Income statement 3. Balance sheet 4. Cash Flow Statement 6-7. Notes to the Financial Statements 8 67

Transcription

1 MARFIN BANK A.D., BEOGRAD FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009

2 TABLE OF CONTENTS Page Independent Auditor s report 1-2 Income statement 3 Balance sheet 4 Statement of Changes in Equity 5 Cash Flow Statement 6-7 Notes to the Financial Statements 8 67 Representation letter

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8 CASH FLOW STATEMENT for the year ended 31 December 2009 (in thousand of RSD) Note CASH FLOW FROM OPERATING ACTIVITIES Interest receipts 1,057,357 1,040,827 Fee and commission receipts 146, ,267 Receipts from other operating income 3,721 3,753 Dividend and other share receipts Cash inflows from operating activities 1,207,180 1,336,048 Interest payments (486,196) (106,090) Fee and commission payments (15,255) (41,915) Salaries and other personnel expenses (727,379) (574,046) Taxes, contributions and other duties paid (205,500) (114,997) Cash outflow from other operating expenses (490,668) (475,501) Cash outflows from operating activities (1,924,998) (1,312,549) Net cash (outflows)/ inflow from operating activities before increase or decrease in placements and deposits (717,818) 23,499 Decrease in loans and placements with banks and other clients 310,910,969 (236,520,682) Decrease in securities at fair value through income statement, investments available for sale and short-term securities held to maturity 200,000 (103,952) Increase in deposits from banks and other clients 656,855, ,537,682 Decrease in placements and increase in deposits taken 967,965,973 (846,162,316) Increase in loans and placements with banks and other clients (314,712,908) 239,893,161 Increase in securities at fair value through income statement, investments available for sale and short-term securities held to maturity (1,634,280) 139,744 Decrease in deposits with banks and other clients (658,522,394) (607,307,406) Increase in placements and decrease in deposits taken (974,869,582) 847,340,311 Net cash inflow outflow from operating activities before tax (7,621,427) (1,154,496) Paid dividends (2,867) (3,710) Net cash outflow from operating activities (7,624,294) (1,158,206) 6

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10 1. CORPORATE INFORMATION Marfin Bank a.d. Beograd was established on 28 December In accordance with the Law on Banks and Other Financial Organisations, the Bank was registered for domestic and foreign payment operations and domestic loan and deposit activities. The Bank was established as Centrobanka a.d. and in 2006 changed its name to Laiki bank a.d. In 2008 the Bank changed its name to Marfin Bank a.d. As of 14 February 2006 the Bank s business name was changed in the Commercial Entities Register and the name Centrobanka a.d., Beograd, Dalmatinska 22 was deleted and Laiki Bank a.d. was entered. On the Bank s Shareholders Assembly meeting held on 14 December 2007, Resolution on change of business name of Laiki Bank a.d. into Marfin Bank a.d., Beograd was delivered. Pursuant to the Resolution of Serbian Business Registers Agency BD22384/2008 dated 28 March 2008 the change became effective as of 31 March The Bank is registered in Belgrade, Dalmatinska 22, where the Bank s Headquarters is also located. The Bank s business network of branches and other business units consists of 31 organizational units as at 31 December As at 31 December 2009 the Bank had 462 employees and as at 31 December 2008 it had 455 employees. The average number of employees in 2009 was 427. The Bank s registration number is and its tax identification number is During the year, the Bank has increased its share capital as per Securities Commission Resolution number 4/ /6-09 dated 1 September 2009, which approved XVI issue of shares. The issue comprised 2,326,750 ordinary shares with nominal value of RSD , totalling the issue value to RSD 1,163,375 thousand. Issuing price was RSD The shares have been bought by Marfin Popular Bank Public Co. LTD. The issue was registered with Business Registers Agency by the Decision No. BD /2009 dated 20 August Based on the Decision No. BD 31729/2009 of the Business Registers Agency dated 3 April 2009 and Decision on the approval of appointment of the National Bank of Serbia dated 31 March 2009, Rodoula Hadjikyriacou was appointed Chairman of the Executive Board instead of Miroslav Pivić. Based on the decision of the National Bank of Serbia on the approval of appointment dated 1 December 2009, Rodoula Christodoulides was appointed Member of the Executive Board. Executive Board members are Panicos Eracleous, Vladan Manic, Borislav Strugarević and Rodoula Christodoulides. 8

