ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2011

Transcription

1 ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2011 Skopje, February 2012

2 CONTENTS: I. CONDITIONS IN WHICH THE BANK PERFORMED ITS ACTIVITIES... 3 II. REALIZATION OF THE BANK S BALANCE SHEET... 6 III. INCOME STATEMENT... 9 IV. RISK MANAGEMENT & SUPERVISORY STANDARDS V. CORPORATE LENDING ACTIVITIES VI. INTERNATIONAL OPERATIONS VII. LIQUIDITY AND FINANCIAL MARKET VIII. VAULT OPERATIONS IX. RETAIL BANKING X. DOMESTIC PAYMENT OPERATIONS XI. MARKET SHARE OF KOMERCIJALNA BANKA AD SKOPJE IN DIFFERENT SEGMENTS OF OPERATIONS XII. INFORMATION TECHOLOGY XIII. MARKETING ACTIVITIES XIV. COMPLIANCE OF THE BANK S OPERATIONS AND ANTI- MONEY LAUNDERING ACTIVITIES XV. ORGANIZATION AND PERSONNEL XVI. INTERNAL AUDIT XVII. FINANCIAL DEPARTMENT XVIII. BRANCH NETWORK MANAGEMENT DEPARTMENT XIX. OPERATIONS OF THE BANK S BRANCHES PARTICIPATION OF THE BRANCHES IN THE BANK S BALANCE SHEET PARTICIPATION OF THE BRANCHES IN THE INCOME STATEMENT OF THE BANK PARTICIPATION OF BRANCHES IN THE BUSINESS ACTIVITIES OF THE BANK33 XX. CORPORATE GOVERNANCE REPORT XXI. CORPORATE SOCIAL RESPONSIBILITY SUMMARY Annex diagram No.1 2/49

3 I. CONDITIONS IN WHICH THE BANK PERFORMED ITS ACTIVITIES From global perspective, 2011 is perhaps one of the most turbulent years in recent history. The devastating earthquake in Japan, political instability in the Arab world, debt crisis in the Euro-zone as well as the slowdown of US economy had significant negative effect on the global financial flows. Despite the optimistic start of 2011 with the expectations for stabilization of the post-crisis global economy, the unfavourable events related mainly to the EU crisis, resulted with drop of domestic economic indicators as of the second half of the year. Also, as significant events which marked 2011 in the Republic of Macedonia are the early parliamentary elections and the appointment of new Governor of the National Bank. In June and December, IMF mission visited the Republic of Macedonia for the purpose of considering the economic policies and assessment of the economic and financial conditions in accordance with the precautionary credit line arrangement. The assessment of the IMF team in the concluding statement was that the economic recovery which started last year continues despite the increased external risks, whereby the growth for 2011 is expected to reach 3 percents, supported mainly by the dynamic growth of the export in the course of the first term. 1. In the course of 2011, the economic ambience 1 is characterized by stabilization of the upward trend of the prices, which started in August 2010, mainly as a result of the slowdown of the global economy and derease of international oil and food prices. Inflation considered according to the cost of living index for the period January-December showed increase of 3.9%, compared to the same period last year (Ø2011/Ø2010). According to the assessments of the NBRM, in the course of 2011, GDP realized real annual increase of 3.5%, in conditions of lower positive contribution of domestic demand and lower negative contribution of net-export. The physical volume of the industrial production 2 showed a drop of 4.8% in December 2011, compared to the same month last year, while considered for the period January December 2011 and 2010, the industrial production has increased by 3.3%. In the period January - December 2011, the volume of trade 3 has increased by 31.0%, compared to last year, where the total value of the export is USD 4,455 million, and of the import USD 7,007 million. The coverage of the import by the export is 63.6%, and in the period January December 2011, the trade deficit is USD 2,552 million. Most significant economic events in the course of 2011: - The Republic of Macedonia continued its cooperation with the World Bank and the Council of Europe Development Bank for support of the realization of energy sector projects, as well as projects in the domain of education, healthcare, etc.; - Macedonia signed agreements with European Investment Bank as wll as with the German Development Bank KFW for financing projects for development of the road infrastructure and the energy sector; - Macedonia was granted EUR 59.5 million from the European commission, out of which EUR 45 million for finalization of the highway secton Demir Kapija Smokvica as part of the corridor 10; - The Government withdrew EUR 220 million from the IMF precautionary credit line, due to changed circumstances, and mainly because of the delay in issuing the Eurobond as a result of the early parliamentary elections; - The Credit Rating Agency Standard & Poor s in the course of the first term has confirmed the assessment of Macedonia, which remains with good credit rating BB stable, even after the withdrawal of the IMF funds. In October the Fitch agency confirmed the credit rating of Macedonia as stable with positive perspective; 1 Source: SSO for al data excluding the GDP where source is the NBRM. 2 As of the beginning of 2011 the SSO applied the new National industrial goods terminology (NNIP) 2008, for collection and processing of data on industrial production. 3 Previous data. 3/49

