Number of staff on balance-sheet date 3,004 56% 1,921 1,342 Banking outlets on balance-sheet date % Official Exchange Rate (BNB)

Transcription

1 Annual Report 2007

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4 Financial Highlights Financial Highlights Monetary values in BGN Thousand 2007 Change Income Statement Net interest income after provisioning for possible loan losses 164,879 47% 112,402 74,306 Net commission income 40,786 62% 25,119 19,317 Trading profit (loss) 35,492 59% 22,349 20,542 Administrative expenses 122,011 49% 81,949 63,206 Profit before tax 120,542 53% 78,533 52,691 Profit after tax 108,612 62% 66,970 44,544 Balance Sheet Loans and advances to banks 730,997 15% 856, ,827 Loans and advances to customers 3,178, % 1,554,980 1,362,877 Deposits from banks 561,360 17% 479, ,002 Deposits from customers 3,650,538 53% 2,379,419 1,597,311 Equity 547, % 248, ,052 Balance-sheet total 5,996,382 53% 3,907,957 2,808,762 Regulatory own funds Total own funds 591,800 76% 335, ,017 Own funds requirement / According to Local Regulations 503,525 67% 301, ,583 Excess cover 88, % 34,270 22,434 Core capital ratio 9.93% 47% 6.78% 7.89% Own funds ratio 14.10% 6% 13.36% 13.25% Performance Return of equity (ROE) before tax 38.2% 12% 43.4% 36.4% Cost/income ratio 49.7% 3% 48.4% 50.2% Return on assets (ROA) before tax 2.7% 1% 2.6% 2.5% Provisions for possible loan losses/risk-weighted assets/ According to Local Regulations Resources 55,706 2% 54,404 43,858 Number of staff on balance-sheet date 3,004 56% 1,921 1,342 Banking outlets on balance-sheet date % Official Exchange Rate (BNB) 1 EUR BGN BGN BGN

5 General Information General Information Establishment of the Bank Raiffeisenbank (Bulgaria) EAD is the fi rst greenfi eld foreign investment in the Bulgarian banking sector made in Main Shareholder Raiffeisenbank (Bulgaria) EAD is a 100% subsidiary of Raiffeisen International Bank-Holding AG, Vienna. Banking License Raiffeisenbank (Bulgaria) EAD has a full banking license for domestic and overseas banking and fi nancial operations. Profile Raiffeisenbank (Bulgaria) EAD is a universal commercial bank with a focus on corporate and SME lending, retail banking, bonds and securities trading on the local and the international money and capital markets, asset management, etc. Raiffeisenbank (Bulgaria) s rating: Moody s Bank Financial Strength D+ In foreign currency: Moody s Short-Term Foreign Currency Deposit P-3 Moody s Long-Term Foreign Currency Deposit Moody s Outlook Baa3 Positive In local currency: Moody s Short-Term Local Currency Deposit P-2 Moody s Long-Term Local Currency Deposit Moody s Outlook Baa1 Stable 3

6 General Information Correspondent Relations Raiffeisenbank (Bulgaria) EAD has established correspondent banking relations with more than 700 banks world-wide. The Bank maintains over 20 accounts in various currencies with fi rst-class foreign banks. Branch Network As of 31 December 2007 the bank operates through 151 branches; 32 outlets are located in Sofi a. Raiffeisenbank (Bulgaria) EAD has a mobile network of 250 consultants, operating in 13 towns in the country. Raiffeisen group in Bulgaria includes the companies as follows: Company Raiffeisenbank (Bulgaria) EAD Raiffeisen (Services) EAD Raiffeisen Leasing Bulgaria OOD Raiffeisen Auto Leasing Bulgaria OOD Raiffeisen Asset Management (Bulgaria) EAD Raiffeisen Insurance Broker OOD Raiffeisen Real Estate EOOD Raiffeisen Factoring EOOD Percentage of participation 100% ownership of Raiffeisen International Bank-Holding AG, Vienna, Austria 100% ownership of Raiffeisenbank (Bulgaria) EAD 24.5% ownership of Raiffeisenbank (Bulgaria) EAD 75.5% ownership of Raiffeisenbank Leasing International GmbH, Austria 100% ownership of Raiffeisenbank Leasing Bulgaria OOD 100% ownership of Raiffeisenbank (Bulgaria) EAD 100% ownership of Raiffeisenbank (Bulgaria) EAD 100% ownership of Raiffeisenbank (Bulgaria) EAD 100% ownership of Raiffeisenbank (Bulgaria) EAD 4

7 Market Shares Market Shares 5

8 Market Shares 6

9 Contents Contents Statement by the Chairman of the Supervisory Board 8 Vision and Mission 9 Statement by the Chairman of the Management Board 10 Management Report 11 Bulgarian Economy in Key Figures 13 Operations 15 Human Resources 16 Segment Reports 17 Corporate Banking 17 Public Sector and Institutional Clients 17 Retail Banking 18 Branch Network and Alternative Distribution Channels 20 Treasury and Investment Banking 21 Financial Institutions 23 Auditors Report 24 Corporate Social Responsibility 75 The Bank s Management 76 Raiffeisen International and the RZB Group at a Glance 77 Raiffeisen Leasing Bulgaria OOD 79 Raiffeisen Insurance Broker EOOD 81 Raiffeisen Asset Management (Bulgaria) EAD 82 Raiffeisen Factoring EOOD 85 Raiffeisen Real Estate EOOD 86 Raiffeisen Glossary 87 Addresses

10 Statement by the Chairman of the Supervisory Board Statement by the Chairman of the Supervisory Board Ladies and Gentlemen, On behalf of the Supervisory Board of Raiffeisenbank (Bulgaria) EAD, it is my pleasure to present the bank s business results for Raiffeisenbank (Bulgaria) EAD significantly strengthened its position on the local market, once again achieving record results. It took good advantage of the favorable overall economic conditions and the fact that the Bulgarian economy noted signifi cant growth in The improvement of all fi nancial ratios of the bank, in comparison to the already very good year 2006, was possible thanks to the bank s effi cient management and staff, as well as the strong cooperation and support from Raiffeisen International Bank-Holding AG and the whole RZB Group. The Supervisory Board highly judges Raiffeisenbank s achievements. The accomplishment of the ambitious goals for 2007 has resulted in strengthening the bank s position in all areas of its activities. Herbert Stepic Chairman of the Management Board of Raiffeisen International Bank-Holding AG and Deputy Chairman of Raiffeisen Zentralbank Österreich AG (RZB) Despite signifi cant investments, Raiffeisenbank (Bulgaria) EAD posted a record growth clearly above the average of the market during the year under review. Its balance sheet total amounted to more than EUR 3 bln, up 53%. Its distribution network expanded by 40 locations to 151 outlets. Raiffeisenbank (Bulgaria) EAD continued its dynamic growth, especially in the Retail Banking segment. The Supervisory Board is very satisfi ed that the strong growth of the highly specialized companies of the Raiffeisen Group in Bulgaria allowed it to strengthen its positions on the leasing, asset management and insurance brokerage markets. Current market positions, client confi dence and thriving business should ensure that both Raiffeisenbank (Bulgaria) EAD and the RZB Group will further develop favorably in the years to come. On behalf of the Supervisory Board, I thank and congratulate all the bank s employees and its management for the excellent business results they delivered and count on their continual commitment. I also extend our thanks to the clients for choosing Raiffeisenbank (Bulgaria) EAD and other Raiffeisen Group members in Bulgaria as their partners. Herbert Stepic Chairman of the Supervisory Board 8 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

11 Vision and Mission Vision and Mission Raiffeisenbank (Bulgaria) EAD is one of the leading universal banks in the country, offering bank services in all customer segments corporate and investment banking, small and middle sized enterprises and retail banking. We seek long-term customer relationships. We provide contemporary fi nancial services to our customers meeting the highest professional standards and effectively satisfying the customers needs. We seek to be seen as a friendly and constructive partner for our customers and we are pro-active and quick in delivering our services. As a member of the RZB Group, we cooperate closely with Raiffeisen Zentralbank, Raiffeisen International and its Network banks. We empower our employees to be entrepreneurial, to show initiative and we foster their development. We conduct our business with integrity and are committed to create a positive and stimulating working atmosphere. We want to attract and keep the best people whom we offer fi rst class training and help to develop long term careers within our institution. We encourage initiative and reward concrete performance and success. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 9

12 Statement by the Chairman of the Management Board Statement by the Chairman of the Management Board Momtchil Andreev Chairman of the Management Board and Executive Director Ladies and Gentlemen, 2007 was another record year for Raiffeisenbank (Bulgaria) EAD. The bank achieved excellent results across all segments and continued to invest in product development, distribution network and payroll. In 2007 the bank reported record net profi t of BGN 108,61 mln, posting over 62% increase, compared to the end of Balance-sheet total went up by 53.44% to BGN 5,996.4 mln and the loan portfolio doubled, reaching BGN 3,234.6 mln. Total deposits increased dynamically (plus 53.42%), reaching BGN 3,650.5 mln. In 2007 the bank concluded several benchmark deals for the Bulgarian fi nancial market. Raiffeisenbank (Bulgaria) EAD negotiated the largest syndicated loan for a Bulgarian bank so far, for the amount of EUR 325 mln, with the participation of 18 leading global fi nancial institutions. The loan was negotiated at a very competitive price. Raiffeisenbank (Bulgaria) EAD was the investment intermediary of the largest deal on the Bulgarian Stock Exchange, in which 65% of the Bulgarian Telecommunication Company s share capital were transferred. The deal was for the amount of BGN 2 bln. In 2007 Moody s assigned Baa3/P3 rating with positive outlook to Raiffeisenbank (Bulgaria) EAD, equal to the rating of Bulgaria. In 2007 our distribution network was expanded by 40 new offi ces, bringing the total number of outlets to 151. We continued to expand our network of mobile bankers to 250, who offer consumer and mortgage loans, as well as bank cards, deposits and services for small and medium enterprises. We created more than 1000 new permanent jobs, thus bringing the total number of employees to We set up the Raiffeisen Real Estate agency and opened 5 mortgage centers, offering real estate brokerage, fi nancing and insurance under one roof. We established Raiffeisen Factoring, thus bringing the number of Raiffeisen companies in Bulgaria to 8, which cover the full spectrum of fi nancial services. Our leasing company posted one of the most dynamic growths in total assets, increasing its market share from 7.88% to 10.54%. The assets managed by Raiffeisen Asset Management increased by more than 160% to BGN mln, reaching a market share of 14%. In 2007 the number of clients went up 4 times. Two years after the start of its activities Raiffeisen Insurance Broker managed to become one of the leaders on the market. Raiffeisen Services offers to its customers estimates, technical expertise and control. On behalf of the Management board, let me thank all clients, business partners and staff of Raiffeisenbank (Bulgaria) EAD and its subsidiaries, for their contribution to the Group s successful development. I would like to wish all of you new achievements and success in Momtchil Andreev Chairman of the Management Board 10 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

13 Management Report Management Report The Management Board of Raiffeisenbank (Bulgaria) EAD. From left to right: Ani Angelova Member of the MB and Executive Director, Evelina Miltenova Member of the MB and Executive Director, Momtchil Andreev Chairman of the MB and Executive Director, Nadezhda Mihaylova Member of the MB and Procurator, Tzenka Petkova Member of the MB and Executive Director. Bulgarian Economy 2007 Bulgaria s macroeconomic environment remained favourable for local businesses in Economic growth far exceeded average growth rates in the wider EU, bringing unemployment further down and helping the government budget once again achieve a hefty surplus. The C/A gap remained a source of concern, as it expanded to a new record high of 21.5% of the projected GDP for the full year. However, the defi cit remained almost entirely covered by foreign direct investment, while foreign reserves continued to pile up and underpin the stability of the currency board arrangement. The ruling coalition remained solid, despite the escalation of social tension in the course of Negotiations for accession to ERM 2 the waiting room of the Eurozone continued to top the external agenda. Hopes for prompt ERM 2 and Eurozone entry cooled off in late 2007, however, as infl ation ended the year in double-digit territory while infl ation expectations for increased. The economy expanded 5.7% yoy in the fi rst nine months of 2007, and is projected to grow by 5.5% in the full year. Investment growth remained in double-digit territory, increasing its share in GDP to almost 35%. On the supply side, industry and services remained key growth drivers, while agriculture slumped due to dry weather. While the ongoing real estate and construction boom propped up industrial growth, the rapid expansion of banking and other fi nancial businesses supported services growth. The increase of bank credit gradually accelerated from 26.7% yoy in January to 64% yoy in December in response to the growth of the real economy and personal incomes. Despite a sharp increase of infl ation in the second half of 2007, wages saw a 23% increase in real terms in the course of The steep rise of wages refl ected tight labour market conditions and growing scarcity of skilled workers in a number of sectors tourism, construction, engineering, services and some industrial branches. Unemployment remained on a stable downward path in 2007 driven by robust economic growth and job creation primarily in the private sector. The ILO-compliant rate of unemployment fell to an average of 6.9% in 2007 against 9% a year earlier, as employment continued to grow. The employment rate for those aged between 15 and 64 years reached 61.7% for the full year. Despite its persistent increase in the last few years, however, the rate of employment still remains far below the EU-wide target of 70% for 2010 set in the EC s Lisbon Agenda for economic reforms. As in the last few years, fi scal policy remained restrictive in a bid to rein in a widening C/A gap. The general government budget ended 2007 with a new record-high surplus of 3.8% of GDP, helped by prudent spending and better-than-expected tax revenues. Tax income far exceeded the government s projections despite 5pp reduction of the uniform corporate tax rate to 10% from start At the same time, the stock of public debt declined further on prepayment of debts to the IMF in April and lack of defi cit-fi nancing needs. Total public debts reached 20% of GDP at the end of 2007 against 24.7% a year earlier. Following a one-notch Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 11