11 2. ACCOUNTING POLICIES 2.1. Basis for preparation These financial statements have been prepared in accordance with the current regulations of the Republic of Serbia based on the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia No. 46/06 and 111/209), Law on Banks (Official Gazette of the Republic of Serbia No. 107/05) and other by-laws of the National Bank of Serbia. Law on Accounting and Auditing and Law on Banks require that the financial statements are to be prepared in accordance with legal and professional regulations, which assume the Framework for Preparation and Presentation of Financial Statements (Framework), International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), as well as interpretations that are integral part of these standards. Framework and IAS applicable since 31 December 2002, which were the basis for previous and current Law on Accounting and Auditing from 2006, were determined and published by a Decision No issued and signed by the Minister of Finance date 30 December Changes in IAS, as well as new IFRS and interpretations issued by International Accounting Standards Board and International Financial Reporting Interpretations Committee (IFRIC) are published in Official Gazette of the Republic of Serbia no. 16 dated 12 February 2008 on the basis of Resolution issued by the Minister of the Republic of Serbia. The Bank s financial statements are presented in the format prescribed by the Rules on the Format and Contents of Positions in the Forms of Financial Statements for Banks and other Financial Organisations (Official Gazette of the Republic of Serbia No. 8/07, 74/08, 3/09, 12/09 and 5/2010). Taking into account the differences between IFRS and certain requirements of accounting regulations of the Republic of Serbia and regulations of the National Bank of Serbia, the Bank s management does not express an unreserved statement of compliance of the financial statements with requirements of all standards and interpretations issued by International Accounting Standards Board, which make International Financial Reporting Standards. The financial statements are prepared using the historical cost method. The basic accounting policies applied on preparation of these financial statements are stated below. These policies have been consistently applied to years shown, except otherwise stated Foreign currency transactions (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The financial statements are presented in Dinars of the Republic of Serbia (RSD), which is the functional and presentation currency of the Bank. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recorded in favour of the income statement under item Foreign Exchange Income or Expenses. 9

12 2. ACCOUNTING POLICIES (continued) 2.2. Foreign currency transactions (continued) (b) Transactions and balances (continued) Translation differences on non-monetary items are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported in the income statement as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the fair value reserve within equity Financial assets The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. a) Financial assets at fair value through profit or loss This category consists of two subcategories: financial assets held for sale and financial assets recognized at fair value through income statement. Financial assets are classified as assets held for sale if those are acquired for sale or for iterative purchase in a short period of time, or if they are part of identified financial instruments portfolio which are kept together and for which there are evidence of recent short realization of profit. Derivative securities are also classified as those which are held for sale unless if those are determine as instruments for protection from risk. Gains and losses, preceded from changes in fair value of derivatives which are held together with particular financial assets or financial liabilities, are included in Net income from financial instruments at fair value. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. All loans and advances are initially recognized at fair value. All loans and advances are recognized when cash is advanced to the borrower. After initial recognition, these are subsequently measured at amortized costs using the effective interest rate method. (c) Available-for-sale financial assets Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Regular-way purchases and sales of financial assets available for sale are recognized on trade date, which is the date on which the Bank commits to purchase or sell the asset. Investments are initially recognized at fair value increased for transaction expenses for all financial assets which are not measured at fair value in the income statement. After initial measurement, available-for-sale financial investments and financial assets at fair value through profit and loss are subsequently measured at fair value. When the available-for-sale securities are disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, and other valuation techniques which at most use market information. 10