4 - In October the last installment of the bond for frozen fx deposits was payed out, thus the citizens and companies were fully remitted in a transparent end efficient manner; - According to Doing Business, Macedonia was ranked third top country of SEE regarding the realized business climate improvement; - The Republic of Macedonia accepted the loan offer of EUR 130 million from Deutsche Bank and Citibank, for covering of the budget deficit for 2011 and part of 2012; - The Ministry of finance started the project for subsidised retail housing loans; - In January 2011, the Securities Exchange Commission (SEC) approved the sixth issue of shares of Komercijalna Banka by way of public offer, for the purpose of increasing the initial capital of the Bank and providing optimum capital adequacy. SEC also approved issue of shares in terms of private offer to Sparkasse Banka Makedonija AD Skopje, Halkbank AD Skopje, the Investment Funds Management Companies Ilirika fund management AD Skopje, KD Fondovi AD Skopje, Sava Tabak Osiguruvanje AD Skopje, AMG Premium AD Skopje insurance representative, NLB Nov Penziski fond AD Skopje and of the Clearing House Klirinski Interbankarski Sistemi AD Skopje; - SEC has issued licence to the Investment Funds Management Company KB Publikum Invest AD Skopje for establishing two new open investment funds, as follows: KB Publikum Cash and KB Publikum Bonds; - SEC also provided consent for the amendments and supplements to the Statute of the Central Securities Depository AD Skopje and to the Rulebook on Trading and to the Rulebook on listing at the Macedonian Stock Exchange; - Pursuant to the Decision of the Governor of the National Bank of the Republic of Macedonia, an approval for statutory change was issued for the merge of Stater Banka AD Kumanovo and Central Cooperative Banka AD Skopje, thereby Stater BankaAD Kumanovo was deleted from the Central Registry. The Governor of NBRM also issued prior consent for Halk Bankasi A.S. Turkey, to acquire 91.56% of the total number of shares of Izvozna i kreditna Banka AD Skopje. - In August a Commitee of financial stability started operations, thus its main activities will be monitoring of the trends in the Macedonian banking system and maintining the stability of the financial system in the country. 2. In the course of the reported period, the monetary policy continued to be implemented in relatively favourable ambience, in spite of the euro stability turmoil. As at , the gross FX reserves reached the amount of EUR 2,068.9 million, and compared to the end of 2010, they are for EUR million higher, mainly as a result of the assets withdrawn from the IMF precautionary credit line. In the course of the reported period, the setting of the monetary instruments remained unchanged the basic interest rate remained 4% (as it was at the beginning of December 2010) and the level of mandatory reserve remained unchanged 4. In this period, NBRM introduced new monetary policy instrument six months deposit bill, aimed as support to the financial stability in the Country. With the amendments and supplements to the regulations on managing the credit risk, NBRM has introduced the credit rating as more objective criteria when determining the risk level of the claims of the banks in the country, so that the EU and OECD countries having low credit rating shall be considered as risky. As at November 2011, the monetary aggregates marked slowdown due to slowdown of growth of total deposits, while lending activities marked moderate annual growth. In November, the annual rate of growth of the total deposits in the banks is 8.6%, which is as a result of the increased 4 In December 2011 the NBRM passed a new Decision on mandatory reserve wich prescribes 0% obligation for 2 year time deposits that contractually can not be withdrawen before the due date. According to the Decision, a minimal part of the funds upon which a reserve is calculated will be released. According to the new Decision the interest rate for mandatory resere in denars is amended from 2% to 1% p.a.considering that the Decision comes into power as of January 2012, it did not have effect in the course of /49

5 savings of households. The annual growth rate of the lending activities reached 8.6% where the loans to the non-financial companies had dominant contribution to the total credit growth. For the purpose of compliance with the new Law on the National Bank of the Republic of Macedonia of 2010, in the course of the reported period, the Council of NBRM adopted new Statute of NBRM, several rulebooks related to the internal organization and operation of NBRM and the Policy for keeping and managing of the fx reserves of the Republic of Macedonia. Also, a number of decisions related to the banking operations were adopted, regarding the issuing consents to a bank, managing the risks, consumers protection when concluding consumers loans, conditions and manner for effecting collections and payments in foreign currencies between residents and nonresidents, defining the procedure for detecting and withdrawing forged money, manner and procedure for establishing and implementation of a bank s money laundering and financing terrorism prevention program, calculation and allocation of mandatory reserve in the NBRM, functioning of the Credit Registry, issuing, trading and payment of treasury bills, utilisation of available overnight loan, intra-daily loan and liquidity loan, allocation of fx deposit with the NBRM, reference rate for calculation of the penalty interest rate, etc. The banking system in the Republic of Macedonia remained stable and safe, in conditions of continuous soundness of liquidity and solvency, but also with increased credit risk. Banks realized their activities with increased cautiousness, but due to negative trends in the real sector, the nonperforming loans in the third quarter marked a dynamic increase which resulted with a drop of profitability of the banking system compared to last year. Total number of banks in 2011 decreased by one, due to a merge, while Ohridska banka AD Ohrid joined the group of large sized banks due to growth of assets which was supported by subordinated debt from the mother bank Societe Generale. In the course of the reporting period Komercijalna Banka AD Skopje realized its activities in conditions defined by the Macroeconomic Policy of the Government of the Republic of Macedonia for 2011, the Aims and Objectives of the Monetary Policy of NBRM for 2011 and in accordance with the Program of Measures and Activities of the Bank s Business Policy for the current year. The Bank continued with the successful realization of its activities, whereby the rating gained and the successful operation were confirmed by the awards received, such as: - The award Bank of the Year 2011 in Macedonia, by the renowned magazine The Banker issued by the group of Financial Times, - The best bank in the Republic of Macedonia for 2011, awarded by the renowned New York Magazine Global Finance, according to the criteria which include increase of the assets, profitability, strategic relations, services to clients, competitive conditions and innovative products, - the award from Deutsche Bank for 2010 for the exceptional quality of the international payment operations in the domain of straight through processing (STP), - the award for integrated approach towards social responsibility of large enterprises from the Centre for institutional Growth, which is awarded for the second time etc. 3. According to the Policy Statement, Komercijalna Banka AD Skopje shall perform its activities on the basis of firm banking principles and shall undertake the necessary steps to provide a maximum profit for the shareholders in a long run and accomplishment of the goals set in Program of measures and activities of the business policy of Komercijalna Banka AD Skopje for 2012 and the development plan of the Bank for the , adopted by the Shareholders Assembly in March /49

