ANNUAL REPORT 2008 A N N U A L R E P O R T

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3 CONTENTS Financial highlights Statement of the Chief Executive Officer Bank s Profile Bank s objectives in 2009 Economic conditions in 2008 and projections for 2009 Review of the Bank s Operation Financial performance Risk management Corporate banking International banking Liquidity management Securities operations Retail banking Cards operations Domestic payment operations Marketing activities Information communication technology Human resources Corporate social responsibility Auditors Report Supervisory Board Board of Directors Management Organizational chart Bank s network of branches and city-branches 3

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5 FINANCIAL HIGHLIGHTS (in thousand MKD) Data on the profit realized (for the year) Profit before taxes 1,551,352 1,069,501 Net profit 1,378,667 1,011,888 Data from the Balance Sheet (as at the end of the year) Total assets 55,099,366 52,864,703 Loans and advances to customers 35,048,476 24,588,063 Placements with, and loans to, banks 5,550,640 13,833,618 Investments 557, ,981 Deposits from banks and other financial institutions 1,572, ,918 Deposits from other clients 45,769,870 45,272,556 Capital and reserves 6,259,292 5,260,314 Profitability ratios Return on assets (ROA) - before taxation 2,8% 2,0% - after taxation 2,5% 1,9% Return on equity (ROE) - before taxation 24,8% 20,3% - after taxation 22,0% 19,2% Expenses ratio 45,8% 45,8% Capital and reserves to total assets 11,4% 10,0% Capital adequacy 9,9% 10,5% Mid exchange rate as per the Exchange Rate List of the Central Bank EUR 61,41 61,20 1 USD 43,56 41,66 5

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7 STATEMENT OF THE CHIEF EXECUTIVE OFFICER Dear Shareholders, business partners and clients, It is my pleasure to present you the Annual Report of Komercijalna Banka AD Skopje for 2008, particularly due to the fact that the despite the global financial and economic crisis which started to be felt in the last quarter of the previous year, the Bank remained stable and successfully completed the past year. The gross profit realized for 2008 in the amount of 1,551.3 million denars is higher for 45% compared to the realization in 2007, and once again, is the highest profit realized so far in the history of the Bank s operation. It should be mentioned that this profit was realized without the effects expected from the announced issue of shares of Komercijalna Banka AD Skopje, although they were taken into account in the projections for The best confirmation for the success and rating achieved by the Bank are the rewards awarded by Global Finance and the Macedonian Stock Exchange. The renowned magazine Global Finance announced Komercijalna Banka AD Skopje the best bank in the Republic of Macedonia according to the criteria including growth of assets, profitability, strategic partnerships, services to customers, competitive prices and new products. The Macedonian Stock Exchange awarded the Bank the reward Crystal bell for the most transparent company in The economic ambient in which the Bank realized its activities in the course of 2008 was characterized by average inflation rate of 8.3%, decrease of prices of industrial products for 10.1% and increase of the manufacturing of 5.5%. 7

8 Monetary policy in the course of 2008 was conducted in an ambient of increased uncertainty as a result of the world crisis, increased inflation pressures, deepening the trade deficit and worsened current account of the balance of payment. Having the strategy of fixed FX rate of the denar, movements on the FX market were in direction of net-sale of foreign currency as a result of external pressures and the psychological factor of the domestic entities. Thus, in December 2008, the gross FX reserves with the Central Bank reached the amount of EUR 1,495 million and, compared to December 2007, they were decreased. The foregoing situation imposed the need of amending the structure of the monetary instruments of the Central Bank in terms of more restrictive monetary policy for the purpose of stabilization of the credit expansion and increased personal consumption. Thus, the basis for calculation of the mandatory reserve of banks was widen, the methodology for determining the capital adequacy was amended, mandatory deposit was introduced in cases when the growth of loans to citizens exceeds the prescribed growth rates, the treasury bills auctions of the Central Bank were transformed from tender on interest rates to tender on amount with additional increase of the interest rate on the treasury bills to 7% and of the collateral loans to 8.5%. The most significant activities realized by the Bank in the course of 2008 are related to the following: intensifying the credit support to the Bank s customers, both by approving loans and by issuing letters of guarantee and letters of credit; continuous adjustment of the payment operations with the needs and abilities of clients, whereas, in order to mitigate the consequences from the hindered economic conditions, fees and commissions in the domestic payment operations were lowered; increase of the interest rates on savings deposits; further advancement of the electronic banking and increasing the number of users of this services; continuous expansion of the branch and ATM network; concluding partnership with the world leader in the card operation - VISA; providing documentation and announcement of the fifth issue of common shares which is going to last up to October 2009; creation conditions for all interested investors to buy stakes from the investment funds at the Bank s counters. These activities commenced with sale of stakes of Ilirika Fund Management AD Skopje this year. 8

9 Dear Shareholders, The profit realized in the newly created conditions of the world financial and economic crisis has proved the stability and successfulness of the Bank. In the course of its operation in 2008, the Bank realized capital adequacy ratio of 9.90%, which is within the legally determined limit (over 8%), while the profitability ratios - the return on equity ratio (ROE) and the return on assets ratio (ROA) are 22.0% and 2.5%, respectively. Total resources of Komercijalna Banka reached the amount of MKD 55.1 billion, and reached an increase of 4,2%. The increase of the total resources is mainly due to the increase of citizens deposits, which realized an increase of 10% and reached the amount of MKD 33.1 billion. In the past 2008, corporate lending and lending to citizens were an important activities of the Bank. The Bank undertook many activities for independent assessment of the credit portfolio and its ranking adequate to the credit risk, monitoring and control of the credit risk of customers, as well as undertaking corrective measures connected with the lending process. The Bank also continued to take measures for workout of debts of customers having the status of bad loans which resulted in collection in the amount of MKD million, out of which 49.8% are collected claims from the balance sheet records, and 50.2% from the off-balance sheet records. The liquidity of Komercijalna Banka in the reporting period was maintained on a level that provided smooth realization of its obligations prescribed by the law and its obligations towards the clients. The Bank regulated it by approving short-term loans to other banks, subscribing treasury bills and Government bonds and allocation of mandatory reserve with the Central Bank in denars and in foreign currency. Successful fulfillment of the growing demands of citizens was a significant segment of the credit activity of the Bank in In the reporting period, Komercijalna Banka AD Skopje continued to successfully perform the domestic payment operations, realizing increased number of the newly opened accounts, of the processed non-cash and cash transactions and increased value of payments. 9

10 The activities in the domain of trading with securities, in 2008, were continued to be realized through: participation of the Bank at the auctions of the treasury bills of the Central Bank, purchase of Government bonds, investing in long-term securities and opening custodian accounts. The activities on the FX market also show an increase, both in terms of the realized turnover and in the number of made FX purchase agreements. The total FX turnover is also increased, while the average amount of placed foreign currency assets with foreign banks show a decrease, due to restructuring of the Bank s portfolio from lower to higher interest bearing assets. In conditions of decreased total turnover and oscillations at the Macedonian Stock Exchange, Komercijalna Banka AD Skopje with the realized total turnover in the amount of MKD 6,514 million (or market share of 26.4%) and realized 13,216 transactions (or market share of 30.5%) kept the leading position in the financial intermediation on the capital market in all trading segment. Also, as a result of the global decline of the stock exchanges in the course of 2008, the income realized under trading with securities show decrease. The Bank continued to perform the activities in the domain of international operations successfully. Thus, the total international payment operations executed by payment orders through the Bank showed increase in value of 21.4%, increase of value of documents received for collection of 6.7%, while in the domain of the letters of guarantee-letters of credit operation the increase was shown in the value of received FX letters of guarantee for 29.5%. The record financial year 2008 and the results achieved in all segments of operation give us the right to believe that, in the forthcoming period, Komercijalna Banka AD Skopje will keep on having successful realization of its activities despite the prospected negative effects from the world economic crisis on the performance of companies and banks in the course of The positive results we have achieved from the operation could not have been achieved without exclusive qualitative engagement of the members of the Supervisory Board, and especially of the management and all employees of the Bank, for which I would like to use this opportunity to express my gratitude. 10

11 At the same time, I would like to express my gratitude to you, dear shareholders, for your support provided and to our business partners and clients, for their professionalism and trust shown in the course of the year. Yours truly, Chief Executive Officer Hari Kostov 11

12 BANK S PROFILE Komercijalna Banka AD Skopje is one of the leading banks in the Republic of Macedonia, which, in its 54 years of existence, has created an image of a bank with tradition, confidence, safety, innovation and strong local and international reputation. The Bank was established in 1955 as Komunalna Banka of the City of Skopje, specialized for citizens savings, housing loans to citizens and enterprises and financial support to construction of municipalities. Since than the Bank has gone through several changes, as a result of the changes in the banking sector, and in 1990, it was transformed into a shareholding company under the name of Komercijalna Banka AD Skopje. Today, it is a universal bank with wide range of activities, such as taking deposits, lending to legal entities and individuals, providing services in the domestic and international payment operations, intermediating activities in purchase and sale of foreign currency, securities, forfeiting etc. The Bank has wide network of citybranches and branches, which is permanently extended on the territory of the whole country. Its business network is comprised of 8 branches (Prilep, Ohrid, Veles, Strumica, Kocani, Stip, Kumanovo and Kavadarci) and 48 citybranches, out of which 31 located in the City of Skopje and the other throughout the country. In order to provide fast and efficient services to satisfy the needs of its clients, the Bank has correspondent relations established with over 600 banks in 117 countries in the world, as well as current accounts with 41 banks. The equity capital of the Bank is comprised of 2,014,067 ordinary and preferred shares. Pursuant to the Decision made by the Bank s Assembly, until , the preferred shares could have been converted into ordinary shares. Thus, as at , the number of ordinary shares is 1,997,135, and the number of preferred shares is 16,932. The shares of Komercijalna Banka AD Skopje are listed on the official market of the Macedonian Stock Exchange and they are included in the calculation of the Macedonian Stock Exchange index, while since 2007, they are also on the super listing. In the course of 2008, as well, the shares of Komercijalna Banka AD Skopje kept the trend as one of the most liquid shares. The average price the Bank s shares were traded at was MKD 5, per ordinary and MKD 5, per preferred share. In 2008, there were 299,386 ordinary and 117 preferred shares traded. As at , there are total 4758 shareholders of the Bank, and the European Bank for Reconstruction and Development is the only shareholder with qualified participation of over 5% of the total number of issued shares, or it owns 5.935% of the total number of issued 12