13 2. ACCOUNTING POLICIES (continued) 2.3. Financial assets (continued) Securities consist of capital instruments which have no current bid price in an active market. Those investments in securities held for sale are evaluated at purchase value and exempted from measurement at market value. (d) Investments in subsidiaries Investments in subsidiaries are carried at cost Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously Derivatives Bank does not use the accounting of hedging transactions and the only derivatives used by the Bank include foreign exchange contracts and interest swap contracts in order to be protected from exchange rates changes and from risk of interest rates changes. Specified derivatives do not comply with criteria of being recorded using hedge accounting and therefore gains and losses from derivative market value changes are recorded directly into income statement. Foreign exchange denomination is built in derivative that is not booked separately from basic contract. Gain/Loss on this basis is booked in Income statement as income/expenditure from change in assets and liabilities Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as available-for-sale, or are carried at fair value are recognized within Interest income and Interest expense in the income statement using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (e.g., advanced payments) but does not consider future credit losses. Calculation includes all fees and amounts paid or received between two contracted parties which are principles of effective interest rate, transaction expenses and all other premiums and discounts. When the financial asset or group of similar financial assets is written-off as a result of loss from value depreciation, interest income is calculated based on the interest rate used for discount of the future cash flow, so to be able to measure the loss on value depreciation. Fee and commission for granted loans are accrued and recognised in income statements on the proportional basis as interest income through the loan repayment period. There is no material difference between applying the linearly accrual and applying the effective interest method. 11

14 2. ACCOUNTING POLICIES (continued) 2.7. Fee and commission income and expense Fee and commission income and expenses are recognized in accordance with the principle of invoiced amount after providing/receiving the service. Main segments of fee and commission are fee and commission for services within payment department, from issued guarantees and from other Bank s services Dividends Dividends are recognized in profit and loss when the right to dividend is established Sales and repurchase agreements Contracts on repurchase agreements are securities bought under reverse REPOs and are accordingly recorded as loans and advances to other banks. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method Impairment of financial assets (a) Assets carried at amortized cost (nominal value) The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset or financial assets that can be reliably assessed. The criteria that the Bank uses to determine if there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest, Cash flow difficulties experienced by the borrower (for example, capital ratio, net income percentage of sales), Breach of loan covenants or conditions, Initiation of bankruptcy proceedings, Deterioration of the borrower s competitive position, Deterioration in the value of collateral. The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 12

15 2. ACCOUNTING POLICIES (continued) Impairment of financial assets (continued) The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Bank s grading process that considers asset type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Internal methodology was applied to all placements past due more than 90 days (non performing portfolio) and the impairment assessment was done for the noncolateralized portion of the placement. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement in impairment charge for credit losses. Financial Assets Loss Provisions in accordance with National Bank of Serbia Provisions for estimated potential losses in accordance with National Bank of Serbia demands is calculated according to the Resolution on Classification of Balance Sheet Assets and Off Balance Sheet Items of a Bank ( Republic of Serbia Official gazette, no. 57/2006, 116/2006, 129/2007, 63/2008 and 104/2009). The terms of this Resolution prescribe conditions under which the Bank needs to create a special provision from profit for estimated losses, which is calculated as a sum of: 0 % 5 15% 20-30% 40-75% 100% A category receivables; B category receivables; V category receivables; G category receivables; D category receivables; Loans, advances and other exposure of the Bank are classified into A, B, V, G and D categories in accordance with the loan and other advances collectability estimation dependant on: number of days overdue, financial position of the customer and quality of obtained collaterals. 13

16 2. ACCOUNTING POLICIES (continued) Impairment of financial assets (continued) Bank is using National Bank of Serbia classification as internal classification and in accordance with Executive board decision lowest impairment rates are applied for respective categories. Calculated special provision for estimated losses is reduced for allowances for impairment of balance sheet assets and provisions for losses from off balance sheet items, determined by the internal methodology, which applies IAS 39, classifying the difference to a shortfall amount of special provisions against potential losses pursuant to article 3, paragraph 2, provision 4 of Decision on Capital Adequacy of Banks ( Republic of Serbia Official gazette, no. 63/2008). In case the Bank has recorded a loss, the stated funds are left as the missing amount of provisions from profit account. Coverage of the calculated special provision is made against the undistributed profit, according to a Shareholders Assembly Resolution. Uncollectible receivables write-offs are made on the grounds of a judicial ruling, interested parties settlement or Executive Board s resolutions, approved by Shareholders Assembly Intangible assets Licenses Acquired licenses are recorded at historical cost. Licenses have a limited useful life and are recorded at cost, less accumulated depreciation. Depreciation is calculated using the proportional method, to allocate their cost to their residual values over their estimated useful lives (5 years) Property, plant and equipment Property, plant and equipment are subject to revaluation. Revaluation frequency depends on fair value movement of the assets revaluated. Net book value increase is classified as revaluation reserve. Net book value decrease that lowers previous increases of asset values is booked directly against the revaluation reserve; all other decreases go against profit and loss. The revaluation reserves are transferred directly to the undistributed profit when gains are made from asset disposals or usage by the Bank; in the latter, amount gained is the difference between depreciation calculated against revaluated book value and depreciation calculated against the initial cost of asset. Additional costs are included in the cost of the asset or are recognized as separate asset, if applicable, only if there it is probable that the Bank will have future economic benefits from that asset and if its value can be reliably measured. All other current maintenance costs are charged to income statement for the financial period in which they occurred. Land is not depreciated. Depreciation of all other assets is calculated using the proportional method, to allocate their cost or revaluated value to their residual values over their useful lives, as follows: buildings 1,3% IT equipment 20% vehicles 20% furniture and equipment 12,5% do 20% leased improvements 20% Gains and losses on disposal of assets are determined from the difference between proceeds and carrying value and are recognized as other gains/losses in the income statement. 14