6 II. REALIZATION OF THE BANK S BALANCE SHEET 1. The total resources of the Bank as at December 31, 2011 reached the total amount of 80,202.1 million denars and noted a significant increase of 9,324.8 million denars or 13.2%, while the Plan for 2011 was 104.6% realized. The growth of the resources is mainly a result of the increased deposits significantly above expectations, considering that 2011 forecasts were made with greater cautiousness due to the uncertainty regarding the expected dynamics of domestic economy s recovery. The share capital and reserves also marked a significant growth as a result of realized capital increase at the beginning of the year and allocation of part of the profit into reserves, thus confirming the Bank s strategic commitment to continuously increase its capital value that will enable additional growth and maintaining of the market share, as well as adequate fulfilment of the supervisory standards. Long-term borrowings also showed an increase as a result of withdrawn instalments upon credit lines. Table 1: Review of the Liabilities of the Bank (in million MKD) Plan Indexes 4:2 4: Short-term and long-term borrowings 2, , , Deposits 59, , , Share capital and reserves 6, , , Other liabilities 5 2, , , Total liabilities 70, , , Namely, total deposits of the Bank represent dominant 83.2% of the total liabilities and compared to December 2010 have increased by 7,340.1 million denars or 12.4%, while the Plan for 2011 is realized with 106.5%. The dynamics of the total deposits is an indicator of the great confidence of retail and corporate clients in Komercijalna Banka AD Skopje, despite the reduction of deposit interest rates on short-term savings in MKD, EUR and USD. Followed by type of clients, the increase in total deposits is resulting from the increase of retail deposits and deposits from non-financial entities, while the deposits from other clients marked annual drop. The maturity structure of deposits shows increase of all types of deposits: demand deposits have increased by 3.1%, short-term deposits by 14.8% and long-term deposits by 55.7%, while the Plan for 2011 with all deposits except the demand deposit is realized over 100%. The significant growth of time deposits is also due to relatively high level of interest rates compared to previous period, while alternative investment forms in the country remain underdeveloped. From the aspect of currency structure, despite the developments in the Eurozone regarding the stability of the euro currency, foreign currency deposits noted an increase, but with slower dynamic compared to the denar deposits, while the Plan is realized over 100%. The maturity structure of total Bank s deposits shows increased participation of the time deposits opposite to demand deposits, while the currency structure of the Bank s deposits shows increased participation of denar deposits on account of fx ones. 5 This amount includes unallocated profit for 2010 in the amount of 1,431.1 million MKD and unallocated profit for 2011 in the amount of 1,085.8 million MKD 6/49