13 shares and 5.986% of the total number of voting shares issued. In accordance with the realization of the pension system reform in the Republic of Macedonia, Komercijalna Banka AD Skopje along with Prva pokojniska druzba from Ljubljana, in June 2005 established KB Prvo penzisko drustvo AD, whose number of members makes 52.1% of the total number of pension insurers of the two-pillar pension fund, as at , i.e. the Fund manages with 55.4% of the total proceeds paid in the second pillar of the pension system. Komercijalna banka AD Skopje holds 49% from the equity capital of the pension company. In the course of 2008, Komercijalna Banka AD Skopje, together with Publikum Holding DOO Ljubljana, Forlex SRL Trieste, Italy, and Pom Invest DD Maribor, acquired a licence from the Securities Commission for establishing the Funds Management Company KB Publikum Invest AD Skopje. The company is established with a capital of EUR 500,000. Pursuant the Statute of the Company, it is provided that at the beginning KB Publikum Investment AD Skopje shall establish and manage two open investment funds, which is expected to result in increased competition in the investment operations at the Macedonian Securities Market. Komercijalna Banka AD Skopje is one of the most successful banks in the Republic of Macedonia with strong local and international reputation, which is confirmed both by its leading position at the Macedonian banking market and the numerous international and national banking awards. Hence, the Bank was four times awarded Bank of the year for the years 2001, 2002, 2004 and 2005 by the renowned banking magazine The Banker, five times awarded The Best Bank in Macedonia for 2004, 2005, 2006, 2007 and 2008 by the New York magazine Global Finance, six times awarded for The Best Bank by Finance Central Europe. Komercijalna Banka was also awarded by EBRD, Deutsche Bank, Trade Finance, and in 2008 it got the reward for the most transparent company in the Republic of Macedonia, awarded for the first time by the Macedonian Stock Exchange. 13

14 OBJECTIVES OF THE BANK IN 2009 In the course of 2009, Komercijalna Banka AD Skopje will endeavor to achieve the priority aims and objectives defined in the Program of Business Policy Measures and Activities for 2009, such as: 1. Maintenance of the capital value and its increase, through the realization of its policy for further allocation of significant part of its net profit for reserves, as well as through an issue of shares, which will provide capital adequacy ratio that corresponds to its planned credit activities; 2. Maximizing profitability from operation by undertaking acceptable risks; 3. Maintenance of the Bank s share at the banking market in the Republic of Macedonia in circumstances characterized by increased competitiveness; 4. Successful and timely compliance with the law regulations regarding the financial reporting as part of the reforms in the banking system in the Republic of Macedonia; 5. Development and improvement of the information technology and implementation of Business Intelligence solution; 6. Continuous improvement of the organization of operation and adjustment of its strategic aims and objectives with the law regulations; 7. Human resources management that will provide higher quality level of its services; 8. As a bearer of the domestic payment operations, the Bank shall be actively engaged in implementation of solutions that will provide fast and qualitative services to the clients; 9. Development of its marketing activities; 10. Within the objectives of the Business Policy for 2009, the Bank remains with the obligation that, if the shareholders of Komercijalna Banka provide control package of shares and determine respective parameters, the management of the Bank shall undertake appropriate procedures, measures and activities for eventual attracting potential foreign strategic investor, which should fulfill the respective conditions set out by the consortium of Bank s shareholders, such as: to be a bank with renown international brand, the offer to be a reflection of the real value of the shares of Komercijalna Banka and to provide a strategic plan for the future development of the Bank. However, in conditions of uncertain economic environment, and in order to keep the position of one of the best banks in the Republic of Macedonia, the additional aims and objectives foreseen for 2009 are as follows: 14

15 undertaking appropriate measures and activities for successful performance and adjustment to the new market conditions, taking into account, first of all, the requirements of the existing and potential clients, further improvement and modernization in the operation, introduction of new banking products and services, development of new modern banking functions, conquering new markets, strengthening the competitive position of the Bank, all of these being the main characteristics of the modern and universal banks, undertaking activities for establishing and starting the operation of a company for investment funds management, implementation of the Decision on the methodology on record keeping and evaluation of the accounting items and on preparation of the financial reports, improvement of the e-banking and information technology in all segments of the Bank s operation. 15

16 ECONOMIC CONDITIONS IN 2008 AND PROJECTIONS FOR 2009 In the course of 2008, the activities of Komercijalna Banka AD Skopje were carried out in conditions defined by the Macroeconomic Policy of the Government of the Republic of Macedonia for 2008, the aims and objectives of the Central Bank s Monetary Policy for 2008 and in accordance with its Program of Business Policy Measures and Activities for the respective year. 1. Last year was characterized by dynamic changes in the external environment with respective effects reflected on the local economy. The application for NATO membership was blocked, and the extraordinary parliamentary elections carried out got unfavorable assessment by the European Union, which impeded the European integration of the Republic of Macedonia. The political shocks complemented by the deficit on the current account, in conditions of recession movements in the global economy during the second half of 2008, had an impact on the changes in the credit rating of the country, which the Credit Agency Fitch had revised from stable to positive (from BB+ for short-term foreign currency was decreased to B and the total rating of the country was confirmed to BBB- ). At the beginning of the year, the inflation growth had more dynamic continuation under the influence of the growth of the food and energy prices in the world, thus reaching 8.3% in December, measured according to the living expenses index average 2008/2007. In the course of 2008, the growing trend of the Macedonian economy continued and at the end of December, the State Statistical Office announced the assessed real growth of GDP of 5.3%. The scope of the trade in the period January December 2008 is for 26.2% larger, compared to the same period in the previous year, where the total value of the export is USD 3,978.2 million and of the import is USD 6,851.6 million. The coverage of the import by the export is 58.1%, and the trade deficit in the period January December 2008 is USD 2,873.4 million. In December 2008, the IMF Executive Committee had rounded up the consultations with the Republic of Macedonia under Article 4, and within the frames of the information announced it was concluded sound growth of the domestic economy supported by the improvement of the business climate and increase of the foreign investments, but with certain concern shown due to the increased macroeconomic and external risks the economy is exposed to regarding the dramatic increase of the current account deficit and increased deficit budget consumption. 2. In the reported period, the Monetary Policy was realized in conditions of greater uncertainty, due to the world financial and economic crisis, higher inflation pressure, increase trade deficit and impaired current account of the balance of payments. With a strategy of fixed denar exchange rate, 16

17 the movements at the exchange market were directed towards net sale of foreign currencies as a result of the external pressure and the psychological factor of the local economic subjects. In December 2008, the gross FX reserves with the Central Bank reached the amount of EUR 1,495 million, which are decreased in regards to the same period in All these conditions imposed the need for changes in the structure of the monetary instruments of the Central Bank, aimed towards more restrictive monetary policy for the purpose of stabilization of the credit expansion and increased personal consumption, so that there was an extension of the basis for calculation of the obligatory reserves of the banks, changes in the methodology for determining the capital adequacy, introduction of obligatory deposit if the increase of the loans to citizens exceeds the prescribed rates of increase, the treasury bills auctions of the Central Bank were transformed from tender on interest rates to tender on amounts and additionally increased the interest rates on treasury bills to 7% and of the collateral loans to 8.5%. In the course of the reported period, the Central Bank has also completed the process of passing the secondary legislation in accordance with the Banking Law. 3. In 2008, the capital market in the Republic of Macedonia was under significant impact from the global financial shocks, mainly as a result of the influence of the psychological factors and illiquidity the foreign investors were affected by. All this resulted in greater supply than demand of securities, followed by continuous decrease in the prices and respective fall of the Macedonian Stock Exchange Index. On the other side, it is worth mentioning that the global financial crisis did not have any direct effect on the functioning of the local banking market, having in mind the fact that Macedonian banks were not included in the activities of the international capital market where large investment banks failed, and the citizens foreign currency deposits were placed with first-class foreign commercial banks. However, this crisis that emerged during the last quarter of 2008, had an impact on the commercial activities in the country and on the operation of the companies and the banks, with estimation that its negative effects will be more severe in the course of