17 2. ACCOUNTING POLICIES (continued) Property, plant and equipment (continued) Residual value of the asset is the estimated amount that the Bank could currently obtain from sale of the asset, reduced for the estimated selling expense, if the asset is already old and in the condition to be expected at the end of its useful life. Residual value of the asset is zero if the Bank expects that the asset will be in use until the end of its physical useful life. Residual value and useful life are revised and as necessary corrected, at each balance sheet date. When revaluated assets are sold, the revaluation amount is transferred to undistributed profit. Fair value of land and buildings valued by revaluation model in accordance with IAS 16 are updated in timely manner with an aim to ensure that carrying value is not materially different from that would be found by using fair value at the end of reporting period. If no evidence on market fair value is present, fair value is estimated by using yield approach Impairment of non financial assets Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date Leases Bank as the lessee The leases entered into by the Bank are primarily operating leases. The total payments made under operating leases are charged to other operating expenses in the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lesser by way of penalty is recognized as an expense in the period in which termination takes place Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks, amounts due from other banks and short-term government securities. 15

18 2. ACCOUNTING POLICIES (continued) Provisions Provisions for restructuring costs and legal claims are recognized when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense Employee benefits (a) Salaries and wages Short-term compensations to employees include salaries and wages, taxes and contributions for social security. Short term compensations to employees are recognized as expense in period in which they occurred. The Bank and its employees are legally obliged to pay taxes and contributions in accordance with the positive regulations. The Bank has no payment obligations towards employees regarding compensations payable by the Fund. The contributions are recognized as employee benefit expense when they are due. (b) Severance payments Termination benefits are payable when employment is terminated by the Bank before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Bank recognizes termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value. (c) Profit sharing and bonuses The Bank may pay part of wage on the grounds of profit made or predetermined operating results upon the annual report. Employees are entitled to payments on the grounds of profit made or predetermined operating results upon the annual report, on a linear basis, in equal amounts to each employee Income taxes and deferred taxes Current income tax represent amount calculated and paid in accordance with tax regulations in Republic of Serbia, based on profit disclosed in statutory financial statements. Tax authorities determine estimated monthly advanced payment of income tax. Income tax in the amount of 10%, which is effective as of 1 January 2005, is paid based on annual profit disclosed in statutory income statement. Accounting profit is, in order to determine amount of taxable profit, adjusted for certain permanent differences and diminished for certain investments during year, as presented in yearly tax balance which is delivered in period of 10 days after final date for delivery of financial reports, which is March 10 of following year. 16

19 2. ACCOUNTING POLICIES (continued) Income taxes and deferred taxes (continued) Deferred income tax is calculated and recorded on temporary differences between tax base of assets and liabilities and their amounts presented in the Bank s financial statements. Deferred tax liabilities are recognized for all taxable temporary differences between tax base of assets and liabilities at balance sheet date, and amounts presented for reporting purposes, which will result with taxable amounts of future periods. Deferred tax assets are recognized for all deductible temporary differences, unused tax assets and unused tax losses, up to amount for which is probable that future taxable gains will be sufficient to enable usage of deductible temporary differences, unused tax assets and unused tax losses. Current and deferred taxes are recognized as revenues and expenses and are included in income statement for period. Deferred tax assets are recognized up to the amount which is likely that future taxable gain will be available and that temporary differences will be recovered Borrowings Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities, unless Bank does not have unconditional right to postpone liabilities settlement for 12 months or more after balance sheet date Share capital (a) Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. (b) Dividends Dividends on ordinary shares are recognized in as liabilities in the period in which they are approved by the Company s shareholders. Dividends for the year that are declared after the balance sheet date are dealt with in the subsequent events. 17

