Tatra banka. Annual Report Slovakia

Transcription

1 Tatra banka Annual Report 2005 Slovakia

2 Annual report 2005

3 Survey of key data according to International Financial Reporting Standards Tatra banka Group Change Income statement Net interest income after provisioning 4,682,521 4,197, % Net fees and commission income 2,289,144 1,805, % Trading profit (loss) 1,140,449 1,544,051 (26.1) % General administrative expenses (5,057,567) (4,703,023) 7.5 % Profit before tax 2,893,884 2,837, % Consolidated profit after tax 2,364,133 2,337, % Earnings per share % Balance sheet Loans and advances to banks 37,608,211 18,900, % Loans and advances to customers 81,075,567 67,755, % Deposits from banks 20,486,181 22,899,143 (10.5) % Deposits from customers 133,428, ,920, % Equity (including consolidated profit) 13,618,838 12,690, % Balance sheet total 184,340, ,772, % Performance Return on equity (ROE) before tax 23.3 % 24.6 % (5.5) % Cost/Income ratio 61.5 % 59.3 % 3.7 % Return on assets (ROA) before tax 1.6 % 1.9 % (11.7) % Resources Number of staff on balance sheet date 3,402 3, % Branches on balance sheet date 135* % Ratings Long-term Short-term Individual Standard&Poor s A- A-2 stable * Including corporate centres and Centrum bývania branches. Note: NBS exchange rate as of December 31, 2005: SKK/EUR 2

4 Contents Statement by the Chairman of the Board of Managing Directors 4 Tatra banka Strong Member of a Strong Group 7 Management s Report on Tatra banka Group 11 Auditor s Report 35 Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards 37 Distribution of the Profit for the Year Top Management as of December 31, Business Locations Network

5 Statement by the Chairman of the Board of Managing Directors Statement by the Chairman of the Board of Managing Directors Dear Shareholders, Business Partners and Clients, Not only can Tatra banka celebrate yet another successful year, but one that marks the 15th anniversary of operations of the bank. In that time we have managed to turn a green field project into a strong and stable bank, and one that ranks among the big three banks on the Slovak market. The business environment has come a long way since our early days, much of its development due to reform steps in legislation and taxes, greater solvency of companies, and improved access to credit sources, as examples. Resulting from its business approach Tatra banka has played its part in improving this business environment. In line with the Slovak economy, Tatra banka itself has also undergone a transition since From its establishment, when it concentrated primarily on key corporate clients, it has gradually grown into a bank also committed to a comprehensive range of retail clients, including SMEs. In line with this growth, the bank concentrated on expanding its network of branches, ATMs and payment terminals throughout Slovakia, to ensure it was fully accessible to its clients. Tatra banka was the first to separate private and corporate banking services to ensure more targeted care of medium-sized companies, setting up a network of corporate centres throughout Slovakia. It was, as a result of the 15 corporate centres, that we managed to cater for the needs of small and medium sized enterprises in particular. In our 15-year history we have often found ourselves in the role of an innovator and pioneer of banking services and products in the Slovak market. We were the first, for instance, to develop the concept of the so-called Centrum bývania branch specialised branches that provide a full housing related service; from selection of a property through to its financing. We have been very active in the automation of banking services and Tatra banka was the first to offer banking services over the phone and on the internet. The internet banking service of Tatra banka was among the most comprehensive and premier service from the outset, proven by the many awards it has received. The special non-stop service entitled i:deal is unique, allowing cash and foreign currency transactions via the internet and enabling transactions with the bank to be even easier. The year 2005 clearly contributed to the successful history of the bank as it was a year in which key financial indicators posted constant growth. Despite strong competition, the bank again managed to preserve exceptionally high profits and generate a 9.9 per cent increase in assets. The volume of loans granted continued in an upward trend and for the twelve months of 2005 totalling SKK 80 billion, which represents an increase of almost 20% over the previous year. The volume of client deposits increased 13.2% y/y to reach SKK 134 billion. Apart from its key position on the Slovak market, Tatra banka also represents a strong part of the bank holding group, Raiffeisen International, which enjoyed a record year in 2005, increasing its consolidated profit by 83%. Raiffeisen reinforced its already strong position in the central and eastern European markets by the successful acquisition of the Ukrainian bank, Aval. 4 Statement Strong Group Management s Report Auditor s Report

6 Statement by the Chairman of the Board of Managing Directors The activities of Tatra banka have traditionally been highly praised also by specialised independent periodicals and institutions, which is demonstrated by the many awards it has received, with 2005 being no exception. After a two year break, the economic weekly Trend once more awarded Tatra banka the title of Bank of the Year This is the sixth time the bank has received this prestigious award in the eight years of the awards. The perception of Tatra banka as a quality and well established brand is also demonstrated by the award Rhodos 2005 prize for the Bank with the best image. Additionally a range of awards in 2005 were given to Tatra banka by the renowned magazine Global Finance: Best Bank in Slovakia also in 2000, 2001, 2002 and 2003, Best Consumer Internet Bank in Slovakia, Best Foreign Exchange Bank in Slovakia, Best Foreign Exchange Research in Slovakia. In addition to providing the best possible banking services, we also ensure that we do not forget the other dimension of doing business social responsibility. In the area of education we supported some 34 Slovak libraries throughout the country in the project 100 books of Tatra banka by buying and donating books of Slovak authors to local libraries. For the past seven years we have been bestowing awards on the talented and aspiring students of the Slovak Technical University in the shape of the Tatra banka Prize for the best diploma work. With the ambition of conducting other activities in support of universities, students and education, the bank set up the new foundation Nadácia Tatra banka, which carried out its first projects last year. In culture we have been supporting Slovak theatre throughout the country for many years, as well as musical and dance festivals. Our appreciation for artists is shown by the annual Tatra banka Art Awards, with this year commemorating the tenth year of the awards. Tatra banka endeavours to respond to sudden crisis situations, such as the calamity in the High Tatra mountains. We supported activities to help the Tatra mountains by way of the Tatra Fund, which was set up by the foundation Ekopolis. We also make a commitment assist child oncology patients by supporting the Red Nose civil association and in the fight against cancer we provide support to the foundation Medical. We are confident that the coming year will be just as commercially successful as the last, as this will further allow us to support many more useful projects and contribute to raising the quality of life in Slovakia. Many of our employees and clients share the same values, and so I would just like to thank all the clients and shareholders of the bank for their faith, and of course, all the employees of the Tatra banka Group for their excellent work. Rainer Franz Chairman of the Board of Managing Directors and General Director Financial Statements Distribution of the Profit Top Management Business Locations 5

7 Tatra banka Strong Member of a Strong Group strong member of a strong group 6 Statement Strong Group Management s Report Auditor s Report

8 Tatra banka Strong Member of a Strong Group Tatra banka - Strong Member of a Strong Group Tatra banka, Slovakia is a member of the RZB Group and subsidiary of Raiffeisen International Bank-Holding AG. Raiffeisen International 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 most powerful banking group with the largest local distribution network. Founded in 1927, RZB provides the full range of commercial and investment banking services in Austria and is regarded a pioneer in Central and Eastern Europe (CEE). It ranks among the region s leading banks, offering commercial, investment and retail banking services in the following markets: Albania Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Hungary Kosovo Poland Romania Russia Serbia and Montenegro Slovakia Slovenia Ukraine Raiffeisen Bank Priorbank, JSC Raiffeisen Bank d.d. Bosna i Hercegovina Raiffeisenbank (Bulgaria) EAD Raiffeisenbank Austria d.d. Raiffeisenbank a.s. Raiffeisen Bank Zrt. Raiffeisen Bank Kosovo J.S.C. Raiffeisen Bank Polska S.A. Raiffeisen Bank S.A. ZAO Raiffeisenbank Austria Raiffeisenbank a.d. Tatra banka, a.s. Raiffeisen Krekova banka d.d. JSCB Raiffeisenbank Ukraine and JSPP Bank Aval Raiffeisen International acts as these banks steering company, owning the majority of shares (in most cases 100 or almost 100 per cent). Furthermore, numerous finance leasing companies (including one in Kazakhstan) are part of the group. Following the largest IPO in Austria s history in April 2005, RZB remains Raiffeisen International s majority shareholder owning 70 per cent of the capital stock. The remaining 30 per cent is free-float, owned by institutional and retail investors. At year-end 2005, 2,443 business outlets covered the CEE-region and more than 43,600 employees attended to 9.7 million customers. As of year-end 2005, Raiffeisen International s total assets amounted to EURO 40.7 billion, up 41 per cent compared with December Consolidated profit (after minorities) according to IFRS came to EURO million, an increase of 83 per cent. The return on equity before tax reached 21.8 per cent and the cost/income ratio improved to 61.6 per cent. As per 31 December 2005, the RZB Group s balance-sheet total amounted to EURO 93.9 billion, up 38 per cent on the figure for year-end IFRS-compliant profit before tax amounted to EURO million, an increase of 34 per cent compared with the same period of The return on equity before tax was 23.9 per cent and the cost/income ratio improved to 58.9 per cent. 7

9 Tatra banka Strong Member of a Strong Group In addition to its banking operations which are complemented by representative offices in Lithuania (Vilnius), Moldova (Chisinau) and Russia (Moscow) RZB runs several specialist companies in CEE offering solutions, among others, in the areas of M&A, real estate development, fund management, leasing and mortgage banking. In Western Europe and the USA, RZB operates a branch in London and representative offices in New York, Brussels, Frankfurt, Milan, Paris and Stockholm. A finance company in New York (with representative offices in Chicago and Houston) and a subsidiary bank in Malta complement the scope. In Asia, RZB runs branches in Beijing (with a representative office in Zhuhai) and Singapore as well as representative offices in Ho Chi Minh City, Hong Kong, Mumbai, Tehran and Seoul. This international presence clearly underlines the bank s emerging markets strategy. 8 Statement Strong Group Management s Report Auditor s Report

10 Tatra banka Strong Member of a Strong Group RZB is rated as follows: Standard & Poor s Short-term A1 Moody s Short-term P 1 Moody s Long-term A1 Moody s Financial Strength C+ Vision Tatra banka Group is a dynamic financial group offering reliable business partnership and solving financial needs of targeted client segments in Slovakia. Mission We seek long-term customer relationships. We offer complex financial services of permanent quality for corporate and also individual clients. We are a friendly, flexible and constructive partner for our customers and we are proactive, innovative and quick in developing new products and in delivering our services. As part of the Raiffeisen International network, we contribute to the achievement of the overall group objectives, while generating sustainable and above-average return on equity for our shareholders. As a member of the RZB Group, we cooperate closely with Raiffeisen Zentralbank and the other members of the Austrian Raiffeisen Banking Group. We create all conditions for permanently high work effort, optimum work performance, contentment and loyalty of employees. Financial Statements Distribution of the Profit Top Management Business Locations 9

11 Management s Report management s report 10 Statement Strong Group Management s Report Auditor s Report

12 Management s Report Management s Report on Tatra banka Group Slovak economy in anticipated breaking point Reflecting back to 2004 it was assumed that 2005 would be the crucial turning point in terms of development within of the Slovak economy. Accordingly Slovakia once more retained its position in 2005 as the fastest growing economy in Central Europe. A key impulse for economic growth in the year was a strong slowdown in the rate of growth in consumer prices, with the average inflation rate achieving an all-time low. This was reflected above all in strong growth in domestic consumption. The lowest recorded interest rates, combined with an increasing influx of foreign capital, manifested in a gradual revival of investment demand. Although export output itself lagged, a major upturn is forecast for 2H 2006 and trough to A key event in 2005 was the entry of Slovakia to the ERM II exchange rate mechanism. Compulsory membership in the ERM II system, prior to the actual adoption of the euro is one of the essential requirements for entry to the eurozone. Overall economic development, as well as direct development with regard to the Maastricht criteria, has so far satisfied the requirements of the convergence programme. Entry to the European monetary union in 2009 therefore remains a realistic expectation. Excellent state of the Slovak economy The Slovak economy has never been in a better condition than it was by the end of Primarily this was due to the developments of the Slovak economy throughout 2005, and also as a result of the realistic projections for the future. Real GDP growth in 2005 reached 6.0%, with the Slovak economy having last seen a similar dynamic of growth in the mid 1990s. At that time, however, strong economic growth was accompanied by an unsustainable imbalance in foreign trade and public finances, as well as by the postponement of certain crucial steps with regard to prices. On the contrary, strong economic growth in recent years has been accompanied by consolidation of public finances and an improved foreign trade balance. In 2005 the foreign trade deficit increased as expected, as a result of revived domestic consumption and investment demand. The outlook for 2006 and 2007 in this area is extremely positive. Alongside investments, the main driving force behind economic growth in 2005 was the final consumption of households, which rose y/y in constant prices by 5.8%. Strong consumer demand was moved forward by the marked hike in real wages by 6.3%, which was the most significant growth seen since The rate of real wages growth was positively affected primarily by a drop in the average overall inflation rate from 7.5% in 2004 to just 2.7% in Falling inflation was once more caused principally by much weaker growth in regulated prices compared to 11

13 Management s Report 2003 and 2004, when price deformations were still being balanced out, especially where energy prices were concerned. Consumer demand last year was also influenced positively by the strong growth in employment, and by the prevailing dynamic growth in personal loans. According to data of the Statistical Office SR, the national level of employment in Slovakia increased by 2.1% last year. The average unemployment rate, according to a labour force sample survey, fell from 18.1% in 2004 to 16.2% in The unemployment rate in Slovakia is still the second highest in the European Union, second only to Poland. A drop in unemployment in the coming years will only be gradual, due to demographic development and a retirement age that been raised. The favourable development seen in public finances in recent years also continued through The State budget ended last year, on a cash basis, with a deficit of just under SKK 34 billion, which represented just 55% of the level planned. According to preliminary results of public financing using ESA 95 methodology, the total public finance deficit was in the range of 2.9% of GDP, even with the one-off negative impact of waiving receivables against third countries to the figure of more than 1% of GDP. The positive development of the State budget, and in particular the effective functioning of the State Treasury, reflected very positively on the development of the public debt. The State Treasury made it possible for central government to take advantage of available resources of other public finance organisations during the course of the year; accordingly it did not have to issue treasury bills to cover the progressive deficit in the State budget. Due to such a development, public debt dropped significantly during 2005 from more than 43% of GDP to around 35%. In the coming years public debt should remain under the level of 40% of GDP, thereby the Maastricht criteria of 60% of GDP should not pose a problem Statement Strong Group Management s Report Auditor s Report

14 Management s Report When evaluating the status and development of the Slovak economy up to the end of 2005, it is not sufficient just to adress the current positive tendencies, but more particularly their sustainability. As a result of the structural reforms and stabilisation measures carried out in 2003 and 2004, a strong foundation has been established for healthy economic growth in the years to come, without the need for restrictive measures. Slovakia advances on the road to the euro The development on the Slovak financial market was influenced primarily by movements in the other markets of Central Europe, especially at the beginning of In 1Q 2005 the strong interest of foreign investors to buy up local currencies prevailed, which in turn strengthened their exchange rates. The exchange rate of the Slovak koruna against the referential euro strengthened from the start of the year from around 38.7 to a new all-time high of 37.5 in mid-march. The National Bank of Slovakia (NBS) once more regarded the tempo of domestic koruna appreciation in this period as inappropriately fast and so tried to influence developments by its market interventions, also by way of a change of interest rates. In an effort to slow down the strengthening exchange rate of the koruna, by direct interventions in the first three months of the year, the NBS purchased more than EUR 3 billion. At the end of February the NBS Board also decided to cut key the two-week interest rates by 1.0% to the level of 3.0%. This took the interest rates on the Slovak market to the lowest point ever recorded. However these steps did not manage to curtail the exchange rate of the SKK, which continued to strengthen in the early part of March. A sharp turnaround on the market did not come until the second half of that month. Yet this development was once more related to the overall situation in the region, which experienced a sharp outflow of liquidity from emerging markets due to the increase in yields in the USA. By the end of March the EUR/SKK exchange rate had weakened to above 39 and in the course of April it even approached 40. In April the NBS made further interventions on the foreign exchange market, but this time in the opposite direction in order to prevent the koruna from falling further. In the months that followed the foreign exchange market gradually stabilised, but the koruna was not able to return to the trend of its long-term appreciation until the end of September. During most of this period the EUR/SKK exchange rate moved in the range of , holding its position mostly in the upper part of the range. After the April interventions to help the koruna, the NBS stayed out of the market in the following months. Likewise, no further change of NBS key interest rates was seen from the end of February. The long-term interest rates, or yields of Government bonds, were mostly influenced by shifts of similar rates in the eurozone. Together with its European counterparts, Slovak long-term rates reached their historic minima in September. In the final quarter of last year a gradual reversal of this trend was seen. The long-term rates started to increase progressively due to an anticipated hike in interest rates by the European Central Bank and increased economic activity of eurozone countries. Financial Statements Distribution of the Profit Top Management Business Locations 13

