ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2012

Transcription

1 ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2012 Skopje, February 2013

2 CONTENTS: I. CONDITIONS IN WHICH THE BANK PERFORMED ITS ACTIVITIES... 4 II. REALIZATION OF THE BANK S BALANCE SHEET... 7 III. INCOME STATEMENT 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. FINANCE DEPARTMENT XVIII. BRANCH NETWORK MANAGEMENT DEPARTMENT XIX. OPERATIONS OF THE BANK S BRANCHES XX. CORPORATE GOVERNANCE REPORT XXI. CORPORATE SOCIAL RESPONSIBILITY CONCLUSION ANNEX DIAGRAM 1 2/47

3 Selected key data on the performance of Komercijalna Banka AD Skopje Change Indicators of the Balance Sheet (in million MKD) Total assets 80, , % Net-loans to clients 42, , % Impairment of loans (special reserves) 5, , % Deposits of clients 66, , % Equity and reserves 8, , % Own funds 8, , % Capital adequacy 13.49% 13.21% pp Net loans/deposits 64.1% 65.9% 1.8 pp Net-loans/Total assets 53.3% 54.9% 1.6 pp Deposits of clients/total assets 83.2% 83.3% 0.1 pp Quality of credit portfolio Total credit exposure (balance and off-balance) 83, , % Participation of the risk category in total credit exposure А 87.9% 83.5% -4.4 pp B 4.5% 6.1% 1.6 pp C 2.0% 2.8% 0.8 pp D & E 5.6% 7.6% 2.0 pp Total impairment (balance and off-balance exposure) in million MKD 5, , % Rate risk of the credit portfolio 6.89% 8.59% 1.70 pp Interest margin Average weighted loan interest rate 5.57% 5.16% pp Average weighted deposit interest rate 2.60% 2.16% pp Interest spread 2.97% 3.00% 0.03 pp Net interest margin (NIM) adjusted annually 3.40% 3.45% 0.05 pp Indicators of profitability and efficiency Current financial result (gross) 1, % Rate of return on assets (ROA) 1.4% 0.7% -0.7 pp Rate of return on equity (ROE) 12.9% 6.3% -6.6 pp Profit before impairment 1, , % Net impairment of financial assets , % Net interest income 1 / Total operating income 66.4% 61.1% -5.3 pp Salary costs/ Total operating income 23.5% 19.5% -4.0 pp Net impairment/net interest income 35.9% 74.3% 38.4 pp Total number of employees 1,213 1, % Financial result/total operating income 29.6% 13.4% pp Presented financial result/total number of employees (in million MKD) % Total assets/total number of employees (assets per employee in million MKD) % Indicators of operating activities Disbursed denar loans to legal entities (in million MKD) 26, , % Disbursed F/X loans to legal entities (in million MKD) % Disbursed denar loans to individuals (in million MKD) 1, , % Issued F/X guarantees (in million EUR) % Received F/X guarantees (in million EUR) % Newly approved denar guarantees (in million MKD) 4, , % Newly issued cards (number) 28,419 27, % Total current account (number)) 704, , % Total number of POS terminals 6,205 6, % АТМ % Total transactions in the sale network of KB (in million MKD) 20, , % Domestic payments total cash collections (million MKD) 58,597 58, % Domestic payments total cash payments (million MKD) 17,884 20, % Corporate E-banking orders (number) 1,132,368 1,720, % Retail E-banking orders (number) 78, , % International payment operations total payments corporate & retail 2, , % International payment operations total collections corporate & retail 2, , % Realized turnover with securities (million MKD) 13,004 1, % Number of traded ordinary shares issued by the Bank (MKD) 3,372 2, % Realized turnover on foreign exchange market of the Bank (million EUR) 1, , % Total f/x operations turnover (million EUR) 1, , % 1 According to methodology of NBRM. Net interest income does not include impairment of interest income. 3/47