7 Share capital and reserves of the Bank noted an increase of 28.3% compared to 2010 due to capital increase through the sixth issue of shares by public offer in the amount of million denars, as well as additional increase of the reserves due to allocation of part of the profit for 2010 into reserves in the amount of million denars. The Plan for 2011 was realized with 100%. Accordingly, the participation of share capital and reserves in the Bank s total liabilities increased from 9.3% in 2010 to 10.5% at the end of Short-term and long-term borrowings noted an increase of 18.5% and realization of the Plan with 97.2%. Within their frames short-term borrowings show increase of 14.9 million denars due to withdrawn new instalment from the credit line from Agricultural credit discount fund, while the longterm borrowings noted 17.9% increase due to withdrawn instalments upon the participation of the Bank in lending program for small and medium-size enterprises and priority projects from the EIB credit line. At the same time, liabilities under long-term denar loans used from MBDP and liabilities upon long-term FX loans serviced through domestic banks decreased due to payment of instalments of foreign credit lines as follows: ICDF Taiwan (for which the principal is fully repaid), Fund for social development of the European Council, APEX Global loan from EIB through the Ministry of finance, EIB through MBDP, Italian commodity credit line, Revolving fund of the Italian commodity credit line and credit line from CEB. 2. Strenghtening of the capital, as well as significant increase of the total deposits during 2011, supported the 13.2% growth of total assets and enabled fulfillment of the regulatory recommendations regarding the capital adequacy. The increase of total assets is mostly due to increase of cash and deposits with the NBRM, loans to customers, investments in securities and other assets. As a result of unfavorable conditions in the economy, during 2011 the Bank continued to apply more conservative approach in the process of approving new loans. Therefore, a larger amount of assets were invested in treasury bills of the Central Bank and government bills with FX clause classified in the portfolio held to maturity. This resulted in structural shifts of certain items of the total assets. The investments in securities reached the participation of 2.1% (opposite to 0.7% in 2010), while the share of loans to customers decreased to 53.3% (opposite to 57.3% in 2010). Table 2: Review of the Bank s assets Plan (in million MKD) Indexes 4:2 4: Money in cash and Deposits with the NBRM 23, , , Assets held for trading Placements in and short-term loans to other banks 1, , , Loans 40, , , Investments in securities , ,617.4 Investments in associates Property 1, , , Other assets 3, , , Total assets 70, , , Total net-loans representing dominant part of the Bank s assets, noted an increase of 5.3% and realization of the plan with 96.2%. The realization of net loans under the forcasted level is mainly a result of the worsening of the economic conditions for the companies, which had impact on the quality of the Bank s credit portfolio and accordingly, the calculated loan impairment provision during 2011 has increased. 7/49

8 Gross loans to non-financial corporate entities show dominant participation and noted an increase of 1,959.6 million MKD or 5.8% compared to December 2010, while the plan was realized with 96.2%. Gross retail loans have decreased by million MKD or 2.2%, while the plan for 2011 is realized with 92.4%. Total due receivables and bad and doubtful claims marked 25.5% increase mainly as a result of deterioration of the quality of corporate loans. Impairment provisions in December 2011 reached the amount of 5,421.6 million denars and marked 18.3% increase, while the plan for 2011 was realized with 108.9%. The currency structure of gross-loans shows dominant participation of denar loans, which are followed by denar loans with f/x clause and gross f/x loans. F/x loans marked significant increase compared to denar loans, while denar loans with f/x clause marked a drop. Money in cash representing 30.8% of the total assets of the Bank noted an increase of 4,455.1 million MKD or 22% due to significant increase of denar cash as a result of larger amount of purchased treasury bills, while the f/x cash showed minimal increase mainlu due to the increased amount of current accounts in foreign banks and increased foreign currencies and checks. The annual plan for 2011 is realized with 111.5%. Deposits with the NBRM which represent Mandatory f/x reserve, participate in the total assets with 4.3%. As at December 31, 2011 they noted an increase of million denars or 8% and the annual plan was realized with 102.1%. Property of the Bank representing 2.3% of the total assets increased by 0.9% due to procurement of working assets, while the plan for 2011 is realized with 91.7%. Other assets representing 5.4% of Bank s total assets increased by 40.4% due to increased amount of collected foreclosures which represent 81.9% of this item and as at reached the amount of 3,547.5 million denars. The annual plan is realized with 139.2%. The remaining amount of this item refers to calculated interest, bad and doubtful claims from interest and impairment losses. Total investments in securities increased their share in the total Bank s assets from 0.7% in 2010 to 2.1% in Within their frames, securities available for selling noted a decrease of 76.2% due to collection upon maturity of the corporate bonds issued by NLB Tutunska banka, while the securities held to maturity noted multiple growth as a result of investments in government bills with f/x clause, that as at reached the amount of 1,497 million MKD, as well as investments in Eurobond and denationalization bonds, but in smaller amount. Short-term loans to other banks representing 1.7% of total assets compared to December 2010 noted an increase of 29.3% due to approved loan for liquidity to a domestic bank and growth of forfeiting claims, while the annual plan is realized with 128.1%. Investments in associates representing insignificant part of 0.1% of total assets have increased by 4.6% due to recorded share in profit/loss of associated companies, while the Plan for 2011 is realized with 87.9%. Opposite to this, trading assets having insignificant participation in the total assets, compared to 2010 have decreased by 92.4% as a result of recording of government bills with f/x clause from this item into investments held to maturity, which resulted with restructuring of the securities portfolio. The Plan as at is realized with 7.6%. 8/49