14 Management Report upgrade of Bulgaria s rating to BBB+ in 2006, S&P s confi rmed the country s ratings and stable outlook in late November, In the course of 2007, Fitch also confi rmed its BBB rating with stable outlook on the sovereign, while Moody s revised upward the outlook on Bulgaria s rating (Baa3) from stable to positive. Despite tight fi scal policies, the C/A defi cit expanded to 21.5% of the projected GDP for the full-2007 against 15.8% a year earlier. As in previous years, the growing defi cit mirrored primarily a widening trade imbalance. The trade defi cit reached 25.9% of GDP, as import growth (18,5%) far outpaced the annual increase of exports (11.7%). Nevertheless, the infl ow of FDI and other types of capital exceeded substantially the C/A outfl ow, and the overall balance of payments remained positive throughout the entire year. As a result, the stock of offi cial foreign reserves continued to pile up, rising by EUR 2,9 bln to EUR 12 bln as of end-2007 and underpinning the stability of the currency board arrangement. Consumer price infl ation ended 2007 at 12.5% yoy after a steep rise in the second half of the year. The leading factor for infl ation acceleration was food prices that grew rapidly in H2 due to world market trends and poor agricultural output at home. Yet higher-than-projected infl ation in 2007 and upward revision of infl ation expectations for reduced chances that Bulgaria will be able to join ERM 2 and the Eurozone in the medium run Bulgarian Banking Sector Overview As of year-end 2007 the Bulgarian banking sector consisted of 24 commercial banks and 5 branches of non-resident banks. Almost 97% of sector s total assets were controlled by private entities, while about 82% of the system was owned by foreign fi nancial institutions. As of 31 December 2007, the sector s total assets reached BGN bln, marking a 40% increase for the full year. Gross deposits marked an increase for another year in a row, by 35% yoy. For the same period, loans extended to companies and households accounted for the highest growth registered to date (67%). Loans to corporates registered the highest growth of 71%, whilst consumer and mortgage lending grew by 59%. The banks gross loan portfolio reached BGN bln, equaling 64% of banking system s total assets. Net profi t increased 42% yoy up to BGN 1,14 bln in 2007, mainly owing to the 40% rise of interest income. In 2007, the banking system reported a good quality of assets, including loan portfolios. The share of classifi ed loans in gross loans totaled 3.68%, including 2.08% of non-performing and rescheduled loans and 1.61% of loans on the watch list. Non-performing loans accounted for a 48% increase yoy, but at the same time loans classifi ed as rescheduled and on the watch list rose by 42.6% and 4.8%, respectively. For another year in a row, profitability (ROA: 2.35%) and capitalization (ROE: 23,75%) ratios registered higher average rates in comparison to other EU countries. The liquidity indicator, refl ecting banks capacity to service their liabilities, rose to 28.2%, which suggested that the banking system s liquidity remained good. In 2007 BNB continued to follow a consistent policy of conservative supervision over local banks. The central bank s increase of the minimum required reserve ratio from 8% up to 12% from start-september was regarded as a restrictive measure, aimed at curbing credit growth. The Law on Credit Institutions that took effect from the date of Bulgaria s accession to the EU introduced a number of changes in the supervisory functions of BNB, such as broadening of the frame of supervision and recuperation measures, as well as implementation of Basel II regulations regarding banks capital adequacy. In 2007, the supervisory authority sticked to its conservative licensing policy, simultaneously assisting ongoing merger and acquisition processes in the local banking market. The merger of three major banks in April, the subsequent acquisition of another bank in November and the reshuffl ing within the top-fi ve banks group did not bring about any signifi cant changes in the market share of the 3 banking groups. As of end-2007, the top fi ve s market share in the total balance sheet of the banking sector was 56.5% Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

15 Management Report Key Figures In 2007 Raiffeisenbank (Bulgaria) EAD proved to be one of the leading banking institutions in the country. The dynamic development of the Bank in 2007, fully supported by its shareholder, is illustrated by the improvement of its market positions at the end of The total assets of the Bank reached nearly BGN 6 bln increasing by 53%. In absolute terms the balance sheet marked a strong growth with BGN 2.1 bln compared to the end The amount of loans granted by Raiffeisenbank (Bulgaria) EAD to private individuals and companies doubled from BGN 1.6 bln in 2006 to BGN 3.2 bln in 2007, while maintaining the excellent quality of the assets. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 13

16 Management Report The total customer deposit base of Raiffeisenbank (Bulgaria) EAD grew by 53% to BGN 3.7 bln year-toyear. During the reporting period, the paid-in capital of the Bank doubled, while the total capital base rose to BGN mln from BGN mln in As of 31 December 2007 the Bank reported a net profi t of BGN mln representing 62% growth compared to 2006 (BGN 66.97mln). The operating income rose 43% to BGN mln. The net interest income was the major contributor and recorded a 35% increase to BGN mln, while the net fees and commissions were up 62% reaching BGN 40.8 mln. Despite the dynamic expansion of the network of Raiffeisenbank (Bulgaria) EAD, in 2007 Cost/Income Ratio increased to 49.7% as compared to 48.4% in Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

17 Management Report In 2007 Raiffeisenbank (Bulgaria) EAD increased its market position by maintaining effi ciency ratios, which are among the best in the sector with Return on Equity (ROE) after tax of 34.5% and Return on Assets (ROA) after tax of 2.4%. Operations During 2007 the Raiffeisenbank (Bulgaria) EAD reported a 57.19% growth of the respective income compared to the previous year. The number of users of Raiffeisen online rose four times compared to 2006 leading to an increase of the electronic banking payments. Local Currency Payments In 2007 the total number of local currency payments initiated by Raiffeisenbank (Bulgaria) EAD clients grew by 13.57% compared to Commission income for the same period grew by 53% and the market share reached 6.72 % as of year-end Real-time local currency payments, processed via RINGS ensured a market share of 12.97% as of 2007 year-end. In 2007 Raiffeisenbank (Bulgaria) EAD strengthened its position as the most active bank, offering the EXPRESS M local currency product. Three years after the product launch, the Bank still keeps a market share of over 61%. Foreign Currency Payments The number of customer clean payments /incoming and outgoing/ in foreign currency grew by 39.55% in 2007, generating a revenue increase from this activity by 43.27%. The upward trend of EUR payments, which in 2007 were 78.5% of the total payments volume, continued. Custody Services The quality and range of custody services, provided by Raiffeisenbank (Bulgaria) EAD to local and foreign customers, along with the opportunities, that the dynamically developing local stock market offers, were among the key drivers for the strong interest of investors in domestic securities issues. In 2007 the volume of assets under custody grew by Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 15

18 Management Report more than 100% compared to December 2006, with an increasing share of non-residents assets. Raiffeisenbank (Bulgaria) EAD is also a reliable partner for companies intending to invest in foreign securities. The Bank s experience and participation in the international fi nancial and capital markets, as well as its accounts held with the leading international depository institutions Euroclear Bank S.A. и Clearstream Banking S.A. are an unconditional advantage for the customers of the Bank. Documentary operations 2007 was successful considering also income generated from documentary business, the number of transactions processed grew by 25.94%, compared to Human resources As of the year-end 2007 the staff of Raiffeisenbank (Bulgaria) EAD grew by 56% to 3004 compared to the previous year. The largest increase 64% was registered in the branch network, where 2209 workers are employed. 81% of the staff are university graduates and the average age is 32 years. The companies in Raiffeisen Group Bulgaria are among the employers offering most attractive working conditions to young university graduates and professionals, who occupy 30% of the new jobs proposed by Raiffeisenbank (Bulgaria) EAD. Through its internship and training programs, more than 250 students started their professional career with the Bank in the fastest developing segments SME lending, Micro lending and Retail business. The Bank also actively recruits specialists for its Mobile Agent Network, which as of reached 250 agents Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

19 Segment Reports Segment Reports Corporate Banking 2007 was another successful year for the corporate banking of Raiffeisenbank (Bulgaria) EAD. The Bank is the 3-rd largest creditor to corporate clients with a market share of 10.64%. As a universal bank, Raiffeisenbank (Bulgaria) EAD offers to small, medium and large companies a full range of banking products including lending, real estate financing, cash management, documentary operations, deposits, foreign exchange, custody, structuring and placement of bond issues, etc. At the end of 2007, the number of corporate customers increased by 43.6% compared to The commercial loans increased by 46% compared to 2006, while the quality of the portfolio remains exceptionally good. Raiffeisenbank (Bulgaria) EAD continued to increase the volume of long-term loans. The attracted funds from corporate customers amounted to BGN mln as at end Nadezhda Mihaylova Member of the MB and Procurator In 2007 the loans extended to small and medium sized customers increased by 95% on a year-to-year basis. The attracted funds from customers in the segment increased by 76%, while the number of small and medium sized customers increased by 47% compared to In 2007 Raiffeisenbank (Bulgaria) EAD opened 12 Microcredit centers in big regional cities. Six Mobile credit centers provided access to fi nance in rural areas. Public Sector and Institutional Clients As of the end of 2007 Raiffeisenbank (Bulgaria) EAD reached 10% market penetration in key clients from the Public sector, compared to 8% at the end of The Bank expanded its relations with the institutional clients, as it reported a19% growth of the attracted institutional clients at the end of December In 2007, Raiffeisenbank (Bulgaria) EAD continued to focus its efforts on the municipalities, as it fi nanced 3 new municipal investment projects with an important social effect. At the end of the year, Raiffeisenbank (Bulgaria) s share in the municipal lending market reached 6%. With the EU perspective, the Bank has established an EU Funds Unit, which offers qualified assistance during project elaboration and implementation, as well as different loan facilities to the benefi ciaries. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 17

20 Segment Reports Retail Banking In 2007 Raiffeisenbank (Bulgaria) EAD continued to actively expand its market positions in the Retail banking segment. The number of retail customers increased by 54% compared to the previous year and at the end of the year exceeded 473 thousand customers. At the end of 2007 the total amount of retail assets reached BGN 584 mln. At the same time total retail liabilities reached BGN mln, showing a growth of 55% compared to In 2007 Raiffeisenbank (Bulgaria) EAD continued to extend the range of products and services for individual clients and introduced the following new products to the market: Housing loan for foreigners the product offers fi nancing for the purchase of real estates in Bulgaria for residents of the United Kingdom and the Republic of Ireland. MIX Deposit a saving product, which is a combination between a standard term deposit and an investment in mutual funds of Raiffeisen Asset Management. Ani Angelova Member of the MB and Executive Director ID card loan the loan gives an opportunity to the clients to get up to BGN with an exceptionally easy and fast procedure. Utility payments the new service offers to the clients an automatic payment of the monthly bills for utility services through the available resources on their current account. Raiffeisen Housing Center In 2007 Rafeisenbank (Bul garia) EAD intro-duced a new concept for complex service of real estate deals under one roof. In the Raiffeisen Housing Center the clients can use property brokerage via Raiffeisen Real Estate Agency, as well as receive financing for the deal via a Housing loan from Raiffeisenbank (Bulgaria) EAD, legal advisory, property evaluation and insurances from Raiffeisen Insurance Broker. In 2007 the number of ATM terminals installed by the Bank grew by 45%, thus reaching a total of 405 at the end of year (125 new ATM terminals). Total number of POS terminals installed by the Bank exceeded 4,071 in 2007, showing a growth of 49% compared to Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

21 Segment Reports In 2007 the number of issued credit cards increased by During the last year the Bank issued more than 125,000 debit cards. The growth in the number of debit and credit cards compared to 2007 was 55%. During the year Raiffeisenbank (Bulgaria) EAD launched three new products, namely: The international revolving credit card MasterCard with chip The international revolving credit card MasterCard Business for SME customers Co-branded revolving credit card Billa Visa Classic with Raiffeisenbank (Bulgaria) EAD and Billa Bulgaria s logo. The co-branded credit card with a supermarket network is a unique product for Bulgaria. All new products are highly secure chip cards, which provide fraud protection to its cardholder s funds. Payment protection insurance was offered to domestic credit card RaiCARD cardholders in August and to all international revolving credit card cardholders in November. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 19

22 Segment Reports Branch Network and Alternative Distribution Channels The branch network of Raiffeisenbank (Bulgaria) EAD increased by 40 new offi ces to reach a total number of 151 offi ces as of the end of The Bank continued further penetration in the capital city and major towns by opening 32 outlets in: Sofi a (13 new offi ces), Blagoevgrad, Burgas (3 new offi ces), Gabrovo, Kazanlak, Kardjali, Kiyustendil, Plovdiv (2 new offi ces), Pleven, Russe, Sliven, Stara Zagora, Shumen, Varna (3 new offi ces). Raiffeisenbank (Bulgaria) EAD also stepped into uncovered smaller markets: Aytos, Bankya, Kostinbrod, Mezdra, Momchilgrad, Nova Zagora, Pavlikeni, Popovo, Harmanli and Cherven Bryag. Raiffeisenbank (Bulgaria) EAD continued to strengthen the position of its agent network of mobile bank consultants as one of the major channels of distribution. As of year-end 2007, the total number of mobile bankers reached 250 (compared to 147 as of yearend 2006). The mobile bankers cover 13 towns countrywide as follows: Sofi a, Plovdiv, Varna, Burgas, Pleven, Russe, Shumen, Pazardjik, Stara Zagora, Blagoevgrad, Sliven, Haskovo and Veliko Tarnovo. The agent network s contribution to the total sales of credit products is measured as follows: 25% of the consumer loans, 5% of the mortgage and housing loans, approximately 30% of the credit cards for individuals, 9% of the micro loans and 3% of the SME loans. At year-end 2007, the total number of customers corporate and individual, exceeded half a million in number and reached , which stands for a 54% growth compared to The credit portfolio of the branch network increased by BGN 1,151 mln (+81%) and the attracted funds by BGN 1,257 mln (+53%) Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

23 Segment Reports Treasury and Investment Banking Foreign Exchange Trading Evelina Miltenova Member of the MB and Executive Director 2007 marked another successful year for Raiffeisenbank (Bulgaria) EAD on the local interbank and customer FX market. The Bank affi rmed its position as a leading market-maker with a 19 % growth of generated FX income, confi rming the clear trend of rising FX volumes above the market average. The continued expansion of the branch network contributed to the increased FX income generated from transactions with clients and leads Raiffeisenbank (Bulgaria) EAD among the top three Bulgarian banks on the local market. Regardless of the tough bank competition, which resulted in tightening of currency spreads, Raiffeisenbank (Bulgaria) EAD managed to evade this trend succeeding in generating higher income as a result of increased transactional volumes and diversifi ed Treasury products structured deposits, derivatives sales (digital options, interest rate swaps, FX swaps and forwards, option forwards), etc. Being an integral part of an international banking group Raiffeisenbank (Bulgaria) EAD successfully exploits the experience of the other network banks and strives to further diversify the range of traded market products and services offered to corporate and institutional clients. Capital Market Operations Raiffeisenbank (Bulgaria) EAD firmed up its position as the leader on the market of debt instruments and one of the major primary dealers in Government securities approved by the Ministry of Finance/BNB. The Bank submitted orders for almost 19% of the total volume of securities offered by the Ministry of Finance for the Jan-Dec 2007 regular BNB auctions of Government securities. The approved face value exceeded 6.5%. At the end of 2007 the total volume of the trading portfolio amounted to nearly BGN 590 mln, almost 10% from the total assets of the bank. The fi xed income portfolio consists primarily of bonds issued by the Bulgarian government and supranational organizations (European Investment Bank), as well as corporate and mortgage-backed securites of high rated local issuers. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 21

24 Segment Reports Raiffeisenbank (Bulgaria) EAD further strengthened its leading role on the local market of newly issued debt instruments corporate and mortgage bonds. In 2007 the Bank reaffi rmed its prime position in this segment having structured and placed debt issues with total nominal value over BGN 265 mln, or a 50% market share. The number of newly launched debt securities managed by Raiffeisenbank (Bulgaria) EAD on the local market reached 10 (26% market share) out of 39, acting as a Lead Manager of 9 issues. With a total turnover reaching nearly BGN 4,6 bln Raiffeisenbank (Bulgaria) EAD took the leading position on the local regulated market BSE-Sofi a AD in terms of traded volume. The Bank was nominated investment intermediary for the sale of 65% of the total share capital of the Bulgarian Telecommunication Company AD and the subsequent realization of a Public Tender Offer towards minority shareholders of the company. In 2007, Raiffeisenbank (Bulgaria) EAD was Lead Manager of the capital increase of one of the most rapidly growing companies in the machine-building sector Hydraulic Elements & Systems, Yambol; Joint Lead Manager of the capital increase of Melinvest Agricultural Land REIT, as well as Co-Manager of the Initial Public Offering of Devin AD, Sofi a. An assessment of Raiffeisenbank s leading position on the local capital market was the award of the Bulgarian Stock Exchange Sofi a Investment Intermediary with highest turnover in Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