4 I. CONDITIONS IN WHICH THE BANK PERFORMED ITS ACTIVITIES The past 2012 from the aspect of international surrounding was characterized by events regarding the debt crisis in Europe, following by intensive activities of the European leaders to design a longterm plan to prevent the spread of the crisis and the introduction of FED s quantitative easing aimed at accelerating the growth in the U.S. economy as well. Nevertheless, pursuant to the IMF estimates, in 2012 slowdown of the recovery of the global economy was showed, thereby the largest European economies fell into recession and the credit ratings of several European countries and large international banks were noted negative corrections. Unfavorable economic ambience in the Republic of Macedonia in the course of 2012 mainly is a result of the deteriorated external influences and certain domestic factors as well. The crisis in the Euro-zone had direct impact on the domestic real sector through decreased demand for domestic products, thereby at the beginning of the second half the Macedonian economy officially entered into recession. The decreased liquidity resulted in difficult servicing of the companies liabilities and liabilities to the banks. The Government confirmed the companies liquidity problem and presented a plan for its overcoming. In March High Level Accession Dialogue, in order to impose new dynamics to the reform process for accession of the Republic of Macedonia to EU was held, while in October the Report of the European Commission (EC) on Macedonia's progress in 2012 was presented, where for the fourth time start accession negotiations with the EU was recommended, having in consideration that the country has continued to adequately fulfill political criteria for membership. As a result of the European Commission recommendations, in October the Credit Rating Agency Fitch has confirmed the credit rating of Macedonia "BB + with stable outlook," while in May the Standard & Poor's credit rating for foreign and domestic currency was confirmed as "stable BB/B with good outlook for future ". 1. In the course of 2012 the economic ambience was characterized by the following: According to the latest indicators of NBRM, the state economic activity noted stagnation. Inflation considered according to the cost of living index for the period January-December 2012 showed increase of 3.1% compared to the same period of 2011 (ø2012/ø2011). The physical volume of the industrial production showed a permanent decrease which in December reached 8.0%, compared to the same month last year, while compared to the period January-December 2012 and 2011 the industrial production dropped by 6.6%. In the period January-December 2012, the volume of trade was lower by 8.3% compared to the same period last year, thereby the total value of export amounted USD 4,002 million and of the import USD 6,511 million. The import coverage by the export was 61.5%, while the trade deficit in the period January-December 2012 was USD 2,509 million. In the course of 2012 the capital market in the Republic of Macedonia showed significantly decreased activities, expressed through the total value of the realized turnover at the Macedonian Stock Exchange on all basis, which marked 59% drop compared to the one realized in the same period last year. Nevertheless, it should be taken into consideration that in 2012, the MSE did not register any large block transaction, compared to 2011, when at the end of the year two block transactions with the shares of Pivara AD Skopje in total amount of about EUR 80 million were realized. Thereby, by adjusting the turnover in 2011, i.e. with it correction for these block transactions value, the reduction of turnover in 2012 amounted to more objective 36%. As at December 2012, there are 11 operative brokerage houses and 5 authorized banks dealing with securities at the securities market. 4/47

5 In January, the Securities Exchange Commission adopted the Rulebook on amendments and supplements to the Rulebook on the form and content of the annual, semi-annual, quarterly and regular reports on the shareholding companies with special reporting obligations kept in the Register of the SEC. In the course of the reporting period, the Commission approved new issues of shares through private offering to 9 shareholding companies and one public offering as well, thus the capitalization in the banking sector was dominant (capitalization by the following banks was made: Sparkasse Banka Makedonija AD Skopje, Procredit Banka AD Skopje, Capital Banka AD Skopje, Halk Banka AD Skopje and Alpha Banka AD Skopje). Pursuant to the Law on Investment Funds, the SEC has registered three new open-end investment funds, as follows: Micro Investment Fund, KD Cash Depozit and Ilirika Cash Fund. In the Republic of Macedonia, there are 10 open-end investment funds and 12 private investment funds In the course of the reported period, the monetary policy was realized in conditions characterized by slowdown in the economic activities and the credit growth was below the expected level. In the course of 2012, the F/X reserves reached EUR 2,193.3 million, and compared to 2011, they are higher for about EUR 124 million. Under these conditions, the NBRM had redesigned the monetary policy instruments and decreased the reference interest rate on treasury bills from 4% to 3.75% 3, thus giving the incentives to the banks to increase their credit activities. In January, new Decision on obligatory reserve entered into force, which prescribes a rate of 0% obligatory reserve in denars for the term deposits over two years, which, according to the agreement, may not be withdrawn earlier and decreased the interest rate on denar obligatory reserves from 2% to 1% p.a., as well. At the end of the year, under the unfavorable economic performances, new non-standard monetary policy measures 4 for mitigation of the consequences from the crisis were adopted by the NBRM, which means reducing of the base for banks reserves requirements for the amount of the new approved loans to net-exporters, domestic producers of electricity and for investments in debt securities in domestic currency without currency clause issued by the aforementioned companies, as well. The new operative framework of the monetary policy that was enacted in April was directed towards improvement of the banks liquidity management and enabling further development of the money market instruments. Thus, regular weekly repo-transactions for the purpose of providing liquid assets in the banking sector under favorable conditions were introduced, which provided support for the long-term placements by the banks and created conditions for development of the money market in the national economy. NBRM also reduced the frequency of the Treasury bill auctions to once within the period of obligatory reserve and limited the offer of treasury bills. For the purpose of providing more flexibility in the liquidity management, NBRM introduced available 7-days deposits, as well as available overnight deposit and additionally decreased the interest rate on the available overnight loans. From the aspect of the stability of the banking system, in 2012, the enacted regulation on completion of the first pillar of Basel II started to be implemented. Furthermore, new/amended regulations were adopted in order to improve the supervisory function of the NBRM and to enable convergence of the banking system toward the second pillar of the Second Capital Agreement that is forthcoming in the following period. In September, the new Methodology for calculation of the capital adequacy entered into force, which allows better connectivity of the banks' risk profile with the regulatory capital. In this regards, for the first time the banks allocated capital for operative risk protection and applied the standardized approach to credit risk management. Also, at the end of the 2 Source: 3 Staring from Staring from to the end of /47