15 Management s Report At the end of November the Slovak koruna unexpectedly entered the Exchange Rate Mechanism II. Entry of the Slovak currency to the waiting list, ahead of its inclusion to the European Monetary Union, was not planned until 2Q 2006 according to the official accession strategy. Although it was obvious that the exact date of entry and its circumstances would remain a secret, entry as early as 25 November came as a real surprise for the markets. The central parity of the koruna against the euro was set at the level of 1 EUR= SKK. At Slovakia s proposal, the central parity was set at the level of the market exchange rate. A standard fluctuation band of +/- 15% of the central parity was determined for movements of the koruna. One of the principal motives behind the speedy entry to ERM II. was to reduce the impact on the koruna exchange rate caused by events occurring on regional markets. After an initial boost in the exchange rate to 37.6, it then stabilised to the end of the year in the range of Statement Strong Group Management s Report Auditor s Report

16 Management s Report Summary of consolidated performance The consolidated after-tax profit of Tatra banka Group increased by SKK 26.7 million y/y to SKK 2,364 million. This relatively low level of growth was the result of higher administrative expenses, which were up SKK 355 million and exceeded the growth in operating income. Provisions for possible loan losses and advance payments fell by SKK114 million due to better risk management in the corporate segment. The structure of consolidated operating income, which increased by 3.9% to SKK 8,385 million, underwent major changes. Net income from fees and commission constituted 27.3% of total operating income, while net interest income made up 59.1%. On the other hand, the share of trading profits fell from 19.5% to 13.6%. Development of Cost/Income ratio Despite a 9.9% increase in assets, operating income rose by just 3.9% due to a drop in the net interest margin on one hand, and markedly lower trading profits on the other. Slower growth of operating income over more rapid growth in operating costs pushed up the cost/income ratio by 2.2% to reach 61.5%. Net interest income increased by 8.1% up to SKK 4,956 million. This growth was weaker than the growth of the balance-sheet total due to of reduced margins, especially where corporate deals were concerned. The interest margin dropped from 3.19% in 2004 to 2.87% in Net fees and commission income contributed strongly to profit, rising 26.8% to SKK 2,289 million. The strongest growth in absolute terms was seen in net fee income, followed by income from investment fund sales, which itself was the fastest growing area of income in relative terms (growth of 96%), and net income from loan processing fees. Financial Statements Distribution of the Profit Top Management Business Locations 15

17 Management s Report Trading income fell 26% to SKK 1,140 million. The major share of trading profit resulted from forex trading, notes and coin trading and the revaluation of foreign currency items. Total administrative expenses rose by 7.5% to reach SKK 5,058 million. The strongest growth here was seen in staff expenses, which increased by 13.8% and the share in total administrative expenses increased from 45% to 47.9%. Balance Sheet development The consolidated balance sheet total was up 9.9% y/y to reach SKK billion as at the end of 2005, from the level of SKK billion in On the assets side of the balance sheet, loans and advances to customers increased by 19.7% to SKK 81.1 billion. The fastest growing item in the credit products was retail lending, which increased by SKK 7,3 billion to SKK 19,7 billion which includes main retail loans as mortgage, consumer loans, home equity loans and credit cards. On the liabilities side client deposits increased by 13.2% to SKK billion. The share of client deposits within liabilities rose slightly from 70.3% in 2004 to 72.4%. Deposits from banks fell 10.5%, i.e. by SKK 2.4 billion Statement Strong Group Management s Report Auditor s Report

18 Management s Report Segment reports The basis for the separation into individual business segments is a customer-oriented internal principle. It reflects the segmentation principle of our shareholder, Raiffeisen International. Segmentation in Tatra banka is as follows: Corporate customers Retail clients Treasury Participations and other Corporate customers (in thousands of SKK or per cent) Net interest income 974, ,459 Provisioning for possible loan losses 158,831 (224,102) Net interest income after provisioning for possible loan losses 1,133, ,357 Net commission income 293, ,073 Trading profit (loss) 512, ,402 Administrative expenses (764,124) (633,324) Other operating profit 1 0 Profit before tax 1,174, ,508 Cost/Income ratio 42.9 % 36.9 % Tatra banka retains long-term position as market leader in corporate customers segment For the large corporate clients segment the year 2005 proved to be extremely demanding, but despite the continual pressure of competition Tatra banka managed to maintain growth in just about every area of corporate trading. A stable client base and strong growth in new acquisitions helped the bank achieve a 25,4% market share in primary deposits and a stable 18,3% share in the field of standard loans. It managed to broaden the portfolio of existing clients in 2005 to include an additional 200 new clients. This increment was achieved primarily as a result the entry of a large number of new investors to the Slovak market, particulary foreign investors. In terms of the largest deals, the bank participated in the syndicated loan for the Trnava Invest Supplier Park amounting EUR 46 million and the syndicated loan for acquisition of Duslo Šaľa by Agrofert, with a loan of amount EUR 51.5 million. Another key project for the bank was its involvement in the syn- Financial Statements Distribution of the Profit Top Management Business Locations 17

19 Management s Report dicated loan for the national motorway company Národná Diaľničná Spoločnosť amounting to SKK 15 billion, in which Tatra banka contributed SKK 1.7 billion from the position of arranger. In the area of project financing it greatly exceeded its targets, especially by the successful participation in the financing of administrative and housing construction projects. SME financing developed intensively Strong economic growth in 2005 was reflected in the co-operation of Tatra banka with small and medium sized enterprises (SMEs). This segment is still experiencing a situation where enterprises remain underfinanced compared to their counterparts from Western Europe. Compared with the previous period, 2005 could also be characterised by more substantial inflows of direct foreign investments into this target segment. The acquisition activities of the bank were concentrated on newly established Slovak companies and on foreign companies. In this respect the mutual co-operation with RZB Vienna and with our partner banks abroad is of great importance. In 2005, in this segment, the bank acquired a total of 498 completely new companies to its portfolio. The activities of the bank in the SME segment manifested in a dynamic growth in assets for the bank. The average volume of assets at regional corporate centres, which account for this segment, increased in comparison to the preceding year by 44%. The sharpest rises were seen mainly in SME loans, which soared 76%, and in the area of project financing, with a growth of 36%. On the side of passive operations the bank posted an 8% rise. The volume of funds held in current accounts was a dominant growth item, rising 20% y/y. The volume of guarantees provided increased by a third. At the end of last year, Tatra banka corporate centres started offering real estate leasing with great success. In 2H 2005 it launched the project Municipality Infrastructure Facility (MIF), the objective of which is to finance the investments of towns and municipalities in West Slovakia. The project is linked to a non-returnable subsidy from EU funds. Approved projects should deal with transport, the natural environment, education and healthcare. In co-operation with the Slovak guarantee and development bank, Slovenská záručná a rozvojová banka (SZRB), the bank developed the product Micro loans, which makes financing available to businesses that do not have quality collateral at their disposal. The SZRB automatically issues a guarantee to each loan included in the Micro loans portfolio to cover 50% of the risk. The remaining 50% is secured simply by a blank bill signed by the client Statement Strong Group Management s Report Auditor s Report

20 Management s Report In 2005 co-operation with the European Investment Fund was extended with regard to its SME Guarantee Programme through to the middle of Tatra banka as a partner in drawing eurofunds The entry of Slovakia to the European Union posed an opportunity for Slovakia and businesses to make use of financial resources from funds of the European Union for development of various fields of business, as well as an opportunity for the country to advance itself. Tatra banka became successfully involved in the pre-financing and co-financing of projects supported from Structural Funds and the State budget (EU subsidy-financing). In 2005 it provided a total of 130 clients with a full package of bank services with regard to EU funds, providing SKK 1 billion in loans to 51 clients. Successful focus on the agricultural sector In agribusiness, Tatra banka concentrated in 2005 on several areas with the aim of supporting undertakings in this sector from small farmers, large processors, through to national agencies. The bank developed yet another new product in the shape of intervention purchases financing. Pilot financing was launched in the last quarter of 2005 amounting to SKK 85 million. At the same time the bank made its bridge financing for direct payments more attractive and in the course of 2005 it financed the needs of 126 clients with an aggregate amount of SKK 746 million. The comprehensive portfolio of products for primary agricultural production is complemented by commodity financing, which has been an integral part of the Tatra banka product range for almost the past 10 years. Here the bank has financed warehouse receipts aggregating SKK 850 million. Tatra banka also participated in warehouse receipts financing for the Intervention Agency in the form of a syndicated loan of approximately SKK 500 million. Intensive co-operation with Eximbanka In 2005 Tatra banka successfully concluded an agreement with Eximbanka on terms to insure medium to long term buyer s credits, thereby creating availability for our clients to receive financing in the shape of buyer s credits. Financial Statements Distribution of the Profit Top Management Business Locations 19

21 Management s Report Together with Eximbanka, in 2005 Tatra banka provided refinancing loans up to EUR 1.78 billion. The newly established product of a loan with an Eximbanka guarantee was welcomed by our customers and by the end of the year the bank had granted loans amounting to almost SKK 300 million. In terms of trade financing, Tatra banka managed to finance export not only to the European Union, but also to countries such as China, Kosovo, Serbia, Croatia, Ukraine and Romania. Growing interest of corporate customers in hedging operations Among the many services offered to corporate clients Tatra banka also provides Treasury banking. The main objective of the activities of Treasury banking, in respect of clients, is the greater provision of services also to small and medium sized enterprises and the provision of advice on hedging exchange and interest risks. Despite the increasing competition among banks, in 2005 the number of clients with active dealings with the Treasury of Tatra banka increased by 24% over the previous year. The i:deal electronic service proved once more to be a major benefit. It is the first and only bank electronic platform in Slovakia to enable clients to arrange conversion between their accounts, or an individual exchange rate for cross-border payments. Likewise, clients can make term deposits from their current accounts using this service in a selection of currencies. The huge popularity of the i:deal service among clients is also proven by the fact that in 2005 almost 52% of all such client deals were made using this platform. Treasury greatly boosted its activities in the provision of solutions for clients when eliminating exchange rate risks. Proof of the success of these efforts is the 12% rise in profit from forwards and more particularly, the significant increase in the use of currency options as a hedging instrument. The very positive trend of the diminishing apprehension by corporate clients against using sophisticated financial instruments when managing their cash-flow and risks was also confirmed by the very positive progress seen in the use of exotic currency options (barrier and digital) for hedging Statement Strong Group Management s Report Auditor s Report

22 Management s Report Retail clients (in thousands of SKK or per cent) Net interest income 3,111,370 2,441,342 Provisioning for possible loan losses (434,084) ( ) Net interest income after provisioning for possible loan losses 2,677,286 2,281,928 Net commission income 1,533,669 1,212,847 Trading profit (loss) 869, ,591 Administrative expenses (3 641,943) (3,260,006) Other operating profit 1 0 Profit before tax 1 438,692 1,100,360 Cost/Income ratio 66.04% 72.10% Retail network growing in importance and strength The trend of expanding the number of operations in areas of economic interest in Slovakia continued with the establishment of 9 new retail branches, taking the total number of Tatra banka retail branches to 116. At the same time the bank focused on expansion of the network of Centrum bývania branches, specialised branches focusing on a full service relating to real estate. The bank was therefore able to specialise by product and create sufficient scope to serve clients. This is one of the reasons why the number of retail clients increased by more than 50,000, as appreciated both the product innovations and the widespread network of branches, ATMs and payment terminals, as well as the convenience of internet banking. A crucial element of the banking services provided by Tatra banka is the quality advice and individual approach applied to different client segments. After the successful implementation of the unique Client Care System, the bank also turned its attention to adapting the system of training, focusing on the quality of communication and services provided, with the aim of improving the advice and communication skills of the employees even further. The bank put a system of Certification in place for financial advisors and personal bankers with the aim of increasing and maintaining their level of knowledge. A major change was made in 2005 in the approach to managing personal finances in the segment of high-net-value clients. Tatra banka became the first bank in Slovakia to implement targeted Financial Planning as a unique service intended for this client segment, thereby combining both personal care and qualified advice in the field of asset management. Specialised advisors can therefore offer clients quality asset management advice. Financial Statements Distribution of the Profit Top Management Business Locations 21

23 Management s Report Loan products at centre of attention, especially in the area of housing Tatra banka defended its position among the top three banks on the exceptionally dynamic retail lending market, which is proven by the volume of new loans generated. It granted 3,210 new mortgage loans totalling SKK 5.3 billion, which represents a y/y increase of 81%. Tatra banka retaines its market position despite continual competitive pressure, this reflected primarily in the cut in interest rates, which reached an all-time low during the year. Competitive pressure also resulted in frequent product innovations. During the year Tatra banka liberalised mortgage loan terms, extending the possibility of financing up to 100% of the value of pledged property and also prolonging the mortgage maturity period. Another advantage for the client was the speedy administration and granting of mortgage and home equity loans, with greatly modified administration processes and the new option for the majority of applicants to enjoy a faster drawdown of loans against a lien registration petition filed with the cadastre. The innovation of products, together with a change in the attitude of the population toward loans and an overall revival of the real estate market, combined to produce a sharp growth in sales of new loans. In addition to growing interest in mortgage loans, the bank also registered strong growth in the volume of general-purpose loans, which was up 38% y/y to reach SKK 4,0 billion. This volume is posted, including general-purpose loans secured with real estate, referred to as Home equity loans, which saw a significant growth of 361% to SKK 2,0 billion. Payment cards top one million The bank has long held third position on the market in terms of the issue of payment cards and in 2005 it managed to increase its market share from 22.5% to 24.5%. The total number of issued payment cards approached the 1 million threshold. In terms of credit cards the bank held on to the number one spot with more than a 46% market share. The growth of the card business in Slovakia is attested to by an almost 19% y/y increase in the volume of transactions. In the course of 2005 the bank produced yet another innovation in the area of card products. In August it acquainted clients with the unique Loyalty Programme, by which a client can use his credit card free of charge for the month subject to a certain volume of transactions being made during that month. The functionality of the exceptionally popular b-mail service accompanying credit cards was expanded several times during the year and currently b-mail provides clients with a complete overview of completed transactions, available card balances, the generation of statements and also information about payments made, this by way of SMS messages or by Statement Strong Group Management s Report Auditor s Report

24 Management s Report Tatra banka also issued its first VISA Electron chip payment card, which it introduced in four attractive new designs as part of the package of services for students under the name TatraAcademy TB. Tatra banka payment terminals are most used As at the end of 2005 Tatra banka had 4,668 payment terminals in use, representing a y/y increase of 22%. Almost 9.5 million transactions were made via these terminals totalling SKK 16.8 billion, which ensured that the bank maintained the leading position on this market with a 39.8% share. Payment terminals received EMV certification so that they are capable of accepting chip cards. The bank will continue with the migration of terminals to the 3DES and EMV systems also during In the case of payment terminals, the bank will take advantage of new communication possibilities with lower operating costs in the shape of GPRS and IP communication. New types of deposit products and ways of saving given the green light The interest of clients in standard deposit products such as deposit books and term accounts declined due to relatively low interest rates, which forced clients to look for more attractive products offering the possibility to achieve higher returns. Retail clients deposited some SKK 27 billion in deposit books and term deposits, which compared with the previous year translates as a drop of SKK 1.7 billion. This situation was favourable for mutual funds, which clients in Slovakia have only started to discover in recent years. The bank mediated the sale of SKK 17.8 billion of the mutual funds of its subsidiary Tatra Asset Management, which meant a growth of 166% over the preceding year. The greatest interest of investors in the first half of the year was mainly in domestic koruna bond funds and money market funds. The reason for this possibly lies in the interesting yields that investors gained from this group of funds in the past. The yield from money market and bond funds waned during the course of the year, and so did the appetite of investors. It was then that the Tatra banka introduced a new generation of investment packages to the market called Profile Funds. This innovative solution immediately sparked the attention of investors and the Profile Funds became the top selling funds offered by the bank. In the space of less than half a year from launch, clients deposited SKK 5 billion into Profile Funds. Total assets of retail clients in mutual funds were up 68% y/y to reach SKK 26.1 billion. Financial Statements Distribution of the Profit Top Management Business Locations 23