18 FINANCIAL PERFORMANCE OF THE BANK Income Statement Despite the financial crisis and the threat imposed by the global shocks for the banking sector, by the end of September and in October, Komercijalna Banka AD Skopje remained stable and successfully completed The gross profit realized is MKD 1,551,352 thousand, where the total income is MKD 9,795,625 thousand and it notes an increase of 46.6%, while the total expenses are MKD 8,244,273 thousand and they note an increase for 46.9%. The interest income under loans and other placements with clients participated with 39.7% in the total income structure and in the course of 2008 it notes an increase of 24.4%. In the reporting period, the realized positive net interest income notes increase of 21.5%, while the net interest margin is 4.06%. The dominant participation of 79.5% in the structure of the realized interest income belong to the loans approved to enterprises and citizens, which show an increase of 37.1%, compared to the previous year. The realized interest income under investments in securities comprise 7.4% of the realized interest income and show multiple increase in regards to the previous year. The realized interest income under loans to banks, money assets and short-term assets, as well as the realized income under other bases, represent 13.2% of the total interest income realized. The net income under fees and commissions and net FX gains noted a decrease of 7.6% and 18.8%, respectively, compared to the previous year. In the structure of the total expenses, significant participation of 55%, and more than two times increase in regards to the previous year, is noted with the FX losses, even though there is FX gain realized in the amount of MKD 101,194 thousand, followed by 15.9% participation and increase of 30.7% of the interest expenses and 29.1% participation of the operative expenses, which are approximately on the same level as in the previous year. Bank s Resources As at 31 December 2008, the total Bank s resources reached the amount of MKD 55,099,366 thousand, which, compared to the end of 2007, is an increase of 4.2% or MKD 2,234,663 thousand. The growth of the total resources is mainly a result of the increase of citizens deposits, special reserve for potential losses and Bank s own funds. The dynamic of the total Bank s resources in 2008 was influenced by the participation of the resources of Prilep Branch with 6.5%, Kumanovo Branch with 3.0%, Ohrid Branch with 2.5%, Strumica Branch with 1.9%, Stip Branch with 1.6%, Veles Branch with 1.5% and Kocani and Kavadarci Branches with 1.4% participation, respectively. 18

19 Within the total resources structure, shortterm resources show an increase of 2% and participation of 80.5% in the total resources, compared to their participation of 83.0% at the end of Within the shortterm resources, the denar ones showed an increase of 5%, increasing their participation from 50.4% to 51.8%. On the other side, short-term foreign currency resources noted a decrease of 1% and their participation in the total short-term resources is 48.2%, compared to 49.6% in The participation of the short-term resources of the branches within the total short-term resources of the Bank is as follows: Prilep - 6.9%, Kumanovo - 3.7%, Ohrid - 2.7%, Strumica - 2.2%, Stip - 1.9%, Veles - 1.8%, Kavadarci - 1.7% and Kocani - 1.6%. Long-term resources showed an increase of 20% and their participation in the total Bank s resources was 19.5%, compared to their participation of 17.0% in Within these frames, dominant participation of 86.5% was shown with the long-term denar resources, with an increase of 15%. Longterm foreign currency resources showed an increase of 68% as a result of the increase of the long-term citizens deposits. The Bank s total long-term resources also included the long-term resources of the branches as follows: Prilep Branch with participation of 5.1%, Ohrid Branch - 1.7%, Strumica Branch - 0.5%, Stip and Veles Branches 0.4%, each, Kumanovo Branch - 0.3%, Kocani - 0.2% and Kavadarci Branch - 0.1% participation. Maturity structure of the resources % 80.5% Short-term resources Long-term resources % 83.0% The trend of higher participation of denar resources than of foreign currency ones continued in Thus, denar resources, showing increase of 7%, participated with 58.6% in the total Bank s resources, while the foreign currency resources participated with 41.4%, compared to their participation of 42.8% at the end of The dynamics of increase of the total denar resources of the Bank was also influenced by the denar resources of the branches, as follows: 6.7% of Prilep Branch, 1.6% of Ohrid Branch, 1.5% of Veles Branch, 1.4% of Stip Branch, 1.3% of Strumica Branch, 1.2% of Kumanovo Branch, 1.1% of Kavadarci Branch and 0.8% participation of Kocani Branch. The increase of the foreign currency resources of 1% is mainly due to the increase of the long-term foreign currency deposits of citizens. The participation of the foreign currency resources of the branches in the total foreign currency resources of the Bank 19

20 is as follows: Prilep - 6.3%, Kumanovo 5.6%, Ohrid - 3.8%, Strumica - 2.7%, Kocani - 2.2%, Kavadarci and Stip - 1.8% each and Veles - 1.5%. Currency structure of the resources ,5 41.4% 80,5 58.6% Denar resources Foreign currency resources Bank s Assets 17,0 42.8% 83,0 57.2% The total Bank s assets in 2008 realized volume and dynamics adequate to the resources and reached the total amount of MKD 55,099,366 thousand. Within the frames of the total assets, short-term placements participated with 53.9%, compared to the one of 66.2% in 2007, which is a decrease of 15%. The increase of the long-term placements of 43% resulted in change of the maturity structure of the Bank s placements in favour of the long-term ones, which, as at , represented 46.1% of the total placements, in regards to 33.8% as at Maturity structure of the placements % 53.9% Short-term placements Long-term placements % 66.2% The qualitative changes of the assets structure continued in Thus, the total placements of the non-financial sector (legal entities together with public sector and citizens) showed dominant participation, on the account of the time foreign currency assets with foreign banks, which were dominant during the passed years. In the course of the previous year, the balance sheet of the Bank continued to be restructured by placing higher amount of assets in the country with higher interest rates, on the account of high amounts of liquid non-interest bearing assets placed with foreign banks. Consequently, credit activities were intensified by continuous improvement of the conditions and offer of new credit products, among which the denar loans with foreign currency clause. The participation of short-term placements of the branches in the total short-term placements of the Bank was as follows: Prilep Branch 9.5%, Kumanovo Branch 5.3%, Ohrid Branch 2.6%, Kavadarci Branch 2.5%, Strumica Branch 2.2%, Veles Branch 2.0%, Stip and Kocani Branches 1.9% each. The currency structure of the total Bank s placements showed continuous trend of higher participation of the denar placements in regards to the foreign currency placements. Thus, with an increase of 26% in regards to their statement at the end of the previous year, denar placements participated with 78.6% in the total Bank s placements. Foreign currency placements showed decrease of 35%, which also decreased their participation in the structure of the total placements of the Bank to 21.4% in 2008, compared to 34.5% in

21 Currency structure of the placements % 78.6% Denar placements Foreign currency placements As for the currency structure of the branches placements, it can be noted that denar placements are dominant, while the foreign currency ones take minimal part. The denar placements of the branches in the total denar placements of the Bank were as follows: Prilep Branch participated with 8.3% in the total denar placements of the Bank, Kumanovo Branch with 3.8%, Ohrid Branch with 3.1%, Strumica Branch with 2.4%, Stip Branch with 2.0%, Veles Branch with 1.9%, Kavadarci Branch with 1.8% and Kocani Branch with 1.7%. RISK MANAGEMENT % 65.5% According to the modern concept of banking, in conditions of market-oriented economy, risk management is understood as one of the basic preconditions for successful operation of any bank. Any probability that certain activity or event may have direct adverse impact on the profit and/or own funds, or may cause difficulties in realization of the Bank s objectives, means risk. Komercijalna Banka AD Skopje continually managed banking risks by their timely identification, evaluation, monitoring, control and reporting. For that purpose, the Bank had established system for undertaking and managing the risk, which is permanently improved and complied with the amendments and supplements in the law regulations and with the positive news in the international theory and practice, having in mind the Bank s strategy for undertaking and managing the risks. In the course of 2008, there were numerous amendments and supplements in the law regulations regarding the risk management. The Bank undertakes all necessary measures and activities for duly compliance therewith. The Bank s system for managing the risks is in compliance with the nature, size and complexity of the financial activities performed by the Bank and covers the following types of risks: credit risk (including the country risk), liquidity, currency, market risk, risk from changes of the interest rates in the portfolio of banking activities, risk from Bank s exposure concentration, operative risk (including the legal risk), reputation risk and the strategic risk. In its system for managing the risks the Bank also includes other risks it is exposed to in the course of its operation when determined that they have significant impact on the performance of the Bank. Credit risk The credit risk, as part of the measurable risks, is a risk from loss for the Bank due to the inability of its client to settle its obligations towards the Bank in the agreed amount and within the agreed terms. In the course of 2008, the Bank made harmonization of its internal acts with the new law regulations on managing the credit risk, issued by the Central Bank, by making and adopting the following policies and procedures: 21

22 Policy of Komercijalna Banka AD Skopje for undertaking and managing the credit risk, made by the Supervisory Board in August The aim of this Policy is to set out the general directions on managing the credit risk that correspond to the nature, scope and complexity of the financial activities performed by the Bank. In order to enable proper implementation of the Policy for undertaking and managing the credit risk, Komercijalna Banka made separate policies, procedures and methodologies for credit risk management that refer to the organizational units that undertake credit risk. Policy and procedures of Komercijalna Banka AD Skopje for financial instruments impairment, made by the Supervisory Board in August The purpose of this Policy is to provide a methodology for calculation of the impairment amount/special reserve for the performing balance and off-balance sheet claims, individually and on group basis, in compliance with the requirements of: IFSR 7 Financial instruments: Disclosures; IAS 32 Financial instruments: Disclosure and Presentation; IAS 37 Provisions, Contingent Liabilities and Contingent Assets; IAS 39 Financial Instruments: Recognition and Measurement and with the Central Bank s regulations. Procedures Komercijalna Banka AD Skopje for identification, evaluation, measuring, monitoring and control of the credit risk, made by the Bank s Board of Directors in August The procedures are part of the system for managing the credit risk, established for the purpose of decreasing, diversification, transfer and avoiding the credit risk, priorly identified, measured and assessed by the Bank. Another constituent part of these are the procedures for determining and managing the capital adequacy of the Bank, as well as defining the measures in case of any eventual exceeding of the legal and internal limits. For the purpose of permanent monitoring of the quality of the credit portfolio, in the course of 2008 as well, the Bank monitored the credit exposure towards individual entities and prepared classification of the assets according to the riskiness of the placements, on monthly basis. The Bank also regularly fulfilled its obligation for quarterly reporting to the Central Bank. In the course of 2008, the Bank maintained high quality of the credit portfolio, which is a predominant segment in the Bank s assets, having the greatest influence on its overall operation. The rate of riskiness of the credit portfolio (calculated as relation of the special reserve for potential losses and the total credit exposure) as at was 6.5% and was increased for 0.2 percentage points compared to when it was 6.3%. As at , claims classified in A and B risk categories participated with 91.9% in the credit portfolio of the Bank (91.7% as at ). Claims and off-balance sheet item classified in C, D and E categories participated with 8.1% in the total credit exposure, out of which those in the risk categories D and E participated with 4.9%. Through the permanent monitoring, control and revision of the limits for credit exposure, within the frames of the credit risk, the Bank was managing the country risk as well, which refers to the credit exposure 22