25 Segment Reports Financial Institutions The relations of Raiffeisenbank (Bulgaria) EAD with the International and Local Financial Institutions continuously develop and optimize. As of the end of 2007 the Bank maintains correspondent banking relations with over 700 banks and over 20 accounts in different currencies. The network of nostro accounts is subject to continuous improvement whereas fi rst ranked banks are preferred such as Raiffeisen Zentralbank Oesterreich AG Vienna, Deutsche Bank AG - Frankfurt, Commerzbank AG Frankfurt, American Express Bank NA New York, Wachovia Bank NA New York, The Bank of Tokyo-Mitsubishi Tokyo, UBS AG Zurich, Danske Bank Copenhagen; Landesbank Baden-Wuerttemberg Stuttgart; HSBC Bank London, etc. Raiffeisenbank (Bulgaria) EAD has access to the International Financial Markets to fund its expansion. Thus in 2007 Raiffeisenbank (Bulgaria) EAD managed to conclude a landmark transaction for the Bulgarian market, arranging the largest-ever syndicated loan extended to a Bulgarian bank for EUR 325 mln. The deal once again testified the confidence of the international financial community in Raiffeisenbank (Bulgaria) EAD and Bulgaria s banking sector. During the fi rst half of the year, the European Bank for Reconstruction and Development (EBRD) extended a new credit line to Raiffeisenbank (Bulgaria) EAD for EUR 10 mln. The funds under this new facility will be used to fi nance projects of farmers and private sector entrerpreneurs operating in Bulgarian rural areas. Raiffeisenbank (Bulgaria) EAD also attracted funds under credit lines amounting EUR 145 mln (including a guarantee agreement for small and medium-sized enterprises (SMEs) to the amount of EUR 20 mln). As of the end of 2007 the total amount of the fi nancial resources attracted from International Financial Institutions amounted to EUR 470 mln, representing a 59% increase compared to Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 23

26 Independent Auditors Report Independent Auditors Report 24 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

27 Independent Auditors Report Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 25

28 Income Statement 26 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

29 Balance Sheets Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 27

30 Statements of Cash Flows 28 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

31 Statements of Cash Flows Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 29

32 Statements of Changes in Shareholders Equity 30 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

33 Notes to the Financial Statements Notes to the Financial Statements 1. Basis of preparation (a) Reporting entity Raiffeisenbank (Bulgaria) EAD has been entered in the company s register of Sofia City Court on as a subsidiary of Raiffeisen Zentralbank Austria AG (RZB), Vienna. In 2003 the ownership has been transferred in full to Raiffeisen International Bank Holding AG, Vienna, which is the holding company controlling the subsidiaries of RZB in Central and Eastern Europe. In April 2005 Raiffeisen International started a procedure of Initial Public Offer (IPO), directed towards private individuals in Austria, as well as Austrian and international institutional investors. The Bank has a general banking license issued by the Bulgarian National Bank (BNB) according to which it is allowed to conduct all banking transactions permitted by the Bulgarian legislation. (b) Statement of compliance These unconsolidated fi nancial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as adopted by the European Commission. A detailed list of the applicable standards is presented in note 35. These fi nancial statements have been prepared on unconsolidated basis. The consolidated fi nancial statements have been prepared by the Bank in accordance with the Accountancy Act. These unconsolidated fi nancial statements should be read in conjunction with the consolidated fi nancial statements. (c) Basis of measurement These unconsolidated fi nancial statements are prepared on a fair value basis for derivative fi nancial instruments, fi nancial assets and liabilities held for trading, available-for-sale assets and fi nancial instruments at fair value through profi t or loss, except those for which a reliable measure of fair value is not available. Other fi nancial assets and liabilities and non-fi nancial assets and liabilities are stated at amortised cost or historical cost convention. (d) Functional and presentation currency These unconsolidated fi nancial statements are presented in Bulgarian levs (BGN), which is the Bank s functional currency. Except as indicated, fi nancial information presented in BGN has been rounded to the nearest thousand. (e) Use of estimates and judgments The preparation of these unconsolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank s accounting policies. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signifi cant to the fi nancial statements are disclosed in Note 2 (o). 2. Significant accounting policies (a) Income recognition Interest income and expense Interest income and expense are recognized in the income statement for all interest bearing instruments on an accrual basis using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the fi nancial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the fi nancial asset or liability. The effective interest rate is established on initial recognition of the fi nancial asset and liability and is not revised subsequently. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 31

34 Notes to the Financial Statements The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a fi nancial asset or liability. Interest income and expense presented in the income statement include: interest on fi nancial assets and liabilities at amortized cost on an effective interest rate basis interest on investment securities carried at fair value through profi t or loss Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income. Fair value changes Fair value changes on derivatives are presented in net changes in fair value of derivatives in the income statement. Fair value changes of investment securities carried at fair value through profit or loss, are presented in net income from investment securities carried at fair value through profi t and loss in the income statement. Fees and commission Fees and commission are generally recognized on an accrual basis when the service has been provided. Fees and commission income and expenses that are integral to the effective interest rate on a fi nancial asset or liability are included in the measurement of the effective interest rate. Loan commitment fees for loans, that are likely to be drawn down are deferred (together with related direct costs) and are recognized as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognized as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses are recognized on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-apportionate basis. Performance linked fees or fee components are recognized when the performance criteria are fulfi lled. Other fees and commission income, including account servicing fees, sales commission, payments transfer fees, etc., are recognized as the related services are performed. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. Dividends Dividends are recognized in the income statement when the Bank s right to receive payment is established. Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences. (b) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

35 Notes to the Financial Statements monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profi t or loss. (c) Financial assets The Bank classifi es its fi nancial assets in the following categories: trading assets, derivatives, loans and receivables, fi nancial assets at fair value through profi t or loss, held-to-maturity investments and available-for-sale fi nancial assets. Management determines the classifi cation of its investments at initial recognition. (i) Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profi t or position taking. Trading assets and liabilities are initially recognized and subsequently measured at fair value in the balance sheet with transaction costs taken directly to profi t or loss. All changes in fair value are recognized as part of net trading income in profi t or loss. Trading assets and liabilities are not reclassifi ed subsequent to their initial recognition. (j) Derivatives Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash fl ow models and option pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. (ii) Loans and receivables Loans originated by the Bank by providing money directly to the borrower or to a sub-participation agent at draw down, other than those that are originated with the intent of being sold immediately or in the short term which are recorded as trading assets, are categorized as loans originated by the Bank and are carried at amortized cost, which is defi ned as the fair value of cash consideration given to originate those loans as is determinable by reference to market prices at origination date. (iii) Financial assets at fair value through profit or loss The Bank has designated fi nancial assets and liabilities at fair value through profi t or loss when either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis; the designation eliminates or signifi cantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that signifi cantly modifi es the cash fl ows that would otherwise be required under the contract. (iv) Held-to-maturity Held-to-maturity investments are non-derivative fi nancial assets with fi xed or determinable payments and fi xed maturities that the Bank s management has the positive intention and ability to hold to maturity. If the Bank sells other than an insignifi cant amount of held-to-maturity assets, the entire category would be tainted and reclassifi ed as available for sale. (v) Available-for-sale Available-for-sale investments are those intended to be held for an indefi nite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 33

36 Notes to the Financial Statements (vi) Measurement Purchases and sales of fi nancial assets at fair value through profi t or loss, held to maturity and available for sale are recognized on the date of the actual delivery of the assets. Loans are recognized when cash is advanced to the borrowers. All Financial assets except for trading assets are initially recognized at fair value plus transaction costs. Financial assets are derecognized when the rights to receive cash fl ows from the fi nancial assets have expired or when the Bank has transferred substantially all risks and rewards of ownership. Available-for-sale fi nancial assets and fi nancial assets at fair value through profi t or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the fi nancial assets at fair value through profi t or loss category are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of availablefor-sale fi nancial assets are recognized directly in equity, until the fi nancial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in profi t or loss. However, interest calculated using the effective interest method is recognized in the income statement. Dividends on available-for-sale equity instruments are recognized in the income statement when the entity s right to receive payment is established. The fair values of quoted investments in active markets are based on current bid prices. If the market for a fi nancial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, discounted cash fl ow analysis, option pricing models and other valuation techniques commonly used by market participants. (d) Fair values of financial assets and liabilities The determination of fair values of fi nancial assets and fi nancial liabilities is based on quoted market prices or dealer price quotations for fi nancial instruments traded in active markets. For all other fi nancial instruments fair value is determined by using valuation techniques. Valuation techniques include net present value techniques, the discounted cash fl ow method, comparison to similar instruments for which market observable prices exist, and valuation models. The Bank uses widely recognized valuation models for determining the fair value of common and more simple fi nancial instruments like options and interest rate and currency swaps. For these fi nancial instruments, inputs into models are market observable. For more complex instruments, the Bank uses proprietary models, which usually are developed from recognized valuation models. Some or all of the inputs into these models may not be market observable, and are derived from market prices or rates or are estimated based on assumptions. When entering into a transaction, the fi nancial instrument is recognized initially at the transaction price, which is the best indicator of fair value, although the value obtained from the valuation model may differ from the transaction price. This initial difference, usually an increase, in fair value indicated by valuation techniques is recognized in income depending upon the individual facts and circumstances of each transaction and not later than when the market data becomes observable. The value produced by a model or other valuation technique is adjusted to allow for a number of factors as appropriate, because valuation techniques cannot appropriately refl ect all factors market participants take into account when entering into a transaction. Valuation adjustments are recorded to allow for model risks, bid-ask spreads, liquidity risks, as well as other factors. Management believes that these valuation adjustments are necessary and appropriate to fairly state financial instruments carried at fair value on the balance sheet. (e) Derecognition The Bank derecognizes a fi nancial asset when the contractual rights to the cash fl ows from the asset expire, or it transfers the rights to receive the contractual cash fl ows on the fi nancial asset in a transaction in which substantially all the risks and rewards 34 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

37 Notes to the Financial Statements of ownership of the fi nancial asset are transferred. Any interest in transferred fi nancial assets that is created or retained by the Bank is recognized as a separate asset or liability if fair value can be reliably determined. The Bank derecognizes a fi nancial liability when its contractual obligations are discharged or cancelled or expire. The Bank enters into transactions whereby it transfers assets recognized on its balance sheet, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognized from the balance sheet. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. In certain transactions the Bank retains rights to service a transferred financial asset for a fee. The transferred asset is derecognized in its entirety if it meets the derecognition criteria. An asset or liability is recognized for the servicing rights, depending on whether the servicing fee is more than adequate to cover servicing expenses (asset) or is less than adequate for performing the servicing (liability). (f) Cash and cash equivalents Cash and cash equivalents comprise cash balances on hand and in ATM, cash deposited with the Central bank and placements with banks with original maturity of less than 3 months. (g) Investment securities Debt investments that the Bank has the intent and ability to hold to maturity are classifi ed as held-to-maturity assets. Other investments are classifi ed as fi nancial assets at fair value through profi t or loss. (i) Securities borrowing and lending business and repurchase transactions (i) Securities borrowing and lending Investments lent under securities lending arrangements continue to be recognized in the balance sheet and are measured in accordance with the accounting policy for assets held for trading or at fair value through profit or loss. Cash collateral received in respect of securities lent is recognized as liabilities to either banks or customers. Investments borrowed under securities borrowing agreements are not recognized. Cash collateral placements in respect of securities borrowed are recognized under loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognized on an accrual basis over the period of the transactions and are included in interest income or expense. (ii) Repurchase agreements The Bank enters into purchases (sales) of investments under agreements to resell (repurchase) substantially identical investments at a certain date in the future at a fi xed price. Investments purchased subject to commitments to resell them at future dates are not recognized. The amounts paid are recognized in the balance sheet as receivables under repurchase agreements. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognized in the balance sheet and are measured in accordance with the accounting policy for either assets held for trading or at fair value through profi t or loss as appropriate. The proceeds from the sale of the investments are reported in the balance sheet as liabilities on repurchase agreements. The difference between the sale and repurchase considerations is recognized on an accrual basis over the period of the transaction and is included in interest. (j) Borrowings Borrowings are recognized initially at cost, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective yield method. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 35

38 Notes to the Financial Statements If the Bank purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of a liability and the consideration paid is included in net trading income. (h) Offsetting Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Bank has a legally enforceable right to set off the recognized amounts and the transactions are intended to be settled on a net basis. (i) Impairment At each balance sheet date the Bank assesses whether there is objective evidence that fi nancial assets not carried at fair value through profi t or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash fl ows on the asset that can be estimated reliably. The Bank considers evidence of impairment at both a specific asset and collective level. All individually significant financial assets are assessed for specifi c impairment. All signifi cant assets found not to be specifi cally impaired are then collectively assessed for any impairment that has been incurred but not yet identifi ed. Assets that are not individually signifi cant are then collectively assessed for impairment by grouping together fi nancial assets (carried at amortized cost) with similar risk characteristics. Objective evidence that fi nancial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In assessing collective impairment the Bank uses statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgments as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modeling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the fi nancial assets and the present value of estimated cash fl ows discounted at the assets original effective interest rate. Losses are recognized in profi t or loss and refl ected in an allowance account against loans and advances. Short-term balances are not discounted. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profi t or loss. When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Impairment losses on available-for-sale investment securities are recognized by transferring the difference between the amortized acquisition cost and current fair value out of equity to profi t or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profi t or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized directly in equity. Changes in impairment provisions attributable to time value are refl ected as a component of interest income. Loans and advances are presented net of specific and general allowances for impairment. Specific allowances are made against the carrying amount of loans and advances that are identifi ed as being impaired based on regular reviews of outstanding balances to reduce these loans and advances to their recoverable amounts. General allowances are maintained to reduce 36 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

39 Notes to the Financial Statements the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the balance sheet date. The expected cash fl ows for portfolios of similar assets are estimated based on previous experience and considering the credit rating of the underlying customers and late payments of interest or penalties. Increases in the allowance account are recognized in the income statement. When a loan is identifi ed to be not recoverable, all the necessary legal procedures have been completed, and the fi nal loss has been determined, the loan is written off directly. If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the write-down or allowance is reversed through the income statement. The recoverable amount of an equity instrument is its fair value. The recoverable amount of debt instruments and purchased loans re-measured to fair value is calculated as the present value of expected future cash fl ows discounted at the current market rate of interest. (j) Property, plant and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefi ts embodied within the part will fl ow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profi t or loss as incurred. Depreciation Depreciation is recognised in profi t or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Assets % Buildings 4 Equipment Fixtures and fi ttings 15 Vehicles 25 Assets are not depreciated until they are brought into use and transferred from assets in the course of construction into the relevant asset category. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 37

40 Notes to the Financial Statements (k) Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortization and any impairment losses. Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally developed software is recognised as an asset when the Bank is able to demonstrate its intention and ability to complete the development and use the software in a manner that will generate future economic benefi ts, and can reliably measure the costs to complete the development. The capitalised costs of internally developed software include all costs directly attributable to developing the software, and are amortised over its useful life. Internally developed software is stated at capitalised cost less accumulated amortisation and impairment. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefi ts embodied in the specifi c asset to which it relates. All other expenditure is expensed as incurred. Amortization is calculated on a straight-line basis over the expected useful life of the asset. The annual rates of amortization are as follows: Assets % Licences Computer software 30 (l) Provisions A provision is recognized in the balance sheet when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outfl ow of economic benefi ts will be required to settle the obligation. Provisions are determined by discounting the expected future cash fl ows at a pre-tax rate that refl ects current market assessments of the time value of money and, where appropriate, the risks specifi c to the liability. In accordance with IAS 19 Employee benefi ts the Bank has accrued expenses for unused annual leave. Taking into consideration the age stricture of the employees, the Bank does not provide for post employment benefi ts. (m) Acceptances An acceptance is created when the Bank agrees to pay, at a stipulated future date, a draft drawn on it for a specifi ed amount. The Bank s acceptances primarily arise from documentary credits stipulating payment for the goods to be made a certain number of days after receipt of required documents. The Bank negotiates most acceptances to be settled at a later date following the reimbursement from the customers. Acceptances are accounted for as liabilities evidenced by paper. (n) Taxation Tax on the profit for the year comprises current tax and the change in deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the year, using the tax rates enacted by the balance sheet date, and any adjustment of tax payable for previous years. Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts for fi nancial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated on the basis of the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity. The tax rate applicable for 2008 applied in the calculation of deferred income tax amount is 10% ( %) Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