25 Management s Report Guaranteed Investment enjoyed success During the year the bank extended its offer of deposit products to include the Guaranteed Investment product. This new product represents a combination of the best aspects of a term account and an investment product. It provides an appreciation of a capital index basket, while guaranteeing 100% return of principal. Clients deposited more than SKK 750 million to the first tranche of this product. Prevailing interest in bank insurance The number of bank insurance products sold increased in 2005 by 23% over the preceding year. In total more than 9,000 policies were signed with a premium of SKK 137 million. A large portion of this came from the Mutual Investment Programme, which combines savings in the mutual funds of Tatra Asset Management and life insurance with the insurer Uniqa. Third pillar of pension savings met expectations As the distributor of the supplementary pension insurance product of the company Pokoj DDP, the bank mediated 9,800 new contracts being concluded, which represents a y/y growth of 39%. This product constitutes a key part of the bank s offer in the area of voluntary pension savings under the third pillar of the pension system. Tatra banka partner of Allianz DSS in pension reform Pension reform also affected also the sales activities of the bank. Sales of Old-age Pension Savings (second pillar of reformed pension system) started at the end of 2004 when the bank started to co-operate as a distributor with the pension management company Allianz Slovenská dôchodková správcovská spoločnosť (AS DSS). Within a year the bank had mediated the sale of 22,000 contracts, making it one of the top distribution partners of AS DSS. Modernisation of ATMs continues The 258 ATMs of the bank spread throughout Slovakia were used for almost 11 million transactions totalling SKK 35.3 billion, which ensured that Tatra banka held onto third position on the market with a share of 16.5%. ATMs were subjected to both a software and hardware upgrade last year with the aim of supporting the more modern and safer PIN code and transaction data encryption technology 3DES. At the same time, they are now prepared also to accept chip cards as soon as the necessary certification with card companies is complete. Some ATMs also use GPRS communication, which is faster and less costly than communication by fixed data lines Statement Strong Group Management s Report Auditor s Report

26 Management s Report Even the long-term best internet banking needs innovation In the appraisal of the publication Global Finance World s Best Internet Banks for 2005, Tatra banka won the prestigious prize Best Consumer Internet Bank in the Slovak Republic for the fourth time. Since 2002 the award has reflected the long-term innovative approach of the bank to the use of internet banking, which is growing in popularity with the public thanks as a result of the simplicity, speed and convenience that it offers. Some 6.8 million domestic transactions were made using internet banking, which was 18% of all domestic transactions of the bank. In an effort to continually supplement and improve the functionality of its internet banking, the bank also offered LOANS in Internet banking. With this service clients can gain basic information quickly and easily about their Mortgage loans, General-purpose loans and Home equity loans, directly or by way of the Dialog service. In addition to information about the loan amount, interest rate, monthly instalments, the number of outstanding repayments, the date of the next repayment, the loan maturity date and the loan balance, clients can also see warnings if they are late with a loan repayment. Selected clients of the bank can even apply for a General-purpose loan on-line directly using Internet banking. This is a completely unique offer on the Slovak market as the client receives the loan just a few minutes from filling in and confirming the application in their Internet banking, without any need to visit a branch. The operation of Eliot bank was wound up in Accounting for the dynamically developing internet banking, which has already become commonplace for thousands of clients on a daily basis, we can safely say that the first internet bank Eliot satisfied its objective to simplify experience with electronic banking. The management of Tatra banka therefore decided to end the operation of Eliot, the services of which in future will be replaced by the more highly developed Internet banking service with its greater functionality. Dialog telephone service expanded successfully also to cover product sales The accessibility of bank services is boosted greatly by the non-stop operation of the telephone service Dialog. The bank puts great emphasis on the speed of service and the quality of provided information, which is proven by the ability to keep the service level at over 80%. In 2005 the Dialog service also started offering the possibility of initial consultations for acquiring a Generalpurpose loan. Not only can clients, interested in a mortgage loan or home equity loan, receive general information about the products, but they can also be quoted an example loan amount with accompanying interest rate quickly and easily over the phone. Financial Statements Distribution of the Profit Top Management Business Locations 25

27 Management s Report However, the Dialog service is not restricted to just dealing with payment orders and providing information, as it is also involved in the sale of products. In terms of sales support and the direct sale of bank products over the phone, the Dialog service is focused primarily on loans. Alongside the sale of various loan products, it also participated in the sale of the Guaranteed Investment products and broadened its scope to include small and medium sized enterprises. Private banking making good use of growth opportunities The premium standard of care given to the high-net-worth clientele is being used and appreciated with increasing frequency by this client segment. This is demonstrated also by the 44% y/y growth in the volume of administered assets, which rose by more than SKK 5 billion to exceed the SKK 17 billion mark. The volume of the average client portfolio also increased, amounting to SKK 10.7 million after a 16% y/y increase. Private banking therefore strengthened the position of Tatra Asset Management as a strategic partner in the area of fund investments, the inclusion of which, in client portfolios, increased by 60% to a volume of SKK 7.4 billion. The excellent business results can be credited not only to the traditionally strong team of private bankers, but also to the fast developing client workplaces in Košice, Žilina and Banská Bystrica. The bank reaffirmed its image as a successful product innovator on the market for sophisticated financial products. In co-operation with Tatra Asset Management the bank introduced a unique concept to the market for its top high-net-worth clients in the shape of a series of three actively managed fund strategies referred to as Private Profile Funds. The faith and interest of clients combined with the quality management of individual investment strategies reflected in the volume of assets administered, totalling SKK 2.7 billion Statement Strong Group Management s Report Auditor s Report

28 Management s Report Domestic and Cross-border Payments The bank maintained the trend of a growing number of payment orders submitted using electronic distribution channels. Cross-border transfers made via electronic distribution channels accounted for 79% of the total number of transfers, while in the case of domestic transfer orders this figure was just under 77% of all transfers. In both cases a 3% y/y growth was posted. The rest were made up of transfers submitted in paper format via the branch network. The bank also maintained its 30% share of cross-border payments made in Slovakia in The total number of domestic transfers increased by an average of more than 7% y/y. Regional Card Processing Centre Serving seven sister banks The Regional Card Processing Centre of Tatra banka is responsible for arranging the issue of cards for banks of the Raiffeisen International. It provides services linked to the administration of debit and credit cards and to the processing of transactions made with these cards, not only for Tatra banka itself, but also for an additional six sister banks in Croatia, Czech Republic, Romania, Albania, Serbia and Montenegro, and the Ukraine. The Regional Card Processing Centre has become the most important processor of credit cards issued within the Raiffeisen International, accounting for 60% of all issued cards and recognising a 50% y/y growth in the number of administered cards. The main task of the Centre is to ensure a high level of reliability and stability. The main activities of the Card Processing Centre focused on this objective, also with an outlook to projected strong growth in the years to come. The Regional Card Processing Centre is the author and implementer of a uniform strategy for the introduction of smart card technology in the issue of cards within the Raiffeisen International. Furthermore, in 2005 the Centre launched new services to the market, such as the option of setting loyalty schemes for credit cards, SMS notification for cardholders and various improvements to the functionality of the card system. Financial Statements Distribution of the Profit Top Management Business Locations 27

29 Management s Report Treasury and investment banking Treasury summary transactions (in billions of SKK) Securities Spot foreign exchange operations on the interbank market Interbank money market deposits* Foreign exchange operations with Tatra banka customers Money market operations with Tatra banka customers* * average volume SKK billions weighted by number of effective days Trading on the foreign exchange market in 2005 was characterised by movements of the Slovak koruna in the range of , whereby the koruna opened the year with a rate of 38.7 SKK/EUR. From the beginning of the year the National Bank of Slovakia battled against the increasingly strong koruna and so progressively intervened on the foreign exchange market. A change of mood on the markets of Central and East Europe came when it reached the level of 37.5, with the Slovak koruna starting to lose ground mostly due to a drop in the Polish zloty. A role here was also played by the overly unilateral exposure of spot and option positions. The central bank was forced to end the crisis by intervening at the level of 40.0 SKK/EUR. The currency then stabilised in the range of EUR/SKK. The National Bank, fearing possible inflation risks, started intervening once more in favour of the koruna in the autumn, this to the level of 39.2 SKK/EUR. At the end of November the Slovak koruna entered the ERM II. mechanism, which saw the currency appreciate sharply to reach SKK/EUR. The koruna ended the year at 37.8 SKK/EUR. Tatra banka comfortably number one in the spot foreign exchange market Tatra banka played a key role in foreign exchange transactions on the interbank market. On the spot market Tatra banka comfortably held the top share representing 39%. In terms of the use of brokers, co-operation with standard brokers accounted for about 10%, while around 40% comprised electronic broker systems. The rest was made up of direct sales transactions. Interest rates saw major changes under the influence of appreciation of the euro against the koruna. In the first part of the year the central bank changed key interest rates from 3% 4.5% 6% to 2% 3% 4%. The strongest impact on the interbank deposit market came from a change of the two-week sterilisation rate. Despite this sharp decline, market expectations throughout the first half of the year were set on a further reduction in rates. Annual interest rates moved in the range of 2.3% to 2.5%. A changing trend started to appear in the third quarter. Preliminary estimates of a further drop in rates gradually changed, mostly under the influence a change in the perception of changes to rates in the eurozone. A substantial change with a short-term impact came in the shape of the entry of the SKK to ERM II., which temporarily changed the expectations of interest rate developments. Annual interest rates gradually dropped to the level of the two-week sterilisation rate. At the end of the year anticipation had returned and the annual interest rates gradually reached the level of 3.2% 3.4% Statement Strong Group Management s Report Auditor s Report

30 Management s Report Development of the Slovak share index SAX index, experienced an extremely volatile development in 2005, moving between long-term phases of appreciation and a falling index. Overall, we can say that with its year-end level appreciating by points from late December 2004 the SAX strengthened by 26.5%, which in absolute terms translates as a growth of 86.7 index points. The total volume of shares was SKK 2.1 billion, in which Tatra banka had a 10.7% share. Participations and Other Tatra Asset Management Tatra Asset Management (in billions of SKK) Total revenues Profit after tax (in per cent) ROE (after taxation) Note: according to Slovak Accounting Standards The mutual funds market continued to enjoy exceptionally dynamic growth again in The total volume of mutual fund sales increased y/y by 83% to reach SKK 79.9 billion. As in previous years a major part of total sales revenue was generated by sales of money market funds and bond funds, where sales were boosted by strong performance, especially in the first months of The total volume of assets in mutual funds was up 75% y/y to total SKK billion was the best year to date in the history of Tatra Asset Management (TAM). The total volume of sales of TAM mutual funds grew by 77.6% y/y to reach SKK 23.2 billion. In the second half of the year the company became the first domestic asset management company to launch a series of six funds of funds on the market, with sales of these funds accounting for almost 22% of total annual sales. Total assets in TAM mutual funds rose by 66% y/y, amounting to SKK 32.5 billion. The market share of the company at end 2005 comprised approximately 26.6%. Total assets administered by the company including assets in managed portfolios increased 61% y/y to reach SKK 36.6 billion. The market share of the company at the end of 2005 represented approximately 27.7%. Financial Statements Distribution of the Profit Top Management Business Locations 29

31 Management s Report In addition to the launch of the six new funds, the company also fully adapted the remaining nine mutual funds it has to the UCITS III directive. Total income of the company increased by 86% y/y, generating SKK million. This growth was fed to a large extent also by an increase in revenues from management fees and revenues from registration fees. Total expenses of the company increased y/y by 79%, amounting to SKK million. The largest portion of expenses similar to 2004 was spent on the distribution of the funds (72%). In 2005 the company generated a profit after tax of SKK 98.8 million, which is more than double that of The ROE of the company was 46.6%. Pokoj DDP Pokoj DDP Number of insured 157, , ,264 Number of employer policies (qty) 5,837 5,040 4,255 Supplementary pension insurance contributions (in SKK bn.) Paid out pensions (in SKK mn.) Note: according to Slovak Accounting Standards Supplementary pension insurance with in the Tatra banka Group is covered by Pokoj doplnková dôchodková poisťovňa (Pokoj DDP). It provides a comprehensive range of products to bank clients, while also offering an optimum solution to client s financial situation in the post-productive years or in the event of disability. Tatra banka is the depository agent for the insurer and also the exclusive asset administrator. The development of the market with supplementary pension insurance in 2005 was influenced primarily by the transformation process taking place pursuant to Act 650/2004 Coll. on supplementary pension savings and on the amendment and supplementing of certain laws (hereinafter Act 650/2004 ), according to which supplementary pension insurance companies are to transform into supplementary pension companies by 30 June Pokoj DDP proceeded with its transformation in line with the prepared Transformation Project, which was approved in March 2005 at the general meeting of founders Statement Strong Group Management s Report Auditor s Report

32 Management s Report In 2005 Pokoj DDP continued on its positive path of previous years and so confirmed the longterm trend of its activities. The number of policyholders in 2005 increased by 13,521 and as at the end of the year totalled 157,159 insured. An increase was also seen in the number of employers contractual partners of Pokoj DDP, that contribute to the supplementary pension insurance of their employees. While they numbered 5,040 at end December 2004 by the end of 2005 this figure had risen to 5,837. The total volume of assets as at end 2005 was SKK 4,2 billion, implying that during the year assets had increased by SKK million. The share in total assets of the supplementary pension insurance sector increased from 22.4% in 2004 to 23.4% in Pokoj DDP therefore satisfied its key planned objectives both in terms of the business plan and the financial plan, and strengthened its position as the second largest supplementary pension insurance company on the market. A favourable development was also recorded in the average contribution sum, which not only increased over the previous year to SKK 973 a month, but which also comfortably managed to maintain the highest level amongst all supplementary pension insurance companies in Slovakia. In 2005 the company acknowledged 18,430 supplementary pensions, totalling SKK million, which is 6,144 fewer pensions than in The economic performance of Pokoj DDP in 2005 can be regarded as successful. The positive development is also documented by the effective co-operation with the administrator Tatra Group Finance, s.r.o., which as a subsidiary of Tatra banka arranges the sale of new policies and the operation of Pokoj DDP. Net income after tax amounted to SKK 37.8 million. In compliance with Act 123/1996 Coll. on Supplementary Pension Insurance, all the profit was divided among insured and pensioners, with the exception of the statutory 2.5% allocation to the reserve fund, comprising SKK 944,000. Tatra Leasing Tatra Leasing (in millions of SKK) Total revenues 7,423.3* 8,505.7* 4,071.8 Profit after tax (in per cent) ROE (after taxation) Note: according to Slovak Accounting Standards * according to standards modified as of January 1, 2004 Tatra Leasing concluded 5,755 leasing contracts in 2005 amounting to SKK billion excluding VAT, which is a 5.8% growth in transactions compared to 2004, when the company generated deals aggregating SKK billion excluding VAT. This volume of transactions in 2005 generated an 8.5% market share for Tatra Leasing in the financing of real estate and movable assets in Slovakia. In 2005 Tatra Leasing moved up into fourth place in the ranking of leasing companies in Slovakia. Financial Statements Distribution of the Profit Top Management Business Locations 31