6 year amendments and supplements to the credit risk management regulation and exposure limits were adopted, which provide tightening of criteria when approving credit exposures to customers with a lower rating and exposures to customers who have no credit rating, but have their registered seat in countries with low credit rating or no credit rating. According to the latest released data of NBRM, in the course of 2012, the banking system in Republic of Macedonia remained stable and safe. The implementation of the new Methodology for determining the capital adequacy 5 did not cause significant changes on the capital adequacy of the banking system. As at , loans to legal entities were increased by 4.5% and loans to citizens showed increase of 6.5% as well, thus the impairment loss of loans recorded more dynamic growth. As at the deposits from households noted increase of 7.2%, while deposits from non-financial entities noted decrease of 1.6% versus December The most significant decisions from the area of the banking operations adopted by NBRM in the reporting period were mainly amendments and supplements of regulation concerning: determining net-debtor of the Bank, liquidity and credit risk management and exposure limits, mandatory reserves, banks information system security, overnights deposits and credits, the manner and procedure on notifying of transaction with non-residents, the manner and terms under which residents, which are not authorized banks, may open and hold accounts abroad, the type of securities and financial derivatives in which authorized banks may invest abroad, the accounting and regulatory treatment of foreclosed assets, the types and contents of banks financial statements, the form and contents of payment instruments for performing domestic payment operations, introducing the process of internal capital determining within the risk management, etc. Additionally, Decision on the lowest denomination of denars in payment operations and Decision on withdrawing coinages of 50 deni from payment operations, applicable from , were adopted. *** In the reporting period Komercijalna Banka AD Skopje realized its activity in accordance with the Program of Measures and Activities of the Bank s Business Policy for the current year, objectives of the monetary policy of NBRM and priorities of the Government for the current period, performing its activity successfully. Rating and successful performance in the first half of 2012 was confirmed by the awards for the best bank in the Republic of Macedonia for 2012 awarded by the renowned New York magazine Global Finance, according to the criteria including growth of assets, profitability, strategic relations, services to clients, competitive conditions and innovative products, the STP excellence award from Deutsche Bank for 2011, the best bank in the Republic of Macedonia for 2012 awarded by the renowned magazine The Banker - for the seventh time, award Golden medal from the Red Cross of the Republic of Macedonia for the corporate responsibility projects etc. 3. In the following period, Komercijalna Banka AD Skopje shall perform its activities towards achieving the goals according to the Program of measures and activities of the business policy for 2013 and the Development Plan of the Bank for the , adopted by the Shareholders Assembly in March Starting from /47

7 II. REALIZATION OF THE BANK S BALANCE SHEET 1. Total resources 1.1 Significant items within the total Bank s resources in the course of 2012 showed the following dynamics and structure: Table 1: Review of the Bank s Liabilities (in million MKD) Index Amount Str. Amount Str. 4: Short-term and long-term borrowings 2, % 2, % Deposits 66, % 68, % Share capital and reserves 8, % 9, % Other liabilities 6 2, % 1, % 82.6 TOTAL LIABILITIES 80, % 82, % The total resources of the Bank as at realized increase of MKD 2,620.9 million in terms to 2011, thereby: - the largest part of the increase was generated by the deposits, which in the course of 2012 realized moderate dynamic of growth as a result of unfavorable economic conditions in the country, - the increase of the capital and reserves is a result of allocation of part of the profit for 2011 into reserves, thus the Bank confirms its strategic commitment to continuously increase its capital value and maintaining of the market share, as well as adequate fulfillment of the supervisory standards, and - the increase of the long-term borrowings is a result of withdrawn installments under credit lines. 1. Short and long term borrowings 1.1. In the period reported, short term borrowings noted decrease as a result of payment of due installments from the credit line from Agricultural Credit Discount Fund. It should be marked that in May, June and July the Bank realized repo transactions pursuant to the new operative framework of NBRM for liquidity management Long-term borrowings were increased on the basis of withdrawn new installments from the foreign credit lines from EIB I, II, III and Revolving fund of the Italian commodity credit line through MBDP. In the reporting period due installments were paid from the EIB I and II credit lines, Italian commodity credit line, Fund for social development of the European Council, Agricultural Credit Discount Fund and credit line from CEB. 6 The amount includes unallocated profit for 2011 in the amount of MKD 1,085.8 million and unallocated profit for 2012 in the amount of MKD million. 7/47