9 III. INCOME STATEMENT In circumstances of expected slowdown of economic growth and further presence of the risks in the economy, the Bank achieved a positive gross financial result in total amount of 1,090.3 million denars or 24.2% less than the profit realized in the same period last year, whereby the Plan for 2011 was realized with 74.4%. The realized profit after income tax for the period reached the amount of 1,085.8 million denars. The underperformance compared to the plan is due to the higher amount of calculated impairment provisions of financial assets, due to deterioration of the corporate clients in the course of the year. Table 3: Review of the main items of the Income Statement ((in million MKD) Plan Index 4:2 Index 4: Net interest income 2, , , Net fee & commision income Net FX gains Other income Total administrative expenses and amortization 1, , , Other expenses Impairment provision of financial assets 3, , , Impairment provision of foreclosures Release of impairment provision 3, , , Collected written-off claims Gross profit before income tax 1, , , Income tax Net profit 1, , , The analysis of the Income Statement structure shows that income from regular operations has predominant influence on the realized positive financial result, thus major participation in the total income realized marked net interest income which reached the amount of 2,446 million denars noting an increase of 10.8% compared to the net interest income realized in the same period last year, despite the decreased loan and deposit interest rates.the Plan for 2011 was realized with 102.0%. Net fee & commission income for the period reached the amount of million denars, showing increase of 10.2% compared to the same period in the previous year, while the Plan for 2011 was realized with 103.1%. In the course of the reporting period the Bank realized net f/x gains in the amount of 62.9 million denars, noting a decrease of 60.5% compared to the net FX gains at the same period of the last year, due to unfavourable trends in the exchange rates of the currencies US and Australian dollar and British pound, that in the first four months of the year resulted with net f/x losses. The level of realizations of these revenues in 2010 influenced the higher projections for 2011, thereby the planned f/x gains were realized with 41.9%. Total amount of realized other income increased by 40.3% as a result of higher level of income from f/x operations, dividends and capital gains from sold assets. Due to this, the plan for 2011 was realized with 134.8%. 9/49

10 Total administrative expenses and amortization for the period reached the amount of 1,451.3 million denars, marking a drop of 4.4% compared to the same period last year and realization of the Plan for 2011 is with 92.2%. Other expenses marked an increase of 13.2%compared to the same period last year, while the plan is realized with 105.7%. They are comprised of deposit insurance premiums in the amount of 320 million denars which marked an increase of 14.5%, while the other and extraordinary expenses have increased by 15.5% due to increased expenses from f/x operations, expenses upon court decisions and property tax. Impairment provisions of financial assets reached total amount of 4,571.7 million denars and marked an increase of 18.9% compared to the same period of the last year due to the deteriorated loan portfolio quality as a result of unfavourable trends in the economy. The plan is realized with 108.1%. Release of impairment provision in the analysed period reached the amount of 3,565.8 million denars, whereby the dynamics of this item was significantly influenced by the collected bad and doubtful loans. IV. RISK MANAGEMENT & SUPERVISORY STANDARDS The modern concept of banking in the market economy can not be performed successfully without adequate approach in the risk management, as well as strict adherence to the supervisory standards which are regulated by the Law and represent the fundament of a successful performance of every bank. The risk management of Komercijalna Banka AD Skopje is based on the Strategy of risk management and established policies for managing distinctive risks, whereby the Bank consistently complies with the limits for risk exposure determined according the law regulation as well as with the internal limits for risk exposure. 1. Within the credit risk management, analysis of the classification of the Bank s risk weighted assets shows: As at , Bank`s total exposure to credit risk is 83,926.7 millions MKD and compared to notes increase of 9.7%. Impairment of the financial instruments exposed to credit risk as at , is comprised of the impairment of balance sheet assets and the special reserve of the off balance sheet assets and is calculated according to the NBRM regulation. Impairment and classification of the credit risk exposure as at is performed on: - Individual basis, for any exposure that is considered individually significant item, (total exposure to a client exceeding 0.007% of the total credit risk exposure of the Bank); - Group basis, for retail credit portfolio; Compared to , the amount of the annual additional impairment for 2011 is million MKD, an increase of the total impairment of the Bank's loan portfolio to 17.4%. 2. Within the currency risk management, Bank s exposure to currency risk in the period of was within the frames of the legal limit of + 30%/ -30% of bank s own funds. The open FX position of 31.08% as at is a result of purchased foreign currencies for sold shares and as at and of 51.36% and 52.32% is a result of activities that the Bank had undertaken in the name and on behalf of customers of the Bank, based on realized block transactions for trading of shares at Macedonian Stock Exchange AD Skopje. At the same 10/49