41 Notes to the Financial Statements A deferred tax asset is recognized only to the extent that it is probable that future taxable profi ts will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefi t will be realized. (o) Critical accounting estimates and judgements in applying accounting policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next fi nancial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (i) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash fl ows from a portfolio of loans before the decrease can be identifi ed with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash fl ows. The methodology and assumptions used for estimating both the amount and timing of future cash fl ows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (ii) Held-to-maturity investments The Bank follows IAS 39 guidance on classifying non-derivative fi nancial instruments with fi xed or determinable payments and fi xed maturity as held-to-maturity. This classifi cation requires signifi cant judgment. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specifi c circumstances for example, selling an insignifi cant amount close to maturity it will be required to reclassify the entire category as available for sale. The investments would therefore be measured at fair value and not at amortized cost. (p) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2007, and have not been applied in preparing these fi nancial statements: IFRS 8 Operating Segments, which becomes mandatory for the Bank s 2009 fi nancial statements, will require the disclosure of segment information based on the internal reports regularly reviewed by the Bank s Chief Operating Decision Maker in order to assess each segment s performance and to allocate resources to them. Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Bank s 2009 fi nancial statements. It is not expected to have any impact on the fi nancial statements. IFRIC 11 IFRS 2 Group and Treasury Share Transactions requires a share-based payment arrangement in which an entity receives goods or services as consideration for its own equity instruments to be accounted for as an equity-settled share-based payment transaction, regardless of how the equity instruments are obtained. IFRIC 11 will become mandatory for the Bank s 2008 fi nancial statements, with retrospective application required. The Bank has not yet determined the potential effect of the interpretation. IFRIC 12 Service Concession Arrangements provides guidance on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 12, which becomes mandatory for the Bank s 2008 fi nancial statements, is not expected to have any effect on the fi nancial statements. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 39

42 Notes to the Financial Statements IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13, which becomes mandatory for the Bank s 2009 fi nancial statements, is not expected to have any impact on the fi nancial statements. IFRIC 14 IAS 19 The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and their Interaction clarifi es when refunds or reductions in future contributions in relation to defi ned benefi t assets should be regarded as available and provides guidance on the impact of minimum funding requirements (MFR) on such assets. It also addresses when a MFR might give rise to a liability. IFRIC 14 will become mandatory for the Bank s 2008 fi nancial statements and is not expected to have any impact on the fi nancial statements. 3. Financial Risk Management a. Introduction and overview The Bank has exposure to the following risks from its use of fi nancial instruments: credit risk liquidity risk market risks currency risks Risk management framework The Management Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. The Board has established the Bank s Asset and Liability (ALCO), Credit committee and Operational Risk committees, which are responsible for developing and monitoring Bank risk management policies in their specifi ed areas. All Board committees have both executive and non-executive members and report regularly to the Board of Directors on their activities. The Bank s risk management policies are established to identify and analyze the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. By its nature the Bank s activities are principally related to the use of fi nancial instruments. The Bank accepts deposits from customers at both fi xed and fl oating rates and for various periods and seeks to earn above average interest margins by investing these funds in high quality assets. The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lending to commercial borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances but the Bank also enters into guarantees and other commitments such as letters of credit. The Management places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. A. Credit risk The Bank is permanently exposed to credit risk, arising from the probability that counterparties might default on their contractual obligation under loans and advances when due or in full. Credit risk is the most important risk for the Bank s business; management therefore carefully manages its exposure to credit risk. The Bank has a set of policies and procedures in relation to credit approval and credit exposures management. In addition, the Bank is exposed to off-balance sheet credit risk through commitments under unutilized extended credit lines and issued guarantees Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

43 Notes to the Financial Statements Concentrations of credit risk (whether on or off-balance sheet) might arise from risk exposures to one borrower or group of borrowers, with similar economic characteristics, that might be affected in equal terms by changes in economic or other circumstances in meeting their contractual obligations. The Bank is exposed to credit risk also in result of its trading and investment activities, as well as in result of its activities as an investment broker for its customers or for third parties. For risk management purposes, credit risk arising on trading securities is managed independently, but reported as a component of market risk exposure. The risk that counterparts to fi nancial instruments might default on their obligations is monitored on an ongoing basis. In monitoring credit risk exposures related to trading instruments, consideration is given to instruments with a positive fair value and to the volatility of the fair value of trading instruments. Credit risk measurement In measuring credit risk of loans and advances to customers and to banks at a counterparty level, the Bank refl ects three components (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derives the exposure at default ; and (iii) the likely recovery ratio on the defaulted obligations (the loss given default). These credit risk measurements, which refl ect expected loss and are required by the Basel Committee on Banking Regulations and the Supervisory practices, are embedded in the Bank s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the balance sheet date, rather than expected losses. The bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit offi cer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the Bank are segmented into rating classes, refl ecting the range of default probabilities defi ned for each rating class. This means, that in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their predictive power with regard to default events. The Bank uses the external ratings where available to benchmark the internal credit risk assessment. Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur. Loss given default or loss severity represent the Bank s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type of seniority of claim and availability of collateral or other credit mitigation. For debt securities or other bills, both internal and external ratings are used by the Bank s Treasury for managing of the credit risk exposures, as most of the securities are not rated by external Rating Agencies ratings. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identifi ed in particular, to individual counterparties and groups, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to regular reviews, when considered necessary. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 41

44 Notes to the Financial Statements Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is taking security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specifi c classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: mortgages over residential properties; cash deposits; charges over business assets such as premises, inventory and accounts receivable; charges over fi nancial instruments such as debt securities and equities. Longer-term finance and lending to corporate entities are generally secured; consumer loans for individual persons are generally unsecured. In addition, in order to minimize the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Derivatives The bank maintains strict control limits on net open derivative positions (i.e. the difference between the purchase and sale contracts), by both amount and term. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favorable to the Bank (i.e. assets, where their fair value is positive), which in relation to derivatives is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding. The credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments. Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank s market transactions on any single day. Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specifi c terms and conditions are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specifi c credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. However, any commitments that are unconditionally cancelable at any time by the Bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in the borrower s creditworthiness, are considered by the Bank to bear no risk. Management of credit risk The Supervisory Board has delegated responsibility for the management of credit risk to the Bank s Management Board. The Management Board defines the credit policy based on analysis of the business situation and the assessment of the risk associated 42 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

45 Notes to the Financial Statements with credit business. The scope of the Corporate Lending Policy is to present a clear picture in which direction the corporate credit portfolio in Bulgaria shall develop within the next year. The approval of the Corporate Lending Policy by Supervisory Board ensures, that the steps proposed by the Bank with regards to targeted industries, products, etc. and the subsequent impacts of those steps on the corporate credit portfolio are in line with the plans of the Supervisory Board and therefore in line with the basic strategy of RI Group. A separate Risk management Division, reporting to the Bank s Management Board and RI Credit Risk Management is responsible for: Recommend and manage portfolio concentration limits Provide independent review of limit applications Perform proactive risk management of transactional and portfolio activities Ensure that risk management standards, policies, practices and tools are adhered to by all business units in the credit process Assist the Risk Originating Units/Account Managers in establishing business-specifi c risk management practices (not contradicting standard tools introduced by RI Risk Management) for the approval, measurement, reporting, monitoring, limiting and analysis of credit risk of corporate customers Assist in the identifi cation, classifi cation and management of problematic exposures Ensure that early warning signs reported by the Risk Originating Units are considered properly and internal actions (e.g. downgrading of Customer Rating, Review) are initiated quickly Cooperate with the Risk Originating Unit in establishing the Credit Policy, review the final Credit Policy paper and recommend amendments whenever necessary as well as monitor the compliance of the Bank with the approved Credit Policy. Impairment and provisioning policies The internal and external rating systems focus more on credit quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognized for fi nancial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the fi nancial statements are usually lower than the amount determined from the expected loss model that is used for internal operational management and banking regulation purposes. The Bank applies different approaches with regard to assessment of impairment and determination of the credit loss, depending on the customer segment and product type. Allowances for impairment of 100% of gross exposure for retail customers (including private individuals and micro SMEs) are recognized if: exposure is past due more than 180 days exposure is identifi ed as uncollectible exposure has been restructured in order to help the borrower overcome a temporary fi nancial diffi culty Impairment that cannot be identifi ed for exposures to retail customers on an individual loan basis may still be identifi able on a portfolio basis. Hence, all accounts without objectively signifi cant evidence of loss are included in a group of similar fi nancial assets for the collective assessment. Allowances for impairment are based on previous loss experience for assets with similar credit risk characteristics (product, asset type, customer type, collateral type, sales channel type, past-due status, etc.) with consideration of the current portfolio performance. Accounts that are individually assessed for impairment and identifi ed as impaired are excluded from a collective assessment of impairment, but they may enter into the model, which determines loss factors used for collective allowances for impairment. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 43

46 Notes to the Financial Statements Exposures to corporate customers are evaluated and classified based on the credit risk level, the period of delay of amounts due, the assessment of the debtor s fi nancial state and the main sources for repayment of the debtor s obligations. The allowances for impairment for exposures to corporate customers shown in the balance sheet at year-end is derived from each of the four internal rating grades: Standard exposures Standard exposures are those loans and advances, which are serviced and information on the debtor s fi nancial state gives no ground to assume that the debtor will not repay in full his debts: principal and interest are repaid in accordance with the contractual agreement terms, or payments on them have been past-due up to 30 days, provided the delay is justifi ed or accidental; the debtor uses the loan for the purposes stipulated in the loan agreement; the bank has suffi cient updated information on the debtor s fi nancial state and on the sources for repayment of his liabilities, as well as other documents relating to his activity. Watch exposures Watch exposures are those loans and advances, where insignifi cant weaknesses exist with respect to their servicing or there is a possibility of deterioration in the debtor s fi nancial state, which may question the full repayment of the obligation: principal or interest arrears payments have been past-due 31 to 60 days; the debtor uses the loan for purposes other than those specifi ed in the loan agreement. Substandard exposures Substandard exposures are those loans and advances, where signifi cant weaknesses exist with respect to their servicing, or the available information points to the debtor s unstable fi nancial state, current and anticipated proceeds are insuffi cient for the full repayment of his obligations to the bank and to other creditors, as well as where weaknesses have been found with the distinct possibility that the bank will sustain some loss: principal or interest arrears payments have been past-due 61 to 90 days; the debtor s fi nancial state has substantially deteriorated and may result in inability to repay his obligations. Non-performing exposures Non-performing exposures are those loans and advances, where grave weaknesses exist with respect to their servicing or as a result of the debtor s deteriorated fi nancial state his obligations are deemed uncollectable, even though they have partial recovery value that may be realized in the future: principal or interest arrears payments have been past-due over 90 days; the debtor suffers a permanent shortage of money; the debtor has been declared bankrupt or is in a liquidation procedure, and there is a risk of leaving creditors unsatisfi ed; the claim reported as a balance-sheet item is subject to court proceedings or the court has awarded it to the bank but it has not been collected; other conditions providing grounds to consider that the risk exposure is jeopardized by non-repayment Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

47 Notes to the Financial Statements Loans and advances The total allowance for impairment for loans and advances is BGN 55,706 thousand (2006: BGN 54,404) thousand) of which BGN 43,001 thousand (2006: BGN 48,414 thousand) represents the allowance for impairment and the remaining amount of BGN 12,705 thousand (2006: BGN 5,990 thousand) represents the collective allowance. Loans and advances by risk categories The tables below represent classifi cation of loans and advances by risk categories. December 31, 2007 Retail customers Corporates Total loans Overdrafts Credit Term loans Mortgages Large SMEs cards corporates Standard exposures 6,945 53, , ,388 1,109,569 1,449,539 3,124,816 Watch exposures ,117 49,209 86,545 Substandard exposures ,321 8,109 Non-performing exposures 21 2,236 6, ,574 4,661 15,114 Total 7,246 56, , ,039 1,148,295 1,510,730 3,234,584 December 31, 2007 Retail customers Corporates Total loans Overdrafts Credit cards Term loans Mortgages Large corporates Standard exposures 2,911 33, , , , ,390 1,509,833 Watch exposures ,109 2,511 34,751 19,794 60,017 Substandard exposures ,390 1,155 10,749 9,545 23,011 Non-performing exposures ,281 1,454 5,438 4,667 17,523 Total 2,948 34, , , , ,396 1,610,384 SMEs Information about impairment allowance for each of the applicable risks and past due categories is presented in the table below. Carrying amount before impairment Impairment allowance Carrying amount after impairment Individually impaired 109, ,552 (43,001) (48,414) 66,767 52,138 Watch 86,545 60,018 (25,269) (20,608) 61,276 39,410 Substandard 8,109 23,011 (4,168) (12,109) 3,941 10,902 Non-performing 15,114 17,523 (13,564) (15,697) 1,550 1,826 Collectively impaired 1,030, ,099 (12,705) (5,990) 1,018, ,109 Unimpaired 2,093,892 1,196,733 2,093,892 1,196,733 there of past due loans from 31 to 60 days 10,069 3,322 (2,165) (1,290) 7,904 2,032 from 61 to 90 days 3,087 2,258 (1,412) (1,600) 1, over 91 days 16,759 11,572 (12,502) (10,235) 4,257 1,337 Total 3,234,584 1,610,384 (55,706) (54,404) 3,178,878 1,555,980 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 45

48 Notes to the Financial Statements The following table illustrates the types of collateral for the respective type of impairment. Type of collateral Individually impaired Collectively impaired Unimpaired Total loans Secured by mortgages 79,058 57, , ,861 1,346, ,295 2,074, ,712 Cash collateral 2,953 2,710 2, ,174 22,394 36,883 25,380 Securities 1, ,244 3,580 3,739 3,585 Pledge 2,904 9,472 40,583 1, , , , ,570 Guarantee 5,710 3, ,257 3,767 71,045 6,815 Unsecured 19,143 27, , , , , , ,322 Impairment allowances (43,001) (48,414) (12,705) (5,990) (55,706) (54,404) Total 66,767 52,138 1,018, ,109 2,093,892 1,196,733 3,178,878 1,555,980 Loans by days past due Loans and advances to corporate customers less than 30 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of past due loans and advances by class of customers that were as follows: December 31, 2007 Retail customers Corporates Total loans Overdrafts Credit cards Term loans Mortgages Large corporates Past due up to 30 days 6,911 51, , ,192 1,146,858 1,497,326 3,204,669 Past due days 57 1, ,123 6,146 10,069 Past due days ,775 3,087 Past due days , ,494 5,410 Past due over 181 days 167 2,239 5, ,989 11,349 Total 7,246 56, , ,039 1,148,295 1,510,730 3,234,584 SMEs December 31, 2006 Retail customers Corporates Total loans Overdrafts Credit cards Term loans Mortgages Large corporates Past due up to 30 days 2,913 33, , , , ,718 1,593,232 Past due days ,281 1, ,322 Past due days ,258 Past due days , ,351 1,065 6,221 Past due over 181 days , ,404 5,351 Total 2,948 34, , , , ,396 1,610,384 SMEs Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets. In subsequent periods, the fair value is updated by reference to market price or indexes of similar assets Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