8 2. The total deposits growth, from the maturity aspect was generated by the time deposits. Thus the significant dynamics of long-term deposits growth is a result of favorable interest rates, in conditions when alternative investment forms in the country remained underdeveloped. Opposite of this, demand deposits showed decline which derived from the decreased deposits of non-financial entities and households, as a two dominant items in this category. The deposits showed growth, despite the reduced interest rates on and Regarding the deposits currency structure, the denar deposits noted increase, due to the higher confidence in domestic currency and the increased households denar savings. Table 2: Maturity and currency structure of total deposits (in MKD million) Index Amount Str. Amount Str. 4: Demand deposits 24, % 24, % 99.8 Short-term deposits 37, % 38, % Long-term deposits 5, % 6, % TOTAL DEPOSITS 66, % 68, % MKD deposits 31, % 34, % FX deposits 34, % 34, % 98.0 TOTAL DEPOSITS 66, % 68, % Regarding the structure of deposits by clients, households deposits remain the major bearers of total deposits growth. Opposite to this, in the course of 2012, deposits of non-financial entities contributed to lower total deposits growth. This situation is due to the serious challenges in the operation of legal entities, whereby the worsened liquidity was a major problem which resulted in a reduction of their saving ability. Table 3: Structure of deposits by clients (in MKD million) Index Amount Str. Amount Str. 4: Deposits by clients -non-financial legal entities 14, % 13, % public sector % % non-profitable institutions % 1, % financial institutions 1, % % households 48, % 51, % non-residents 1, % 1, % TOTAL DEPOSITS 66, % 68, % Share capital and reserves of the Bank showed an increase of 7% or MKD million, as a result of allocation of part of the profit for 2011 into reserves. 8/47

9 2. Assets The total assets of the Bank realized volume and dynamics adequate to the resources. Thereby: - in 2012, the trend of growth of assets continue, but with slower dynamics compared to the projections, - the structure of interest bearing assets was changed, i.e. the participation of short-term loans to other banks and money in cash was decreased, while the participation of loans to clients was increased and - fixed assets showed an increase due to putting into use of the foreclosed property for the Bank s needs. Table 4 Review of the Assets of Komercijalna Banka AD Skopje (in million MKD) Index Amount Str. Amount Str. 4: Money in cash and deposits with the NBRM 29, % 30, % Placements with, and shortterm loans to other banks 1, % % Loans to customers 42, % 45, % Securities portfolio % % Property 1, % 2, % Other assets 4, % 3, % 85.3 Total assets 80, % 82, % Money in cash and deposits with the NBRM 1.1. Within the item money in cash: - f/x money in cash noted an increase of 16.2% as a result of realized activities for purchasing of foreign currencies by using credit lines and purchase at the f/x market and at the same time maintaining the high level of f/x deposits of Bank s clients. In the reporting period, the structure of the f/x cash was changed, i.e. short-term deposits in foreign banks declined due to redistribution of the part of these funds into the item current accounts in foreign banks. The redistribution made is a result of the negative interest rates of time deposits in foreign banks due to the continued impact of the global financial crisis and it is in accordance with the established exposure limits. Within the f/x money in cash, short term f/x deposits in domestic banks noted an increase, too, as a result of two time f/x deposits placed with a domestic bank, out of which one deposit is secured by deposit received. - Denar cash is reduced by 17.3% due to lower amount of subscribed treasury 7 and government 8 bills with f/x clause held to maturity, as well as restructuring the maturity of government bills. Within this item, in August the Bank for the first time subscribed government bills with EUR clause. 7 The decrease of treasury bills is a result of reduced frequency of auctions from once a week to once a month and at the same time limited supply according to new operational framework of Monetary policy of NBRM 8 With maturity up to 3 months 9/47

10 Gross loans Net loans 1.2 Deposits with the NBRM (f/x mandatory reserve) reached the amount of 3,430.6 million MKD and noted a decrease of 49.4 million MKD mainly as a result of decreased f/x deposits in the previous calculation cycle. 2. Placements with, and short-term loans to other banks noted a decrease compared to December 2011, mainly due to reduced amount of time deposits abroad over 2 years, returned loan for liquidity given to another bank for a period of up to 1 month and reduced claims under forfeited letters of credit from financial institution non-residents. 3. Net loans to customers as a dominant item in the Bank s total assets noted an increase of 6.3%. Performing gross loans noted an increase of 6.5%, while the bad and doubtful claims and impairment provision noted an increase of 30% and 32.5% each. Such trends are due to the unfavorable conditions for the Bank s corporate clients, and worsening of the loan portfolio s quality. From the aspect of monthly change of loans, in July, significant deterioration in the loan portfolio quality occurred as a result of worsened liquidity of few corporate clients where the Bank has larger exposure to, which moved from performing into non-performing loans. In December, performing loans noted significant increase as a result of realized transaction with the Government of the Republic of Macedonia under the sale of the Bank s business premises. As for the currency structure of loans, denar loans and denar loans with f/x clause noted an increase, while the f/x loans noted a decrease, compared to December Table 5 Review of the total loans (in million MKD) Index Amount Str. Amount Str. 4: Short-term loans, due receivables and bad and doubtful claims 12, % 13, % Long-term loans 29, % 31, % Total net-loans 42, % 45, % Total performing loans (gross) 42, % 45, % Total due receivables and bad and doubtful claims (gross) 5, % 7, % Impairment provisions -5, % -7, % Total net loans 42, % 45, % Table 6 Currency structure of total loans (in million MKD) Index Amount Str. Amount Str. 4: Denar loans (gross) 30, % 34, % F/X loans (gross) 7, % 6, % 94.2 Denar loans with f/x clause (gross) 10, % 11, % Impairment provisions -5, % -7, % Total net loans 42, % 45, % /47