33 Management s Report The strongest growth in transactions was achieved by Tatra Leasing in the technology segment, where it posted a 9.99% growth in deals over In the segment of trucks, trailers and semitrailers a 6.9% growth in deals was recorded, and in the segment of utility vehicles the company achieved growth of 4.8%. Tatra Leasing posted a drop in the volume of transactions concluded only in the personal vehicle leasing segment, which fell 9.2%. Tatra Leasing currently offers its clients financial leasing and instalment sale options for transport equipment, machinery and equipment, technology and medical equipment. At the beginning of 2005 the company started to offer financial leasing of real estate. In the course of 2005 some 5 real estate leasing projects were carried out totalling SKK million excluding VAT, placing Tatra Leasing among the top leasing companies in this dynamically expanding segment. Human Resources as a reliable partner of the bank To continually increase awareness of the employee brand, raise the standards for the staff and the level of motivation to achieve targets are the permanent human resources priorities of the Tatra banka. These proven priorities increases the attractiveness of Tatra banka as a prospective employer in the labour market, which is further underscored by the fact that the number of applications exceeds the number of vacancies. The bank maintains its high level of competitiveness in the labour market also due to the introduction of internal salary comparisons according to the benefit of particular job posts for the bank, in line with the objectives of the Raiffeisen International group, and with a strong focus on the external environment and the performance of employees. We are continually increasing the variable component of salaries in order to motivate employees to an even higher greater performance level. In 2005 we started co-operation with universities throughout Slovakia. With the help of trainee programmes we provide an opportunity for the best students to witness at first hand our working processes and so gain invaluable experience to building their own careers. We are constantly improving the management process. We are also increasing the quality of the process of appraisal by work output so as to increase the motivation and advancement of employees. As regards employee training, Tatra banka has focused on developing professional knowledge and sales skills, which are then appraised in the form of certification tests. Tatra banka is a young organisation with an average employee age of 30 years. As at end 2005 Tatra banka had 3,268 employees, of which 72% were women. The share of university educated employees was 49%. At the end 2005 Tatra banka Group had 3,02 employees Statement Strong Group Management s Report Auditor s Report

34 Management s Report Outlook for 2006 As expected, the year 2006 will see changes to the market that will pose new challenges to the bank. One of them is the ever growing competition, which will become even fiercer this year with the fusion of two banking houses. It will therefore be of prime importance for Tatra banka to retain its positions and extend the lead that it has in areas where it already holds a competitive advantage, and to make use of the growth potential of the Slovak economy, boosted by both domestic demand and exports. With regard to corporate financing Tatra banka will continue to adapt its services to the current needs of clients and to apply its business and risk policies in a way that reaffirms and strengthens the bank s position as a strong corporate bank and a reliable partner for various business segments, with particular focus on the SME segment. Where this group of clients is concerned, the bank is well aware of the importance of an individual approach, and so it will continue to increase the capacity and professionalism of its relationship managers. The continually improving level of cross-selling within the group is also expected to contribute to generating new acquisition opportunities. In retail the bank intends to maintain its position as an innovator. Due to several new elements, as well as the upgrading of existing products and services, the bank expects to reinforce its position on the market by providing a broader portfolio of investment and loan products. In addition to acquiring new clients, the bank will also concentrate on increasing the level of satisfaction of current clients, reflecting their needs, especially in terms of financing housing, and also expand the branch network and the accessibility of services. This is linked also to another longterm goal of the bank to provide clients with expert advice by way of trained and professional staff, directly corresponding to the client s individual needs. Additionally the aim of Tatra banka in 2006 will be to generate continual growth in financial indicators and increase productivity, combined with rationalisation and strict control over operating expenses. Another long-term goal of the bank is the ongoing consolidation of IT systems, and it will be just as important for it to prepare all its processes for Slovakia s entry to the European Monetary Union and the adoption of the euro in The harmonisation of these processes and preparation of the bank for a smooth transition to the adoption of a common currency is one of the biggest projects that the bank will concentrate on in Financial Statements Distribution of the Profit Top Management Business Locations 33

35 Auditor s Report auditor s report 34 Statement Strong Group Management s Report Auditor s Report

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37 financial statements 36 Statement Strong Group Management s Report Auditor s Report

38 Financial Statements (IFRS-compliant consolidated financial statements as adopted by the European Union) Income Statement (in thousands of SKK) Notes Interest and similar income 6,168,300 5,745,797 Interest and similar expenses (1,212,624) (1,161,056) Net interest income (1) 4,955,676 4,584,741 Provisioning for impairment losses on loans and advances (2) (273,155) (386,854) Net interest income after provisioning 4,682,521 4,197,887 Fees and commissions income 2,656,853 2,151,370 Fees and commissions expense (367,709) (346,072) Net fees and commission income (3) 2,289,144 1,805,298 Trading profit (4) 1,140,449 1,544,051 Net income from equity investments (5) 37,117 45,370 General administrative expenses (6) (5,057,567) (4,703,023) Other operating profit/(loss) (7) (197,780) (51,703) Profit before income taxes 2,893,884 2,837,880 Income taxes (8) (529,751) (500,488) Consolidated profit after tax 2,364,133 2,337,392 Basic and diluted earnings per share (in SKK) (9) 47,079 46,547 The accompanying notes are an integral part of these consolidated financial statements. 37

39 Balance Sheet Assets (in thousands of SKK) Notes December 31, 2005 December 31, 2004 Cash reserve (11) 4,106,753 3,914,754 Loans and advances to banks (12) 37,608,211 18,900,493 Loans and advances to customers (13) 81,075,567 67,755,720 Impairment losses for loans and advances (14) (2,314,343) (2,171,235) Financial assets at fair value through profit or loss (15) 22,011,488 44,776,816 Held to maturity securities (16) 37,473,640 30,532,908 Equity investments (17) 320, ,480 Intangible fixed assets (18, 20) 693, ,777 Tangible fixed assets (19, 20) 2,510,898 2,490,057 Income tax assets (21) 93,443 47,255 Other assets (22) 760, ,751 Total assets 184,340, ,772,776 Equity and liabilities (in thousands of SKK) Deposits from banks (23) 20,486,181 22,899,143 Deposits from customers (24) 133,428, ,920,143 Liabilities evidenced by paper (25) 11,560,175 8,280,668 Provisions for liabilities and charges (26) 735, ,792 Income tax liabilities (27) 28, ,427 Liabilities from trading activities (28) 2,980,013 3,718,310 Other liabilities (29) 1,501,801 1,032,410 Total liabilities 170,721, ,081,893 Equity (excluding current year profit) (30) 11,254,705 10,353,491 Consolidated profit after tax 2,364,133 2,337,392 Total equity 13,618,838 12,690,883 Total equity and liabilities 184,340, ,772,776 The accompanying notes are an integral part of these consolidated financial statements Statement Strong Group Management s Report Auditor s Report

40 Statement of Changes in Equity (in thousands of SKK) Share capital Share premium Reserves and other funds Retained earnings Retained earnings of associates Consolidated profit after tax Total Equity as at 1 January ,004, , ,556 8,024, ,924 2,040,512 11,558,674 Transfers (696) 789,392 46,633 (835,329) - Dividends paid (1,205,183) (1,205,183) Consolidated profit after tax ,337,392 2,337,392 Equity as at 31 December ,004, , ,860 8,814, ,557 2,337,392 12,690,883 Transfers - - 5, ,618 46,755 (901,214) - Transfer of retained earnings of associate (492) - - Dividends paid (1,436,178) (1,436,178) Consolidated profit after tax ,364,133 2,364,133 Equity as at 31 December ,004, , ,701 9,663, ,820 2,364,133 13,618,838 Financial Statements Distribution of the Profit Top Management Business Locations 39

41 Cash Flow Statements Cash flows from operating activities Profit before taxation 2,893,884 2,837,880 Adjustments for non-cash operations (Note 31) (4,627,671) (3,474,081) Cash flow used in operating activities before changes in working capital, interest received and paid and income taxes paid (Note 31) (1,733,786) (636,201) (Increase)/decrease in operating assets: Obligatory reserve with National Bank of Slovakia 298,496 1,175,836 Loans and advances to banks (18,783,960) (6,173,919) Loans and advances to customers (13,328,261) (6,415,550) Financial assets at fair value through profit or loss 22,106, ,172 Equity investments 1,908 (2,353) Other assets (110,489) (217,479) Increase/(decrease) in operating liabilities: Deposits from banks (2,436,168) 12,991,351 Deposits from customers 15,518,047 10,029,566 Liabilities evidenced by paper 3,253,190 3,750,960 Other liabilities 423, ,992 Cash from operations before interest paid and received and income taxes paid 5,208,531 14,933,375 Interest paid (1,172,536) (1,102,122) Interest received 6,457,873 5,303,897 Income taxes paid (1,106,808) (9,384) Net cash flows from operating activities 9,387,060 19,125,766 Cash flows from investing activities Purchase of held to maturity securities (6,759,639) (20,566,184) Proceeds from sale or disposal of fixed assets 7,284 3,311 Fixed assets purchased (744,902) (822,472) Dividends received Net cash flows used in investing activities (7,497,250) (21,384,465) Cash flows from financing activities Dividends paid (1,436,178) (1,205,183) Net cash flows used in financing activities (1,436,178) (1,205,183) Effects of exchange rate changes on cash and cash equivalents 5,125 (108,881) Change in cash and cash equivalents 458,757 (3,572,763) Cash and cash equivalents, beginning of the year (Note 31) 2,915,803 6,488,566 Cash and cash equivalents, end of the year (Note 31) 3,374,560 2,915,803 The accompanying notes are an integral part of these consolidated financial statements Statement Strong Group Management s Report Auditor s Report

42 Notes GENERAL INFORMATION A. Principal activities of parent company The consolidated group of Tatra banka, a. s. (the Group ) consists of the parent company Tatra banka, a. s. (the Bank ) and 11 subsidiaries and associated undertakings. Tatra banka, a. s. is incorporated in the Slovak Republic as a joint-stock company. The principal activities of the Bank are as follows: receiving deposits; provision of loans; system of payments and clearing; investing activities for its clients; investing into securities on its own account; dealing on its own account with the following: financial instruments of the money market in Slovak Crowns and in foreign currency, including exchange services; financial instruments of the capital market in Slovak Crowns and in foreign currency; coins of precious metals, commemorative banknotes and coins, groups of banknotes and circulation coins; managing clients receivables and securities on clients accounts including consulting service (portfolio management); financial leasing; providing guarantees, opening and confirming Letters of Credit; issuing and managing media of payment; providing consulting services in business; issues of securities, participation in securities issues, and provision of related services; financial mediation activities; depositing of valuables; leasing safes; providing banking information; performing mortgage activities under Article 67 (1) of the Banking Act; acting as a depositary according to a special regulation; processing of banknotes, coins, commemorative banknotes and coins. The main shareholders of the Bank are as follows: December 31, 2005 December 31, 2004 Raiffeisen International Bank Holding AG % 72.44% Tatra Holding % 14.11% Other % 13.45% Financial Statements Distribution of the Profit Top Management Business Locations 41

43 The registered office of the Bank is Hodžovo nám. 3, Bratislava. The Bank has 135 branches and sub-agencies in the Slovak Republic, including Corporate centers and Centrum byvania branches. The ultimate parent of the Group is Raiffeisen-Landesbanken Holding GmbH ( RLBHOLD ). This financial holding owns the majority stake in Raiffeisen Zentralbank Österreich AG ( RZB or RZB Group ). The parent of the Group is Raiffeisen International Bank-Holding AG and is also included in the consolidated financial statements of Raiffeisen Zentralbank Österreich AG. The Bank s ordinary shares are publicly traded on the Bratislava Stock Exchange. B. Definition of the consolidated group: As of December 31, 2005 the Group consisted of the Bank and the following companies ( consolidated companies ): Company Direct Group holding % holding % Indirect holding through Principal activity Method of consolidation /valuation Registered office Tatra Group Servis, s.r.o. Tatra Asset Management, správ. spol., a.s. 99.5% 100% ELIOT, s.r.o. 0.5% 100% TG Strom, s.r.o. 0% 100% Tatra Group Finance, s.r.o. Tatra Billing, s.r.o. 100% 100% n/a 0% 100% Tatra Group Servis, s.r.o. Tatra Group Servis, s.r.o. Tatra Group Servis, s.r.o. services asset management tenement, property administration IT support tenement, property administration, administrator Supplementary pension insurance Tatra Billing, s.r.o. 100% 100% n/a services TL Leasing, s.r.o. 0% 100% CENTRUM BÝVANIA, s.r.o. 0% 100% Tatra Reality, s.r.o. 0% 100% Tatra Group Servis, s.r.o. Tatra Group Servis, s.r.o. Tatra Group Servis, s.r.o. leasing tenement, property administration tenement, property administration Tatra-Leasing, s.r.o. 48% 48% n/a leasing full consolidation full consolidation full consolidation full consolidation full consolidation not consolidated as immaterial full consolidation full consolidation full consolidation equity method Bratislava Bratislava Bratislava Bratislava Bratislava Bratislava Bratislava Bratislava Bratislava Bratislava Slovak Banking Credit Bureau, s.r.o % 33.33% n/a services not consolidated as immaterial Bratislava 42 Statement Strong Group Management s Report Auditor s Report

44 C. Developments in the Group during 2005: During 2005, the following subsidiaries/affiliates changed name: Previous commercial name Commercial name changed to Validity AXEN, s.r.o. ELIOT, s.r.o CTH Real, s.r.o. Tatra Reality, s.r.o Tatra Reality, s.r.o. CENTRUM BÝVANIA, s.r.o eliot, s.r.o. Tatra Billing, s.r.o General Annual Meeting of K.A.X., s.r.o. on 21 December 2004 decided on the liquidation on 1 January The company was liquidated as of 31 August As of 30 December 2005 the company was erased from the Commercial Register of the District Court of Bratislava I. PRINCIPAL ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below: a) Basis of presentation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (the EU ). IFRS as adopted by the EU do not currently differ from IFRS as issued by the International Accounting Standards Board (IASB), except for portfolio hedge accounting under IAS 39 which has not been approved by the EU. The Group has determined that portfolio hedge accounting under IAS 39 would not impact the consolidated financial statements if it had been approved by the EU at the balance sheet date. At the date of authorisation of these financial statements, the following Standards were in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures (effective 1 January 2007); Amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards (effective 1 January 2006); Amendments to IAS 39 Financial Instruments: Recognition and Measurement in respect of cash flow hedge accounting (effective 1 January 2006); Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts for financial guarantee contracts (effective 1 January 2006); and Amendments to IAS 1 Presentation of Financial Statements on capital disclosures (effective 1 January 2007). The adoption of these standards in future periods is not expected to have a material impact on consolidated profit or equity. Financial Statements Distribution of the Profit Top Management Business Locations 43

45 The consolidated financial statements are prepared on an accrual basis of accounting whereby the effects of transactions and other events are recognised when they occur and are reported in the consolidated financial statements of the period to which they relate, and on the going concern assumption. The consolidated financial statements are prepared under the historical cost convention, and modified by the fair value adjustment of certain financial instruments. Each member of the Group maintains its books of accounts and prepares financial statements for regulatory purposes in accordance with accounting principles valid in the Slovak Republic. The accompanying financial statements are based on the accounting records of the Group, together with appropriate adjustments and reclassifications necessary for the fair presentation of consolidated financial statements in accordance with IFRS. A reconciliation of consolidated equity and profit for 2005 and 2004 reported under Slovak accounting principles to consolidated equity and profit for 2005 and 2004 reported under IFRS is shown in Note 30 to these financial statements. The presentation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and future changes in the economic conditions, business strategies, regulatory requirements, accounting rules or/and other factors could result in a change in estimates that could have a material impact on the reported financial position and results of operations. The reporting currency used in the consolidated financial statements is the Slovak Crown ( SKK ) with accuracy to SKK thousand, unless otherwise indicated. b) Consolidation principles Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been fully consolidated, unless the impact is immaterial. Subsidiaries are consolidated from the date on which the Group acquired control over them and are no longer consolidated from the date of disposal or loss of control. All receivables and liabilities, sales and purchases, as well as income, expenses, gains and losses from the transactions within the Group have been eliminated. Investments in associated undertakings are companies in which the Group has 20% and more of the voting rights, and over which the Group exercises significant influence, but which it does not control. Investments in associates are measured under the equity method in the consolidated financial statements, which requires that at the initial recognition the investment is measured at cost and adjusted thereafter for the post acquisition change in the investor s share in the net assets of the investee. The profit and loss of the investor includes the investor s share in the profit and loss of the investee Statement Strong Group Management s Report Auditor s Report