23 towards non-resident legal entities and individuals, which arise from their country of origin. The credit exposure to related parties (Board of Directors, members of the Supervisory Board and other bodies of the Bank and persons with special rights and responsibilities) as at was only 1.65% of the own Bank s funds and was kept within the limits of 3% of the own funds. Capital adequacy Capital adequacy ratio, showing the level of coverage of the risk operation of the Bank, was monitored and calculated on three-months basis and was permanently maintained within the limit of over 8%, as prescribed by the law. As at , the capital adequacy ratio was 9.9%. Upon the distribution of the undistributed profit for 2008 and allocation into the reserves, it is expected for the capital adequacy to be increased and be about 11.9%. Liquidity risk In the course of 2008, the Bank continued to monitor and manage its liquidity. Pursuant to the law and internal regulations, the Bank permanently fulfilled its legal obligation for the obligatory reserve in denars and in foreign currency, maintained stable level of the cash at counters, in function of protection of the instable segments of the deposit base, subscribed treasury and government bills, monitored the stability and concentration of the deposit base, harmonization of the inflows and outflows on the Bank s account, residual and prospected maturity and currency accordance of the Bank s assets and liabilities, etc. In the course of the year, the Bank had stable current liquidity position. Risk from the changes in the interest rates in the portfolio of the banking activities The Decision on interest rates and the effects from its implementation to the Bank s Income Statement is the base for interest rate risk management. The period analyzed is characterized by continuation of the regular activities regarding the implementation of the Decision on the interest rates, as well as further consideration of the possibilities for improving and maintaining the competitive position in regards to the other banks. Throughout the year, the Bank was making regular analysis of the interest bearing assets and liabilities, the level of change sensitivity of the interest rates, the average risk weighted loan and deposit interest rate, the extent of the interest bearing assets and liabilities with internal and external determination of the interest rates, as well as other relevant indicators, as foundation for successful management of the interest rates risk. Taking into account the principles of safety, profitability and competitiveness, during 2008, the Bank continued implementing the concept of differentiated interest rates in accordance with previously set criteria, as well as introducing new products, in accordance with the needs and capabilities of the existing and potential clients. Currency Risk Denar exchange rate and its stability, foreign currency reserves of the Central Bank and its capacity for intervention, foreign currency reserves of the banks, inter-currency relations, the Monetary Policy of the Central Bank, etc., are the factors that have direct or indirect impact and determine the level and exposure of the Bank s currency risk. 23

24 The management of the currency risk means monitoring, quantification and control of the OFXP as main indicator for the level of currency risk exposure of the Bank. During 2008, the Bank continually followed and managed the currency risk, which resulted in realized net FX gains of MKD 101,194 thousand, stable level of aggregate OFXP within the legal frames up to 50% of the own funds and open FX position by currencies within the legally defined limits. Market risk Management of the market risk means management of the investment portfolio of the Bank with simultaneous adherence to the principles of banking operations, safety of the invested funds, regulation and maintenance of the Bank s liquidity and profitability, diversification of the risks, etc. Pursuant to the Policy of Komercijalna Banka AD Skopje on investing in securities, the Bank fulfills the defined limits and successfully manages the market risk. Operational and reputational risk The operational risk is defined as risk from losses due to inadequate or failled internal processes, persons and systems or from external events. This definition includes the legal risk, as well. In its daily performance, Komercijalna Banka AD Skopje permanently monitors, records and analyzes the events that caused loss or represent potential operational risk. On the basis of the information obtained and analyses made, the Bank is undertaking actual measures for readjustment of the deteriorations and elimination/limiting and control of the risk in future. In order to have successful management of the operative risk, in 2008, the Bank permanently worked on: Monitoring the compliance of the Bank s operation with the law regulations and supervisory standards and carried out adequate adjustments in accordance with the respective changes, which resulted in permanent compliance therewith; Monitoring and undertaking adequate measures for rehabilitation of deterioration of information system; Undertaking measures for elimination of the risks in card operation; Constant implementation of the Law on Money Laundering Prevention and reporting to the Ministry of Finance - Money Laundering and Terrorism Financing Prevention Department, on regular basis; Monitoring and undertaking measures for elimination of the risks from natural disasters, thefts, damages of property etc.; Monitoring of the decision-making concentration for the purpose of proper adherence to the authorizations defined by the Credit Policy of the Bank; Monitoring and control of the employees in order to obtain strict adherence to the prescribed rules and procedures for operation of the Bank and undertaking measures for elimination of the risk of incorrect or illegal operation. Komercijalna Banka AD Skopje is permanently monitoring and undertaking measures for protection against the reputational risk. CORPORATE BANKING As one of the main activity of Komercijalna Banka AD Skopje,corporate lending is performed in accordance with its principles of profitability, 24

25 efficiency and safety of its placements, simultaneously adhering to the law regulations, aims and objectives of the Monetary Policy of the Central Bank, as well as the Business and Credit Policy of the Bank. In the course of its existence and successful performance of several decades, Komercijalna Banka AD Skopje remained recognizable business partner to its clients. Through its permanent focus on the needs of its clients and corresponding offer of financial products and services, the Bank has created conditions for deepening the cooperation with the existing clients and attracting new ones. The active monitoring, support and participation in the improvement of the profitability and efficiency of the clients had an impact on the success of the Bank and its significant participation in the banking sector of the Republic of Macedonia. In this sense, and by introducing new products and services, the permanent intention of Komercijalna Banka AD Skopje is to improve the quality of the products and services offered to its existing clients and to attract new clients, as well. Driven by the strategic aims and objectives and the successful operation during the passed period, in 2008 as well, Komercijalna Banka AD Skopje continued with implementation of interest rate policy of lower interest rates for clients who regularly service their obligations and those which had been identified as first-class clients, which led to growth of the credit portfolio of legal entities of about 34% compared to The number of clients in 2008 was increased for more than 16%, thus confirming the efforts of the Bank for diversification of the credit risk and support to small- and medium-size enterprises. In the domain of the lending to legal entities, the activities of the Bank were directed towards providing short-term credit assets for supporting their current operation and simultaneously approving long-term loans. The largest part of the loans, or over 98%, was approved from the Bank s own assets, while the rest was approved from the proceeds of the credit lines placed through the Bank. Following the practice from the previous years, in 2008 also, in cooperation with the Macedonian Bank for Development Promotion, the Bank continued to support and monitor the clients approved projects from the credit lines. In cooperation with the Ministry of Finance of the Republic of Macedonia, the Bank approved loans from the funds of the International Fund for Agriculture Development (IFAD) through the Agriculture Credit Discount Fund Project for financial services in agriculture, where MKD 183,739 thousand were placed. In 2008, the structure of the Bank s credit portfolio by sectors was in accordance with the proportions set out for the risk diversification by sectors, in accordance with the Credit Policy of the Bank. Structure of the credit portfolio by industries as at Business and other services 2.0% Catering and tourism 1.4% Agriculture 4.5% Transport 6.0% Construction 13.1% Other 9.5% Manufacturing 32.4% Trade and finance 31.1% 25

26 INTERNATIONAL BANKING According to its results achieved, Komercijalna Banka AD Skopje had again confirmed its continuous and successful participation in the domain of the international banking, efficiently meeting the needs of its clients, positioning itself as a safe and reliable partner for active introduction of its clients in the international trade. The Bank has established highly professional correspondent relations with 786 banks from 76 countries in the world, which are completely put in the function of the Macedonian companies, thus enabling them to have easier and more successful access to the global market. The quality that is permanently offered by the Bank in the segment of international banking mainly due to the permanent researches for improvement and unification of the banking practice in regards to the local and international law regulations, as well as to its determination for maintenance of highly professional human capital. Payment Orders (in million EUR) , , Collections Payments Total The permanent increase of this payment instrument, partly due to the increased volume of operation of the existing clients and partially as a result of attracting new clients, and it represents the largest source of income for the Bank in the segment of the international banking. Letters of Credit (in million EUR) , ,659.1 As a result of optimization of its personnel and organizational structure, as well as of its reputation abroad, Komercijalna Banka AD Skopje has continually been increasing its capacity in the offer of different consulting services and providing support to export financing. Import Letters of Credit Export Letters of Credit International payment operation Having in mind the growing trend of income realized by payment instruments, the international payment operation is one of the key activities of the Bank, which in 2008, compared to 2007, is as follows: Use of letters of credit as a payment instrument and security of payments shows a stable trend. The difference at export letters of credit in terms of 2007 is due to the extraordinary growth in 2007 arising from financing large capital projects. The sensitive nature and complexity of the documentary credit operation, 26