20 3. FINACIAL RISK MANAGEMENT Bank operations are exposed to various financial risks which require identifying, measuring and estimating of those risks as well as risk management. Risk management is performed through the special risk management organization unit. The Bank sets out the policies for identifying, measuring and estimating the risk as well as for risk management in accordance with the regulations, standards and rules of the profession. Risk management policies are designed in such manner to identify and analyze these risks, to set adequate limits to risks and controls as well as to monitor the risks and hold onto the limits by reliable and up to date information system. Type of risks By the type of business, the Bank is exposed to various risks i.e.: 3.1. Liquidity risk; 3.2. Credit risk; 3.3. Interest rate risk; 3.4. Foreign currency risk; 3.5. Financial assets and liabilities fair values risk; 3.6. Risks of exposure to one entity or to a group of related parties; 3.7. Risks from investments in other entities and fixed assets; 3.8. Risks related to the customer s country of origin; 3.9. Operational risk, including the legal risk, as well as the risk of inappropriate management of informational and other technologies important for the Bank s operations Liquidity risk Liquidity risk is the risk that the bank is unable to meet its liabilities when they fall due which could have negative effect on financial result and the Bank s equity. Bank manages this risk by having various sources for financing which include the following: - client deposits with diverse maturity dates; - deposits from money market; - loans from foreign banks and financial institutions; - share capital. Bank continuously estimates liquidity risk by identifying and monitoring the changes in sources of financing required for reaching business objectives under the conditions from Bank s business strategy. Liquidity risk policies have the objective to secure enough funds to meet liabilities when they fall due and the demand of customers for new credits. The Bank manages the liquidity risk by the constant monitoring of the maturity mismatch of receivables and liabilities and by analyzing the projected cash flows in order to enable the Bank to fulfil its obligations at any moment. In addition, the Bank appropriates the funds in obligatory reserves with Central Bank, as protection from sudden and significant withdrawal of deposits. 18

21 3. FINANCIAL RISK MANAGEMENT (continued) 3.1. Liquidity risk (continued) Table below shows assets and liabilities grouped in relevant groups by remaining maturity dates as of balance sheet date. Less than 1 month From 1 to 3 months From 3 to 12 months Over 1 year Total As at 31 December 2009 ASSETS Cash and cash equivalents 1,491, ,491,758 Revocable deposits and loans 4,953, ,953,311 Interest and fees receivables, receivables from sales, changes in fair value of derivatives and other receivables 24, , ,889 Loans and deposits 193, ,936 1,697,289 11,443,737 14,019,295 Securities (without own shares) 507, , ,680 1,434,280 Equity investments ,192 2,192 Other placements 32,572 2,409 21,740 62, ,137 Intangible assets ,350 65,350 Property, plant and equipment , ,199 Fixed assets held for trade and assets of discontinued operations Deferred tax assets , ,177 Other assets 12,754 81, , , ,364 Loss above equity level TOTAL ASSETS 7,216,539 1,186,944 2,630,576 12,655,893 23,689,952 LIABILITIES - Transaction deposits 2,956, ,956,329 Other deposits 3,336,753 1,516,554 2,539,847 81,590 7,474,744 Borrowings 115,947-1,342,443 6,365,244 7,823,634 Issued securities Interest and fees payables and changes in fair value of derivatives 6, ,025 Provisions , ,496 Tax liabilities 2, ,872 Liabilities from profit 4, ,784 Liabilities from fixed assets held for trade and assets of discontinued operations Deferred tax liabilities Other liabilities 253, , , ,096 TOTAL LIABILITIES 6,677,500 1,516,604 4,118,403 6,682,473 18,994,980 Maturity mismatch 539,039 (329,660) (1,487,827) 5,973,420 4,694,972 As at 31 December Total assets 10,574, ,229 1,299,837 4,992,583 17,117,841 - Total liabilities 6,030,839 4,682, ,143 1,858,214 13,531,909 Maturity mismatch 4,543,353 (4,431,484) 339,694 3,134,369 3,585,932 Maturity matching of assets and liabilities and Bank s ability to swap certain positions for interest bearing liabilities, at acceptable costs, are important factors in Bank s liquidity assessment and assessment of its exposure to interest and foreign currency risk. 19