46 The consolidated financial statements were prepared using the same accounting policies for similar transactions. c) Foreign currencies Assets and liabilities denominated in foreign currencies are translated into Slovak crowns and reported in the consolidated financial statements as at the exchange rate declared by the National Bank of Slovakia ( NBS or National Bank of Slovakia ) valid as of the balance sheet date. Income and expenses denominated in foreign currencies are recorded in Slovak Crowns in the underlying accounting system of the Group and are reported in the consolidated financial statements at the actual exchange rate of the National Bank of Slovakia valid as of the date of the transaction. Exchange rate gains/losses from all foreign exchange transactions are included in Trading profit. Fixed-term transactions denominated in foreign currency are translated into Slovak crowns in the Bank s off-balance sheet using the NBS spot exchange rate valid as at the balance sheet date. The unrealised gain or loss from fixed term transactions is calculated using the anticipated forward rate based on a standard mathematic formula which takes into account the NBS spot rate and interest rates effective as at the balance sheet date and is reported in the item Financial assets at fair value through profit or loss in the balance sheet and Trading profit in the income statement. d) Cash reserve Cash reserve comprises cash held, cash balances with the National Bank of Slovakia, including the compulsory minimum reserve with the National Bank of Slovakia. The compulsory minimum reserve with the National Bank of Slovakia is a required reserve to be held by all commercial banks licensed in the Slovak Republic. e) Loans and advances to customers and provisions for loan impairment Loans and advances to customers are stated at amortised cost. For each period, a provision for impairment of loans and advances to customers is recognised in the income statement in Provisioning for impairment losses on loans and advances. When signing a loan agreement, the Bank records the loan commitment issued on the off-balance sheet. The loans are recognised on the balance sheet when the funds are provided to the debtors. During the performance of their activities, the Group records contingent liabilities with inherent credit risk. The Group accounts for these contingent liabilities in the off-balance sheet accounts and records provision for liabilities that reflect the level of risk of issued guarantees, letters of credit, and unused credit limits as at the balance sheet date. The provision for possible loan losses is calculated to reduce loans to their recoverable amount representing expected future cash flows discounted to the present value using the original effective interest rate implicit in the loan at inception or the fair value of the related collateral. Specific provisions for identified potential losses on loans are assessed with reference to the credit standing and financial performance of borrower and considering collateral. Financial Statements Distribution of the Profit Top Management Business Locations 45

47 Loans and advances from corporate customers are generally individually significant and are analysed on an individual basis. The calculation of specific provisions is based on an estimate of expected cash flows reflecting estimated delinquency in loan repayments, as well as proceeds from collateral. Impairment amount is determined by the difference between loan s carrying amount and net present value ( NPV ) of the estimated cash flows discounted by the loan s original effective interest rate. Specific provisions are recorded when there is an objective evidence of loss event, which occurred after initial recognition. Loans and advances under retail asset class are generally individually non-significant and are treated on a portfolio basis. These exposures are divided by product into portfolios with homogenous risk characteristics. The basis for calculation of portfolio provisions is probability of default, in case loss event took place before the loan is assessed. To conform with the incurred loss concept stipulated in Revised IAS 39, probability of defaults (PD) is transformed to a parameter reflecting estimated incurred losses as of the balance sheet date. Portfolio provisions are then calculated based on incurred loss and loss given default ( LGD ). Portfolio provisions cover losses, which have not yet been individually identified, but based on prior experience, are deemed to be inherent in the portfolio as at the balance sheet date. According to a valid decision on ceasing recovery of claims, issued by the competent court, the Board of Directors, or by other Group bodies (the Collections Committee, Problem Loan Committee, Executive Committee), the Group writes off its loans and advances to customers directly through the income statement with the release of the relevant loan loss provision. The receivables written off which are still in the collection process under the law are recorded in the off-balance sheet. If, after the write off, the Group is able to collect additional amounts from the customer or obtain control of collateral worth more than earlier estimated, a recovery is recorded through the income statement in the caption Provisioning for impairment losses on loans and advances. The Group stops recording interest from loans and advances to customers overdue for more than 90 days, and such receivables are recorded in off-balance sheet accounts. Interest recorded on the off-balance sheet amounts to SKK 47,664 thousand in 2005 (SKK 4,472 thousand in 2004). The carrying amount of non-accruing loans represents the amount of the receivable decreased by the provision for expected losses. The provision is determined usually as 100% of the receivable decreased by the amount that the Group expects to recover. The Group charges penalty interest to borrowers when a portion of the loan falls overdue. Penalty interest is accounted for on a cash received basis in the caption Interest and similar income. f) Securities Securities held by the Group are categorised into portfolios in accordance with the Group s intent on the acquisition of the securities and pursuant to the Group s security investment strategy. The Group developed security investment strategies reflecting the intent of the acquisition and accordingly records securities portfolios. The principal difference among the portfolios relates to the measurement of securities Statement Strong Group Management s Report Auditor s Report

48 All securities held by the Group are recognised using settlement date accounting. All purchases and sales of securities that require delivery within the time frame established by regulation or market convention ( standard way ) are recognised as spot transactions. Transactions that do not meet the standard way settlement criteria are treated as financial derivatives. Trading securities Trading securities are financial assets (equity and debt securities and treasury bills) acquired by the Group for the purpose of generating a profit from short-term fluctuations in prices. Subsequent to the initial recognition, these securities are accounted for and stated at fair value, which approximates the price quoted on recognised stock exchanges or using valuation models. The Group includes unrealised gains and losses from the fair value adjustment of securities to fair value in the income statements caption Trading profit. Interest income on trading securities is accrued on a daily net basis and reported in Trading profit in the income statement. Dividends on securities held for trading are recorded in the income statement line Trading profit. The fair value of trading securities is reported in the balance sheet in the line Financial assets at fair value through profit or loss. Held to maturity securities This portfolio represents mainly long-term investments that the Group intends and is able to hold to maturity. The held to maturity portfolio includes securities issued by the government and other creditworthy securities. Held to maturity securities are measured at amortised cost based on the effective interest rate. Interest income and discounts and premiums on securities held to maturity are accrued on a daily basis and recognised as Interest and similar income in the income statement. In the event of security impairment, provisions are established. Equity investments Equity investments include associates using the equity method and other equity investments. Other equity investments represent investments with a share of less than 20% of the share capital and voting rights. They are valued at fair value and gains or losses are recognised directly in equity, through the statement of changes in equity. If market price in an active market cannot be reliably measured, they are valued at cost less impairment provisions, which are recognised in income statement. g) Sale and repurchase agreements - repo transactions Securities sold under sale and repurchase agreements ( repo transactions ) are recorded as assets in the balance sheet lines Financial assets at fair value through profit or loss, or Held to maturity securities and the counterparty liabilities are included in Deposits from banks or Deposits from customers as appropriate. Securities purchased under agreements to purchase and resell ( reverse repos ) are recorded as assets in the balance sheet line Loans and advances to banks or Loans and advances to customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued evenly over the life of the repo agreement using the effective interest rate. Financial Statements Distribution of the Profit Top Management Business Locations 47

49 h) Derivative financial instruments The Group enters into derivative financial instruments for trading purposes. Underlying assets are recorded on the off-balance sheet on the trade date. Derivative financial instruments are recorded at fair value on the balance sheet. Fair values are determined based on market values using discounted cash flow models and options pricing models. All derivative financial instruments are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Certain derivative financial instrument transactions, while providing effective economic hedges under the Bank s risk management policy, do not qualify for hedge accounting under the specific rules stipulated by IAS 39 and are therefore treated as derivative financial instruments held for trading with fair value gains/losses reported in the income statement line Trading profit. The fair value of financial derivative instruments held for trading is disclosed in Note 39 and is reported in the balance sheet in the line Financial assets at fair value through profit or loss. i) Tangible and intangible fixed assets Tangible and intangible fixed assets are stated at historical cost less accumulated depreciation/ amortisation together with accumulated impairment losses. Fixed assets are depreciated using the accelerated or straight-line method based on the estimated useful life. Tangibles in progress, land, and artwork are not depreciated. The estimated useful economic lives in years are set out below: Machinery and equipment, computers, vehicles 4 15 Software 4 Goodwill 5 Fixtures, fittings and equipment 6 15 Energy machinery and equipment Optical network 30 Buildings and structures When there is any indication that an asset may be impaired, the Group estimates the recoverable amount of the asset. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down to its recoverable amount. Where assets are identified as being impaired, the Group s management have assessed the recoverable value by reference to a net selling price based on third party valuation reports adjusted downwards for an estimate of related sale costs. Repairs and maintenance are charged directly to the income statement when the expenditure is incurred. Goodwill represents surplus of the cost of investment over the fair value of identifiable net assets of subsidiary, associate or joint venture as at the date of acquisition. Goodwill is amortised to the income statement on a straight-line basis over its economic life Statement Strong Group Management s Report Auditor s Report

50 j) Leases Assets held under finance leases that confer rights and obligations similar to those attached to owned assets are capitalised at their fair value and depreciated over the useful lives of assets. The capital element of each future lease obligation is recorded as a liability, while the interest elements are charged to the income statement over the period of the leases to produce a constant rate of charge on the balance of capital payments outstanding. Payments made under operating leases are charged to the income statement on a straight-line basis over the term of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. k) Securities issued Debt securities issued by the Group are stated at amortised costs using the effective interest rate method. Interest expense arising on the issue of securities is included in the income statement line Interest and similar expenses. l) Provisions for liabilities and charges The amount of provisions for liabilities and charges is recognized as an expense and a liability when the Group has present legal or constructive obligations, which has occurred as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle that obligation and a reasonable estimate of the amount of the resulting loss can be made. Any loss resulting from recognition of provision for liability is recognized in the income statement for the period. m) Recognition of income and expense Income and expenses are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective interest rate. Interest income includes revenues from fixed and floating interest rate coupons and accrued discount and premium on treasury bills and other discounted instruments. Penalty interest is accounted for on a cash basis. Fees and commissions are recognised as expense and income in the income statement on the accrual basis as earned. Non-interest expenses are recognised at the time when the transaction occurs. n) Taxation and deferred taxation Income taxes are calculated in accordance with the provisions of the relevant legislation of the Slovak Republic, based on the profit or loss recognised in the income statement prepared pursuant to Slovak accounting standards. Deferred income tax is provided, using the balance sheet liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the tax assets can be utilised. Financial Statements Distribution of the Profit Top Management Business Locations 49

51 The Group is subject to various indirect operating taxes. These are included as a component of operating expenses. The deferred income tax liability of the Bank associated with investments in subsidiaries was not recognised in the accompanying consolidated financial statements since the Bank is able to control the timing of the reversal of the temporary differences, and it is probable that the temporary differences will not reverse in foreseeable future as it is planned that the earnings will not be distributed, but retained for use in the business at each consolidated subsidiary or associate. o) Regulatory requirements The Group is subject to the regulatory requirements of the National Bank of Slovakia. These regulations include limits and other restrictions pertaining to minimum capital adequacy requirements, classification of loans and off balance sheet commitments, and provisioning to cover credit risk, liquidity, interest rate and foreign currency position. Similarly, consolidated companies are subject to regulatory requirements including specifically regulations in relation to supplementary insurance and collective investment schemes Statement Strong Group Management s Report Auditor s Report

52 Other Notes 1. Net interest income Interest and similar income 6,168,300 5,745,797 from loans and advances to banks 817, ,030 from loans and advances to customers 4,028,562 4,009,899 from held to maturity securities 1,322, ,868 Interest and similar expenses (1,212,624) (1,161,056) on deposits from banks (496,717) (262,988) on deposits from customers (296,161) (611,350) on liabilities evidenced by paper (419,746) (286,718) Net interest income 4,955,676 4,584,741 Interest and similar income includes income from dividends of SKK 7 thousand for 2005 (2004: SKK 295 thousand). 2. Provisioning for impairment losses on loans and advances Provisioning for impairment losses on loans and advances arising from on-balance-sheet and off-balance-sheet transactions break down is as follows: Allocated to provision for impairment losses on loans and advances (1,314,789) (942,117) Released from provision for impairment losses on loans and advances 1,041, ,263 Direct write-downs (1,459) - Recovery of written-down claims 1,030 - Gains from the sale of loans 76 - Total (273,155) (386,854) Details of the provisions for impairment losses on loans and advances are provided in Note 14. Financial Statements Distribution of the Profit Top Management Business Locations 51

53 3. Net fees and commission income Payment transfers business 1,398,502 1,169,617 Credit processing and guarantee business 327, ,122 Securities business 473, ,994 Foreign exchange and notes-and-coin business (15,856) (12,670) Other banking services 105, ,235 Total 2,289,144 1,805, Trading profit Trading profit includes all interest and dividend income, funding costs, commission and changes in the fair value of trading portfolios. Interest-rate contracts (516,604) (458,575) Bonds and other fixed interest securities (470,568) 1,096,337 hereof interest income 1,249,172 2,039,580 hereof fair value adjustment (483,158) 1,216,232 hereof capital gains from securities sold 50, ,549 hereof refinancing costs (1,288,391) (1,771,398) Derivative financial instruments (46,036) (1,554,912) hereof interest income (188,278) (405,887) hereof fair value adjustment 142,242 (1,149,025) Currency contracts 1,626,881 2,002,626 Foreign exchange differences and realised profit on derivatives 1,551,951 1,968,647 Fair value adjustment of derivative financial instruments 74,930 33,979 Index-related contracts 30,172 - Derivative financial instruments 30,172 - Total 1,140,449 1,544,051 The reported amount of profit/(loss) from transactions with securities and from derivative transactions for 2005 and for 2004 is affected by the fact that in December 2004 the Bank purchased from RZB Vienna (a related party) debt securities in the amount of EUR 210 million. This transaction included transactions with interest rate swaps (IRS) entered into with the same counterparty and in the same amount. During 2005, part of securities in value of EUR 175 million were sold back and the transactions with interest rate swaps in the same amount with RZB were terminated. The transactions described above gave rise to the following expenses and revenues reported in these consolidated financial statements: 52 Statement Strong Group Management s Report Auditor s Report

54 Revenue/(expense) from: Interest income and fair value adjustment of derivatives 547,754 (1,068,613) fair value adjustment of securities (623,548) 769,431 interest income from securities 157, ,721 sale of securities (29,335) - Net profit from transaction 52,614 23, Net income from equity investments Net income from equity investments includes gains and losses of equity investments. They include interests in companies accounted for using the equity method and other companies: From companies consolidated using the equity method 47,037 46,756 From other equity investments (9,920) (1,386) Total 37,117 45, General administrative expenses The Group s consolidated general administrative expenses comprise staff expenses, other general expenses, depreciation, amortization and write-downs of tangible and intangible fixed assets. They break down as follows: Staff expenses (2,424,427) (2,129,761) Wages and salaries (1,931,950) (1,690,021) Social security costs (433,525) (390,540) Voluntary fringe benefits (58,952) (49,200) Other general expenses (2,070,890) (1,938,462) Costs on premises (407,180) (423,649) IT and communication costs (462,775) (456,364) Legal and consultancy costs (159,230) (142,975) Advertising and entertainment expenses (216,931) (180,690) Deposit guarantee costs (380,402) (354,155) Other items (444,372) (380,629) Depreciation, amortization and write-downs of tangible and intangible fixed assets (562,250) (634,800) Tangible fixed assets (408,837) (486,022) Intangible fixed assets (153,413) (148,778) Total (5,057,567) (4,703,023) Financial Statements Distribution of the Profit Top Management Business Locations 53

55 Wages and salaries include expenses related to preferred shares amounting to SKK 155,000 thousand in 2005 (in 2004 SKK 103,500 thousand). Information on preferred shares is presented in Note 29. The Group does not have pension arrangements separate from the State pension system of the Slovak Republic. Pursuant to Slovak legal regulations, an employer is obliged to pay contributions to social security, health insurance, medical insurance, accident insurance, unemployment insurance and contribution to a guarantee fund set as a percentage of gross salary. These expenses are charged to the income statement in the period when the related compensation is earned by the employee. The Group contributes to a supplementary pension plan administered by a private pension fund, based on the employment period of the employee. No liabilities arise to the Group from the payment of pensions to employees in the future. Supplementary retirement insurance expenses amounted to SKK 16,873 thousand in 2005 (in 2004 SKK 13,327 thousand). 7. Other operating profit/loss Among other things, other operating profit/(loss) includes revenues and expenses arising from non-banking activities and revenues and expenses arising from the disposal of tangible and intangible fixed assets and VAT not claimable as follows: Revenues from non-banking activities 7, ,995 hereof income from release of provisions to legal disputes (Note 26) ,411 Expenses arising from non-banking activities (394,756) (348,804) hereof other taxes (229,764) (198,707) hereof expenses from allocation to legal disputes (Note 26) (149,252) (115,253) Other operating income 337, ,979 Other operating expenses (147,919) (47,873) Total (197,780) (51,703) 8. Income taxes Current tax expense (477,266) (556,169) Deferred tax (expense)/income (52,485) 55,681 Total (529,751) (500,488) 54 Statement Strong Group Management s Report Auditor s Report