11 4. The significant increase of total Bank s securities portfolio in 2012 is due to increase of government bills in denars with maturity over 3 months recorded as securities held for trading, as well as increased investments in denar securities held for trading. Investments in associates also noted and increase due to recorded share in financial result of KB Prvo penzisko drustvo AD Skopje and KB Publikum invest AD Skopje. Opposite to this, securities held to maturity noted decrease as a result of declined statement of the government bills in denars with f/x clause over 3 months. 5. Fixed assets noted increase of 18.5% compared to 2011 as a result of putting into use of the undertaken property upon realized transaction for sale of business premises of the Bank. Namely, according to the public call by the Government of the Republic of Macedonia on the Bank concluded an Agreement on sale of own premises with total squaring of 22,525 m 2 at sale price in the amount of EUR 21,736,625, without tax and duties, including the buildings in which the Bank is performing its activities and other buildings in its possession. By this transaction the Bank realized capital gain in the amount of million MKD and resolved the litigation regarding the debtor s property, taken over in At the end of 2012, other assets noted significant decrease. Thus, the total amount of foreclosures reached 2,858 million MKD opposite to 3,547 million MKD on This decline is a result of putting into use of building and land, as well as realized sale of property taken over from the debtors. III. INCOME STATEMENT The analysis of the Bank's Income Statement for the period of , compared to 2011, indicates that the Bank achieved a positive gross financial result in total amount of million MKD that is 47.9% less than the profit realized in the same period last year. The realized net profit for 2012 reached the amount of million MKD. These indicators are result of unfavorable ambience during the year, so the Bank was faced with worsening of liquidity on a several companies. Realized profit before impairment provisions of financial assets, which is an indicator for operational capacity of the Bank for covering the operative expenses, is for 35.6% 9 higher than for the same period last year, as a result of the continued increase of total income during the year, with simultaneous decrease of total operating expenses. 9 The Calculation includes net positive effect of the financial results from associated companies. 11/47

12 Table 7: Review of the main items of the Income Statement Realized Realized (in million MKD) Index 3: Net interest income 2, , Net fee & commission income Foreign exchange gains Other income Total Incomes from operating ( ): 3, , Total administrative expenses 1, , Other expenses Total operative expenses (6+7): 1, , Profit before impairment provision of financial assets (5-8): 1, , Impairment provision of financial assets 4, , Release of impairment provision 3, , Collected written-off claims Impairment provision of foreclosures Gross profit before income tax ( ): 1, Tax Net profit 1, Net interest income are the major component of the total operating income and marked an increase of 6.2% in terms to the same period last year due to the realized growth of interest income despite the decrease of loan interest rates. Within the total interest income, the interest income by nonfinancial entities has dominant share of 69.1%, while within the total interest expenses the interest paid to households takes dominant part (73.1%). Net fee & commission income shows an increase in terms to the same period last year mostly achieved in the households sector. Followed from the aspect of type of financial activities, the growth is due to the increased net fee & commission income by the domestic and international payment operations and lending activities. Total realized other income is increased more than twice, compared to the same period last year, mainly as a result of capital gains realized from the sale of property and realized positive financial result from associated company. Total administrative expenses and amortization noted decrease of 2.6% in terms to the same period 2011 that is consistent with commitment for more efficient management primarily of material costs. The decrease of other expenses is as a result of reduced expenses from f/x operations, despite the increasing of deposit insurance premiums for 12.7%. Impairment provisions of financial assets marked an increase of 28.1% in terms to the same period last year. Besides the deteriorating condition of the clients, an additional effect on increasing 12/47