11 time, the Bank has started to sale foreign currencies, and on the open FX position of the Bank has reached 21.08% and it is within the legal limit prescribed by the National Bank of the Republic of Macedonia. According to the Decision on currency risk management (Official Gazette 17/2008), if the bank exceeds the prescribed limits in two consecutive days, the next day it is obligated to submit to the National Bank of the Republic of Macedonia written explanation of the reasons that led to the occurred overdraft, and to specify measures to comply within the prescribed limit. Within the prescribed period the Bank proceeded according to the requirements of the regulation. 3. Within the liquidity risk management, in the period January December 2011 the Bank fulfilled the legal obligation for allocation of denar and foreign currency mandatory reserve. - The percentage of the average fulfillment of the compulsory reserve in denars was from % in June as the lowest level, up to % in December 2011 as the highest level. - During 2011 the interest rate on treasury bills remained unchanged and amounted to 4.00%. Weighted interest rates on government bills in 2011 compared to 2010 were lower due to the auctions of government securities with fx clause, whose interest rates are lower than interest rates on denar government bills. - In terms of stability and concentration of the deposit base, it can be concluded that the Bank has not significant concentration of deposits by clients depositors - legal entities and the percentage of participation of the 20 largest depositors in the average deposit base oscilated from 7.32% in November to 10.77% in April. According to the Decision on liquidity risk management of banks ("Official Gazette of the Republic of Macedonia" no. 126/2011) which entered into force on , the separate monitoring of concentration level in transaction accounts and sight deposits in denars and foreign currency (form NK denars and form NK foreign currency) is abolish and they are monitored in a summary form (form NK). The highest participation in the latest quarter was 16.55% in December and the lowest was 13.53% in November. - In 2011 the Bank has continued to calculate the internal liquidity indicators (LP form) 6 on monthly basis. The limits for these indicators are defined in the Policy for undertaking and managing liquidity risk of Komercijalna Banka A.D Skopje. In the period , as in the period liquidity indicators were fully complied with the internal limits. Due to unstable economic conditions and signals of new financial crisis, in the next period the existing internal limits for the existing internal liquidity indicators will remain valid and the Bank will revise them according to current and expected liquidity profile. - According to regulation, the Bank continued with calculation of liquidity ratios up to 30 and up to 180 days 7, both in denars and in foreign currency. According to the new Decision on liquidity risk management of banks ("Official Gazette of the Republic of Macedonia" no. 126/2011) which entered into force on , the NBRM introduced the following significant changes in the liquidity ratios: - integrated monitoring of bank liquidity, regardless the currency, by maintaining the unique liquidity ratio; 6 Starting from Starting from /49

12 - the calculation of liquidity ratio, term deposits are included as outflows by 80% instead of 100%; - the liquidity ratios must be at least equal to 1, ie it abolish the dynamics of adjustment (because of integrated liquidity ratio) and - certain changes in the inclusion of securities. Liquidity ratios, as before, are determined at the end of each month as the average of the daily statement of the positions included in their establishment, for each day of the month. Liquidity ratios in the period January December 2011 are complied with the required level / minimum rate, except the liquidity ratio 30 (MKD) in March and April 2011 and the liquidity ratio 180 (MKD) in the period from January to May 2011, for which adequate explanation has been submitted to the NBRM according to the requirements of regulation. - Based on the monthly monitoring and analysis of the expected maturity structure of assets and liabilities (which has built-in element of forecasting the movement of certain balance and off-balance positions) it can be concluded that, during 2011 the Bank had a stable current liquidity position. The expected maturity (balance and off-balance record) shows that in the maturity blocks up to 7 days and days was achieved positive liquidity gap, also as in the maturity block from 8 to 30 days, except in May, July, August, September and November (as at the end of month) when negative liquidity gap was achieved, but it did not influence the stability of the liquidity position. -According to the methodology of the NBRM the Own assets with reached the amount of 8,269.6 million MKD and compared to when they were total 6,410.6 million MKD marked an increase due to realized sixth issue of shares. Capital adequacy ratio as of is 13.49% and compared to shows increase of 2.44 percentage points. The Capital adequacy ratio was within the frames of the legally established limit (above 8%) and above the rate of capital adequacy minimum of 12% defined in the Strategy for risk management of Komercijalna Banka A.D Skopje. 4. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes reputation risk. Komercijalna Banka AD Skopje, in its everyday operation continually follows, records and analyses the loss events i.e. events that had caused damage/loss or are potential operative risk. Based on gathered information and analyses made, the Bank undertakes certain measures for mitigation and elimination of the loss events consequences and for elimination/limitation and control of the risk in the future. In the period January-December 2011, the Bank has no significant exposure to operational risk. Registered the following events that had caused or could caused damages/losses: misuse (forgery) of bank cards for which 36% of the Inter-banking procedure is closed and on KB bearing are most of the forged cards, damage of assets where the settlement of loss is about 84% and other material insignificant events. Reputation risk is current or future risk which can influence the profit or own funds of the bank due to unfavourable observing by customers, creditors, shareholders, investors and regulatory bodies. In the period January-December 2011, there are not recorded transactions, activities or events that had caused significant exposure to reputation risk. 5. During 2010, the Bank has successfully managed the market risk. The participation of the securities portfolio (net) in the Bank s total activities was from 2.00% as the lowest percentage as at up to 7.31% as the highest percentage as at /49