22 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk The Bank is exposed to credit risk and possibility that debtor fail to fulfil its commitments to the Bank in contracted amount and at maturity date. Exposure to credit risk is resulting mainly from the Bank s credit operations. To maintain credit risk at acceptable level, the Bank: - investigates credit solvency of debtor by credits, guarantees and other products; - determines credit limits based on risk assessment; - deals with credit solvent clients and acquires relevant collateral. Clients are under permanent supervision, and limits for risk exposure are corrected if needed. Risk limitations are determined depending on different types of collateral. Risk concentration by type of industry is also under continuous monitoring, even though limits are not set. Risk exposure toward one debtor including banks is under limitations and contains balance sheet and off-balance sheet exposure to risk. Total risk exposure per one debtor compared to limitations is considered before transaction occurrence. Loan commitments Primary goal of this instrument is to have funds available and at disposal to client, according to his request. Guarantees and letters of credit are obligatory for bank to be settled in case that client cannot fulfil its commitment toward third party and they carry same risk as credits. Maximum credit exposure before collateral: (In thousand of RSD) Placements with banks 16,579 9,753 Loans and placements with clients Retail loans and placements 1,985,520 1,544,971 Corporate loans and placements - Large enterprises 5,448,671 5,209,911 - Small and medium enterprises 1,691,075 1,022,171 Total net loans and placements with clients 9,125,266 7,777,053 Allowance for impairment of loans and placements with clients 1,948,055 2,320,231 Total gross loans and placements with clients 11,073,321 10,097,284 Total gross risk bearing assets 11,089,900 10,107,037 Total risk bearing assets in amount of RSD 11,089,900 thousand (2008: RSD 10,107,037 thousand) comprises balance sheet items which are subject of classification in accordance with National Bank of Serbia s regulatory rules. Therefore, disclosed amounts do not comprise balance sheet items which are not held as risk bearing nor are subject to classification, and therefore they do not match amounts under Placements with banks and Placements with clients in balance sheet. 20

23 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) In that sense, placement with public company Putevi Srbije in the amount of RSD 5,753,328 thousand, which is secured by unconditional guarantee issued by Republic of Serbia government, is not included in position Loans and placements with clients Thus, for purposes of disclosing maximum credit risk exposure, positions that are not considered risk bearing by National Bank of Serbia regulations had been excluded from the Placements with banks. Loans and placements with clients include placements to customers, fee and interest receivables, capital and short-term securities as well as other risk bearing assets. Retail loans include loans to entrepreneurs. (in thousand of RSD) Risk bearing off-balance sheet assets off-balance sheet items which are being classified Payment guarantees 1,803,516 1,820,130 Performance guarantees 377, ,952 Avals and acceptances 63, ,141 Other guarantees - - Uncovered letters of credit 42,514 69,087 Commitments and contingences 1,144,119 1,005,908 Other off-balance items which can lead to payments 362, Total 3,792,988 4,002,513 Off-balance sheet items which are classified do not include off-balance sheet items which are not considered risk bearing and which are not subject to classification, in accordance with National Bank of Serbia s policies, such as: Bank s receivables for suspended interest (RSD thousand), Bank s receivables for REPO transactions (RSD 1,800,000 thousand), treasury notes (RSD 1,434,280 thousand), loro guarantees (RSD 3,292,026 thousand) and other off-balance sheet items which are, in accordance with National Bank of Serbia s policies, recorded in trading book as well as other off-balance sheet items that cannot lead to payments. Retail placements by types of loan products: Placements with clients Placements Net with clients Allowance for impairment Allowance for impairment (in thousand of RSD) Cards 154,499 43, , ,819 57, ,707 Consumer loans 1,127, , ,576 1,060, , ,389 Housing loans 928,852 37, , ,882 41, ,786 Current accounts overdraft 38,856 20,956 17,900 37,170 17,587 19,583 2,249, ,759 1,776,123 1,882, ,357 1,441,465 Entrepreneurs 251,435 42, , ,922 55, ,506 Total retail loans 2,501, ,797 1,985,520 2,041, ,773 1,544,971 Net 21