13 impairments in 2012 has the reclassification of claims according to the recommendations of the Central Bank, based on the tightened criteria for approving credit exposures to customers whose parent entity is seated in countries with lower or without credit rating, and annual adjustment of internal methodology of the Bank for determining impairment / special reserve on group basis using new higher impairment percentages for part of the sub-portfolios of small loans. Release of impairment provision marked increase of 4.5% in terms to the same period last year. The dynamics of release of impairment provisions was significantly impacted by the collected bad and doubtful claims in total amount of MKD 1,406.6 million. At the end of 2012 the impairment provision of foreclosed assets amounted in MKD million and it is lower compared to 2011 as a result of the implementation of the new Decision on amendments and supplements on the Decision on the accounting and regulatory treatment of foreclosed assets under uncollected claims. IV. RISK MANAGEMENT & SUPERVISORY STANDARDS The modern concept of banking in the market economy cannot 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 89,539.4 million MKD and compared to notes increase of 6.7%. - 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 and represent more than 0.007% of the total credit risk exposure of the Bank, and on group basis for the portfolio of small loans. - The amount of the additional impairment for the period is 1,907.1 million MKD, which compared to the total cumulative impairment as at means an increase of the total impairment of the Bank's loan portfolio of 33.0%. 2. Bank's exposure to currency risk in the period was within the legally prescribed limit of + 30% / - 30%. 3. Within the liquidity risk management, in the period January December 2012, the Bank fulfilled the legal obligation for allocation of denar and foreign currency mandatory reserve. - Denar mandatory reserve ranged from 4,096.6 million denars up to 4,493.4 million denars, while the foreign currency mandatory reserve ranged from 3,386.9 million denars up to 3,545.6 million denars. 13/47

14 - The percentage of the average fulfillment of the mandatory reserve in denars was from % in November as the lowest level, up to % in January 2012 as the highest level. - In May 2012, NBRM reduced the interest rate on treasury bills from 4.00% to 3.75%. - 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 oscillated from 6.42% in October to 10.10% in January. - In 2012 the highest level of concentration of the 20 largest depositors was 16.34% in February and the lowest was 10.16% in October. - In 2012 the Bank has continued to calculate the internal liquidity indicators (LP form) on monthly basis. The limits for these indicators are defined in the Policy for undertaking and managing liquidity risk of Komercijalna Banka AD Skopje. In the period liquidity indicators were in full compliance with the internal limits. - In the period January-December 2012 obtained liquidity ratios (LR 30 and LR 180) are above the minimum level (1), and they are in accordance with regulatory requirements. In 2012, NBRM made a change in the Methodology for calculating LR by introducing foreign banks' credit ratings of at least BBB- (according to the rating of Standard & Poor s agency) or Baa3 (according to the rating of Moody s agency) as a condition for their inclusion in the calculation of liquidity ratios up to 30 and 180 days. - Based on the monthly monitoring and analysis of the expected maturity structure of assets and liabilities (balance and off-balance records) which has built-in element of forecasting the movement of certain balance and off-balance positions it can be concluded that, during 2012, the Bank had a stable current liquidity position and shows positive liquidity gap in all maturity blocks. - According to the methodology of the NBRM, the own funds as at , reached the amount of 8,896.7 million MKD and compared to marked an increase due to increase of reserve fund, in accordance with the Decision on distribution of profits from 2011 adopted by the Shareholders Assembly. - Capital adequacy ratio as at is 13.21% and it is 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 AD Skopje. The capital adequacy ratio has decreased by 0.28 pp compared to As of , the National Bank of the Republic of Macedonia has introduced a new Methodology on determining of capital adequacy and own funds according to which the Bank has, for the first time, allocated capital for operational risk coverage. Credit risk weighted asset and capital required for operational risk coverage are calculated by applying the standardized approach. 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. Komercijalna Banka AD Skopje, in its everyday operation, continually follows, records and analyzes the loss events i.e. events that had caused damage/loss or are potential loss due to exposure to 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 2012, the Bank has no significant exposure to operational risk. In September 2012, a risk event was discovered that can cause material damage to the Bank. There were risk events found that had or might have caused loss, such as: abuse by an employee of Prilep Branch, with material damage which is on the account of KB until collected from the perpetrator - the Bank s officer, complained transactions by the bank card users mostly on KB 14/47

