individuals and unincorporated bussines, 48% Current accounts and deposits from corporate entities, state and public sector, 28% Borrowings and current accounts and deposits from banks, 5% Other liabilities, 4% Equity, 15% Current accounts and deposits from individuals and unincorporated businesses represent 63.4% of total deposits from customers (2016: 64.2%). Current accounts and deposits from banks and borrowings Current accounts and deposits from banks and borrowings amounted to HRK 5,002 million, decreased by HRK 3,591 million or 41.8% (in 2016, the decrease in this position was HRK 6,510 million or 43.1%). Deposits from banks amounted to HRK 1,998 million as of 31 December 2017, decreased by HRK 2,863 million (-58.90%). The balance of borrowings decreased by HRK 728 million (-19.51%) to HRK 3,004 million Annual Report Zagrebačka banka dd

37 Equity The Bank s share capital is denominated in HRK and comprises ordinary shares listed on the Zagreb Stock Exchange. The equity of the Bank amounted to HRK 15,698 million on 31 December It represents 15.4% of total funding sources (2016: 15.7%). Capital adequacy ratio reached 27.75% as at 31 December 2017 (31 December 2016: 26.18%). Zagrebačka banka dd 2017 Annual Report 37

38 Transform operating model. The transformation of our operating model is fully on track, including cost discipline and efficiency measures to reduce the cost income ratio. Our FTE and branch reductions are ahead of schedule as we further improve on customer focus, services and products. The digital and IT transformation is fully on track, investments supporting the business transformation with digitalization as a key enabler Annual Report Zagrebačka banka dd

39 Management and corporate governance Zagrebačka banka dd 2017 Annual Report 39

40 Management and corporate governance 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 2017 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 co-ordinating duties. Information on the Bank s shareholders can be found in this Annual Report, under the heading: Notes to the financial statements (Note 31 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 relating to financial reporting are described within this Annual Report, under the heading: Notes to the financial statements (Note 38 - 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. Management Board In line with the provisions of the Bank s Articles of Association, the Bank s Management Board is comprised of three 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 Annual Report Zagrebačka banka dd

41 Management Board and other Bank s by-laws. The responsibilities and scope of competence of the Management Board members are legal, statutory and with supervisory and directional powers in respect of the area of the executive responsibility of the managers of the first hierarchical level who are under their direct competence. 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 2017: Miljenko Živaljić Chief Executive Officer, Chairman Claudio Cesario General Manager, Vice-Chairman Dijana Hrastović Member Lorenzo Ramajola Member Marko Remenar Member Albert Angersbach Member Stefano Gison Member 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. 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 Zagrebačka banka dd 2017 Annual Report 41

42 Management and corporate governance Management and corporate governance (Continued) Declaration of application of the Code of Corporate Governance (continued) 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 2017: 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 Romeo Collina Member Wolfgang Schilk Member (Member as of 30 August 2017) Simone Marcucci Member (Member as of 30 August 2017) 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 Annual Report Zagrebačka banka dd

43 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 of the Zagreb Stock Exchange? Yes. 2. Does the Company have its own Code of Corporate Governance? No. 3. Does the Company have adopted principles of corporate governance within its internal policies? Yes. 4. Does the Company announce within its annual financial reports the compliance with the principles of corporate governance? 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. Are there cases when any of the shareholders is treated differently? (if yes, explain) No. 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) 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. Are there cases when any of the shareholders are 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. Yes. Zagrebačka banka dd 2017 Annual Report 43

44 Management and corporate governance Management and corporate governance (Continued) Code of Corporate Governance Annual questionnaire (continued) 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. 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? Yes. 21. Does the company have independent members in its Supervisory Board and/or its Management Board? (if not, explain) Yes. 22. Is there a long-term succession plan in the company? (If not, explain) Yes. The succession planning is important for the purpose of ensuring the continuity of operations and 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 of the Human Resources function with top management in identifying future business needs and potential successors at all management levels; The efficiency of such approach is reflected in the fact that in 2017 the Bank satisfied the major part of its succession needs for managerial levels from the 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 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 Management Board, i.e. executive directors received from the company or from other persons related to the company, including the structure of such remuneration, been made public (in the annual financial report)? (If not, explain) No. The annual report and public disclosure contain financial information on the Company s aggregate costs in respect of the overall remuneration for the Management Board members. 26. Have detailed records on all remunerations and other earnings of each member of the Supervisory or Management Board received from the company and from other persons related to the company, including the structure of such remuneration, been made public (in the annual financial report)? (if not, explain) Annual Report Zagrebačka banka dd

45 No. Information on cost reimbursement and consideration paid by the Company is disclosed in the decision of the General Meeting. 27. 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, immediately, and no later than three working days as of the date of transaction? (If not, explain) Yes. 28. 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 in that respect. 29. Are there any contracts or agreements between members of the Supervisory or Management Board of the company and the company itself? No. 30. 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. 33. Did the Supervisory or Management Board establish the remuneration committee? Yes. The Remuneration Committee has been established. 34. Did the Supervisory or Management Board establish the audit committee? Yes. The Audit Committee has been established. 35. Was the majority of the audit committee members selected from the group of independent members of the Supervisory Board? (If not, explain) No, in that respect, the Company follows the Corporate Governance Rules of the Group to which it belongs, the Group exercises its own supervisory powers in accordance with the legal regulations applicable to it. 36. Did the audit 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. 37. Did the audit 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. 38. Has the audit 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. 39. 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. Zagrebačka banka dd 2017 Annual Report 45