49 Notes to the Financial Statements Loans and advances individually impaired The breakdown of the gross amount of individually impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows: 31 December 2007 Retail customers Corporates Total Overdrafts Credit cards Term loans Mortgages Large corporates Individually impaired loans 301 2,349 6, ,726 61, ,768 Fair value of collateral ,207 53,896 90,625 SMEs 31 December 2006 Retail customers Corporates Total Overdrafts Credit cards Term loans Mortgages Large corporates Individually impaired loans 288 3,327 8,599 5,137 49,042 34, ,552 Fair value of collateral 466 5,076 43,742 23,502 72,786 SMEs Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans. Renegotiated loans that would otherwise be past due or impaired totaled BGN 3,563 thousand as at 31 December 2007 (2006: BGN 28,525 thousand). Concentration of risks of loans and advances by industry sector The following table breaks down the Bank s main credit exposures at their carrying amounts, as categorized by the industry sectors of our counterparties. In BGN Thousand 2007 % 2006 % Manufacturing 783,156 24% 424,413 26% Construction 211,473 6% 82,112 5% Transport 88,611 3% 48,065 3% Trade 933,817 29% 532,611 33% Real estate 382,771 12% 61,265 4% Other 253,447 8% 102,470 7% Individuals 581,309 18% 359,448 22% Gross loans and advances 3,234,584 1,610,384 Less: allowance for impairment (55,706) (54,404) Net 3,178,878 1,555,980 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 47

50 Notes to the Financial Statements (i) Market risk The Bank takes on exposure to market risks, which is the risk that the fair value or future cash fl ows of a fi nancial instrument will fl uctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general or specifi c market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices. The Bank separates exposures to market risk into either trading or non-trading portfolios. The market risks arising from trading and non-trading activities are concentrated in the Bank s Treasury. All marked-to-market instruments are subject to market risk. The instruments are recognized at fair value based on quoted bid prices, and all changes in market conditions directly affect net trading income (through trading instruments) or equity value (through available for sale instruments). The Bank manages its trading portfolios in accordance with the changes in market conditions, as well as through setting of respective limits for the relative instruments. Market risk measurement techniques As part of the management of market risk, the Bank undertakes various hedging strategies. The Bank also enters into interest rate swaps to match the interest rate risk associated with the fi xed-rate long-term debt securities and loans to which the fair value option has been applied. The major measurement techniques used to measure and control market risk are outlined below. Value at risk The Bank applies a value at risk methodology (VAR) to its trading and non-trading portfolios, to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Board sets limits on the value at risk that may be accepted for the Bank, trading and non-trading separately, which are monitored on a regular basis by the Bank s Treasury. VAR is a statistically based estimate of the potential loss on the current portfolio from adverse market movements. It expresses the maximum amount the Bank might lose, but only to a certain level of confi dence (99%). There is therefore a specifi ed statistical probability (1%) that actual loss could be greater that the VAR estimate. The VAR model assumes a certain holding period until positions can be closed (10 days). It also assumes that market moves occurring over this holding period will follow a similar pattern to those that have occurred over 10-day periods in the past. The Bank s assessment of past movements is based on data for the past two years. The Bank applies these historical changes in rates, prices, indices, etc. directly to its current positions - a method known as historical simulation. Actual outcomes are monitored regularly to test the validity of the assumptions and parameters/factors used in the VAR calculation. The use of this approach does not prevent losses outside of these limits in the event of more signifi cant market movements. The quality of the VAR model is continuously monitored by back-testing the VAR results for trading books. All back-testing exceptions and any exceptional revenues on the profi t side of the VAR distribution are investigated, and all back-testing results are reported to the Management board. Stress tests Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests include; risk factor stress testing, where stress movements are applied to each risk category; emerging market stress testing, where emerging market portfolios are subject to stress movements; and ad hoc stress testing, which includes applying possible stress events to specifi c position or regions. The results of the stress tests are reviewed by Management. The stress testing is tailored to the business and typically uses scenario analysis Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

51 Notes to the Financial Statements VAR summary for 2007 and 2006 Trading portfolio VAR by risk type In BGN Thousand 12 months to 31 December 2007 Average High Low Foreign exchange risk Interest rate risk 2,065 3,097 1,323 Price risk 564 2,051 Total VAR 2,780 5,394 1,363 Non-trading portfolio VAR by risk type In BGN Thousand 12 months to 31 December 2007 Average High Low Foreign exchange risk Interest rate risk 714 1, Total VAR 714 1, Trading portfolio VAR by risk type In BGN Thousand 12 months to 31 December 2006 Average High Low Foreign exchange risk Interest rate risk 2,689 3,517 2,089 Total VAR 2,972 4,143 2,164 Non-trading portfolio VAR by risk type In BGN Thousand 12 months to 31 December 2006 Average High Low Foreign exchange risk Interest rate risk 1,569 1,904 1,104 Total VAR 1,569 1,904 1,104 Currency risk The Bank is exposed to currency risk through transactions in foreign currencies. As a result of the currency Board in place in Bulgaria, the Bulgarian currency is pegged to the Euro, therefore currency risk arises from changes in the exchange rate Euro/US dollar. The Bank is not exposed to substantial currency risk due to the fact that it monitors and maintains the proportion between amounts and terms of its US dollar assets and liabilities. The Bank s transactional exposures give rise to foreign currency gains and losses that are recognized in the income statement. These exposures comprise the monetary assets and monetary liabilities of the Bank that are not denominated in the measurement currency of the Bank. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 49

52 Notes to the Financial Statements The foreign currency position of the bank as of 31 December 2007, respectively 31 December 2006 is represented below: December 31, 2007 In BGN Thousand Assets In Bulgarian Levs EUR Other foreign currency Cash and balances with central banks 198, ,111 6, ,997 Trading assets 177, , , ,387 Derivatives 1,067 1,067 Loans and advances to banks 66, , , ,240 Loans and advances to customers 1,161,810 2,001,860 15,208 3,178,878 Receivables under repurchase agreements 892 3,788 4,680 Investment securities 243, ,282 7, ,690 Investments in associates 5,751 5,751 Property and equipment 30,580 30,580 Intangible assets 19,497 19,497 Other assets 4,885 2,540 2,190 9,615 Total assets 1,911,171 3,690, ,735 5,996,382 Liabilities Derivatives 1,302 1,302 Deposits from banks 273, ,367 50, ,360 Deposits from customers 1,652,900 1,679, ,180 3,650,538 Liabilities on repurchase agreements 26,140 21,613 47,753 Debt securities issued 73,612 73,612 Long term borrowings 803, ,666 Subordinated liabilities 179, ,879 Provisions 10,124 10,124 Current tax liabilities 3,356 3,356 Deferred tax liabilities Other liabilities 33,713 69,772 12, ,214 Total liabilities 2,075,259 2,991, ,689 5,448,703 Net position (164,088) 698,721 13, ,679 Total 50 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

53 Notes to the Financial Statements December 31, 2007 In BGN Thousand Assets In Bulgarian Levs EUR Other foreign currency Cash and cash equivalents 188, ,325 5, ,142 Trading assets 216, ,009 97, ,903 Derivatives 3,675 3,675 Loans and advances to banks 69, , , ,467 Loans and advances to customers 605, ,009 16,120 1,555,980 Receivables under repurchase agreements 654 1,546 2,200 Investment securities 210, ,972 8, ,068 Investments in associates 4,701 4,701 Property and equipment 23,024 23,024 Intangible assets 10,798 10,798 Other assets 3,203 2,313 1,483 6,999 Total assets 1,336,546 2,234, ,454 3,907,957 Liabilities Derivative liabilities held for risk management 3,263 3,263 Deposits from banks 249, ,584 43, ,506 Deposits from customers 1,043,511 1,061, ,765 2,379,419 Debt securities issued 100, ,754 Long term borrowings 456, ,476 Subordinated liabilities 179, ,304 Provisions 7,801 7,801 Current tax liabilities 3,911 3,911 Deferred tax liabilities Other liabilities 7,949 33,542 7,816 49,307 Total liabilities 1,414,093 1,919, ,528 3,659,933 Net position (77,547) 315,645 9, ,024 Interest rate risk The Bank s operations are subject to the risk of interest rate fl uctuations to the extent that interest-earning assets and interestbearing liabilities mature or re-price at different times or in differing amounts. In comparison to the other risks the interest rate risk could be minimized trough the mutual management of assets and liabilities. The EU accession and the expectations for stable development of the Bulgarian economy will lead to conversion of interest rates to the current levels in the Euro zone. The policy of the Bank to minimize interest rate risk is to grant fl oating rate loans against the received fl oating rate external fi nancings. Interest rate risk is also managed through the balanced use of different funding sources (borrowings from other local banks, long-term borrowings from foreign banks, customer deposits etc.), as well as through purposeful credit policy, providing for increasing return. Total Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 51

54 Notes to the Financial Statements It is of crucial importance for the Management of the Bank to control the interest rate sensitivity of assets and liabilities. Due to the nature of banking an absolute mismatching in maturities or in periods of re-pricing of contracted interests on fi nancial assets and liabilities is not possible. An unmatched position potentially enhances profi tability, but may also increase the risk of losses. The Bank s interest rate exposures are monitored and managed by generating interest rate sensitivity reports. The majority of the Bank s interest bearing assets and liabilities are structured to match either short-term assets and short-term liabilities, or long-term assets and liabilities with re-pricing opportunities within one year, or long-term assets and corresponding liabilities whereby re-pricing is performed simultaneously. For most interest-bearing assets and liabilities exists a possibility of re-pricing at a relatively short notice and any interest rate sensitivity gaps are considered immaterial. The following table indicates the periods in which interest bearing fi nancial assets and liabilities re-price as at 31 December 2007, respectively 31 December December 31, 2007 In BGN Thousand Up to 3 months From 3 months to 1 year From 1 year to 5 years More than 5 years Total Assets Trading assets 135, , , , ,608 Loans and advances to banks 854, , ,240 Loans and advances to customers 3,176,026 3,176,026 Receivables under repurchase agreements 4,680 4,680 Investment securities 255, , ,573 Total assets 4,426, , , ,487 5,178,127 Liabilities Deposits from banks 319,321 60, , ,888 Deposits from customers 3,300, ,993 98,730 3,638,488 Liabilities on repurchase agreements 47,753 47,753 Debt securities issued 73,612 73,612 Long term borrowings 752,163 51, ,667 Subordinated liabilities 179, ,879 Total liabilities 4,420, , ,102 5,292, Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

55 Notes to the Financial Statements December 31, 2007 In BGN Thousand Up to 3 months From 3 months to 1 year From 1 year to 5 years More than 5 years Total Assets Trading assets 129,954 98, , , ,689 Loans and advances to banks 781,628 74, ,882 Loans and advances to customers 1,554,055 1,554,055 Receivables under repurchase agreements 2,200 2,200 Investment securities 109,081 35, ,241 37, ,733 Total assets 2,576, , , ,663 3,390,559 Liabilities Deposits from banks 478, ,156 Deposits from customers 2,236, ,668 37, ,379,418 Debt securities issued 100, ,754 Long term borrowings 440,829 15, ,476 Subordinated liabilities 179, ,304 Total liabilities 3,334, ,422 53, ,594,108 Management of Market risk Exposure to market risk is formally managed in accordance with risk limits set by senior management by buying or selling instruments. Overall authority for market risk is vested in ALCO. Risk Management Division is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day to-day review of their implementation. Non-trading activities Below is a discussion of the various risks the Bank is exposed to as a result of its non-trading activities and the approach taken to manage those risks. (i) Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its fi nancial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfi ll commitments to lend. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 53

56 Notes to the Financial Statements Liquidity risk management process The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing term deposits, loan drawdown and guarantees. The Bank does not maintain cash resources required to meet all possible outgoing cash fl ows as experience has shown that there is a minimum level of reinvestment of maturing funds that can be predicted with a high level of certainty. The correlation between assets and liabilities, as well as the outgoing and incoming cash fl ows are managed to guarantee the regular and timely fulfi llment of current obligations for the going concern scenario as well as for liquidity shortage. The maturity of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates. The diversifi cation of deposits by type and customer segment, and the past experience of the Bank give reason management to believe that deposits are a long-term and stable source of funding for the Bank. Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The starting point for those projections is an analysis of the contractual maturity of the fi nancial liabilities and the expected collection date of the fi nancial assets. The Bank s Treasury also monitors unmatched medium term assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees. Funding approach Sources of liquidity are regularly reviewed by Treasury to maintain a wide diversifi cation by currency, geography, provider, product and term. Cash flows Non-derivative liabilities The maturity of non-derivative liabilities is expressed as the cash fl ows payable by the Bank under fi nancial liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash fl ows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash infl ows. Derivative liabilities The Bank s derivatives will be settled on a gross basis and include: Foreign exchange derivatives currency forwards, currency swaps Interest rate derivatives single currency interest rate swaps, cross currency interest rate swaps. The maturity table analyses the Bank s derivative fi nancial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash fl ows Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

57 Notes to the Financial Statements As at 31 December 2007 In BGN Thousand Less than 1 month 1-3 months 3 months to 1 year 1-5 years More than 5 years Total inflow/ outflow Non derivative liabilities Deposits from banks (319,321) (60,195) (169,372) (548,888) Deposits from customers (2,848,382) (467,265) (250,494) (115,800) (3,681,941) Liabilities on repurchase agreements (47,790) (47,790) Debt securities issued (353) (3,453) (77,418) (81,224) Long term borrowings (982) (26,946) (41,456) (764,406) (39,218) (873,008) Subordinated liabilities (858) (8,399) (222,763) (232,020) Provisions (7,322) (2,561) (241) (10,124) Current tax liabilities (3,356) (3,356) Deferred tax liabilities (899) (899) Other liabilities (114,312) (631) (114,943) Total non-derivative instruments (3,217,686) (619,201) (366,558) (1,351,289) (39,459) (5,594,193) Derivative liabilities Foreign exchange derivatives Outfl ow (497,603) (9,584) (507,187) Infl ow 497,118 9, ,483 Interest rate derivatives Outfl ow (1,211) (3,403) (11,308) (19,222) (5,500) (40,644) Infl ow 1,046 2,361 8,028 14,845 4,732 31,012 Total derivative liabilities (650) (1,261) (3,280) (4,377) (768) (10,336) Total financial liabilities (contractual maturity dates) (3,218,336) (620,462) (369,838) (1,355,666) (40,227) (5,604,529) Total Assets (expected maturity dates) 1,004,416 1,030,964 1,329,835 1,156,185 1,018,474 5,539,874 Total inflow/(outflow) (2,213,920) 410, ,997 (199,481) 978,247 (64,655) Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 55