24 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) Policy of determining allowance for impairment in accordance with the Bank s methodology is described in Note 2.11, as well as methodology required by National Bank of Serbia. The Bank s management is using classification in accordance with National Bank of Serbia rules for determining and monitoring internal rating of loans to customers and other financial assets, in other words monitoring credit quality of receivables. Loans to customers and other risk bearing assets presented in the following table comprise total risk bearing assets except placements to banks. Besides loans to customers, interest and fees receivables and other risk bearing assets are included as well as risk exposure based on equity investments and short-term securities. Clients ranking (in thousand of RSD) Allowance Allowance Gross loans for Gross loans for to clients impairment to clients impairment Rank: A 3,559,350 15,072 3,373,899 40,068 B 502,436 17,493 1,619,627 43,244 V 775,006 20,716 1,399,135 16,913 G 2,603,329 66, ,388 60,956 D 3,630,102 1,825,290 2,780,235 2,159,050 11,070,223 1,944,956 10,097,284 2,320,231 Low level of allowance for impairment for loans classified as G is caused by clients with high exposure, but completely secured, such as Irva DOO (gross exposure RSD 1,198,161 thousand), Fond Inex Interexport AD in Restructuring (gross exposure in G category RSD 240,152 thousand), Grapoc DOO (gross exposure RSD 102,290 thousand) and others, who are classified in this category and no allowance for impairment is created for them. Banks ranking (in thousand of RSD) Gross Allowance Gross Allowance placements for placements for with banks impairment with banks impairment Rank: A 9,964-4,023 - B V G D 9,671 3,098 5,730-19,677 3,098 9,753 - Difference between gross placements to banks and total placements to banks is due to balance sheet items which are not assets that are subject to classification. 22

25 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) Quality of loan portfolio (total risk bearing assets) percentages: (in thousand of RSD) Group s Group s share in total portfolio Impairment allowance (%) share in total portfolio Impairment allowance (%) Rank: A 32% 0.42% 33% 1.19% B 5% 3.48% 16% 2.67% V 7% 2.67% 14% 1.21% G 23% 2.55% 9% 6.59% D 33% 50.23% 28% 77.50% 100% 100% Placements: Loans to clients (in thousand of RSD) Placements Loans to Placements with banks clients with banks Placements neither past due nor impaired (1) 2,739,761 12,781 1,197,462 4,018 Placements past due but not impaired (2) 2,699,332 3,764 2,334,963 5,735 Placements not past due or past due collectively impaired (3) 2,930,172-3,122,973 - Individually impaired loans (4) 2,700,958 3,132 3,441,886 - Gross placements 11,070,223 19,677 10,097,284 9,753 Allowance for impairment (1,944,956) (3,098) (2,320,231) - Net placements 9,125,267 16,579 7,777,053 9,753 *Category explanation 1. Placements that are not past due 2. Placements that are past due, but are collectible i.e. not impaired 3. Collective impairment is determined by applying appropriate % (probability of default) on unsecured portion of a placement 4. Placements considered uncollectible i.e. impaired placements (loans that are more than 90 days past due and individually impaired loans) 23

26 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) Placements neither past due and nor impaired: (in thousand of RSD) Total placements with clients Placemen ts with banks Retail Corporate Total placements with clients Placements with banks Retail Corporate Rank A 387,087 1,532,659 1,919,746 9, , , ,296 4,018 B 7, , ,189-19,791 40,617 60,408 - V , , , ,478 - G , , ,199 65,234 - D - 3,339 3,339 2, Total 395,123 2,344,638 2,739,761 12, ,404 1,021,058 1,197,462 4,018 Total placements include interest and fee receivables and other risk bearing assets that are subject to classification. Loans that are classified as risk bearing assets (NPL), but are completely secured by collateral (deposit or mortgage) and are not impaired, are presented in previous table. Placements past due but not impaired (100% secured loans): (in thousand of RSD) Retail Corporate Total Retail Corporate Total Less than 30 days past due 76, , ,423 13, , , days past due , ,676 6,757 1,238,342 1,245, days past due 10,963 59,028 69, , ,367 More than 90 days past due 18,648 1,881,594 1,900,242 8, , ,435 Total 106,403 2,592,929 2,699,332 28,373 2,306,590 2,334,963 Fair value of collateral 179,640 17,107,583 17,287,223 86,813 14,485,391 14,572,204 24