27 especially of the operation with letters of credit, requires active knowledge of the generally accepted rules and standards in the international trade, transport, forwarding and insurance. Its long experience and expertise in the domain of international banking, is used by the Bank to provide consulting services to its clients in all phases of international trade. In order to realize optimal realization of the import-export transactions and minimization of all types of risks, the Bank offers consultant services on the way of defining and concluding international contracts, conceiting financial constructions, preparing terms and conditions for letters of credit, producing draft-text and providing assistance in preparation of the export documentation. Documents for collection (in million EUR) Letters of Guarantee (in million EUR) Payment L/G-s Performance Bonds Export L/G-s The value decrease shown with the issued FX guarantees, is a result of the increased trading without security instruments provided by the Macedonian companies, due to their mutual confidence with their foreign partners. The increase shown with the export Letters of Guarantee is mainly as a result of the increased export activities of the Macedonian companies In 2008, Komercijalna Banka AD Skopje continued approving foreign currency loans, both from its own resources and from the credit lines proceeds. The increase of value of the export documents for collection is a reflection of the increased number of clients, increased level of operation and trust of our clients with their foreign partners, as well as of the level of specialization in the domain of the international trade. Export-trade financing Export Value of the FX letters of guarantee issued in 2008 is presented bellow: In the course of the reported period, the Bank approved total 11 short-term and long-term loans from its own resources, in total amount of EUR 25.4 million, out of which 3 short-term loans in total amount of EUR 6 million and 8 longterm loans in the total amount of EUR 19.4 million. During 2008, the Bank approved total eight short-term and long-term loans in the total amount of CHF 21 million, out of which four short-term loans in the total amount of CHF 19.4 million and four long-term loans in the total amount of CHF 1.6 million. One short-term foreign currency loan in the amount of USD 1 million and one short-term revolving foreign currency 27

28 loan in the amount of USD 5 million, were also approved. The Bank approved one foreign currency loan out of the Revolving Fund credit line of the Council of Europe Development Bank in the amount of EUR thousand. Having in mind the global crisis that is expected to spread over our economy, during the next year, the Bank is expecting a process of more intensive approval of loans out of the proceeds from the credit lines. In 2008, Komercijalna Banka AD Skopje continued its activities related to forfeiting the claims under international trade operations instruments. Thus, despite forfeiting of claims under Letters of Credit, the Bank also forfeited claims under guarantees, or there were seventeen cases of forfeiting under Letters of Credit made in the total amount of EUR thousand and USD thousand. LIQUIDITY MANAGEMENT In the course of 2008, Komercijalna Banka AD Skopje achieved optimal level of its denar and foreign currency liquidity, which enabled smooth realization of the financial activities and fulfillment of the legal obligations. Treasury bills In accordance with the conditions for realization of the Central Bank s treasury bill auctions and the Bank s policy for liquidity management, in 2008, the Bank was buying treasury bills on its behalf and for its account in the total amount of MKD 49,300 million, which is for MKD 29,301.4 million more than the treasury bills bought in At the same time, the treasury bills bought at the secondary market were in the amount of MKD 250 million. Government bills The Bank participated at the auctions for government bills on its behalf and for its account and bought government bills in the amount of MKD 940 million (in 2007, the government bills bought amounted in 2,709.1 million). The government bills bought on the secondary market were in the amount of MKD 2 million. Government bonds At the bonds auctions held in the course of 2008, the Bank bought government bonds on its behalf and for its account in the amount of MKD 200 million (in 2007, the government bonds bought were in the amount of MKD 290 million). Placements with domestic and foreign banks In 2008, the average statement of the foreign currency assets placed with foreign banks was EUR million, which is for 30.4% less than the average amount of foreign currency assets placed in 2007 (EUR million). Deposits placed with foreign banks (in million EUR) ,9 28

29 Internal FX market The total turnover realized in 2008 at the internal FX market of Komercijalna Banka AD Skopje was EUR 1,731 million. Compared to 2007, when the internal FX market turnover amounted in EUR 1,697 million, there is an increase of 2% realized in the reported period. In the course of the year reported, the Bank concluded total 66,773 FX purchase agreements, which compared to 2007 when total 74,242 FX purchase agreements were concluded, means 7,469 FX purchase agreements or 10% less. The share of Komercijalna Banka AD Skopje in the FX market in the Republic of Macedonia ranged between 20.8% and 32.1%. Internal FX market of KB (in million EUR) ,731 1,697 Purchase/sale of foreign currencies with international and domestic banks (FX transactions) The total turnover realized in 2008 under FX transactions was EUR 1,442.2 million, which is for EUR million or 85.2% more, compared to the turnover of EUR million realized in TRADING WITH SECURITIES Investments for trading In the course of 2008, the Bank kept the investments in shares issued by Fersped AD Skopje, Alkaloid AD Skopje, Ohridska Banka AD Ohrid, Makedonija Turist AD Skopje and Tutunska Banka AD Skopje. As at , these investments in shares intended for trading amount in MKD 22.4 million. Government bonds held to maturity As at , the value of the bonds issued by the Republic of Macedonia and held to maturity is MKD million. Government bonds for trading As at , the value of the portfolio of bonds for trading issued by the Republic of Macedonia is total MKD 8.3 million, out of which the value of the bonds issued under the citizens foreign currency deposits is MKD 2.5 million, while the value of the bonds issued under denationalization is MKD 5.8 million. Treasury bills and government bonds for clients In the course of 2008, and at the treasury bills and bonds auctions, the Bank purchased bills and bonds on its behalf, and for account of its clients in the amount of MKD million. Corporate bonds available for sale As at , the value of the Bank s portfolio was increased for MKD million, as a result of the investment in corporate bills issued by NLB Tutunska Banka AD Skopje. The Bank purchased 5,000 bonds with foreign currency clause and as at , they amount in MKD million. 29

30 Trading with securities In the period , and in conditions of decreased total turnover and oscillations at the Macedonian Stock Exchange, according to the total turnover with securities realized in the amount of MKD 6,514 million (or market participation of 26.4%) and realized 13,216 transactions (or market participation of 30.5%), Komercijalna Banka AD Skopje kept its leading position in the financial mediation at the capital market in all segments of the trading. It is worth mentioning that in 2008, the number of brokerage houses permanently increased, consequently increasing the competition, which had an influence on the decrease of the compensation from trading and take over of part of the market participations. Custodian activities Pursuant to the provisions of the Law on FX Operations, and for the purpose of portfolio investments, purchasing securities in the Republic of Macedonia by non-residents, legal entities and individuals, as at , the Bank keeps total 519 custodian accounts, out of which 143 for legal entities and 376 for individuals non-residents. During 2008, through these accounts non-resident clients made payments for transactions realized at the primary and secondary market through the denar custodian accounts in the total amount of MKD 3,992.3 million, which is for 69.9% less than the turnover realized in the same period At the same time, FX inflow on the foreign currency custodian accounts during the reported period was EUR 74.3 million, which represents 64.6% less inflow, compared to the one realized in The decrease of the volume of realized custodian services for foreign legal entities and individuals is mainly due to the decrease of the turnover realized at the Stock Exchange and decreased presence of and less trading with securities by foreign entities. During the last quarter in 2008, the Bank started to provide bank custodian services for three domestic investment funds. The unfavorable conditions at the capital market in the course of the previous year, as well the fact that the funds are at the initial phase of their operation, resulted in small amounts of assets the investment funds are managing with, which consequently confirmed the expectations for small income for the Bank during the first few months of proving this services. These conditions are expected to be improved with the increase of the funds assets. At the same time, in December, and upon completion of the comprehensive preparations, the Bank started with the realization of one agreement for providing bank custodian services on the property of one foreign bank, having the function of sub-custodian on the property for the local capital market. RETAIL BANKING OPERATIONS Citizens deposits As at , the total citizens deposits with Komercijalna Banka AD Skopje are MKD 33,146,971 thousand and compared to the statement as at , when they were MKD 29,947,075 thousand, they show an increase of 10.7%, thus continuing the trend of deposits increase noted for several years in a row. Total citizens deposits participate with 72.4% in the deposit base of the Bank s clients, and their participation in the total resources is 60.1%, being basis for realization of the deposit function of the Bank. As for the maturity structure of the citizens deposits as at , demand deposits participate with 36.2%, while time deposits participate with 63.8%. 30

31 The time deposits show an increase in terms of the demand deposits, mainly due to increase of the interest rates on the time savings deposits. In 2008, participation of the FX demand deposits in the total citizens deposits increased to 62.5%, compared to 59.0% in Maturity structure of the citizens deposits Lending to citizens As at , the total credit exposure towards citizens amount to MKD 7,499,973 thousand, and compared to the total credit exposure as at in the amount of 5,774,677 thousand, it shows an increase of 29.9% % 41.2% 63.8% 58.8% In 2008, the Bank approved total 12,482 loans in the total amount of MKD 2,984 million, being a decrease of the number for 5%, and increase in the value of the newly approved loans for 30%. Demand deposits Time deposits The table below illustrates the lending activities of the Bank in relation to citizens, by volume, amount and type: Loans approved to citizens (in thousand MKD) PURPOSE Index No. Amount No. Amount 2008/2007 Loans with identified purpose for purchasing immovable property and construction , , Loans for cars 59 38, , Scholarship loans 45 4, , Loans through merchants 215 8,767 / / / Cash loans with no purpose identified 10,848 1,991,102 11,941 1,721, Loans upon pledge of deposit , , Loans upon pledge of securities 4 39, , Loans with no purpose identified under mortgage on real estate and draft 67 79, , Short-term loans , , Total: 12,482 2,983,681 13,166 2,287,