58 Notes to the Financial Statements As at 31 December 2006 In BGN Thousand Less than 1 month 1-3 months 3 months to 1 year 1-5 years More than 5 years Total inflow/ outflow Non derivative liabilities Deposits from banks (329,718) (169,824) (499,542) Deposits from customers (2,113,879) (102,193) (116,585) (64,845) (2,397,502) Debt securities issued (335) (3,268) (108,752) (112,355) Long term borrowings (50) (13,087) (311,684) (95,202) (64,518) (484,541) Subordinated liabilities (710) (6,924) (224,317) (231,951) Provisions (6,201) (1,600) (7,801) Current tax liabilities (3,911) (3,911) Deferred tax liabilities (192) (192) Other liabilities (49,307) (49,307) Total non-derivative instruments (2,444,692) (174,699) (440,061) (663,132) (64,518) (3,787,102) Derivative liabilities Foreign exchange derivatives Outfl ow (423,224) (52,904) (100,714) (576,842) Infl ow 423,322 52, , ,973 Interest rate derivatives Outfl ow (1,838) (28) (1,920) (20,305) (59,893) (83,984) Infl ow 1, ,730 18,361 58,292 80,051 Total derivative liabilities (103) 1 (155) (1,944) (1,601) (3,802) Total financial liabilities (contractual maturity dates) (2,444,795) (174,698) (440,216) (665,076) (66,119) (3,790,904) Total Assets (expected maturity dates) 1,004,416 1,030,964 1,329,835 1,156,185 1,018,474 5,539,874 Total inflow/(outflow) (1,440,379) 856, , , ,355 1,748,970 Assets available to meet all of the liabilities and to cover outstanding loan commitments include cash, central bank balances, items in the course of collection and treasury and other eligible bills; loans and advances to banks; and loans and advances to customers. In the normal course of business, a proportion of customer loans contractually repayable within one year will be extended. In addition debt securities and treasury and other bills have been pledged to secure liabilities. Such secured liabilities represent funds, which the bank has attracted from budgetary organizations, amounting to BGN 340 Mio as at 31 December 2007 (2006: BGN 312 Mio). Fair values of financial instruments According to IFRS 7 the Bank discloses fair value information on assets or liabilities for which published market information is readily available and where the fair value is materially different from their recorded amounts. The fair value of cash and cash equivalents, deposits and other current receivables and liabilities is approximately equal to the book value given, because of their short-term maturity. The Bank changes interest rates applicable on customers deposits with fl oating interest rate in accordance with market conditions Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

59 Notes to the Financial Statements Given the fact that the Bank s non-trading fi nancial assets and fi nancial liabilities, which are not designated at fair value through profi t or loss are re-priced on a very short-term basis, their fair value should not signifi cantly differ from the reported carrying amounts. Fair value of fi xed interest rate investment securities held to maturity which are presented with a carrying amount of BGN 22,406 thousand as at December 2007 amounts to BGN 23,679 thousand. Fees and commission income and expenses that are integral to the effective interest rate on a fi nancial asset or liability are included in the measurement of the effective interest rate. As at 31 December 2007 In BGN Thousand Assets Cash and balances with central banks Fair value through profit or loss Held-tomaturity Loans and receivables Available for sale Other amortised cost Total carrying amount Fair value 730, , ,997 Trading assets 639, , ,387 Derivatives 1,067 1,067 1,067 Loans and advances to banks 991, , ,240 Loans and advances to customers 3,178,878 3,178,878 3,178,878 Receivables under repurchase agreements 4,680 4,680 4,680 Investment securities 362,284 22, , ,963 Investments in associates - 5,751 5,751 5,751 Property and equipment 30,580 30,580 30,580 Intangible assets - 19,497 19,497 19,497 Other assets 9,615 9,615 9,615 Total 1,002,738 22,406 4,174, ,440 5,996,382 5,997,655 Liabilities Derivatives 1,302 1,302 1,302 Deposits from banks 561, , ,360 Deposits from customers 3,650,538 3,650,538 3,650,538 Liabilities on repurchase agreements - 47,753 47,753 47,753 Debt securities issued 73,612 73,612 73,612 Long term borrowings 803, , ,666 Subordinated liabilities 179, , ,879 Provisions 10,124 10,124 10,124 Current tax liabilities 3,356 3,356 3,356 Deferred tax liabilities Other liabilities 116, , ,214 Total 1, ,316, ,593 5,448,703 5,448,703 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 57

60 Notes to the Financial Statements As at 31 December 2006 In BGN Thousand Assets Cash and balances with central banks Fair value through profit or loss Held-tomaturity Loans and receivables Available for sale Other amortised cost Total carrying amount Fair value 454, , ,142 Trading assets 623, , ,903 Derivatives 3,675 3,675 3,675 Loans and advances to banks 856, , ,467 Loans and advances to customers 1,555,980 1,555,980 1,555,980 Receivables under repurchase agreements 2,200 2,200 2,200 Investment securities 337,592 28, , ,230 Investments in associates 4,701 4,701 4,701 Property and equipment 23,024 23,024 23,024 Intangible assets 10,798 10,798 10,798 Other assets 6,999 6,999 6,999 Total 965,170 28,476 2,414, ,664 3,907,957 3,909,119 Liabilities Derivatives 3,263 3,263 3,263 Deposits from banks 479, , ,506 Deposits from customers 2,379,419 2,379,419 2,379,419 Liabilities on repurchase agreements - Debt securities issued 100, , ,754 Long term borrowings 456, , ,476 Subordinated liabilities 179, , ,304 Provisions 7,801 7,801 7,801 Current tax liabilities 3,911 3,911 3,911 Deferred tax liabilities Other liabilities 49,307 49,307 49,307 Total 3,263 3,595,459 61,211 3,659,933 3,659,933 Capital management The Bank s objective when managing capital, which is broader concept than the equity on the face of balance sheets, are: To comply with the capital requirements set by the local banking regulator; To safeguard the Bank s ability to continue as a going concern so that it can continue to provide returns for shareholders; 58 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

61 Notes to the Financial Statements To maintain a strong capital base to support the development of its business Capital adequacy and the use of regulatory capital are monitored on a regular basis by the Bank s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by the Bulgarian Central Bank (the Authority), for supervisory purposes. The required information is fi led with the Authority on a quarterly basis. The Authority requires each bank or banking group to (a) hold the minimum level of regulatory capital of BGN 10 Mio, and (b) maintain a ratio of total regulatory capital to the risk-weighted assets at or above 12%. The Bank s regulatory capital is divided into two tiers: Tier 1 capital: share capital and profi t reserves Tier 2 capital: qualifying subordinated loan capital Investments in associates as well as intangible assets are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital. As of December 31, 2007 the Capital base of Raiffeisenbank (Bulgaria) EAD comprises as follows: In BGN Thousand 2007 Tier 1 capital Ordinary share capital 310,073 Retained earnings 128,994 Less intangible assets (19,497) Less investments in companies (2,875) Total 416,695 Tier 2 capital Qualifying subordinated liabilities Total 177,980 Less investments in companies (2,875) Total 175,105 Total Capital base (Own funds) 591,800 The risk-weighted assets are measured by means of groups of risk weights classifi ed according to the nature of and refl ecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposures, with some adjustments to refl ect the more contingent nature of the potential losses. Capital requirements for credit risk cover credit risk and dilution risk in the banking book, counterparty risk in the overall business and settlement risk in the trading book. Capital requirements for market risk cover market risk in the trading book, foreign-exchange and commodity risks in the overall business. Operational risk is calculated on applying the Basic Indicator Approach and represents 15% of the Bank s average annual gross income for the last three years (2006, 2005 and 2004). Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 59

62 Notes to the Financial Statements The additional capital requirements, presented in the table below, are subject to National Discretion of Bulgarian National Bank. They are calculated as 50% of the total capital requirements for credit risk, market risk and operational risk. As of December 31, 2007 the capital requirements for credit, market and operational risks are as follows: In BGN Thousand 2007 Capital requirements for credit risk Exposures to: Central Governments and Central Banks 300 Regional Governments or local authorities 4,428 Administrative bodies and non-commercial undertakings Institutions 18,723 Corporates 178,921 Retail 50,610 Exposures secured on real estate property 22,705 High risk exposures Short-term exposures to institutions and corporates 10,497 Other exposures 3,687 Total capital requirements for credit risk 289,871 Capital requirements for market risk 27,737 Capital requirements for operational risk 18,075 Total capital requirements for credit risk, market risk and operational risk 335,683 Additional capital requirements subject to National Discretions from the Regulator 167,842 Total regulatory capital requirements 503,525 Capital Base (Own funds) 591,800 there of Tier I 416,695 Free equity (own funds) 88,275 Total capital adequacy ratio 14.10% Tier I ratio 9.93% 4. Segment Analysis The Bank is divided into four main business segments: Retail customers incorporating private banking services, private customer current accounts, savings, deposits, credit and debit cards, consumer loans and mortgages; Large corporates incorporating current accounts, deposits, overdraft facilities, loan and other credit facilities, real estate fi nancing, foreign currency and derivative products; SMEs incorporating current accounts, deposits, overdraft facilities, loan and other credit facilities, micro lending, foreign currency and derivative products; Proprietary business incorporating business transactions conducted on own account and risk of the Bank that are originated from managing market risk positions like FX-dealing, securities and derivatives trading, money market trading, liquidity management and funding, strategic positioning (investment portfolio), interest rate gapping (maturity transformation) Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

63 Notes to the Financial Statements As at 31 December 2007 In BGN Thousand Retail customers Large corporates SMEs Proprietary business Other Total Segment operating income 55,635 61, ,305 7,927 12, ,795 Segment assets 581,309 1,145,566 1,507,709 2,634, ,021 5,996,382 Segment liabilities 1,219,749 1,733, ,478 1,479, ,861 5,448,703 Impairment charge (5,238) 13,203 (9,206) (1,241) Operating expenses (51,261) (22,299) (44,625) (2,841) (985) (122,011) As at 31 December 2006 In BGN Thousand Retail customers Lrge corporates SMEs Proprietary business Other Total Segment operating income 42,786 44,632 71,027 7,097 5, ,771 Segment assets 359, , ,223 2,234,352 63,221 3,907,957 Segment liabilities 785,029 1,198, ,422 1,032, ,549 3,659,933 Impairment charge (5,026) 415 (5,678) (10,289) Operating expenses (32,567) (18,034) (29,507) (1,650) (191) (81,949) 5. Net Interest Income In BGN Thousand Interest income Loans and advances to banks 27,371 18,546 Loans and advances to customers 248, ,827 Investment securities 21,022 13,947 Total interest income 296, ,320 Interest expense Deposits from banks (17,029) (5,026) Deposits from customers (73,350) (39,765) Debt securities issued (4,485) (2,608) Long-term borrowings (25,720) (15,467) Subordinated liabilities (10,222) (5,763) Total interest expense (130,806) (68,629) Net interest income 166, ,691 Net interest income includes interest income and expense for fi nancial assets and fi nancial liabilities that are not held for trading. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 61

64 Notes to the Financial Statements 6. Net Fee and Commission Income In BGN Thousand Fee and commission income Payment transactions 15,306 9,313 Card transactions 8,489 6,456 Cash transactions 6,369 4,529 Opening and maintenance of accounts 8,177 4,787 Other loan fees 3,909 2,398 Documentary transactions 2,787 1,785 Securities business 4,300 1,385 Other Total fee and commission income 49,721 31,025 Fee and commission expense Payment transactions (3,251) (2,403) Guarantees (1,014) (1,033) Card operations (2,626) (1,884) Securities business (1,623) (348) Other (421) (238) Total fee and commission expense (8,935) (5,906) Net fee and commission income 40,786 25,119 Included above is fee and commission income and fee and commission expense other than fees included in determining the effective interest rate. 7. Dividend Income The year ended 31 December 2007 was the fi rst year of dividend payments by the Bank s fully owned subsidiaries. Total dividend received from 2006 profi t amounts to BGN 1,000 thousand. 8. Net Trading Income In BGN Thousand Fixed income 22,863 13,299 Equities 2, Foreign exchange 10,116 8,060 Net trading income 35,492 22,349 Fixed income trading comprises of realized and unrealized dealers margins from changing in market prices of Government treasury bills and corporate bonds, as well as interest rate futures. Trading result from foreign exchange represents the net result arising from purchases and sales of foreign currencies, as well as translation gains arising from the translation of assets and liabilities, denominated in foreign currencies into Bulgarian levs Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

65 Notes to the Financial Statements 9. Net Changes in Fair Value of Derivatives In BGN Thousand Foreign exchange instruments Interest rate instruments (623) 1,008 Net changes in fair value of derivatives (350) 1,351 Foreign exchange instruments represent fx forwards and cross currency swaps. Interest rate instruments are basically interest rate swaps. 10. Net Income from Investment Securities Carried at Fair Value through Profit or Loss In BGN Thousand Net valuation result 1,288 (746) Net proceeds from disposal (1,283) (18) Net result 5 (764) 11. General Administrative Expenses In BGN Thousand Personnel costs (50,737) (33,781) Materials and services (52,914) (34,022) Depreciation and amortization charge (10,854) (7,614) Deposit insurance instalments (7,506) (6,532) Total general administrative expenses (122,011) (81,949) Personnel costs include salaries, social and health security contributions under the provisions of the local legislation. For the year 2007, the average number of employees is 2,357 (2006: 1,585). 12. Allowances for Impairment In BGN Thousand Balance as аt January 1 54,404 43,858 Additional allowances for impairment losses 33,013 27,608 Reversals (31,616) (17,062) Written off receivables (95) Balance as at December 31 55,706 54,404 In BGN Thousand Additional allowances for impairment (33,013) (27,609) Reversal of write downs 31,615 17,062 Recoveries from non performing loans previously written off Impairment losses (1,241) (10,289) Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 63

66 Notes to the Financial Statements The following tables illustrate the breakdown of impairment losses into specifi c and collective allowances for impairment. Individual allowances for impairment In BGN Thousand Balance as аt January 1 48,414 36,540 Additional allowances for impairment losses 24,087 26,087 Reversals (29,405) (14,213) Written off receivables (95) Balance as at December 31 43,001 48,414 Collective allowances for impairment In BGN Thousand Balance as аt January 1 5,990 7,318 Additional allowances for impairment losses 8,925 1,521 Reversals (2,210) (2,849) Balance as at December 31 12,705 5,990 Total 55,706 54, Income tax Expense In BGN Thousand Current tax expense (11,223) (11,667) Deferred tax (expense)/income related to origination and reversal of temporary differences (707) 9 Deferred tax (expense)/income resulting from reduction in the tax rate 96 Total tax (expense)/income (11,930) (11,562) Current income tax expense represents the amount of due corporate tax to be paid under Bulgarian law. Deferred tax income or expense results from the change in the carrying amounts of deferred tax assets and deferred tax liabilities. The relationship between tax expense and accounting profi t is as follows: In BGN Thousand Accounting profi t 120,542 78,533 Tax at the applicable tax rate (15% for 2006, 10% for 2007, 10% for 2008) (12,054) (11,780) Tax effect on permanent differences Tax effect from change in the tax rate 96 Total tax expense (11,930) (11,562) Effective tax rate 9.90% 14.72% 64 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

67 Notes to the Financial Statements Reported deferred tax liabilities at December 31, 2007 and 2006 comprise the following: In BGN Thousand Assets Liabilities Net (Assets)/ Liabilities Fixed assets Unused leave of personnel (256) (160) (256) (160) Other provisions (732) (732) Provisions for loan impairments 1,420 1,420 Net (Assets)/Liabilities (988) (160) 1, Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 10% effectively January, 1st Movements in temporary differences during the year are recognized in income statement on the following items: Movements during the year Deferred taxes 2007 Changes 2006 In BGN Thousand Income statement loss/(profit) Fixed assets 467 (115) 352 Unused leave of personnel (256) 96 (160) Other provisions (732) 732 Provisions for loan impairments 1,420 (1,420) 899 (707) Cash and Balances with the Central Bank In BGN Thousand Cash on hand 82,530 42,630 ATM cash 26,613 20,410 Current account with BNB in Bulgarian Levs 116, ,712 Obligatory minimum reserve with BNB in foreign currency 505, ,390 Total 730, ,142 The current account with the Central Bank is used for direct participation in the money and treasury bills markets and for settlement purposes. As of December 31, 2007, the Bank maintains minimum obligatory reserve in EUR with the Central Bank, calculated as 12% on the deposits in foreign currency. The minimum reserve for deposits in Bulgarian levs is also 12% and is covered by the current account with BNB. In 2007 the Bulgarian Central Bank increased minimum reserves from 8% in 2006 to 12%. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 65