15 account, damage of physical assets with about 67% compensation by the insurance companies, as well as other materially insignificant events. Reputation risk is current or future risk which can influence the profit or own assets of the bank due to unfavorable observing by customers, creditors, shareholders, investors and regulatory bodies. In the period January-December 2012, there are no transactions, activities or events that may cause any significant reputation risk exposure for the Bank. 5. Market risk: During the period January-December 2012, the participation of the securities portfolio (net) in the Bank s total activities was from 3.15%, as the lowest percentage as at , up to 8.57%, as the highest percentage as at Movement of the structure of the securities portfolio (net) by type during the period January December 2012 is as follow: held for trading (HFT): from 0.85% up to 10.29% held to maturity (HTM): from 1.53% up to 96.56% available for sale (AFS): from 1.19% up to 95.05% investments in subsidiaries and associates: from 1.37% up to 3.22% During the period January December 2012, the Bank has not exceeded the limitat defined in the Decision on the methodology for determining capital adequacy (Official Gazette No. 159/2007 and No. 47/2012), i.e. the Bank has no obligation to hold adequate capital for covering market risk. Analyzing the currency structure of the securities portfolio, during the period January December 2012, it can be concluded that the investments in denars have dominant participation. During the period January December 2012, investments in securities are within the frames of legal limits. 6. The Decision on the interest rates and the effects from its implementation on Income Statement are the basis for management of the risk from changes in the interest rates in the portfolio of banking activities. In the period January-December 2012, several amendments and supplements were made, out of which, the most important are as follow: decrease of the loan interest rates on: the housing loans with EUR clause and loans for business premises with EUR clause by 0.65 pp; interest rate on mortgage loans with no purpose identified with EUR clause approved after by 0.9 pp; interest rate of loan for scholarship by 2 pp; interest rate on consumer loans based on draft for 0.1 pp, loans for purchase of cars for 0.5 pp, consumer loans with special purposes through merchants for clients who do not receive salary on transaction account with the Bank for 0.5 pp, cash loan based on mortgage with EUR clause (approved before ) for 0.2 pp and the agreed increase of loan interest rates from 12% to 11.75% p.a. introducing a new products with competitive loan interest rates such as: denar consumer loans with competitive interest rate of 9.5% annually, without reducing interest rates on existing consumer loans; loan for improvement of the energy efficiency with an interest rate of 8.5% annually; modified product - consumer loan with purpose identified and through merchants - interest free but with appropriate commission in accordance with the Decision on Terms and Conditions; on the new credit card MasterCard SCM Co-branding with Skopje City Mall as co-branding partner and on the negative balances of the new credit card product VISA Revolving Study&Go, the Bank has defined fixed interest rate of 11.7% on the amount of the credit limit and agreed increased interest on the amount over the credit limit "to the extent of the legal penalty interest rate"; decreasing the following deposit interest rates: on the denar saving deposits (except demand deposits) and part of the interest rates on foreign currency saving deposits for the 15/47

16 currencies EUR, USD, AUD, GBP and CAD (for all terms except demand deposits); on demand saving deposits in denar and current accounts in denar of legal entities, on demand saving deposits in foreign currency and current accounts in foreign currency of legal entities (for all currencies) and time denar deposits of legal entities; on denar time deposits of legal entities for terms up to 15 days, up to 1 month, up to 2 months, up to 3 months, up to 6 months and up to 12 months; on time deposits of individuals from 0.1pp to 0.4 pp and from 0.1 pp to 0.2 pp for savings deposits in EUR deposited for a period longer than 1 month; Introducing a new maturity time denar deposits to 9 months with an interest rate of 4.70% for pension and investment funds and investment fund management companies; change in the Interest rate calculation and payment methods, which allows to determine the interest rate for the reallocated deposit for legal entities that corresponds to the new deposit period, without correction of the interest rate on the amount that shall be reallocated and its reduction of the level of demand interest rate; harmonization of the current operation with the provisions of the Law on Obligation Relations, according to which no applicable interest rate may be higher than the legal penalty interest rate. As at the average weighted loan interest rate is 5.16% (vs. 5.57% on ), the average weighted deposit interest rate is 2.16% (vs. 2.60% on ). The interest margin (spread) is 3.00% (vs.2.97% on ), while the net interest margin (NIM) is 3.45% (vs. 3.40% on ). 7. In its operations, the Bank strictly adhered to the prescribed 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 assets in relation to the equity capital, which according to article 64 for the Banking Law should not be less than the equity 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 of the Bank should not exceed 10% of the total nominal amount of the total shares); - the capital adequacy rate is 13.21% and it is within the prescribed minimum of 8%; - the Bank fulfils the standard for exposure towards individual subject and related parties therewith, which should not exceed 25% of the Bank s own assets; - The Bank does not have any exposure toward a subsidiary (which should not exceed 10% of the Bank s own funds); - the Bank does not have exposure higher than the prescribed 10% of the own assets towards shareholder of the Bank with qualified participation and its related parties, which directly or indirectly have at least 5% of the total number of shares or issued shares with voting rights, which may significantly influence the Banks managing process, and the Bank is fully complied with this supervisory standard; - the exposure towards the management of the Bank and the related parties represents 1.95% of the Bank s own assets in total and is within the legally prescribed 3% of the Bank s own assets towards the management of the Bank and their related parties; - total exposure toward subsidiary, shareholders with qualified participation and individuals with special rights and responsibilities is 1.95% and it is under the limit of 65% of the Bank s own funds; 16/47