13 During the period January December 2011, the Bank has not exceed the limitation defined in item 29 in the Decision on the methodology for determining capital adequacy (Official Gazette No. 159/2007), i.e. the Bank has no obligation to hold adequate capital requirements for covering market risk. Exception is April 2011 when the Bank has exceeded for the first time the limitation (only in absolute amount) defined in the above mentioned Decision and therefore has notified the NBRM. Considering that the total amount of the trading book as at was under 915 million denars and taking into account the answer given by the NBRM it should be marked that the Bank has no obligation to hold adequate capital requirements for covering market risk. 6. Basis for management of interest rate risk in the portfolio of the banking activities represents the Decision on the interest rates and the effects from its implementation on Income Statement. During the period January-December 2011 several changes and amendments were made, from which the most important are as follows: the Bank has decreased the following lending interest rates: interest rates on the loans for the most creditworthy legal entities and other legal entities acceptable for lending by the Bank; on the consumption loans secured by drafts, Tip Top consumption loans, identified purpose consumption loans approved through the merchants, on tourist loans and Scholarship loans;on negative balances on citizens current accounts, as well as decrease of the interest rates on credit cards for legal entities and individuals; the Bank has decreased the following deposit interest rates: on the term denar savings deposits and savings deposits in EUR and USD for citizens, on the term denar deposits of legal entities, on over night deposits, on the current accounts with average daily balance up to 50 mil. denars and over 50 mil denars, on legal entities current accounts in foreign currency, residents and non-residents; the Bank has allowed acceptance of denar or foreign currency cash in depo as a collateral for loans to individuals; The Bank has made technical precision in the text that refers to the amount for the interest rate to Bank s loans secured with guarantee provided by first class foreign bank or international institution, the Bank has made adjustment to the Bank s acts with the current practice in the frame of Bank s loan support for certain clients and its participation in projects with combined sources of funding (with the participation of domestic and/or foreign banks). the Bank has introduce a possibility for funds deposing within 48 months and up to 60 months for legal entities and thereby equalization the terms with the terms for fund deposing for the pension and investments funds, companies for managing with the pension and investments funds As at the average weighted loan interest rate is 5.57% (vs 5.83% on ), the average weighted deposit interest rate is 2.60% (vs 2.87% on ). The net interest margin (NIM) as at is 3.40%, while the interest spread is 2.97 p.p. and it is below the internal defined limit in the Policy for undertaking and management the risk of change in the interest rates in the banking book of Komercijalna banka AD Skopje of minimum 3 p.p., therefore the Bank shall undertake activities in order to make interest adjustment on interest bearing positions. During the 2011, the interest spread was in the frame of internal defined limit (with the exception of when it was 2.93 p.p. and ). 13/49

14 7. In its operations, the Bank strictly adhers to the legal framework (standards) of the credit exposure and its investments, whereby they were completely fulfilled in regards to: - the capital required for establishing the Bank, which, according to the law, should be MKD 310,000,000; - the capital required for performing the following activities: international lending, factoring, financing of commercial transactions, trading with FX resources, securities, financial derivatives, managing with resources and securities portfolio in account of clients, providing services property custodian and trading, and placement of new issued securities, which, according to the law, should be MKD 560,000,000; - the Bank s own funds in relation with the basic capital, which according to article 64 for the Banks Law should not be less than the basic capital: - the Bank fulfills the supervisory standards in accordance with article 15 of the Banking Law (the total nominal amount of shares without voting rights in the Bank in the total nominal amount of the total shares not exceeding 10%); - the capital adequacy rate is 13.49% and it is within the prescribed minimum of 8%; - the Bank has big exposure towards individual subject and related parties, which exceeds 25% of the Bank s own funds; As at total exposure of the group KBC BANK NV in relation to the Bank s own funds was 25.98% and it exceeded the prescribed limit under article 71 of the Law on Banks. Exceeding the limit of the total exposure of the Group is due to the rejection of placements of f/x assets by other foreign banks. Therefore, on the critical date, the Bank was obligated to concentrate a larger amount of deposits in KBC BANK NV, which coincides with the placement of surplus denar assets in liquidity loan to NLB Tutunska banka AD Skopje which is related party to the KBC BANK NV. According to the Decision on determining the limits for total exposure of Komercijalna Banka AD Skopje towards banks and saving houses in the Republic of Macedonia and towards foreign banks, the breaching of the limits should be complied in the period no longer than 5 working days after the occurance of non-compliance. Compliance of the exposure towards the group KBC BANK NV was committed on and it is 24.07% of the Bank s own funds. - The Bank doesn t have exposure toward branch which should not exceed 10% of the Bank s own funds; - the Bank doesn t have exposure higher than the prescribed 10% of the own funds towards shareholder of the Bank with qualified participation and related individuals with them, which directly or indirectly have at least 5% of the total number of shares or issued shares with voting rights which can significantly influence the Banks managing process; - the exposure towards the management of the Bank and the related parties represents 2.07% of the Bank s own funds in total and is within the legal provision according to which it should not exceed 3% of the own funds; - total exposure toward branch, shareholders with qualified participation and individuals with special rights and responsibilities is 2.07% and it is under the limit of 65% of the Bank s own funds; 14/49