32 In accordance with its determination to be closer to its clients and their needs, as well as based on following the market trends, in the course of 2008, the Bank made improvement of the terms and conditions of the existing credit products and introduced new credit products for individuals, such as: loans through merchants, frame revolving credit limit with validity period of 5 years where on the basis of the appraised security (mortgage on real estate) and the limit set, the Bank approves loans and other types of credit exposures (credit cards, guarantees etc.) depending on the credit ability of the client, and housing and mortgage loans without identified purposes with EUR clause with favourable interest rate and repayment period. Current accounts Operation with current accounts constantly shows increase, whereas in the period the Bank opened total 89,639 new transaction accounts, and only in the last quarter of 2008 there were over 15,000 new accounts opened for the inflows under pensions in accordance with the provisions for payout of pensions through transaction accounts instead of delivery of pensions at home address. In 2008, there was a trend of increasing the number of accounts with positive balance, thus, the total amount of positive balance on the transaction accounts was increased for 78% in terms of 2007, while on the other side, there was significant decrease of the amounts of overdrafts. This was mostly due to the law provisions, according to which all inflows must be received on the transaction accounts, as a result of which a great number of accounts with overdrafts and accounts having stand by status were settled. In the course of 2008, the total inflows on the transaction accounts were MKD 66,191 million and were increased for 200%, mainly as a result of the increased number of companies paying salary to their employees through current accounts. The total placements on current accounts as overdraft facility are increased for 53%, while utilization thereof is increased from 29.3% in 2007 to 30.5% in In this segment of operation, due to termination of issuance of guaranteed cheques pursuant to the Decision of the Government and in order to meet the clients demands in 2008 the Bank was engaged in designing a solution for conclusion of service agreements with companies for opening standing orders for execution of payments from the transaction accounts. Thus, companies can sell their services to clients with a possibility for payment in instalments collectible from the transaction accounts upon concluded standing order. In 2008, the number of users of e-banking for individuals was increased and as at , there were total 6,460 users of the service of following the statement of accounts through Internet bank, while 1,135 clients were given subscription for the service providing payment through the Internet Bank. 32

33 CARD OPERATION In 2008, the Bank s operation in this domain was in accordance with the strategy for strengthening the leading position on the banking market in the country. So, the card operation was focused on increasing the number of holders of all types of cards, increased turnover, extension of POS terminals network, increased number of ATMs and increased number of users of all types of debit and credit cards. Also, in 2008 the Bank continued the process of implementation and realization of the project for issuance of Visa cards, accomplishing a great deal of preparatory activities and in July the first Visa cards of Komercijalna Banka AD Skopje were issued. The issuance was commenced with Visa Classic Standard cards and after that it continued with Visa Electron and Visa Classic Revolving. In October, the first Visa cards for legal entities Visa Business Revolving were issued in a pilot phase, and in the course of 2009 the Bank plans to issue new products. Apart from the Visa cards, the Bank started activities for issuance of debit cards for non-residents, for the purpose of increasing its portfolio of products. Card issuing In the course of 2008, the Bank went on with continuous increase of the number of issued cards. Thus, as at , the total number of cards is 207,641, which is 42% more than in Maestro cards show the highest increase, as well as the credit cards MasterCard Revolving and MasterCard SP Co-branding. In the course of 2008, there were total 5,171,560 transactions realized in the total value of MKD 15,615 million. Compared to the total number of 2,688,271 transactions realized in the course of 2007 were in the total value of MKD 8,341.7 million, it means that there is an increase of 92% of the number of transactions, while their value is increased for 87%. This indicates that the Bank had a very successful year in the cards operations and it strengthened its leading position in the domain of cards operations at the banking market in the country. Cards structure Payment cards for legal entities Debit cards for individuals 1,533 1, , , Credit cards for individuals 50,727 42,979 33

34 Card acquiring Regarding card acquiring, up to , the Bank had total 6,856 points of sale opened, which is an increase of their number for 26%. In order to meet its clients needs, up to , the Bank established a network of total 115 ATMs installed. There are total 4,771,516 transactions realized through the Bank s network with total value of MKD 15,453.9 million, being an increase of 75.6% regarding the number and 77.0% regarding the value of the transactions realized, in regards to the previous year. Number of transactions through the Bank s network Trade (goods and services 947,044 1,467, ATMs 1,763,726 3,299,364 Bank counters 4,251 5,754 DOMESTIC PAYMENT OPERATIONS In 2008, the Bank continued to realize excellent results in the domain of domestic payment operations, thus firming the leading position in the banking sector of the Republic of Macedonia. In the reporting period, the Bank processed total 18,558,445 financial transactions for legal entities and individuals, being an increase of 26% in relation to the same period last year. The realized participation of the Bank in the total number of transactions realized in the country is 24.6% The beginning of 2008 was characterized by the successful completion of the reform of the domestic payment operations, when pursuant to the amendments of the law regulations the accounts of individuals were transferred to ERTS, i.e. opening transaction accounts of individuals having any denar product with the Bank. This amendment made the Bank take the first place in the banking system in terms of the number of opened accounts. Regarding the total number of accounts opened for legal entities the, the Bank has the leading place in the total banking sector with participation of 24.5%. Total processed transactions Legal entities 5,412,811 9,086, Individuals 7,484,013 7,557,971 Issued statements of accounts 1,987,802 1,703,425 34

35 Realization of payments through the transaction accounts of individuals has significantly contributed to decrease of the cash payouts at the Bank s counters, and contributed to increased utilization of the offered alternative channels for noncash payment, e-banking, standing orders for payment of bills for public utilities etc., which enable cheaper and simpler access to the funds. Introducing the transaction accounts of individuals provided increase of the volume of processed non-cash transactions initiated by legal entities for 99%. The number of the transactions processed through the transaction accounts of individuals shows an increase of 149%. Total number of processed non-cash transactions for legal entities ,048,599 3,536,498 The number of users of e-banking in 2008 shows an increase of 152%. In 2008, the number of legal entities that used e-banking to follow the statement of accounts is 11,632, out of which 1,337 clients exercise payment transactions as well. On the other side, the number of individuals that used the system to follow the statement of accounts is 25,921, out of which 2,066 clients also execute payment transactions on Internet. The number of realized electronic orders shows an increase for about three times more than in 2007, while the realized turnover shows an increase of 66% in terms of 2007 and is in the amount of MKD 104,034.8 million. Turnover realized through electronic orders (in million MKD) ,035 For the purpose of decreasing the financial burden of companies, in conditions of general financial crisis, which hit the world in September and October, the Bank lowered the fees in the non-cash denar payment operations. Following the needs of clients, in the reporting period the Bank offered additional services such as various types of insurance policies, quick money transfer through the service Western Union which shows an increase of 56% compared to 2007, as well as joining and sale of documents for stake in the opened investment funds Ilirika Southeast Europe and Ilirika Global Emerging markets. MARKETING ACTIVITIES 62,601 In the course of 2008, the Bank conducted many activities within the marketing mix of the Bank (products, promotion, marketing research and distribution channels). In the domain of marketing research, and in order to improve the quality of services and products offered by the Bank to its clients, the Agency Brima Gallup 35

36 International conducted research of the banks in the Republic of Macedonia, and in order to determine the quality level of services provided by the counter officers, there was research conducted by using the method of mystery shopping in 15 citybranches in Skopje and 4 city-branches throughout the Republic. In the part of distribution channels, the Bank commenced the activities for standardization of the classical distribution channels (citybranches and branches) in order to improve the image of the Bank and to realize easier distinction thereof, as well as activities for standardization of the internal and external forms of the Bank. Concurrently, the process of re-branding the ATMs on the territory of the overall country was commenced. The Bank followed the needs of clients and created products and services accordingly. Introduction of new products and services was supported by appropriate marketing campaigns, out of which worth mentioning are the following campaigns: Increased interest rates for deposits, the campaign There is no place like home, the campaign Avoid the queue for the purpose of increasing the use of internet banking, ATM s, info kiosk, standing orders and alike and the campaign Excellent news! Reduced costs in the domestic payment operations up to 66% and Excellent news! Increased interest rates of deposits from At the end of the year the Bank launched the campaign for the new Visa credit and debit cards with the slogan The Right Visa for you. Besides that, in cooperation with MasterCard and Maestro the Bank organized the prize winning game Komercijalna Banka AD Skopje takes you to EURO 2008, and for the needs of merchants having installed its POS terminals, the Bank organized a oneday seminar with the topic: Payment with cards challenge for the modern business. In order to keep the clients informed the Bank regularly updated the existing brochures, printed leaflets for many products and made design of the leaflets for the new credit products. In the reporting year, the Bank was constantly updating its web site, info kiosk and info center. Komercijalna Banka AD Skopje is responsible towards the society in terms of achieving common welfare for everyone. In accordance with its Program for approving sponsorships and donations, the Bank continuously confirms its responsibility through the support given to many organizations, events and activities from the domain of sport, art, scientific- research, publishing activity and conferences, social areas etc. INFORMATION & COMMUNICATION TECHNOLOGY In the course of 2008, the activities in the domain of the Information Technology of the Bank contributed to advancement of the operation by following the modern trends in banking and harmonization with the law regulations. In that term, the IT Division realized the following projects: - Upgrade of the Bank s integrated information system according to the NBRM Decision for implementing Methodology of evidence and evaluation of accounting items and preparation of financial reports. - Development of new software solution according to the NBRM Decision for new advanced credit register and implementation of new approach for digital transfer from/to NBRM. 36