68 Notes to the Financial Statements 15. Trading Assets In BGN Thousand Bulgarian government securities 343, ,104 Bulgarian corporate bonds 207, ,510 Foreign corporate bonds 81,347 87,076 Equities 4,975 2,005 Interest rate futures 1, Total trading assest 639, ,903 As at 31 December 2007 Bulgarian Government bonds with a fair value of BGN 45,858 thousand are pledged under repurchase agreements. All repurchase agreements mature within 1 month. 16. Derivatives The Bank uses the following derivative instruments for both hedging and non-hedging purposes. Currency forwards represent commitments to purchase foreign and domestic currency, including undelivered spot transactions. Currency and interest rate swaps are commitments to exchange one set of cash fl ows for another. Swaps result in an economic exchange of currencies or interest rates (for example fi xed interest for fl oating rate) or a combination of all these (i.e. cross currency interest rate swaps). No exchange of principal takes place, except for certain currency swaps. The Bank s credit risk represents the potential cost to replace the swap contracts if counterparties fail to fulfi ll their obligations. The risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. The following table indicates all derivative instruments held by the bank. In BGN Thousand Contract /notional amount Fair values Assets Liabilities As at 31 December 2007 Currency forwards 765,812 1, Forex swaps 195,583 5 Interest rate swaps 106, ,068,132 1,067 1,302 As at 31 December 2006 Currency forwards 569,512 3,488 3,241 Forex swaps 7, Interest rate swaps 56, ,979 3,675 3, Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

69 Notes to the Financial Statements 17. Loans and Advances to Banks (a) Analysis by currency In BGN Thousand Bulgarian levs 66,330 68,541 Foreign currency 924, ,926 Total 991, ,467 (b) Geographical analysis In BGN Thousand Domestic banks 81,748 27,884 Foreign banks 909, ,583 Total 991, , Loans and Advances to Customers In BGN Thousand Individual (retail customers) Overdrafts 7,246 2,948 Credit cards 56,184 34,875 Term loans 145, ,122 Mortgages 367, ,087 Corporate entities: Large corporates 1,148, ,956 SMEs 1,510, ,396 Gross loans and advances 3,234,584 1,610,384 Less: allowance for impairment 55,706 54,404 Net 3,178,878 1,555,980 Included in loans and advances to customers are confi rmed letters of credit for BGN 2,852 thousand as at 31 December 2007, 1,925 thousand as of December 31, 2006 respectively. During the past two years the Bank has transferred and derecognized from its balance sheet total volume of loans to customers for the equivalent of BGN 1,344 Mio (as at 31 December 2006: BGN 833 Mio), whereof loans to Individuals BGN 763 Mio and loans to corporate customers BGN 581 Mio. Considering the sold portfolios, total lending business growth during 2007 was 80%. Interest sensitivity Interest rates on most loans are calculated at the cost of funds plus a set margin. Cost of funds depends on the interest-fi xing period and of the respective currency of the loan. Loan margins vary and are based on the loan term and on the credit risk associated with the borrower. In case of overdue loan interest and principal penalty interest is applied. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 67

70 Notes to the Financial Statements 19. Receivables under Repurchase Agreement Receivables under repurchase agreements represent securities purchased under agreements to sell them back to the counterparty on a future fi xed date at a contracted fi xed price. As of December 31, 2007 the receivables under repurchase agreements amount to BGN 4,680 thousand, whereby the fair value of received government securities as pledge on such agreements amounts to BGN 5,425 thousand, (2006: BGN 2,621 thousand fair value of securities received as pledge for receivables under repurchase agreements in the amount of BGN 2,200 thousand). 20. Investment Securities A. Securities at fair value through profit and loss In BGN Thousand Bulgarian government securities 44,079 45,057 Bulgarian corporate bonds 230, ,026 Bulgarian corporate shares Foreign corporate bonds 76,280 86,173 Other 10,580 8, , ,592 In 2005 the Bank formed a security portfolio, neither held for trading not to maturity. The value of this portfolio is the market price of the securities. Gains or losses from changes in fair values of the securities in this portfolio are included in the net profi t or loss for the reporting period in which it occurred. Bulgarian corporate bonds comprise issues of Bulgarian banks and large corporate bank clients. The foreign corporate bonds represent a middle-term bonds issue of EIB in BGN. B. Securities held to maturity In BGN Thousand Bulgarian government securities 20,393 21,493 Bulgarian corporate bonds 2,013 6,983 22,406 28,476 Total Investment securities 384, ,068 Long-term securities held to maturity represent debt investments that the Bank has the intent and ability to hold to maturity Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

71 Notes to the Financial Statements 21. Fixed Assets Cost Total Premises Computer Equipment Office Furniture Motor Vehicles Software Other Intangible fixed assets Assets in process of aquisition January 1, ,578 13,087 27, ,860 9,746 2,169 Additions/(disposals) 27, ,808 8, ,291 10, Write offs (310) (121) (189) December 31, , ,774 35, ,151 20,311 2,264 Accumulated Depreciation and amortization January 1, ,756 7,877 12, ,674 3,144 Charge for the period 10, ,930 3, ,923 2,224 Depreciation of write offs (285) (120) (165) December 31, , ,687 15, ,597 5,368 Net Book Value December 31, 2006 Net Book Value December 31, ,822 5,210 15, ,186 6,602 2,169 50, ,087 20, ,554 14,943 2, Other Assets In BGN Thousand Prepayments and other deferrals 5,804 2,663 Other 3,811 4,336 Total 9,615 6, Deposits from Banks In BGN Thousand Money market deposits Domestic commercial banks 165, ,939 Foreign commercial banks 354, , , ,007 Current accounts Domestic commercial banks 28,631 28,679 Foreign commercial banks 12,363 5,820 40,994 34,499 Total 561, ,506 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 69

72 Notes to the Financial Statements 24. Deposits from Customers In BGN Thousand Large corporate customers Current accounts 679, ,069 Term deposits 1,053, ,899 SMEs Current accounts 521, ,903 Term deposits 176,431 56,519 Retail customers Current accounts 415, ,877 Term deposits 803, ,152 Total 3,650,538 2,379, Debt Securities Issued At October 30th 2006 the bank registered a 3-year BGN unsecured bond emission for a nominal amount of BGN 100 Mio. In 2007 part of the nominal value for the amount of BGN 27,182 thousand was repaid. Debt securities issued are carried at amortized cost amounting to BGN 73,612 thousand as at December 31, 2007 (2006: BGN 100,754 thousand). 26. Long-term Borrowings Long-term borrowings comprise loans attracted from international fi nancial institutions for fi nancing small- and medium-sized companies in the fi eld of environmental protection, energy savings, industry, services and tourism as well as municipalities and private individuals. The purpose of attracting syndycated loans is general funding for on-lending to various core customers of the bank Credit lines from KfW 21,188 19,856 Credit lines from EIB 50,386 55,183 Credit lines from CEDB 72,250 78,703 Credit lines from EBRD 23,847 8,261 Syndicated loan 635, ,473 Total 803, , Subordinated Liabilities With the permission of the Bulgarian National Bank, in March 2001, the Bank entered into an agreement with Raiffeisen Zentralbank Oesterreich AG for a subordinated debt in the form of debt-capital hybrid instrument. These funds are a supplementary capital reserve and increase the capital base of the Bank for regulatory purposes. As at December 31, 2007 the nominal value of the subordinated debt amounts to EUR 91 Mio. Considering accrued interest the carrying amount in the balance sheet as at December 31, 2007 is BGN 179,879 thousand. The repayment of the debt is not bound by any maturity. Management believes that the use of this instrument will be for a term of over 5 years Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

73 Notes to the Financial Statements The treatment of these liabilities for capital adequacy purposes is in accordance with the requirements of local legislation. Any prepayment of subordinated debt prior to its fi nal maturity is subject to written approval from the Bulgarian National Bank. 28. Provisions The bank recognizes a provision for unused holidays, which is the undiscounted amount of the expected short-term income of its employees for the work performed during the current period. Provision is recognized also for other liabilities to its employees, such as bonus payments for the current year. Taking into consideration the age stricture of the employees, the bank does not provide for post employment benefi ts. Based on the analysis of any potential litigation, no provisions for contingent liabilities have been allocated. 29. Other Liabilities In BGN Thousand Transfers in process 100,302 45,745 Other liabilities 15,912 3,562 Total 116,214 49,307 Transfers in process represent customers money transfer orders with value date after December 31, Equity a) Share capital As of December 31, 2007 the registered and fully paid-in capital of the Bank comprised of 310,073,452 registered shares with a par value of BGN 1 each. b) Statutory reserve Statutory reserves comprise amounts appropriated for purposes defined by the local legislation. Under the Bulgarian Commercial Code, the Bank is required to set aside one tenth of its profi t in a statutory reserve until it reaches 10% of its equity. c) Retained earnings The Bank presents under retained earnings section all distributable reserves in excess of the statutory reserves under (b). 31. Commitments and Contingent Liabilities The Bank provides fi nancial guarantees and letters of credit to guarantee the performance of customers to third parties. The contractual amounts of commitments and contingent liabilities are set out in the following table by category. The amounts refl ected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognized at the balance sheet date if counterparts failed completely to perform as contracted. In BGN Thousand Letters of guarantee and letters of credit issued 304, ,674 Unused credit lines 1,246, ,573 Total commitments and contingencies 1,550, ,247 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 71

74 Notes to the Financial Statements These commitments and contingent liabilities have off balance-sheet credit risk because only organization fees and accruals for probable losses are recognized in the balance sheet until the commitments are fulfi lled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash fl ows. 32. Cash and Cash Equivalents For the purposes of the cash fl ow statement, cash and cash equivalents comprises the following balances with less than 90 days original maturity: In BGN Thousand Cash on hand and nostro accounts 113,450 69,036 Current account with the Central Bank 621, ,102 Placements with banks with original maturity of less than 3 months 638, ,171 Total 1,373,839 1,233, Related Party Transactions Parties are considered to be related if one party has the ability to control or exercise signifi cant infl uence over the other party on making fi nancial or operational decisions, or the parties are under common control with the Bank. A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and other transactions. Related party Type of relation Type of transaction Balance as of December 31, 2007 In BGN Thousand Raiffeisen Owner of Raiffeisen Nostro accounts 886 Zentralbank AG International Bank Receivables from deposits 826,159 Holding AG Liabilities on deposits 320,376 Subordinated debt 179,879 Commissions for credit lines and guarantees paid 1,026 Interest income 22,364 Interest expense 19,289 Positive fair value of derivative fi nancial instruments 11 Negative fair value of derivative fi nancial instruments 627 Raiffeisen Leasing Associated company Current accounts, term deposits, leasing liabilities 10,981 Bulgaria OOD RAISA Subsidiary of RZB Operating expenses 1,395 Raiffeisen Insurance Broker Management and employees of the Bank Subsidiary of the Bank Income from SLA 100 Loans and advances 28, Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

75 Notes to the Financial Statements 34. Post Balance Sheet Events There are no events after the balance sheet date that would require either adjustments or additional disclosures in these unconsolidated fi nancial statements. 35. List of Applicable Standards IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IAS 1 IAS 2 IAS 7 IAS 8 IAS 10 IAS 11 IAS 12 IAS 14 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 23 IAS 24 IAS 26 IAS 27 IAS 28 Share-based Payment Business Combinations Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Presentation of Financial Statements Inventories Cash Flow Statements Accounting Policies, Changes in Accounting Estimates and Errors Events after the Balance Sheet Date Construction Contracts Income Taxes Segment Reporting Property, Plant and Equipment Leases IFRIC 10 Interim Financial Reporting and Impairment Revenue Employee Benefi ts Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting by Retirement Benefi t Plans Consolidated and Separate Financial Statements Investments in Associates Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 73

76 Notes to the Financial Statements IAS 29 IAS 31 IAS 32 IAS 33 IAS 34 IAS 36 IAS 37 IAS 38 IAS 39 IAS 40 IAS 41 SIC 7 SIC 10 SIC 12 SIC 15 SIC 13 SIC 21 SIC 25 SIC 27 SIC 29 SIC 31 SIC 32 IFRIC 1 IFRIC 2 IFRIC 4 IFRIC 5 IFRIC 6 Financial Reporting in Hyperinfl ationary Economies Interests in Joint Ventures Financial Instruments: Presentation Earnings per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement Investment Property Agriculture Introduction of the Euro Government Assistance No Specifi c Relation to Operating Activities Consolidation Special Purpose Entities Operating Leases Incentives Jointly Controlled Entities Non-Monetary Contributions by Ventures Income Taxes Recovery of Revalued Non-Depreciable Assets Income Taxes Changes in the Tax Currently effective version of an Entity or its Shareholders Evaluating the Substance of Transactions Involving the Legal Form of a Lease Disclosure Service Concession Arrangements Revenue Barter Transactions Involving Advertising Services Intangible Assets Web Site Costs Changes in Existing Decommissioning, Restoration and Similar Liabilities Members Shares in Co-operative Entities and Similar Instruments Determining whether an Arrangement contains a Lease Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Liabilities arising from Participating in a Specifi c market- Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement approach under IAS 29 IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives 74 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

77 Corporate Social Responsibility Corporate Social Responsibility In 2007 Raiffeisenbank (Bulgaria) EAD continued to support signifi cant social, cultural, educational and sustainable projects and events reinforcing its image of a socially engaged and reliable company and contributing for enhancing the value of the Raiffeisen brand. The Bank s donor and sponsor initiatives strengthened its position of a socially responsible organization helping disadvantaged children, students and people of the arts. The Bank made a donation to the H. Stepic CEE Charity. The non-profi t association aims at supporting the disadvantaged above all women, children and adolescents by initiating projects in the countries of Central and Eastern Europe. These projects are intended to give the benefi ciaries new perspective, primarily by supporting and accompanying them on their way towards fi nding employment. Raiffeisenbank supported the St. Nicolas Orphanage in Novi Khan to the St. Trinity Church. The donation was aimed at helping the establishment of a healthcare service. Representatives of the Bank visited the orphanage several times to keep in pace with the life of the children and the process of the new building s construction. University and college students from the whole country received 216 scholarships from Raiffeisenbank. The scholarships were granted to excellent students recommended by the educational institutions. They studied economy, fi nance and other subjects and had a good command of English. Raiffeisenbank traditionally donated the charity initiative The Bulgarian Christmas, which was carried out under the auspices of the President of the Republic of Bulgaria Mr. Georgi Parvanov and which is backed by the media, businesses and society. The donation was granted to support healthcare and medical services and children who needed medical help. In 2007 the Bank made two donations to the Embassy of the Republic of Austria in Bulgaria. The first donation went for supporting the Welcome Event Bulgarien gala night on the occasion of Bulgaria s accession to the European Union. The second one was used for the Wall to Wall Poetry project, within the framework of which every European Union Member State featured poems of their poets on different buildings in Sofi a. The Austrian Embassy published a poem by Wolf Harant on the Sofi a Municipal Library. Raiffeisenbank s involvement in environmental protection through financing energy saving projects boosted the Bank s reputation as a socially responsible company. Raiffeisenbank demonstrated its responsibility for the people and the environment by developing a loan under the Residential Energy Effi ciency Credit Facility (REECL) with the purpose of optimizing the energy used by the households and minimizing their expenses. Raiffeisenbank granted fi nancial support to the Operosa Foundation for encouraging and developing the opera art. The Foundation presents and helps young and talented Bulgarian and International opera singers. The Bank backed the Foundation s Festival in the open at the Evxinograd Residence on the Bulgarian Black Sea coast. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 75