17 - the Bank has large exposure towards individual and individuals related to them which is equal or largest than 10% of the Bank s own funds, but total amount of large exposures is 3 times of the Bank s 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 from other banks which own shares of the Bank that represent more than 5% of the total share capital; - 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 27.96% 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 Bank s own funds compared to the prescribed one of 30% of the own Bank s funds; - The Bank does not control any non-financial institution; - The Bank fulfils 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. - The Bank fulfils the standard of the Companies Act according to which the percentage for allocation into mandatory general 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 In the course of 2012 the Bank continued to perform its credit activities 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, with strictly respecting the principles of profitability, efficiency and security of the placements which bear acceptable credit risk. In the reporting period the Bank applied more considerate approach in the approval of new loans, thereby the diversification of the loan portfolio was focused of the industrial sectors which showed more flexible mitigation of the economic crisis effects. 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 loans in 2012 marked an increase of approximately 10%, the regular loans were increased about 6%, while the amount of bad and doubtful loans reached about 38% as a result of unfavorable events in the real sector, that appropriately reflected on the Bank s profitability. In the reporting period the activities regarding the realization of projects of inter-banking lending through Syndicated loan with Raiffeisen Bank Albania and common lending of construction projects with Stopanska Banka AD Skopje and Sparkasse Bank Makedonija AD Skopje continued. In the reporting period, the Decision for amendments and supplements to the Decision of the Bank s lending policy and procedures was passed, regarding of terminological, technical and legislative adjustments with the EBRD s Environmental and Social Policy, increasing of the allowed limit expressed as a percentage of the unsecured credit exposure in terms of the total loan portfolio of legal entities, complying with the new methodology for determining of the capital adequacy and integration of the process of approval and administration of denar loans with f/x clause and foreign currency loans from the Bank s resource with the act of the Credit Policy, thus the Decision which prescribes the criteria for approval of above stated loans from 2010 was abolished. 17/47

18 1. The Bank, in the reporting period, continued with the support of the corporate clients and has managed to maintain the high market share in this segment of the operation. Thus, the maturity structure analysis of the disbursed loans showed increase of short-term and long-term disbursed loans. The participation of the total disbursed short-term denar loans in the total disbursed denar loans is 79.3% (79% in 2011), while the participation of the long-term loans is 20.7% (21% in 2011). The number of used short-term denar loans of the Bank is 2,634, in the total amount of 25,884.2 million of denars and noted an annual increase of 22.6% in terms of In the domain of denar long-term lending, the number of loans under disbursed long-term loans from the Bank s assets is 606 in total amount of 6,771.2 million denars, which is annual increase of 20.7%. The growth of short-term and long-term denar loans mostly was generated by the following sectors: manufacturing, trade, transport and communications and construction. In the course of 2012, the cooperation with credit line from Agricultural Credit Discount Fund through MBDP continued, which is intended for agricultural entities in the Republic of Macedonia. During 2012, the disbursed loan funds were in the amount of 7.9 million denars. 2. In the reporting period, the Bank continued to approve F/X loans from the funds of foreign credit lines and from the Bank s resources. During 2012, active credit lines administrated through MBDP are: Revolving fund of Italian commodity credit line, credit line from EIB and credit lines from EIB II and III (as at the Bank concluded new Framework agreement with MBDR to participate in the credit line in total amount of EUR 100 million for lending of small and medium enterprises and priority projects from EIB III). From these credit lines 53 loans in total amount of 16.6 million EUR were disbursed, while by the Bank s funds were disbursed 14 short-term loans in amount of 20 million EUR, 10 long-term loans in amount of 26.2 million EUR and 10 revolving loans in amount of 3 million EUR. Of the total loans approved from the credit lines from EIB II and III, three sub-loans in total amount of EUR 1.8 million are approved as priority projects for which the Bank participates with 50% from own resources. Despite the approving, the Bank performed and administration on disbursed F/X loans from the credit lines: Fund for social development of the European Council, APEX Global loan from EIB through the Ministry of finance, Italian commodity credit line, Revolving fund of the Italian commodity credit line and credit line from CEB. 3. Within the Bank s denar operations with legal entities payable and performing guarantees were issued, thereby, compared to 2011, the number and value of issued denar guarantees showed increase of 13.9% and 14.1%. Komercijalna Banka AD Skopje is a first among the banks in the Republic of Macedonia which implemented the Project Issuing bank guarantee in electronic form, thus starting from until it issued 27 electronic guarantees for participation on bidding in a total amount of MKD 5.1 million. 4. In the course of 2012, the Bank continued its activities and measures for collection of the claims from its clients having the status of a problem loans. Thus, in the period from to the Bank collected total amount of MKD 1,354.8 million, out of which 95.2% are collected claims from balance-sheet records and 4.8% are collected claims from off-balance sheet records as follows: cash payment by debtors 5.20%, collected foreclosures 75.03%, sale of foreclosures at auction 1.38%, sale of assigned claims 17.55% and collected claims in receivership procedure 0.84%. 18/47