37 - Implementation of new methodology for evaluation of credit risk with implementation of more sophisticated analysis for credit portfolio classification; - Implementation of HW/SW platform for Business Intelligence solution for Risk Management and IFRS reporting; - Implementation of HW/SW platform to support Bank s activities as Custody Bank for investments and pension funds, to manage private portfolios of resident and nonresident clients; - Development and implementation of the following application solutions: Record keeping, calculation of points and pulling out the winners in MasterCard prize winning game Komercijalna Banka AD Skopje takes you at EURO 2008 ; Plastic Inventory Control; Records on the Bank s suppliers and buyers; Payment of bills for cable TV and internet services (On.Net, CableTel) at the Bank s tellers and via internet; Acceptance of lump sums and scheduled payments and purchase of stakes for the following investment funds: Ilirika, Moj Fond and KD Fondovi; Issuing insurance policies for the following insurance companies: Insig and Osiguritelna polisa; Electronic acceptance of PP53 orders (gross salary) from KIBS at the Bank s tellers and via internet, their procession and execution; Approval and administration of new types of loans for individuals: House mortgage loan in domestic currency with variable rate, Family car loan, Loan with identified purposew without endorser, Tiptop loan with identified purpose, Loans for land construction, Loans for individuals with grace period, introduction of frame revolving crefit limit fot individuals; Acceptation and processing of foreign currency order for domestic legal entity and non- resident users; Review of all payments on all POS terminals at one merchant; Automatic approval of permitted exceeding on the transactional accounts; Execution of orders for enforced payment from transaction accounts; Generation/acceptation and processing of PP32 (MT102) which is collective payment from one to many customers; ICT systems alerting trough SMS; SMS notification in case of produced, expired and renewed plastic card; - Several huge migrations has been carried out: Migration of core banking databases from Microsoft SQL2000 to Microsoft SQL Server 2005; Card payment system data migration from the old to the new storage DS and at the new AIX p-series servers; Joining the Bank to Visa International, making certification with Visa International for accepting Visa cards at bank s ATMs. The system has been released in production. Certification of ATM s fraud module was completed, introduced new Visa products in the Bank s operation: Visa Electron, Visa Classic Standard, Visa Classic Revolving and Visa Business Revolving and the regular quarterly reports were prepared; - Replacement of WAN routers was done in all branch offices and affiliates and new services were implemented like: Encryption of network traffic, Quality 37

38 of Service, Network administration via SSH channel, Improvement of security of WAN network, integration of corporate computer network and video surveillance network; - Implementation of entire virtual IT infrastructure (servers and management console) based on VMWare technology for resource hosting; - Replacement of recording devices (DVR) in all branch offices and affiliates for unification, consolidation and optimization of Video Surveillance system; - Implementation of production environment for Dial-up POS terminals Hypercom TA4210 and LAN POS terminals Verifone Vx510. They are installed at the end users location; - Installation of Symantec Brightmail Gateway (Symantec Mail Security 8340 Aplliance) and Symantec Endpoint Security in corporate computer network; - Graphic screens for ATMs were made and ATMs were configured to support them, as well as video advertising materials. HUMAN RESOURCES In these contemporary living and working conditions, human resources are among the principal criteria and factors that define the competition of the companies. Accordingly, Komercijalna Banka AD Skopje is among the leading banks in the region. The activities of the Bank s management directed to permanent increasing and improving the knowledge and qualification of the employees are understandable. The investment in the development of the human resources provides qualitative return that influences the increased financial performances. The Bank s employees are permanently provided different forms of professional training in the country and abroad. In the course of 2008, 214 employees attended or participated in different courses or seminars in the country and abroad. As at , the total number of the Bank s employees is 1,224. The tendency of the Bank s management is aimed towards permanent improvement of the qualification structure and increased participation of young and highly qualified personnel therein, as well. Therefore, the Bank is stimulating its personnel for acquiring higher levels of education post graduation and doctorate studies by its significant participation in financing thereof. Following the law regulations and new trends in operation and the new achievements in the sphere of business, economy and banking are realized by providing professional literature available to all employees of the Bank. CORPORATE SOCIAL RESPONSIBILITY In the course of 2008, Komercijalna Banka AD Skopje paid significant attention to its environment, social and economic issues, which were part of the analysis of the operative risks, in order to identify and incorporate the new values, such as non-financial performances of the Bank in its operation with clients, employees and the community in which it realizes its mission. The Bank has not defined a strategy for corporate social responsibility, however, it continuously realizes its principles incorporated in the Bank s Statute, Code of Ethics and Standards for compliance of the Bank s operation with the law 38

39 regulations, making and implementing policies, decisions and procedures. By undertaking activities for implementation of the policies and legal obligations, as well as activities which are part of the annual programs incorporating principles for corporate social responsibility (CSR) of the United Nations, the Bank wants to create conditions for: - analysis of the benefits from the consistent investment in the society; - improvement of the management informing for the purpose of building a strategy for investment in the society; - initiation of debate on investing in the society; - determination of the key values to be supported in its activities in the society and - improvement of the internal communication. 1. Protection of the human and employees rights Policies In the period the Bank adopted several policies and decisions having incorporated and defined the Bank s attitudes in accordance with the law regulations and international standards for protection of the employee s and human rights, as follows: - Operative Risk Policy; - Policy on Relationships with Foreign Suppliers; - IT Security Policy; - Policy on Sponsorships and Donations; - Policy on Data and Reports Disclosure by the Bank; - Legal Risk Policy; - Reputation Risk Policy; - Rules and Principles for Protection of Personal Data in Komercijalna Banka AD Skopje; - Code of Conduct for the employees; - Two decisions on amendments and supplements to the Collective Agreement for the purpose of harmonization with the Law on Labour Relations; - Program for professional training of the employees of Komercijalna Banka; and - Decision on improving the working conditions and renovation of premises. Activities In the course of 2008, the Bank mainly implemented the amendments and supplements to the law regulations from the sphere of labour relations and protection at work. The following activities were undertaken: - Amendments of the organizational structure in order to achieve better functionality, mobility of the labour and definition of the hierarchical responsibility; - Training of employees for protection at work; - Activities for reconstruction and rehabilitation of the offices in order to improve the working conditions; and - Medical examinations of the employees. Training Having into consideration the principle that the Bank has staff of the highest expertise and integrity, the following activities were undertaken in the course of 2008: employees were sent to professional training in the country and 98 employees were sent abroad; - 53 employees attended foreign language courses 39

40 - 12 employees were approved funds for postgraduate and doctorate studies; and employees obtained Certificate for the needs of performing foreign exchange operations. The Bank also organized internal training from the domain of information security and protection at work. As a result of the long cooperation with educational institutions, in 2008, the Bank arranged training for 208 students from many faculties and organized training for foreign currency operations in high schools of economics. The Bank awarded 5 scholarships for the school year 2008/2009. For the purpose of strengthening the organizational culture and enhancement of the communication skills, in 2008, the Bank realised internal training for 182 employees from eight branches of the Bank throughout the Republic. Through the self-assessment process and by finding the key values the employees managed their prejudices, built an attitude for the personal and social responsibility and were informed of the language strategic use. In the next period, it is planned to continue the training cycle with practical management of conflicts, role of confidence and why the organizational culture is important for the organization and its good practices in communication with clients. As a result of the training and the questionnaires filled in by the employees, it is concluded that most of the employees consider themselves open to accept changes, without prejudices and that each employee in the organization is responsible for the organizational culture, which is a good base of attitudes for further strengthening and incorporating values. Donations In the past period, when the existential and social problems became more emphasized, employees in the Bank s branches showed a high level of responsibility and social consciousness manifested through humanitarian activities. In the course of 2008, the Bank received many requests for donations. Pursuant to the Policy of Sponsorships and Donations, last year the Bank approved funds for medical treatment of 26 persons. The Bank has a long practice of donating fix assets free of charge. Last year it donated: obsolete equipment, furniture, computers and computer equipment to schools, hospitals and other public institutions. Informing The Bank s Intranet site provides all the necessary information on the regulations and decisions necessary for successful accomplishment of duties of the employees, improvement of their informing regarding donation activities of the employees, training courses and important events for the Bank. In 2009, it is planned to open forum where employees could take active part in creation of opinions on different issues from all areas of the Bank s operation, and at the same time, by expressing their points of view, to make influence on the level of loyalty, trust and organizational culture. Having in mind that out of 1,224 employees, 74% are women, and 64.8% of the management structure is composed of women, it may be concluded that the Bank has no problem with equality of sexes and that women have essential leading positions in the Bank. 40

41 2. Management of sustainable development Realization of the mission to be a highly profitable institution, recognized as a leading, independent, private Macedonian bank which offers a universal range of services and enjoys good international reputation, professionally supported by a strongly market-oriented and skilful management, means sustainable development of the Bank for a long period. While realizing its aims and objectives set, the Bank does not only consider the profit, but it also takes into account the principles for protection of rights of its shareholders and clients, informing them of its products and services continually. For that purpose, the Bank has established a contact center, which in 2007 started with probation use of a telephone software. So, in the course of 2008, there were total 5,229 calls received, mostly made by citizens interested in the products and services of the Bank and there were 4,156 calls made by the Bank in order to inform its clients of collection of claims, new credit products and winning games, to remind its clients about unsettled liabilities and to notify its clients on approved loans. In 2008, the Bank kept its practice of visiting its potential and existing clients. This way of direct communication and need of closer relation of the Bank with its clients is imposed by the market, having in mind the new trends of customer care and the more aggressive approach of the competition. The main purposes of the visits are as follows: - attracting the potential clients; - maintaining the relationships with the existing clients and checking the level of satisfaction; - following the activities of the competition and response to the competition offers; - promotion of new products and services and cross sale; - research regarding the need of introducing new products and services; and - cooperation with clients in the phase of development of new products. Upon the information received from the visit, the Bank prepares complete offers for the clients regarding cooperation with the Bank, in accordance with the clients demands and needs set. Monitoring of the operative risks Monitoring of the operative risks is the most significant segment in realization of sustainable development of the Bank. Therefore, apart from the other parameters in implementation of the Reputation Risk Policy, the information from media are also taken into consideration which could have positive or negative impact on the Bank s reputation, as well as information from other media used by the Bank for communication with citizens and following their opinions on the Bank s operation Media Total Answered questions of 93 media Answered questions 122 received on the electronic contact address Communications and 25 notifications sent to media Complaints, compliments 111 and reactions of citizens Infokiosk 26 41