56 Slovak legal entities must individually report taxable income and remit corporate income taxes thereon to the appropriate authorities. In 2005 the corporate income tax rate amounted to 19% (2004: 19%). The Group s tax liability is calculated based upon the accounting profit taking into account tax nondeductible expenses and tax exempt income and income subject to the final tax rate. The tax on the profit before tax differs from the theoretical amount that would arise using the basic income tax rate as follows: Profit before tax 2,893,884 2,837,880 Theoretical tax calculated at a tax rate of 19% (549,839) (539,197) Income not taxable 114, ,480 Tax non deductible expenses (92,725) (33,049) Provisions and reserves, net 32,028 (86,738) IFRS adjustments effects (28,733) 2,196 Consolidation effect (3,468) 4,901 Non taxable losses (1,654) (1,506) Other 172 3,425 Total income tax expense (529,751) (500,488) Financial Statements Distribution of the Profit Top Management Business Locations 55

57 Deferred tax assets and liabilities as at December 31, 2005 relate to following items: (in thousands of SKK) Book value Tax value Temporary difference Deferred tax assets Loans and advances (net of impairment losses) December 31, 2005 December 31, ,044,436 79,923, , , ,169 Tangible fixed assets 2,359,526 2,360,708 1, ,946 Other assets 921, ,665 17,706 3,364 3,578 Provisions for liabilities and charges 735, , , ,620 Other outstanding payables 3,588,698 3,588, Total 310, ,321 Deferred tax liabilities Amounts due from clients 79,044,436 79,919,018 24,458 (4,647) (1,795) Tangible fixed assets 2,359,526 2,307,370 52,156 (9,910) Total (14,557) (1,795) Net deferred tax asset 295, ,526 Allowance for uncertain realisation of deferred tax asset (310,298) (340,367) Net deferred tax asset/(liability) (14,326) 38,159 The Group did not recognise a deferred tax asset in the amount of SKK 310,298 thousand (2004: SKK 340,367 thousand), which mainly relates to the deductible temporary differences resulting from provisions, due to its uncertain timing and realisation in the future accounting periods. Tax assets comprise: Income tax 93,443 2,048 Deferred income tax - 45,207 VAT ,571 Other 29,758 35,140 Total 123, ,966 The movement of the deferred income tax is as follows: Net deferred income tax liability as of 1 January 38,159 (17,522) Net deferred income tax income (52,485) 55,681 Net deferred income tax asset/(liability) as of December 31, (14,326) 38, Statement Strong Group Management s Report Auditor s Report

58 Net deferred income tax liability of SKK 14,326 thousand arises mainly from temporary taxable differences related to amounts due from clients and amortization of loss in subsidiary. In 2004, deferred income tax asset mainly related to deductible temporary differences related to tangible fixed assets. 9. Earnings per share Earnings after tax in the accounting period (in thousands of SKK) 2,364,133 2,337,392 Average number of ordinary shares outstanding during period 50,216 50,216 Earnings per share (in SKK) 47,079 46,547 The average number of ordinary shares outstanding do not include preferred shares (Note 29). Dividend per share paid in 2005 (from 2004 profit) was 28,600 SKK, in 2004 (from 2003 profit) was 24,000 SKK. 10. Segment reporting Operating income was mainly generated from the provision of banking services in the Slovak Republic. The Group considers that its products and services arise from one segment of business, namely the provision of banking and related services. 11. Cash reserve Cash in hand 2,074,937 1,963,270 Balances at central banks 2,031,816 1,951,484 hereof obligatory minimum reserves 1,342,861 1,641,357 deposits repayable on demand 688, ,127 Total 4,106,753 3,914,754 The minimum obligatory reserve is maintained as an interest bearing deposit under the regulations of the National Bank of Slovakia (bearing interest at 1.5% p.a.). The amount of the reserve depends on the level of deposits accepted by the Bank. The Bank s ability to withdraw the reserve is restricted by statutory legislation, and therefore is not included in cash and cash equivalents for the purposes of the preparation of consolidated cash flow statement (see Note 31). Financial Statements Distribution of the Profit Top Management Business Locations 57

59 12. Loans and advances to banks Giro and clearing business 610, ,406 Money-market business 6,630,589 9,323,884 Loans to banks 30,366,954 8,934,203 Total 37,608,211 18,900,493 Loans to banks are collateralised by treasury bills issued by the National Bank of Slovakia (Note 36). Loans and advances to banks break down along geographical lines are as follows: Slovakia 35,196,662 17,738,604 Other countries 2,411,549 1,161,889 Total 37,608,211 18,900, Loans and advances to customers Loans and advances to customers are comprised of: Loans except mortgage loans* 68,393,893 58,355,560 Loans backed by bills of exchange 363, ,183 Receivables under mortgage loans 12,318,131 8,854,977 Total 81,075,567 67,755,720 *including product american mortgage Loans and advances to customers broken down along geographical lines are as follows: Slovakia 78,284,351 66,099,321 Other countries 2,791,216 1,656,399 Total 81,075,567 67,755, Statement Strong Group Management s Report Auditor s Report

60 Loans advances to customers broken down along economics sectors are as follows: Manufacturing 14,386,278 17,871,998 Trading enterprises 17,654,441 14,579,990 Financial services 8,890,733 5,329,350 Other services 6,209,767 5,329,347 Transportation 3,826,884 4,541,159 Healthcare and public services 2,731,877 3,193,379 Real estate construction 2,359,037 1,394,168 Agriculture 793, ,340 Mining 76,459 68,267 Other (all non-residents included) 24,147,002 14,618,722 Total 81,075,567 67,755, Impairment losses for loans and advances Impairment losses for loans and advances are carried out applying homogeneous Group-wide standards and cover all recognizable borrower risks. The movement in the provisions for loan and other losses during 2005 is as follows: (in thousands of SKK) As at 1 January 2005 Allocated Released Used Transfers, exchange differences As at December 31, 2005 Borrower risks Loans and advances to customers 1,846,893 1,093,885 (779,574) (140,469) (16,422) 2,004,313 Portfolio provisions 324, ,730 (137,042) ,030 Subtotal 2,171,235 1,216,615 (916,616) (140,469) (16,422) 2,314,343 Risks arising from off-balancesheet items (Note 26) 269,424 98,174 (125,371) - (3,145) 239,082 Total 2,440,659 1,314,789 (1,041,987) (140,469) (19,567) 2,553,425 Financial Statements Distribution of the Profit Top Management Business Locations 59

61 The movement in the provisions for loan and other losses during 2004 is as follows: (in thousands of SKK) On 1 January 2004 Allocated Released Used Transfers, exchange differences On December 31, 2004 Borrower risks Loans and advances to customers 1,948, ,095 (454,526) (102,076) (55,229) 2,171,235 Subtotal 1,948, ,095 (454,526) (102,076) (55,229) 2,171,235 Risks arising from off-balancesheet items 270, ,022 (100,737) - (8,850) 269,424 Total 2,219, ,117 (555,263) (102,076) (64,079) 2,440, Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss comprised the following securities and derivative instruments held for trading: Debt securities and other fixed-interest securities 19,974,841 42,991,332 Public-authority bills eligible for refinancing - 18,374,559 Other debt instruments issued by public sector 13,893,348 12,716,325 Bonds and debt securities issued by other issuers 6,081,493 11,900,448 Shares and other floating-rate securities 68,615 59,368 Shares and other securities 1,927 2,538 Investment fund units 66,688 56,830 Positive fair values arising from derivative financial instruments 1,968,032 1,726,116 Interest-rate contracts 1,289,599 1,166,077 Exchange-rate contracts 644, ,039 Index-related contracts 33,567 - Total 22,011,488 44,776,816 Shares and ownership interests held for trading at fair value, allocated by issuer, comprise: Shares and ownership interests held for trading issued by: Financial institutions in the Slovak Republic 68,405 59,364 Other entities in the Slovak Republic Total shares and ownership interests held for trading 68,615 59, Statement Strong Group Management s Report Auditor s Report

62 16. Held to maturity securities Debt instruments issued by the public sector 27,686,313 22,985,404 Bonds and debt securities issued by other issuers 9,787,327 7,547,504 Total 37,473,640 30,532, Equity investments Interests in companies accounted for using the equity method 316, ,312 Other equity investments 3,953 11,168 Total 320, ,480 Investments accounted for using the Equity method 1 January 318, ,557 Share of profit of associates after taxation (Note 5) 47,037 46,755 Liquidation of K.A.X. (472) - Elimination of dividends received (48,000) - December , ,312 As at December 31, 2005 the Group had investments in the following associates: Associate Share on equity in % Cost of investment Provision Net book Share on net value assets 2005 Share on net assets 2004 Tatra-Leasing, s.r.o. 48% 96,000-96, , ,820 K.A.X., s.r.o. 40% ,000-96, , ,312 Overview of selected items of associate company Tatra-Leasing: Total assets 6,462,518 6,090,417 Interest and similar income 492, ,458 Profit after tax 85,201 76,465 Contingent liabilities 91,485 74,762 Financial Statements Distribution of the Profit Top Management Business Locations 61

63 18. Intangible fixed assets Software 405, ,009 Intangibles in progress 287, ,768 Total 693, ,777 Contractual commitments for the purchase of intangible fixed assets are in the amount of SKK 73,463 thousand as of December 31, Tangible fixed assets Land and buildings used by the Group for its own operations 1,306,569 1,352,215 Other tangible fixed assets, office furniture and equipment 1,204,329 1,137,842 Total 2,510,898 2,490,057 Obligations arising from the use of tangible fixed assets (primarily office rent) not shown on the Balance Sheet during the 2006 financial year will amount to SKK 269,064 thousand Statement Strong Group Management s Report Auditor s Report

64 20. Development of tangible and intangible fixed assets Development of tangible fixed assets: (in thousands of SKK) Land and buildings Machinery & equimentequipment. Other fixed assets Means of Construction transport in progress and advances Total Cost 1 January ,722,080 2,591, , ,261 67,663 5,519,178 Additions , , ,462 Disposals (10,898) (125,647) (21,384) (20,134) (57,736) (235,799) Reclassification - (12,716) 12, Transfer from tangibles in progress 20, ,385 27,909 60,219 (355,411) - December 31, ,732,594 2,700, , , ,372 5,783,841 Accumulated depreciation 1 January 2005 (360,156) (1,937,459) (615,735) (115,771) - (3,029,121) Depreciation charge (67,058) (249,650) (56,222) (35,907) - (408,837) Disposals 1, ,372 21,340 20, ,015 December 31, 2005 (426,026) (2,064,737) (650,617) (131,563) - (3,272,943) Net book value ,361, , ,794 69,490 67,663 2,490,057 Net book value ,306, , ,385 96, ,372 2,510,898 Development of intangible fixed assets: (in thousands of SKK) Software Goodwill Others Intangible in Total progress Cost 1 January ,192,685 33, ,769 1,385,429 Additions 2, , ,153 Disposals (12,995) - - (195,744) (208,739) Transfer from intangibles in progress 167, (167,852) - December 31, ,349,955 33, ,913 1,671,843 Accumulated depreciation 1 January 2005 (803,677) (33,194) (781) - (837,652) Depreciation charge (153,413) (153,413) Disposals 12, ,411 December 31, 2005 (944,679) (33,194) (781) - (978,654) Net book value , , ,777 Net book value , , ,189 Financial Statements Distribution of the Profit Top Management Business Locations 63

65 21. Income tax assets Current income tax assets 93,443 2,048 Deferred income tax assets - 45,207 Total tax assets 93,443 47,255 Deferred tax assets - 45,207 Deferred tax liabilities (Note 27) (14,326) (7,048) Net deferred tax assets/(liabilities) (14,326) 38, Other assets Prepayments and other deferrals 165, ,059 Provisions for other assets (29,757) (31,092) Other 624, ,784 Total 760, , Deposits from banks Giro and clearing business 250, ,119 Money-market business 17,689,624 22,258,323 Long-term finance 1,609, ,701 Loans from banks 935,838 - Total 20,486,181 22,899,143 Deposits from banks by geographical lines as follows: Slovakia 6,131,087 4,334,926 Other countries 14,355,094 18,564,217 Total 20,486,181 22,899, Statement Strong Group Management s Report Auditor s Report

66 24. Deposits from customers Deposits from customers by product groups are as follows: Sight deposits and current accounts 73,276,761 55,161,715 Time deposits 51,574,990 54,740,714 Savings deposits 8,577,004 8,017,714 Total 133,428, ,920,143 Deposits from customers by geographical lines are as follows: Slovakia 131,252, ,167,775 Other countries 2,176,275 1,752,368 Total 133,428, ,920, Liabilities evidenced by paper Issued debt securities 9,078,167 6,764,300 Other liabilities evidenced by paper 2,482,008 1,516,368 Total 11,560,175 8,280,668 The issued debt securities were issued by the Group with the following terms as of the date of issuance: Name (in thousands of SKK) Interest rate Issue date Maturity date December 31, 2005 December 31, 2004 Mortgage bonds 7.50% , ,760 Mortgage bonds 5.50% ,033,328 1,037,821 Mortgage bonds 6.00% , ,239 Mortgage bonds 5.00% ,051,135 1,053,932 Mortgage bonds 4.60% , ,072 Mortgage bonds 4.60% ,007,587 1,007,558 Mortgage bonds 5.00% ,037,500 1,037,500 Mortgage bonds 4.50% ,023,353 1,023,408 Mortgage bonds 4.60% Mortgage bonds 2.70% ,022,202 - Mortgage bonds 2.90% ,900 - Mortgage bonds 12 M BRIBOR ,999 - Total mortgage bonds 9,078,167 6,764,300 Financial Statements Distribution of the Profit Top Management Business Locations 65

67 26. Provisions for liabilities and charges (in thousands of SKK) On January 1, 2005 Allocated Used Released Transfers, On exchange December 31, differences 2005 Legal disputes (Note 35) 359, ,252 (14,954) (219) 3, ,886 Guarantees (Note 14) 109,276 16,447 0 (24,597) (1,943) 99,183 Unconditional loan commitments (Note 14) 160,148 81,727 0 (100,774) (1,202) 139,899 Other 43,112-0 (39,561) (3,551) - Total 671, ,426 (14,954) (165,151) (3,145) 735, Income tax liabilities (in thousands of SKK) On January 1, 2005 Allocated Used On December 31, 2005 Current tax 552,379 5,460 (543,608) 14,231 Deferred tax 7,048 7,278-14,326 Total 559,427 12,738 (543,608) 28, Liabilities from trading activities Negative market values arising from derivative financial instruments Interest-rate contracts 2,302,513 2,629,378 Exchange-rate contracts 643,924 1,088,932 Index-related contracts 33,576 - Total 2,980,013 3,718, Other liabilities Deferred items 14,400 14,702 Other liabilities 1,487,401 1,017,708 hereof liability from preferred shares 807, ,350 hereof other taxes 54,643 62,182 Total 1,501,801 1,032, Statement Strong Group Management s Report Auditor s Report

68 In accordance with its Articles of Association, the Group sold to its employees preferred shares as part of an incentive programme. The Group is obliged to repurchase these shares upon employee request. The calculation of the repurchase price is defined in the Group s Articles of Association and in general, it is based on the profitability of the Group. Preference shareholders do not exercise voting rights, although they are entitled to dividends. In respect of the obligation of the Group to buy the preferred shares back in firmly defined time and for a firmly defined price, these were classified as liabilities to employees and are included in other liabilities for the purposes of preparation of these financial statements. As of 31 December 2005, such liability amounted to SKK 807,728 thousand (December 31, 2004 SKK 530,350 thousand). Change in the liability is charged to General administrative expenses, item Staff expenses. Dividends paid to employees included in expenses, in 2005 were SKK 65,426 thousand (2004: SKK 36,944 thousand). 30. Equity Share capital consists of 50,216 ordinary shares with a face value of SKK 20 thousand each. Structure of shareholders is included in General information section. Earnings per share is disclosed in Note 9. Contribution of the Group companies to share premium, reserves and retained earnings (excluding profit of the current year) is as follows. In accordance with the Commercial Code in force in the Slovak Republic, usage of reserve funds is restricted. (in thousands of SKK) December 31, 2005 December 31, 2004 Parent company 9,985, ,198 Companies consolidated by full method 43,393 6,909 Companies consolidated by equity method 221, ,064 Total share premium, reserves and retained earnings 10,250,385 9,349,171 Contribution of the Group companies to consolidated profit after tax for the year is as follows: Parent company (the Bank) 2,212,444 2,254,152 Companies consolidated by full method 104,652 36,484 Companies consolidated by equity method 47,037 46,756 Consolidated profit after tax 2,364,133 2,337,392 Financial Statements Distribution of the Profit Top Management Business Locations 67