27 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) For placements past due but not impaired, structure of collateral in 2009 was as follows: (in thousand of RSD) Retail Corporate Total Retail Corporate Total Deposits 5,664 27,040 32,704 21,561 34,622 56,183 Mortgage 173,976 17,080,543 17,254,519 65,252 14,450,769 14,516,021 Fair value of collateral 179,640 17,107,583 17,287,223 86,813 14,485,391 14,572,204 Individually impaired loans: (in thousand of RSD) Retail Corporate Total Retail Corporate Total Individually impaired loans 56,263 2,644,695 2,700,958 99,800 3,342,087 3,441,886 Fair value of collateral 13,281 3,167,099 3,180,380 16,506 4,368,879 4,385,384 Data in table for individually impaired loans represent loans individually impaired with exposure above RSD thousand for which increase in credit risk was estimated. Data in the table is obtained by impairment test which is based on estimation of future net cash flows. For placements that are subject to individual assessment and impairment, structure of collateral in 2009 was as follows: (in thousand of RSD) Retail Corporate Total Retail Corporate Total Deposits 4,399-4,399 3,330 18,035 21,365 Mortgage 8,882 3,167,099 3,175,981 13,176 4,350,844 4,364,020 Fair value of collateral 13,281 3,167,099 3,180,380 16,506 4,368,879 4,385,384 Allowance for impairment 43,929 1,338,550 1,382,479 70,765 1,706,988 1,777,754 Unsecured placements 42,982 1,134,161 1,177,143 83,294 1,115,258 1,198,552 Secured placements 13,281 1,510,534 1,523,815 16,505 2,226,828 2,243,333 Total placements 56,263 2,644,695 2,700,958 99,800 3,342,086 3,441,885 Activated collaterals: There were no activated collaterals during 2009 with respect to

28 3. FINANCIAL RISK MANAGEMENT (continued) 3.2. Credit risk (continued) Collectively impaired loans: (in thousand of RSD) Retail Corporate Total Retail Corporate Total Collectively assessed loans 1,943, ,643 2,930,172 1,737,166 1,385,807 3,122,973 Fair value of collateral 268, , , , , ,849 For placements that are subject to collective assessment and impairment, structure of collateral in 2009 was as follows: (in thousand of RSD) Retail Corporate Total Retail Corporate Total Deposits 206,081 40, , ,083 87, ,528 Mortgage 62, , , , ,321 Fair value of collateral 268, , , , , ,849 Allowance for impairment 471,785 90, , , , ,477 Unsecured placements 1,675, ,057 2,185,239 1,478,083 1,037,041 2,515,124 Secured placements 268, , , , , ,849 Total placements 1,943, ,643 2,930,172 1,737,166 1,385,807 3,122,973 Deposits and mortgages, used as collaterals for Bank s placements, are taken into account for the purpose of determining fair value of collateral. Deposits are valued in their full amount, while 25% haircut is applied on market value of mortgages. Other types of collaterals were not taken into account. Concentration of loan portfolio by sectors is presented in Note Interest rate risk Bank is exposed to changes in dominant level of market interest rates which have an effect on Bank s financial position and cash flow. As result of such changes, interest margin can increase, decrease, or result in losses in case of unexpected changes. Interest rates are based on market interest rates and Bank is regularly updating them. Risk management activities are aimed at optimizing net interest income, given marker interest rate levels are consistent with the Bank s business strategies. The Bank s management manages assets and liabilities maturity match on the basis of: macro and micro economic forecasts, forecasts of liquidity conditions and the anticipated trends in interest rates. Interest rate risk represents unfavourable change of credit price compared to level of funding interest rates, on one hand, and possibility of decrease of optimal difference between average lending and against funding interest rates, on the other. 26