78 The Bank s Management The Bank s Management Shareholders Raiffeisen International Bank-Holding AG 100% Supervisory Board Chairman: Herbert Stepic Chairman of the Managing Board of Raiffeisen International Bank-Holding AG and Deputy Chairman of Raiffeisen Zentralbank Österreich AG (RZB). SB Members: Heinz Hoedl Peter Lenkh Management Board Chairman: Momtchil Andreev Members of the Board: Tzenka Petkova Evelina Miltenova Ani Angelova from Nadezhda Mihaylova 76 Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

79 Raiffeisen International and the RZB Group at a glance Raiffeisen International and the RZB Group at a glance Raiffeisenbank (Bulgaria) EAD is a subsidiary of Raiffeisen International Bank-Holding AG, which in turn is a fully consolidated subsidiary of Vienna-based Raiffeisen Zentralbank Österreich AG (RZB). RZB is the parent company of the RZB Group and the central institution of the Austrian Raiffeisen Banking Group, the country s largest banking group by total assets with the widest local distribution network. RZB and Raiffeisen International have time and again underpinned their reputation as early movers and pioneers in CEE, having founded the fi rst subsidiary bank in Hungary already in 1986, three years prior to the fall of the Iron Curtain. In more than 20 years of market presence, ten banks were founded and another ten were acquired. The resulting network covers the region with universal banks in the following 15 markets, servicing more than 13 mln customers. Albania Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Hungary Kosovo Poland Romania Russia Serbia Slovakia Slovenia Ukraine Raiffeisen Bank Sh.a. Priorbank, OAO Raiffeisen Bank d.d. Bosna i Hercegovina Raiffeisenbank (Bulgaria) EAD Raiffeisenbank Austria d.d. Raiffeisenbank a.s. and ebanka, a.s. Raiffeisen Bank Zrt. Raiffeisen Bank Kosovo J.S.C. Raiffeisen Bank Polska S.A. Raiffeisen Bank S.A. ZAO Raiffeisenbank Raiffeisen banka a.d. Tatra banka, a.s. Raiffeisen Banka d.d. VAT Raiffeisen Bank Aval Raiffeisen International acts as these banks steering company, owning the majority of shares (in most cases 100 or almost 100%). Furthermore, many fi nance leasing companies (including one in Kazakhstan and in Moldova) are part of the Raiffeisen International Group. RZB owns 68.5% of the common stock. The balance is free fl oat, owned by institutional and retail investors. The company s shares are traded on the Vienna Stock Exchange. With its continually growing regional and local presence, as well as its increasing and innovative product spectrum, Raiffeisen International has signifi cantly contributed to the development of both the region s banking environment and its overall economic state. As of 31 December 2007, Raiffeisen International s consolidated profi t (after tax and minorities) rose by 42% to EUR 841 mln. Having grown by 30%, the balance-sheet total amounted to EUR 72.7 bln. The return on equity before tax stood at 25.7%, and the cost/income ratio improved to 57.6%. 3,015 business outlets covered the CEE-region and over 58,000 employees attended to 13.7 mln customers. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 77

80 Raiffeisen International and the RZB Group at a glance Founded in 1927, RZB provides the full range of commercial and investment banking services. It is Austria s third largest bank. As of 31 December 2007, the RZB Group s balance-sheet total amounted to EUR bln, up 19% compared with December IFRS-compliant profi t before tax increased by nearly 16% to EUR 1,485 mln. The return on equity before tax reached 22.2%, and the cost/income ratio was 56.9%. At the reporting date, the Group employed a staff of more than 61,300 worldwide. In addition to its banking operations which are complemented by a representative office in Russia (Moscow) RZB runs several specialist companies in CEE offering solutions, among others, in the areas of M&A, real estate development, fund management and mortgage banking. In Western Europe and the USA, RZB operates a branch in London and representative offi ces in Brussels, Frankfurt, Madrid, Milan, Paris, Stockholm, and New York. A fi nance company in New York (with representative offi ces in Chicago, Houston and Los Angeles) and a subsidiary bank in Malta complement the scope. In Asia, RZB runs branches in Beijing (with a representative offi ce in Zhuhai), Xiamen (China) and Singapore as well as representative offi ces in Ho Chi Minh City, Hong Kong, Mumbai, Tehran and Seoul. This international presence clearly underlines the bank s emerging markets strategy. RZB is rated as follows: Standard & Poor s Short term A-1 Long term A+ Moody s Short term P-1 Long term Aa2 Financial Strength C Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

81 Raiffeisen Leasing Bulgaria Raiffeisen Leasing Bulgaria Dobromir Dobrev Manager Ekaterina Hristova Manager Vassil Koshnicharov Manager Valeri Mlazev Manager Raiffeisen Leasing Bulgaria OOD was established in 2004 with shareholders Raiffeisenbank (Bulgaria) EAD, holding 24.5% of its shares, and Raiffeisen Leasing International GmbH, holding 75.5%. Raiffeisen Leasing Bulgaria OOD owns 100% of the shares of Raiffeisen Auto Leasing Bulgaria EOOD. Raiffeisen Leasing Bulgaria has been an active player on the leasing market for 4 years now. The main leased assets offered to the customers are as follows: new and used vehicles, construction and agricultural machinery, light and heavy trucks, trailers and forklifts, machines and equipment, real estate lease, as well as lease of yachts. As of 31 December 2007 Raiffeisen Leasing Bulgaria OOD and Raiffeisen Auto Leasing Bulgaria EOOD had a market share of 10.54% as per BNB statistics and data from the Bulgarian Association for Leasing (BAL). The new business represented % of the newly generated deals in the leasing sector at purchase price. Raiffeisen Leasing has been the most dynamic developing leasing company on the market for 2 consecutive years, increasing its market share in 2006 from 4.20% to 7.88% (that represents a 3.7% increase) and up to 10.54% in 2007 (a 2.66% increase). As of 31 December 2007 the assets of both Raiffeisen Leasing Bulgaria OOD and Raiffeisen Auto Leasing Bulgaria EOOD increased by 108% to BGN 425 mln, compared to 31 December Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 79

82 Raiffeisen Leasing Bulgaria The net lease receivables of Raiffeisen Leasing Bulgaria and Raiffeisen Auto Leasing Bulgaria as of 31 December 2007 were at the amount of BGN 384,410 thousand. The leased assets were allocated as follows: vehicles 77.7%, equipment 20.1% and real estate 2.2%. The net lease receivables growth in 2007 compared to the previous year represented 109.6%, which proves the extremely dynamic growth of the company. The customers of Raiffeisen Leasing Bulgaria and Raiffeisen Auto Leasing Bulgaria are segmented into corporate ones, which form 63.1% of the total portfolio, followed by small and medium enterprises 27.4%, and private individuals 9.5%. In 2007, the companies attracted and utilized BGN 402 mln in medium- and long-term fi nancing, of which BGN 49 mln from international organizations. At the end of 2007 Raiffeisen Leasing Bulgaria OOD began to utilize a second credit line from the European Bank for Reconstruction and Development at the amount of EUR 10 mln. Raiffeisen Leasing Bulgaria OOD and Raiffeisen Auto Leasing Bulgaria EOOD have registered 15 branches in Bulgaria in the capital city of Sofi a and the regional towns throughout the country Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

83 Raiffeisen Insurance Broker Raiffeisen Insurance Broker Raiffeisen Insurance Broker EOOD, a company founded in 2006, is 100% owned by Raiffeisenbank (Bulgaria) EAD. Raiffeisen Insurance Broker EOOD was listed in the register of the insurance brokers under Registration No 250-3B by the Commission for Financial Supervision on The company s activities are related to intermediation in the process of conclusion of insurance contracts between the customers of the broker and the insurance companies. Raiffeisen Insurance Broker prepares analysis and study of the insurance market, offers insurance products consistent with the individual needs of the customers, administers insurance contracts and offers assistance in case of an accident covered by the insurance policy. Raiffeisen Insurance Broker EOOD clients are Raiffeisen bank s borrowers, Raiffeisen Leasing Bulgaria OOD and Raiffeisen Auto Bulgaria ЕOOD leasers, Raiffeisen Real Estate EOOD, as well as new clients of the Raiffeisen Group. Kremena Kisova Manager Gergina Shumanova Manager As of Raiffeisen Insurance Broker EOOD accumulated BGN 29,345,552 premium income for its partner insurance companies and a market share of 7.29% and again was among the leading insurance brokers on the market. Sales for new bankassurance products life insurances for Raiffeisenbank (Bulgaria) EAD cardholders, started during Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 81

84 Raiffeisen Asset Management (Bulgaria) Raiffeisen Asset Management (Bulgaria) In 2007 Raiffeisen Asset Management (Bulgaria) EAD (RAM) strengthened its leading position as an asset manager and distributor of mutual funds. The company s results stem from the implementation of a successful active market strategy, strong co-operation with Raiffeisenbank (Bulgaria) EAD, the owner of the company, and close collaboration with Raiffeisen Capital Management, Austria. The company remains the only provider on the Bulgarian market offering simultaneously local and foreign mutual funds. RAM manages and distributes four Bulgarian funds that cover the entire risk spectrum from low-risk to balanced and high-risk funds. The fi rst quarter of 2008 is expected to see the launch of another balanced investment scheme, denominated in US dollars, as an alternative investment opportunity for USD holdings. Mihail Atanasov Executive Director Alexander Lekov Executive Director As of 31 December 2007, total assets of the four local funds managed by the company exceed BGN 130,6 mln, which corresponds to an annual increase of 160% and a market share of 13.94%. The reduction of the company s market share by some 2 percentage points against 2006 was due to several large-scale redemptions by clients that reduced their general exposure to collective investment schemes. In 2007, RAM continued to expand the range of investment opportunities offered to clients and launched distribution of two more funds managed by Raiffeisen Capital Management with global focus. Thus, the total number of foreign funds offered to customers grew up to ten. The volume of sales of the ten Austrian funds licensed by the Financial Supervision Commission exceeded EUR 5,15 mln in The number of RAM s clients reached 1,770 in total. Of these, the number of institutional and corporate clients was 32 and 65, respectively. Over 50% of the resources held with RAM s funds were attracted from those two types of customers. In parallel to a successful fund management and distribution activity, last year Raiffeisen Asset Management EAD established itself as leader in the segment of discretionary management. As of 31 December 2007, the company managed funds of 18 clients in the amount of BGN 43.6 mln. The stock of assets under RAM s discretion rose almost 6 times and exceeded the company s expecta Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

85 Raiffeisen Asset Management (Bulgaria) tions by more than 330%. Main discretionary client accounts belong to institutional investors, as over 72% of all such assets were provided by such clients. As of 31 December 2007, the total amount of net assets under management of Raiffeisen Asset Management EAD reached BGN mln. As a result of RAM s dynamic development and with the view of upgrading the quality of services offered, proven professionals joined the company s team. The number of employees reached 19 as of end-2007, which represented a 72% increase compared to a year earlier. In addition, in order to meet adequately the challenges it faces and the objectives it sets, the company continued to raise the level of competence of its employees through a number of courses and trainings. Investment Approach and Achieved Return Raiffeisen Asset Management EAD applies the analytical, information and professional expertise of the Raiffeisen group in taking investment decisions, constructing and managing local funds portfolios. The objective of the company is to achieve sustainable growth of assets under management in the long run, via investment in companies with fundamentally stable fi nancial indicators and high-quality management. The return achieved by the four collective investment schemes is commensurate with the market average, and has been obtained by following investment policies and strategies that match the risk profi le of each fund. In the last two years, the market witnessed a sustainable upward trend for prices of public companies, traded on the Bulgarian Stock Exchange Sofi a, and a substantial increase of the market s headline indexes SOFIX and BG40. Robust economic growth, currency board stability, strict fi nancial and fi scal discipline and membership to the EU can be quoted as key reasons for the upturn of the stock market. The forecasts of a number of reputed economists and investment bankers for the future development of Bulgaria remain upbeat. These analyses and most recent statistical data suggest that the growth rate of the economy will remain above the EU average in the next few years. The Bulgarian stock market is a part of the global capital market and is therefore more and more infl uenced by the dynamics of leading markets. The sub-prime mortgage crisis that broke out in the USA in late 2007 Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 83

86 Raiffeisen Asset Management (Bulgaria) worsened liquidity in the fi nancial markets and affected negatively global economic growth. As a result, investors reduced their risk exposures and share prices on world stock markets decreased. The Bulgarian stock market was not spared by that correction either. Most of the correction, however, was driven by short-term factors related to the restructuring of portfolios of foreign and local investors with speculative risk profi les. The successful implementation of an adequate investment strategy, including international diversifi cation of equity funds, ensured liquid resources that were suffi cient to guarantee investors security and high-quality business management. Achievements 1. As of 31 December 2007, Raiffeisen (Bulgaria) Balanced Fund was the biggest balanced fund in Bulgaria with net asset value of BGN 55.7 mln and achieved return of 24.89% in annualized terms. 2. The net asset value of Raiffeisen Equity Fund reached BGN 61,3 mln as of 31 December, The annualized return of 32.68% went together with high level of diversifi cation, prudent investment and perfect liquidity. 3. A new balanced fund of Raiffeisen Asset Management (Bulgaria) EAD, denominated in US dollars, has already been registered and licensed for sale of units. Distribution of the fund s unit is expected to start in early Consolidated Financial Data In 2007, Raiffeisen Asset Management (Bulgaria) EAD scored revenue of BGN mln. For the same period, its operational expenses totaled BGN mln. The fi nancial result net of taxes was positive at BGN mln for the reported period Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report

87 Raiffeisen Factoring Raiffeisen Factoring Todor Chanev Manager Cvetana Georgieva Manager Kiril Yanchev Manager Raiffeisen Factoring EOOD, a company founded in 2007, is 100% owned by Raiffeisenbank (Bulgaria) EAD. Raiffeisen Factoring EOOD is registered on with court decision 1 dated under company case 13001/2007 of the Sofi a City Court. The company s activities are connected with deals on purchasing accounts receivables, resulting from goods delivery or service rendering, advance fi nancing against invoices with deferred payment, management and collection of trade receivables, coverage of credit risk, fi nance and business consultation. Corporate Social Responsibility The Bank s Management RZB Group RLBG Raiffeisen Insurance Broker RAM Raiffeisen Factoring Raiffeisen Real Estate Raiffeisen Glossary Addresses 85

88 Raiffeisen Real Estate Raiffeisen Real Estate Raiffeisen Real Estate EOOD is a universal real estate agency 100% owned by Raiffeisenbank (Bulgaria) EAD. The company was established in January 2007 and its fi rst offi ce was opened in March 2007 in Sofi a. Raiffeisen Real Estate EOOD is specialized in the fi eld of consultancy and brokerage of residential and commercial properties as well as plots of land. The Agency offers over residential and business properties such as new developments and retail market. Raiffeisen Real Estate EOOD has brokerage agreements with more than 250 investment and construction companies in Bulgaria. The offi ces of Raiffeisen Real Estate EOOD are positioned in Mortgage Centers as part of the Raiffeisenbank (Bulgaria) EAD one stop shop concept for real estate deals. Ani Angelova Manager Nadejda Peneva Manager At the end of 2007 Raiffeisen Real Estate EOOD had offi ces in fi ve Mortgage Centers in Sofi a, Plovdiv, Varna, Burgas and Stara Zagora Statement by the Chairman of the SB Vision and Mission Statement by the Chairman of the MB Management Report Segment Reports Auditor s Report