69 Equity and profit are reconciled between Slovak accounting legislation and IFRS as follows: (in thousands of SKK) December 31, 2005 December 31, 2004 Equity Profit Equity Profit Slovak Accounting Legislation (Bank only) 13,889,982 2,418,866 12,872,047 2,238,368 IFRS consolidation effect 342, , , ,524 Preference shares adjustment (613,497) (155,000) (400,894) (103,500) International Financial Reporting Standards 13,618,838 2,364,133 12,690,883 2,337,392 According Slovak accounting legislation preferred shares transactions are recorded in equity. 31. Information for Cash flow statement Profit from operating activities before changes in working capital is as follows: Cash flows from operating activities Profit before income taxes 2,893,884 2,837,880 Adjustments for non-cash operations: Interest expense 1,212,624 1,161,056 Interest income (6,168,300) (5,745,797) Provisions for losses and write off of assets, net 259, ,296 (Profit) / loss on sale and other disposals of fixed assets 9,115 27,050 Share of profit of associates 963 (46,756) Fair value adjustment of derivatives and trading securities (497,056) 176,575 Depreciation and amortization 562, ,800 Dividend income (7) (880) Changes in accrued income and expense (1,612) (306) Foreign exchange (gain)/loss on cash and cash equivalents (5,125) 108,881 Cash flow of operating activities before changes in working capital, interest received and paid and income taxes paid (1,733,786) (636,201) Cash and cash equivalents comprise of the following: Cash in hand (Note 11) 2,074,938 1,963,270 Deposits with National Bank of Slovakia repayable on demand (Note 11) 688, ,127 Giro and clearing business (Note 12) 610, ,406 Total 3,374,560 2,915, Statement Strong Group Management s Report Auditor s Report

70 32. Receivables and payables with related parties Related parties as defined by IAS 24 are those counter parties that represent: a) enterprises that directly, or indirectly through one or more intermediaries control, or are controlled by, or are under common control with the reporting enterprise. (This includes holding companies, subsidiaries and fellow subsidiaries); b) associates enterprises in which the Group has significant influence and which is neither a subsidiary nor a joint venture of the investor; c) individuals owning, directly or indirectly, an interest in the voting power of the Group that gives them significant influence over the Group, and anyone expected to influence, or be influenced by that person in their dealings with the Group; d) key management personnel, that is those persons having authority and responsibility for planning, directing and controlling the activities of the Group, including directors and officers of the Group and close members of the families of such individuals; and e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of the Group and enterprises that have a member of key management in common with the Group. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely the legal form. A number of banking transactions are entered into with related parties in the normal course of business. These transactions were carried out on commercial terms and conditions and at market rates. Financial Statements Distribution of the Profit Top Management Business Locations 69

71 The following are assets, liabilities, commitments and contingencies, derivatives, revenues and expenses with related parties: Assets (in thousands of SKK) Loans and advances to banks and customers 2,337,176 1,621,037 Statutory bodies and Supervisory Board 4,577 5,569 RZB 938, ,659 RZB Group 998, ,921 Associates 335, ,147 Other related parties 60,589 43,741 Receivables from financial derivative transactions 35,338 39,974 RZB 19,891 19,799 RZB Group 2, Associates 12,946 19,768 Other assets 48,092 10,433 RZB RZB Group 44,773 3,653 Associates 3,207 6,720 Liabilities (in thousands of SKK) Deposits from banks and customers 6,745,711 14,180,869 Statutory bodies and Supervisory Board 66,304 78,006 RZB 5,979,164 13,058,431 RZB Group 698,505 1,042,735 Associates 1,738 1,697 Liabilities from financial derivative transactions 309,530 1,233,651 RZB 306,596 1,230,171 RZB Group Associates 2,399 3,389 Other liabilities 1, RZB RZB Group 1, Associates Statement Strong Group Management s Report Auditor s Report

72 Income (in thousands of SKK) Interest income 55,996 26,707 Statutory bodies and Supervisory Board RZB 48,480 16,199 RZB Group 835 3,138 Associates 6,293 6,783 Other related parties Income from charges 97,462 48,005 RZB 1, RZB Group 79,797 22,591 Associates 16,454 25,376 Unrealized gain on financial derivative transactions 519,823 - RZB 514,857 - RZB Group 1,184 - Associates 3,782 - Operating revenues 180,105 27,460 RZB RZB Group 165,882 5,051 Associates 13,963 22,244 Total revenues 853, ,172 Financial Statements Distribution of the Profit Top Management Business Locations 71

73 Expenses (in thousands of SKK) Interest expenses (260,941) (61,097) RZB (250,540) (44,648) RZB Group (10,361) (16,359) Associates (40) (90) Expenses on charges (49,942) (65,784) RZB (41,075) (58,694) RZB Group (8,867) (7,090) Unrealized loss on financial derivative transactions - (1,107,799) RZB - (1,120,420) RZB Group Associates - 11,719 Administrative expenses (116,675) (109,435) RZB (15,813) (39,795) RZB Group (28,976) (25,575) Supervisory Board remuneration (10,105) (8,143) Statutory bodies remuneration (61,781) (35,923) Operating expenses (639) - RZB (435) - RZB Group (204) - Total expenses (428,197) (1,344,116) Commitments and contingent liabilities (in thousands of SKK) Guarantees issued 1,374, ,514 RZB 113, ,817 RZB Group 1,243, ,197 Associates 17,675 5,500 Guarantees received 2,712,772 2,902,166 RZB 2,638,111 2,644,781 RZB Group 74, , Statement Strong Group Management s Report Auditor s Report

74 33. Foreign currency items The Consolidated Financial Statements contain the following volumes of assets and liabilities denominated in foreign currencies: Assets 34,045,807 35,338,913 Liabilities 38,626,426 43,905, Foreign assets and liabilities Assets and liabilities with counterparties outside Slovakia are as follows: Assets 15,621,678 19,402,211 Liabilities 18,339,934 23,275, Contingent liabilities and other off-balance-sheet items Contingent liabilities 7,613,739 5,383,472 Arising from guarantee credits 211, ,051 Arising from other guarantees 6,633,019 4,576,387 Arising from letters of credit 769, ,034 Commitments 37,742,446 28,899,165 Arising from irrevocable loan promises/stand-by facilities Up to 1 year 25,826,610 22,324,284 More than 1 year 11,915,836 6,574,881 Off balance sheet commitments from guarantees represent irrevocable obligations that the Group will make payments in the event that a customer cannot fulfil its obligations against the third parties. Documentary letter of credit is an irrevocable undertaking of the issuing Group acting at the request of a customer (buyer) to make payment to the beneficiary (seller) or to pay or accept bills of exchange drawn by the beneficiary against stipulated documents, provided all terms and conditions of the letter of credit are complied with. The documentary letters of credit are collateralised depending on the creditworthiness of the customer and on the same basis as guarantees or loans. Financial Statements Distribution of the Profit Top Management Business Locations 73

75 The primary purpose of unused credit facilities (loan commitments) is to ensure that funds are available to a customer as required. Commitments to grant loans issued by the Group represent issued loan commitments and unused part of approved overdraft loans. The risk associated with off balance sheet financial commitments and contingent liabilities is assessed similarly as for loans to customers taking into account the financial position and activities of the entity to which the Group issued the guarantee and taking into account the collateral obtained. As of December 31, 2005 the Group created reserves for these risks amounting to SKK 239,082 thousand (2004: SKK 269,424 thousand) (Note 14). Legal disputes In the ordinary course of business the Group is subject to legal actions and complaints. Group representatives believe that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial situation or the results of future operations of the Group. As of December 31, 2005 the Group created provisions for these risks amounting to SKK 496,886 thousand (2004: SKK 359,256 thousand) (Note 26). Values in custody and management: Values in custody Investment bills of exchange 2,483,713 1,516,892 Trust receipts 509, ,874 Unit trust certificates of the trust holders in the open unit trusts of Tatra Asset Management ( TAM ) 31,655,700 19,558,343 Values in management Securities 1,562,163 1,049,271 Total 36,210,800 22,560,380 In accordance with the depository function for Tatra Asset Management, správ. spol., a.s. (TAM), as at December 31, 2005 the Bank reported securities in custody of the TAM Unit Trusts in the amount of SKK 27,861,931 thousand (2004: SKK 14,299,605 thousand). 36. Repurchase agreements The following repurchase and redelivery commitments were in place on December 31, (under reverse repo transactions): Repurchase agreements (as borrower) Deposits from banks 955,667 - Total 955, Statement Strong Group Management s Report Auditor s Report

76 Reverse repurchase agreements (as lender) Loans and advances to banks 30,372,631 8,935,236 Total 30,372,631 8,935, Assets pledged as collateral The following obligations were securitized by assets as shown on the Balance Sheet: Deposits from banks 757,781 - Liabilities evidenced by paper 3,577,763 2,000,000 Contingent liabilities and commitments 174, ,205 Total 4,509,645 2,208,205 The following assets on the Balance Sheet were furnished as collateral for the above named obligations: Held to maturity securities 1,036,952 - Financial assets at fair value through profit or loss 3,302,609 2,053,123 Loans and advances to banks 192, ,017 Total 4,532,074 2,284, Non-interest-bearing assets Loans and advances to customers 673, ,426 Impairment losses for loans and advances (572,762) (333,815) Total 100,803 52,611 Financial Statements Distribution of the Profit Top Management Business Locations 75

77 39. Derivative financial instruments The total volume of unsettled derivative financial instruments are as follows on December 31, 2005: (in thousands of SKK) Nominal amounts by maturity Fair values Up to 1 year From 1 to 5 years More than 5 years Total Positive (Note 15) Negative (Note 28) a) Interest rate contracts 21,198,536 38,909,512 13,913,920 74,021,968 1,289,599 (2,302,513) OTC products: Interest rate swaps 16,198,536 38,909,512 13,913,920 69,021,968 1,288,066 (2,301,372) Forward rate agreements 5,000, ,000,000 1,533 (1,141) b) Exchange rate contracts 70,420,604 9,012, ,322 80,036, ,866 (643,924) OTC products: Currency and interest rate swaps - 1,393, ,322 1,996,868 83,566 (17,306) Foreign currency forwards 43,492,184 4,630,230-48,122, ,103 (426,541) Currency options - buys 13,297,522 1,489,592-14,787, ,197 - Currency options - sells 13,630,898 1,498,797-15,129,695 - (200,077) c) Index related contracts 8, , ,367 33,567 (33,576) OTC products: Index-related options-buys 4, , ,481 33,567 - Index-related options-sells 4, , ,886 - (33,576) Total 91,627,466 48,273,718 14,517, ,418,426 1,968,032 (2,980,013) The total volume of unsettled derivative financial instruments are as follows on December 31, 2004: (in thousands of SKK) Nominal amounts by maturity Fair values Up to 1 year From 1 to 5 years More than 5 years Total Positive (Note 15) Negative (Note 28) a) Interest rate contracts 16,022,920 35,296,364 15,525,420 66,844,704 1,166,077 (2,629,378) OTC products: Interest rate swaps 2,872,920 34,996,364 15,525,420 53,394,704 1,162,616 (2,608,760) Forward rate agreements 13,150, ,000-13,450,000 3,461 (20,618) b) Exchange rate contracts 53,093,949 1,583, ,669 55,288, ,039 (1,088,932) OTC products: Currency and interest rate swaps 652,191 1,466, ,669 2,729,577 89,434 (275,085) Foreign currency forwards 29,632, ,090-29,749, ,857 (705,992) Currency options - buys 10,040, ,040,734 88,748 - Currency options - sells 12,768, ,768,561 - (107,855) Total 69,116,869 36,880,171 16,136, ,133,129 1,726,116 (3,718,310) 76 Statement Strong Group Management s Report Auditor s Report

78 40. Fair value of financial instruments Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Insofar as market prices were available (which was mainly the case for securities and derivative instruments traded on stock exchanges and functioning markets), they were used. All other financial instruments were valued using internal measurement models, including in particular present value models or accepted option price models, or use was made of external expert opinions. Fixed-interest receivables from and payables to banks or customers were only remeasured to fair values different from their carrying amount on the Balance Sheet if they had a remaining term of more than one year. Variable-rate receivables and payables were only taken into account if they had an interest rollover period of more than one year. Only in those cases does discounting based on an assumed interest rate in line with market rates have a significant effect. (in thousands of SKK) Fair value Carrying amount Assets 2005 Difference Fair value Carrying amount 2004 Difference Loans and advances to banks 37,608,211 37,608,211-18,900,493 18,900,493 - Loans and advances to customers 81,771,923 81,075, ,356 68,173,020 67,755, ,300 Held to maturity securities 37,835,744 37,473, ,105 31,062,637 30,532, ,729 Intangible and tangible fixed assets 3,204,087 3,204,087-3,037,834 3,037,834 - Liabilities Deposit from banks 20,486,181 20,486,181-22,899,143 22,899,143 - Deposit from customers 133,512, ,428,755 83, ,920, ,920,143 - Liabilities evidenced by paper 11,560,175 11,560,175-8,280,668 8,280, Average number of staff The average number of staff during the financial year breaks down as follows: White collar 3,284 3,040 Total 3,284 3,040 Financial Statements Distribution of the Profit Top Management Business Locations 77

79 42. Remuneration of board members The members of the Managing Board and the Supervisory Board were remunerated as follows: Managing Board* 61,781 38,974 Supervisory Board 10,105 8,143 Total 71,886 47,117 * also including statutory bodies 43. Credit risk exposure to the Slovak Republic The table below provides the summary of the Bank s credit risk exposure against the Slovak Republic (companies controlled by the Slovak Republic, guarantees issued by the Slovak Republic and similar exposures): Deposits with the NBS 688, ,127 State zero coupon bonds and other securities accepted by the NBS for refinancing 6,841,273 24,462,756 Amounts due from banks 31,709,815 10,575,560 Amounts due from clients 10,680,676 14,424,962 Debt securities 35,126,254 29,618,123 Total 85,046,973 79,391, Risk report Credit risk The Group bears a credit risk, i.e. the risk that the counter party will not be able to repay in full amounts owed, at their maturity. The Group classifies the loan exposure borne by the Group by setting limits of the risk accepted with respect to one debtor, or a group of debtors, and with respect to individual countries. Such risks are monitored on a regular basis and reviewed at least annually. Exposure to one debtor including banks and securities dealers is also limited by partial limits set for balance sheet and off-balance sheet exposures, and by daily limits of exposure in relation to items traded, such as forward foreign currency contracts. The actual exposure is compared to set limits on a daily basis. The loan exposure is managed based on regular analyses of debtor s and potential debtors ability to repay the principal amount and interest and based on potential adjustments to such loan limits. Credit risks are also partially managed by collaterals and guarantees received from private individuals or legal entities Statement Strong Group Management s Report Auditor s Report