46 Management and corporate governance Management and corporate governance (Continued) Code of Corporate Governance Annual questionnaire (continued) 40. Did the audit 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. 41. Did the audit 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. 42. Did the audit 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 and the rules of the Holding. 43. Did the audit 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. 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. 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. 48. 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 Annual Report, 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. 49. 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. 50. 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. 51. Does the company have an external auditor? Yes Annual Report Zagrebačka banka dd

47 52. Is the external auditor of the company related with the company in terms of ownership or interests? No. 53. Is the external auditor of the company providing to the company, him/herself or through related persons, other services? Yes. 54. 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. 61. 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. 62. Did the management of the company hold meetings with interested investors, in the last year? No. 63. 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. 55. Does the company have internal auditors? (If not, explain) Yes. 56. Does the company have an internal audit system established? (If not, explain) Yes. 57. Are the semi-annual, annual and quarterly reports available to the shareholders? Yes. 58. Did the company prepare the calendar of important events? Yes. 59. 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. 60. Did the company establish mechanisms to ensure supervision of the flow of inside information and possible abuse thereof? Yes. Zagrebačka banka dd 2017 Annual Report 47

48 Management and corporate governance Management and corporate governance (Continued) Organisation chart Organisation chart of the Bank as of February 2018: Supervisory Board Audit Commitee 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 Affairs 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 Monitoring Special Credits Strategic Risk Management and Risk Control Market, Liquidity, Operational Risk and Risk Integration Internal Validation Retail strategy and business development Product Management Card Business Multichannel Retail sales Commercial Strategy GTB Financing Markets Investment Banking Private Banking International Clients Corporate Special Solutions Corporate Network BC Financial Institutions Planning & Controlling Accounting & Regulatory Reporting Finance Shareholdings Macroeconomic and Market Analysis Operations ICT Organization & Logistics Security Procurement & General Services Division Department Network Unit Team (exemption) Technical structure Annual Report Zagrebačka banka dd

49 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 - Simone Marcucci - Wolfgang Schilk - Members of the Management Board Miljenko Živaljić 130,705 Claudio Cesario - Stefano Gison - Marko Remenar 16,770 Albert Angersbach - Lorenzo Ramajola - Dijana Hrastović 24,062 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. Rewarding The top management and key employees whose professional activities have a significant impact on the risk profile are included in the incentive system. Rewards for the business year are paid in instalments throughout a period of several years, in cash and financial instruments. The Bank s and the Group s strategy and long-term sustainable growth is supported in this way. The annual incentive scheme is also available whereby all employees of the Bank have a right of participation, based upon pre-determined standards and criteria. Employees are rewarded in accordance with results achieved in three levels: individual performance, the performance of the organisational unit and Zagrebačka banka Group/ UniCredit Group as a whole. Reward schemes are continuously reviewed, improved and aligned with local and European regulatory requirements. The incentive schemes promote adequate and efficient risk management and they do not encourage risk-taking beyond the acceptable level for the Bank. Substantial shareholdings The following entities held more than 1.5% of the share capital of the Bank as at 31 December 2017: 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. Employees As at 31 December 2017 the Group had 5,424 employees - in head office, in the branch network and in subsidiaries (of which 4,161 are in the Republic of Croatia). The Bank has 3,923 employees. The practice of continuous learning and internal mobility of employees is in place in order to meet the changing requirements. In this way employees are encouraged to maximise their potential and improve their competencies, which ultimately increases efficiency. Employees of the Bank recognise the possibilities for the realisation of their professional careers, in return they demonstrate high levels of commitment, loyalty and professionalism. Zagrebačka banka dd 2017 Annual Report 49

50 Responsibilities of the Management and Supervisory Boards Responsibilities of the Management and Supervisory Boards for the preparation and approval of the annual financial statements The Management Board of the Bank is required to prepare unconsolidated and consolidated financial statements for each financial year which give a true and fair view of the financial position of the Bank and the Group and of the results of their operations and cash flows, in accordance with applicable accounting standards, and is responsible for maintaining proper accounting records to enable the preparation of such financial statements at any time. It has a general responsibility for taking such steps as are reasonably available to it to safeguard the assets of the Bank and the Group and to prevent and detect fraud and other irregularities. The Management Board is responsibile for selecting suitable accounting policies to conform with applicable accounting standards and then apply them consistently; making judgements and estimates that are reasonable and prudent; and preparing the financial statements on a going concern basis unless it is inappropriate to presume that the Bank and the Group will continue in business. The Management Board is responsible for the submission to the Supervisory Board of its annual report on the Bank and the Group together with the annual financial statements for acceptance. If the Supervisory Board approves the annual financial statements, they are deemed confirmed by the Management Board and Supervisory Board. The Management Board is responsible for the preparation and content of the Management Board Report of Condition of the Bank, Management Board Report of Condition of the Bank s subsidiaries, Declaration of application of the Code of Corporate Governance and the rest of other information, in accordance with the Accounting Act (Official Gazette 78/15, 134/15, 120/16). The unconsolidated and consolidated financial statements set out on pages 60 to 210 as well as the schedules prepared in accordance with the Decision of the Croatian National Bank on the Structure and Content of the Annual Financial Statements of Credit Institutions (dated 3 April 2017, Official Gazette 30/17), were authorised by the Management Board on 28 February 2018 for issuance to the Supervisory Board and are signed below to signify this Annual Report Zagrebačka banka dd