15 - the Bank has large exposure towards individual and individuals related to them which is equal or largest than 10% of the own funds, but total amount of large exposures is 3.5 times of the own funds and does not exceed prescribed eight-fold amount of own funds; - the Bank does not have any loan approved or other type of credit exposure for purchase of Bank s shares or upon pledge of Bank s shares from the Borrower; - the Bank does not have shares with other bank and does not use the legal opportunity to acquire up to 5% of the shares from other bank; - the Bank fulfils the standard from the article 75 to purchase own shares to 10% of the nominal value of total shares, but amount of the purchased own shares should not exceed the amount of retain profit; - The Bank s property in buildings, land, equipment and capital parts in other banks, non-banking financial organizations and non-financial institutions is 28.44% of the own funds and is within the prescribed 60% of the own funds; - The aggregate amount of capital parts with non-financial institutions is 0% of the own funds compared to the prescribed one of 30% of the own funds; - The Bank does not control any non-financial institution; - The Bank fulfills the obligation for obligatory reserve in MKD and FX according to the Methodology of NBRM; - The open FX position of the Bank (daily open FX position) is within the prescribed 30% of the Bank's own funds. Exceeding the prescribed limits were only at and , as a result of activities that the Bank took in behalf of clients of the Bank on the basis of concluded block transactions for trading of shares on Macedonian Stock Exchange AD Skopje. As a result of activities undertaken for the sale of foreign currency, as at the aggregate FX position is within the prescribed limit. Aggregate FX position of the Bank by days shows that during December the Bank had a long FX position, t.e. the Bank has more claims than liabilities; - The Bank fulfils the standard of the Companies Act according to which the mandatory common reserve of the Bank may not be lower than 15% of the profit until the reserves reach the amount which is equal to one fifth of the capital. V. CORPORATE LENDING ACTIVITIES As a main activity of Komercijalna Banka AD Skopje, corporate lending is performed in accordance with the Credit Policy and Procedures of the Bank, aims and objectives of the Monetary Policy of the Central Bank and the other law regulations and internal acts of the Bank that regulate the lending activities, strictly respecting the principles of profitability, efficiency and security of the placements which bear acceptable credit risk. In the course of the reporting period the Bank applied more conservative approach in the approval of new loans with prudent analysis of the risks related to the economic crisis in Eurozone and the events in the domestic real sector that could have any negative effect on the quality of the credit portfolio. The Bank also continued to apply the policy of adequately positioned interest rates for clients who regularly service their debt and the first-class clients. Thus, the corporate loan portfolio 15/49

16 marked an increase of approximately 6%, while the number of clients in 2011 has increased by 1.5% compared to Also, the Bank continued to diversify the loan portfolio through lending to companies operating in industries that did not suffer significant loss or managed to mitigate the effects of the economic crisis. 1. Within corporate lending, the Bank s activities were directed toward active monitoring, supporting and participating in the growth of profitability and efficiency of the clients, which also influence the success of the Bank and its significant market share in the banking sector in the Republic of Macedonia. The analysis of the total disbursed denar loans to legal entities in the period shows participation of disbursed short-term loans of 79% (79.7% in 2010) compared to 21% (20.3%) participation of disbursed long-term loans. The number of used short-term denar loans of the Bank is 2,639, in the total amount of 21,104.4 million of denars. Denar short-term corporate lending shows an annual increase of 13.6% realized in the following sectors: trade and craft industry, electricity, gas and water supply and mining. In the domain of denar long-term lending, the number of loans under disbursed long-term loans from the Bank s assets is 631 in total amount of 5,609.8 million denars, which is annual increase of 18.4% realized in the following sectors: agriculture, mining, trade and craft industry, real estate, renting and business activities. In the reporting period, Komercijalna Banka AD Skopje fulfilled the criteria for participation in the disbursment of funds from the Agricultural Credit Discount Fund - credit line through the MBDP and during 2011 were disbursed loans in the amount of 78.6 million denars. 2. In the reporting period, the Bank continued to approve F/X loans from the assets of foreign credit lines and F/X loans from Bank s resources. During 2011 the cooperation with the European Investment Bank (EIB) continued. According to the signed Frame Agreement for participation in the Program for lending to small and medium size enterprises and priority projects from the EIB credit line in the amount of 100 million EUR, in the reporting period the Bank disbursed additional 13,390.1 thousand EUR, thus the resources from this credit line have been completely utilized. According to the new Frame Agreement concluded with the MBDP in November 2011, the Bank secured participation in the Program for lending to small and medium size enterprises and priority projects II from the EIB credit line in total amount of 50 million EUR. In 2011 the Bank approved loans in amount of 5,095 thousand EUR, but they will be disbursed at the beginning of Despite the approving, the Bank performed administration of the approved FX loans from the following credit lines: ICDF Taiwan, Fund for social development of the European Council, APEX Global loan from EIB through the Ministry of finance, EIB through MBDP, Italian commodity credit line, Revolving fund of the Italian commodity credit line and credit line from CEB. In the reporting period the Bank was also approving F/X loans and denar loans with FX clause for payments in the country and abroad, in accordance with the Decision on terms and manner of granting f/x loans and denar loans with f/x clause between the residents whereby 24 short-term loans in total amount of EUR 29.7 million, 10 long-term loans in amount of 29.1 million EUR and 7 revolving loans in total amount of 2.4 million EUR were disbursed. In this period there is a prolongation of 6 loans in total amount of 2,728 thousand EUR and 4,759 thousand CHF. 16/49