80 Retail debtors are assessed by the Group using the scoring models developed for individual products. Credit risk in retail portfolio is managed by following main tools. Credit scoring is a tool used by bank in loan decision process for private individuals and also for small companies. Next important tool in loan approval process is system of underwriting by specialists which goal is to optimise revenues from loans to risk taken by the bank. The regular monitoring of the existing portfolio quality and trends together with appropriate strategies to secure quality of existing portfolio are also very important part of risk management that significantly contribute to retaining portfolio quality and to targeted level of risk charges. For products other than retail provisions are created individually (case by case basis). For retail receivables Group creates individual provisions for cases where a group is able to identify individual receivable impairment. Group also creates portfolio provisions for risks present in portfolio which does not become evident on individual receivable basis. In the portfolio provisions size calculation group uses its own history and experiences with existing loan portfolio quality and success rate in collection process. When claiming receivables, the Bank uses internal or external resources depending on the amount and type of receivable. Receivables up to a certain amount are forwarded to collecting agencies. In the case of unsuccessful collection of receivables, the receivable is sold to an external company that specialises in the enforcement of receivables using legal action. Receivables over a certain amount and specific or selected types of receivables are dealt with by an expert team of internal employees in co-operation with the legal function and professional divisions of the Bank. Market risk The Group is exposed to market risks. Market risks result from open positions from transactions with interest rate, cross-currency and equity products subject to general and specific market changes. To assess the approximate level of market risks associated with the Group s positions, and the expected maximum amount of potential losses, the Group uses internal reports and models for individual types of risks faced by the Group. The Group uses a system of limits, the aim of which is to ensure that the level of risks the Group is exposed to at any time does not exceed the level of risks the Group is willing and able to take. These limits are monitored on a daily basis. For risk management purposes, the market risk is regarded as the risk of potential losses the Group may incur due to unfavourable development in market rates and prices. To manage market risks, the Group uses a system of limits imposed on individual positions and portfolios. As to the structure of trades, the Group primarily faces the following market risks: Currency risk Interest rate risk Financial Statements Distribution of the Profit Top Management Business Locations 79

81 Currency risk The currency risk represents the potentiality of loss resulting from unfavourable movements in foreign currency exchange rates. The Group controls this risk by the determination and monitoring of open position limits. Open currency positions are subject to real-time monitoring through the banking information system. The currency position of the Group is monitored separately for each currency, as well as for three currency groups, formed according to the respective market liquidity. Limits for these positions are set in line with the RZB Group standards. Data on the Group currency positions and on the Group s compliance with the limits set by RZB are reported on a weekly basis. In addition to the limit on an open currency position, the Group also sets a negative gamma limit on an option position for each currency match subject to trading. The Group also sets the vega limit on the overall option position. Positions from client option trades to currency matches, where no gamma limit on trading has been specified by the Group, are closed in the market, so as to ensure that the Group has no open position for this currency match. Moreover, the Group sets two stop-loss limits (40-day) on: The overall currency position The currency option position (in thousands of SKK) December 31, 2005 Net FX position December 31, 2004 Net FX position EUR 1,258,505 27,004 USD (235,617) 61,931 CZK (140,777) (35,026) SKK (234,544) (136,940) Other 138, Total Net FX position 785,885 (82,932) Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore indicates to what extent it is exposed to interest rate risk. The Group controls and manages its interest rate risk for all trades, and for the Banking Book and the Trading Book separately. The interest rate risk is monitored and assessed on a daily basis. To monitor the interest rate risk, the following methods are employed: the gap analysis method and the method of sensitivity to the yield curve shifts (BPV) and Trading Book Money Market Stop Loss Limit Statement Strong Group Management s Report Auditor s Report

82 Internal interest rate risk limits applicable in the Banking Book are set in the form of limits on open positions in each time band of the interest gap for each currency that is included in the Banking Book (SKK, EUR, USD). The Group s limit on the interest rate risk of the Banking Book has been set in the form of maximum dollar duration of the Banking Book with a limit on the position concentration in one time basket and one currency. The interest rate risk limits applicable in the Trading Book are set in the form of limits on sensitivity of the overall position to the yield curve shifts (BPV). The limits are set for individual currency included in the Trading Book. On a weekly basis, the Risk Control Department submits information on the current level of interest rate risk by individual currency and on the drawing of limits on interest rate risks. In the case of exceeding the set limit, the interest rate positions are closed by using both traditional and derivative financial instruments. The table below provides information on the extent of the Group s interest rate exposure based either on the contractual maturity date of its financial instruments or, in the case of instruments that re-price to a market rate of interest before maturity, the next re-pricing date. Those assets and liabilities that do not have contractual maturity date or are not interest-bearing are grouped in unspecified category. Deposits from customers are split into individual time baskets by the Group s historical experience with their actual drawing by clients. Financial Statements Distribution of the Profit Top Management Business Locations 81

83 (in thousands of SKK) Up to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years Unspecified Total Cash reserve 2,031, ,074,937 4,106,753 Loans and advances to banks 36,898, , ,844 37,608,211 Loans and advances to customers 43,081,255 11,902,864 16,968,569 5,729,925 3,392,954 81,075,567 Impairment losses for loans and advances (2,314,343) (2,314,343) Financial assets at fair value through profit or loss 3,988,456 1,056,203 8,032,872 6,897,308 2,036,649 22,011,488 Held to maturity securities 10,845,641 2,701,598 23,926, ,473,640 Equity investments , ,830 Tangible and intangible fixed assets ,204,087 3,204,087 Other assets , ,055 Total assets 96,845,995 16,366,205 48,927,842 12,627,233 9,573, ,340,288 Deposits from banks 17,909,470 2,343, ,947 52,317 45,992 20,486,181 Deposits from customers 59,566,058 44,156,788 26,963,135 4,472 2,738, ,428,755 Liabilities evidenced by paper 2,543,748 1,196,519 5,742,310 2,000,000 77,598 11,560,175 Provisions for liabilities and charges , ,968 Income tax liabilities ,557 28,557 Liabilities from trading activities ,980,013 2,980,013 Other liabilities ,501,801 1,501,801 Equity (excluding current year profit) ,254,705 11,254,705 Consolidated profit after tax ,364,133 2,364,133 Total liabilities 80,019,276 47,696,761 32,840,392 2,056,789 21,727, ,340,288 Balance sheet interest rate sensitivity gap 16,826,719 (31,330,556) 16,087,450 10,570,444 (12,154,057) - Net off balance sheet interest rate sensitivity gap * (586,958) 2,392, ,676 (7,313,920) (39,416,542) (44,049,475) Cumulative interest rate sensitivity gap 16,239,761 (12,698,526) 4,264,600 7,521,124 (44,049,475) - As of December 31, 2004 Total assets 87,620,701 16,951,290 38,892,060 16,318,458 7,990, ,772,776 Total liabilities 98,016,211 16,678,115 32,396,136 2,561,455 18,120, ,772,776 Balance sheet interest rate sensitivity gap (10,395,510) 273,175 6,495,924 13,757,003 (10,130,592) - Net off-balance sheet interest rate sensitivity gap * Cumulative interest rate sensitivity gap 14,579,168 (5,097,938) 4,021,888 (13,925,420) - (422,302) 4,183,658 (641,105) 9,876,707 9,708,290 (422,302) - *) Off balance sheet position in 2004 includes certain interest rate sensitive transactions with financial derivatives. In 2005 the off balance sheet position includes certain interest rate sensitive transactions with financial derivatives, amounts receivable and payable from spot transactions with interest rates instruments, future loans, from guarantees, letters of credit and amounts payable from collateral Statement Strong Group Management s Report Auditor s Report

84 Individual interest rate gaps in the Bank (individual) as of December 31, 2005: IR Gap up to 6 mon 6-12 mon 1-2 Yrs 2-5 Yrs >5 Yrs (in thousands of SKK) SKK 9,183,237 (18,144,223) 12,543,834 3,562,781 1,325,696 EUR 3,130, , , ,695 1,512,013 USD (3,584,118) (1,011,442) 344,511 (158,082) 418,816 CZK (256,971) (1,330,320) (7,438) (139,037) - Change in the present value of interest rate exposure of the Bank (individual) at December 31, 2005 given a parallel increase in interest rates of one basis point: +1BPV up to 6 mon >6-12 mon >1-2 Yrs >2-5 Yrs >5 Yrs SKK (439) 1,703 (2,268) (1,454) (900) EUR (151) (61) (137) (70) (1,043) USD (60) 60 (248) CZK Average interest rates as of December 31, 2005: The average interest rates calculated as a weighted average for each asset and liability category are as follows: SKK FCY SKK FCY Assets Cash reserve 2.26 % % - Treasury bills and other bills eligible for refinancing 3.24 % % - Loans and advances to banks 3.45 % 1.62 % 4.81% 1.17% Loans and advances to customers 6.35 % 3.83 % 7.13% 4.05% Debt securities 4.25 % 2.90 % 4.94% 8.14% Total assets 4.43 % 3.25 % 5.48% 4.79% Total interest earning assets 4.60 % 3.33 % 5.73% 4.86% Liabilities Deposits from central bank % 4.79% Deposits from banks 2.63 % 2.22 % 4.74% 1.89% Deposits from customers 1.26 % 1.31 % 2.41% 0.96% Securities issued 4.65 % 0.54 % 3.99% 1.07% Total liabilities 1.45 % 1.61 % 2.27% 1.10% Total interest bearing liabilities 1.56 % 1.70 % 2.58% 1.17% Financial Statements Distribution of the Profit Top Management Business Locations 83

85 Liquidity risk Liquidity risk means a risk of possible loss of the Group s ability to fulfil its liabilities when they become due. The Group wishes to maintain its solvency, i.e. the ability to meet its financial liabilities in a proper manner and in time, and to manage its assets and liabilities so as to ensure continuous liquidity. Liquidity management is the responsibility of the Assets and Liabilities Committee (ALCO) and the Treasury and Investment Banking Division. Regular meetings of ALCO are held on a weekly basis, during which the Group s liquidity is evaluated and, subsequently, decisions are taken based on the current state of affairs. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees and from margin and other calls on cash settled derivatives. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Group sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The Risk Control Department submits information on the Group s liquidity position to ALCO on a weekly basis. The Asset and Liability Management Department submits reports on the Group s structure of assets and liabilities to ALCO for approval on a quarterly basis, and proposes the size of the portfolio of strategically held securities and their structure for the following period subject to monitoring. The Group is obliged to perform its activities so as to ensure that at any time it meets the liquidity requirements and coefficients set by the National Bank of Slovakia. The Group monitors long-term liquidity risk by developing a liquidity and crisis liquidity gap based on internal rules and assumptions. The limits are approved by the Risk Control Department, ALCO, and the Bank s management. The table below provides an analysis of assets, liabilities and shareholders equity grouped by relevant residual maturity from the balance sheet date to the contractual maturity date. It is presented under the most prudent consideration of maturity dates where options or repayment schedules allow for early repayment. Those assets and liabilities that do not have a contractual maturity date are grouped together in the unspecified category Statement Strong Group Management s Report Auditor s Report

86 (in thousands of SKK) Up to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years Unspecified Total Cash reserve 4,106, ,106,753 Loans and advances to banks 36,902, , ,608,211 Loans and advances to customers 22,621,101 12,979,199 26,980,408 14,385,691 4,109,168 81,075,567 Impairment losses for loans and advances (2,314,343) (2,314,343) Financial assets at fair value through profit or loss 1,147,721 1,282,747 11,636,897 7,875,508 68,615 22,011,488 Held to maturity securities 633,070 1,221,581 35,138, ,017-37,473,640 Equity investments , ,830 Tangible and intangible fixed assets ,204,087 3,204,087 Other assets 387,223 53,888 39,593 2, , ,055 Total assets 65,798,539 16,242,955 73,795,870 22,743,565 5,759, ,340,288 Deposits from banks 17,198,503 2,343, , ,578-20,486,181 Deposits from customers 126,264,043 5,168,463 1,866,165 4, , ,428,755 Liabilities evidenced by paper 2,547, ,128 6,290,312 2,015,510-11,560,175 Provisions for liabilities and charges , ,968 Income tax liabilities ,557 28,557 Liabilities from trading activities 674, , , ,729-2,980,013 Other liabilities , ,490,824 1,501,801 Equity (including consolidated profit) ,618,838 13,618,838 Total liabilities 146,685,328 9,054,593 9,133,279 3,467,288 15,999, ,340,288 Balance sheet position (80,886,789) 7,188,362 64,662,591 19,276,277 (10,240,441) - Net off balance sheet position * (10,993,915) 4,777,228 4,532,346 4,226,534 (140,771) 2,401,422 Cumulative position (91,880,704) (79,915,114) (10,720,177) 12,782,634 2,401,422 - As of December 31, 2004 Total assets 56,524,512 26,510,623 56,709,788 25,342,036 2,685, ,772,776 Total liabilities 133,589,558 5,928,826 7,748,700 5,973,396 14,532, ,772,776 Balance sheet position (77,065,046) 20,581,797 48,961,088 19,368,640 (11,846,479) - Net off-balance sheet position * (2,103,505) (4,918,023) (3,566,072) (6,019,354) 1,103,000 (15,503,954) Cumulative position (79,168,551) (63,504,777) (18,109,761) (4,760,475) (15,503,954) - *) Off balance sheet 2004 includes amounts receivable and payable arising from spot and derivative transactions, guarantees and letters of credit. Off balance sheet position 2005 includes amounts receivable and payable arising from spot and derivative transactions, commitments to extend and receive credit, guarantees and letters of credit. Financial Statements Distribution of the Profit Top Management Business Locations 85

87 Operational risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. As in the case of other types of risks, operational risk is managed by applying the standard principle including the separation of functions in risk management and controlling. For regulatory capital purposes the Group is going to use The Standardised Approach according to BASEL II requirements. Gross Income - relevant indicator for measuring operational capital charge is presented as the average over three years of the sum of net interest income and net noninterest income. For the identification of operational risk the Group uses a three-dimensional model compound of risk categories, business functions and business lines (Risk Management Association methodology). Operational risk loss data collection will cover the collection of all operational losses according to risk categories. The Group puts the accent on process quality improvement and operational risk mitigation actions. The essential assumption of set goals is based on operational risk awareness and operational risk bank culture. The Group has rolled in an implementation of Key Risk Indicators. These indicators are used as the next tool of operational risk management and serve for monitoring and analysis of operational risk-sensitive areas. Basel II The Group is preparing to thoroughly fulfil the revised EU Directive on the capital adequacy proposed by the European Parliament as Re-casting Directive 2000/12/EC that is based, to the significant extent, on the document called International Convergence of Capital Measurement and Capital Standards issued by the Basle Committee, generally known as Basel II. The implementation of the Basel II requirements is a high priority project for the Group. The objective of the project is primarily to ensure the most accurate assessment and proper management of credit, market and operation risks. The achievement of this objective is based among others on the appropriate collection and archiving of all comprehensive data or potential comprehensive data, on the development of a reliable measurement methodology for individual types of risks, on the maintenance of effective and well-developed processes for the prudent management of individual types of risks, on the maintenance of quality and secure IT systems for the automation of processes, data collection, data analysis, calculations, and provision of outputs Statement Strong Group Management s Report Auditor s Report

88 The goal is to take into consideration knowledge of the respective risks in any area of the Group s activities, for which the individual risks are relevant. The outcome will be that the risk and the capital maintained for this type of risk will be regarded in both, commercial strategies and management of the Group itself in order to achieve the best effect in terms of the optimum compromise between minimizing individual types of risk and increasing the market share, the profits, and the ROE. The concepts, methodology, and documentation for the Basle II Project are prepared in close cooperation with both RZB and Raiffeisen International. 45. Approval of the financial statements The financial statements are signed and authorised for issue on 31 March Financial Statements Distribution of the Profit Top Management Business Locations 87

89 88 distribution of the profit

90 Distribution of the Profit Distribution of the Profit for the Year 2005 (in thousands of SKK) 2005 Profit after tax 2,418,866 Dividends - Ordinary shares 1,677,214 Dividends - Preferred shares 117,522 Remunerations to Supervisory board 15,000 Allocation to retained earnings 609,130 Profit according to Slovak Accounting Standard, see Note 30 to the consolidated financial statements. 89

91 90 top management

92 Top Management Top Management as of December 31, 2005 Supervisory Board Milan Vrškový Chairman of the Supervisory Board Herbert Stepic CEO Raiffeisen International Bank-Holding AG, Vienna Peter Baláž Professor, Economic University, Bratislava Tomáš Borec Attorney of Law Renate Kattinger Senior Vice-President, Raiffeisen International Bank- Holding AG Ján Neubauer Financial Director, FIT PLUS, s.r.o. Peter Püspök General Manager, Raiffeisenlandesbank Niederösterreich Wien, reg. Ges.m.b.H, Vienna Management Board of Managing Directors: Rainer Franz General Manager Miroslav Uličný Deputy General Manager Igor Vida Deputy General Manager Christian Masser Karel Fíla Marcel Kaščák Procurists: Oľga Džuppová Pavol Feitscher Eva Kollárová 91

93 92 business locations network