42 3. Environment protection The environment protection is incorporated in the Credit Policy of the Bank, on the basis of which the Bank defines the level of the environmental risk for each loan application. The Bank follows the directions of EBRD and the Guidelines for environment procedures. The frame credit lines of the Bank refer to financing projects from the domain of the energetic efficiency and renewable sources of energy, in cooperation with the World Bank and MBDP, as well as with the Agency for Energetics of the Republic of Macedonia, which is responsible for the technical part of the projects. 4. Corruption and money laundering prevention In the course of 2008, pursuant to the legal obligations and recommendations of FATF, the Bank adopted new Program for prevention of corruption and Program for prevention of money laundering, implemented Guidelines for measures and activities for money laundering prevention for all divisions and policies for undertaking appropriate activities. The Bank s Compliance Control and Money Laundering Prevention Department is responsible for system implementation and follow of all the activities connected with money laundering and corruption. In the reporting period, the Department worked out a plan for training of the employees regarding anticorruption measures in the Bank, and a part of the training shall be realized in The system established for prevention of money laundering and corruption prevention in the Bank was assessed by the Internal Audit. In the combat against corruption and money laundering the Bank cooperates with all competent institutions. All the Bank s employees have been informed and must obey and follow the rules for combat against all forms of bribe and corruption which are incorporated in the new Code of Ethics, passed in

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45 AUDITORS REPORT For the year ended 31 December

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47 Independent auditor s report PricewaterhouseCoopers REVIZIJA DOO ul. Marshal Tito 12, "Palata Makedonija" IV floor 1000 Skopje Republic of Macedonia Telephone +389 (02) (02) (02) Facsimile +389 (02) To the Shareholders of Komercijalna Banka AD - Skopje We have audited the accompanying financial statements of Komercijalna Banka AD - Skopje, which comprise the balance sheet as of 31 December 2008 and the income statement, statement of changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 47

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49 Financial statements for the year ended 31 December 2008 Income statement Notes Year ended 31 December Interest and similar income 5 3,886,908 3,123,544 Interest expense and similar charges 5 (1,309,455) (1,001,630) Net interest income 2,577,453 2,121,914 Fee and commission income 6 899, ,776 Fee and commission expense 6 (135,191) (113,894) Net fee and commission income 764, ,882 Dividend income 7 20,119 8,106 Foreign exchange gains (net) 101, ,667 Net trading (loss)/income (16,442) 76,279 Other operating income 8 301, ,257 Administrative expenses 9 (722,182) (705,223) Other operating expenses 10 (1,001,830) (840,656) Impairment charge for credit losses 11 (487,004) (763,346) Operating profit 1,537,178 1,065,880 Share of gain from associate 14,174 3,621 Profit before income tax 1,551,352 1,069,501 Income tax expense 12 (172,685) (57,613) Profit for the year 1,378,667 1,011,888 Basic earnings per share Diluted earnings per share

50 Financial statements for the year ended 31 December 2008 Balance sheet Notes At 31 December ASSETS Cash and balances with the National Bank of Republic of Macedonia 14 7,708,973 7,364,628 Treasury and other eligible bills 15 3,353,838 3,191,943 Financial assets at fair value through profit or loss ,781 1,003,542 Loans and advances to banks 17 5,550,640 13,833,618 Loans and advances to customers 18 35,048,476 24,588,063 Investment securities , ,981 Investments in associates 20 49,693 35,520 Property and equipment 21 1,582,488 1,448,151 Investment property 22 8,488 57,855 Intangible assets 23 40,191 41,233 Other assets ,138 1,002,561 Deferred income tax assets Total assets 55,099,366 52,864,703 LIABILITIES Deposits from banks 25 1,572, ,918 Other deposits 26 45,769,870 45,272,556 Borrowings ,103 1,065,592 Current income tax liabilities 62,649 9,665 Provisions , ,595 Other liabilities , ,063 Total liabilities 48,840,074 47,604,389 SHAREHOLDERS EQUITY Share capital 33 2,014,067 2,014,067 Share premium 109, ,026 Retained earnings 1,373,346 1,140,837 Statutory reserves 34 2,653,136 1,886,667 Other reserves , ,717 Total shareholders equity 6,259,292 5,260,314 Total equity and liabilities 55,099,366 52,864,703 50

51 Financial statements for the year ended 31 December 2008 Statement of changes in equity Share capital Share premium Treasury Shares Statutory Reserves Other reserves Retained Earnings Total equity Balance at 1 January ,014,067 32,146 (121,651) 1,468, , ,911 4,380,138 Net profit for the year ,011,888 1,011,888 Total recognized income for ,011,888 1,011,888 Dividends (330,243) (330,243) Transfer to statutory reserve ,719 - (417,719) - Treasury shares acquired Treasury shares sold - 76, , ,531 Balance at 31 December ,014, ,026-1,886, ,717 1,140,837 5,260,314 Balance at 1 January ,014, ,026-1,886, ,717 1,140,837 5,260,314 Net profit for the year ,378,667 1,378,667 Total recognized income for ,378,667 1,378,667 Dividends (379,689) (379,689) Transfer to statutory reserve ,469 - (766,469) - Balance at 31 December ,014, ,026-2,653, ,717 1,373,346 6,259,292 Detailed information is provided in Notes 33 and

52 Financial statements for the year ended 31 December 2008 Cash flow statement Year ended Notes 31 December Cash flows from operating activities Profit before tax 1,551,352 1,069,501 Adjustments for: Depreciation of property and equipment and amortization of intangible assets , ,927 Gain on sale of property and equipment 8 (11,593) (3,003) Loss on sale of collected collateral 10 18,953 22,529 Decrease in value of assets acquired through foreclosure procedure 10 12,677 - Depreciation of investment property ,844 Impairment losses , ,346 Dividend income 7 (20,119) (8,106) Interest income 5 (3,886,908) (3,123,544) Interest expense 5 1,309,455 1,001,630 Net trading income 16,442 (76,279) Share of gain from associate (14,174) (3,621) Interest and commission receipts 3,658,396 2,975,223 Interest paid (1,193,126) (779,359) Cash flows from operating profits before changes in operating assets and liabilities 2,116,132 2,017,088 (Increase)/Decrease in operating assets Restricted accounts (13,788) (25,320) Current accounts with foreign banks 67,819 12,776 Balances with NBRM 908,888 (1,960,184) Financial assets at fair value through profit or loss 780,761 (920,368) Placements with and loans to banks 8,282,978 3,503,619 Loans and advances to customers (11,009,469) (7,872,149) Other assets 26,423 16,393 Increase/(Decrease) in operating liabilities Deposits from banks and other financial institutions 779, ,518 Amounts owed to other depositors 497,314 8,496,783 Other liabilities (15,217) (10,329) Net cash from operating activities 2,421,384 3,404,827 52

53 Financial statements for the year ended 31 December 2008 Cash flow statement (continued) Cash flows from investing activities Acquisition of property and equipment (289,850) (236,130) Proceeds from the sale of property and equipment 9,376 9,158 Proceeds from sale of investments 674,203 64,614 Purchase of investments (934,444) (8,741) Dividends received 18,929 4,549 Net cash used in investing activities (521,786) (166,550) Cash flows from financing activities Proceeds from borrowed funds 322,580 1,359,277 Repayments of borrowed funds (438,778) (1,726,536) Treasury shares sold - 198,531 Dividends paid (383,325) (368,813) Net cash used in financing activities (499,523) (537,541) Net increase in cash and cash еquivalents 1,400,075 2,700,736 Cash and cash equivalents at beginning of year 5,018,351 2,317,615 Cash and cash equivalents at end of year 35 6,418,426 5,018,351 53

54 Notes to the financial statements for the year ended 31 December General Information A Introduction Komercijalna Banka AD Skopje (further the Bank ) is a joint stock company incorporated and domiciled in the Republic of Macedonia. The Bank is listed on the Macedonian Stock Exchange under the ID code KMB. The Bank is licensed to perform all banking activities and the main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. In addition, it provides trade finance facilities to companies for export and import purposes. The address of its registered office is as follows: Kej Dimitar Vlahov 4, 1000 Skopje Republic of Macedonia Directors The names of the Directors of the Bank serving during the financial year and to the date of this report are as follows: Chief Executive Officer Chief Operative Officer Chief Financial Officer Liquidity and Financial Market Division Manager Corporate Lending Division Manager International Division Manager Retail Banking Division Manager Hari Kostov Ilija Iloski Maja Stevkova Sterieva Suzana Moskovska Biljana Maksimovska Popovik Vesela Curilova Gabriela Stojanovska Risk management and Planning Division Manager Human resources and General Affairs Division Manager Legal Affairs, Problem Loans Workout and Management Division Manager Information Technology Division Manager Maja Stevkova Sterieva Slavko Razmilik Teodora Guskova Prodanova Zorica Cerepnalkoska Finance Department Manager Violeta Markovska Valjak Domestic Payment Operations Department Manager Vault Operation Department Manager Marketing Department Manager Branch Managing Department Compliance and Anti Money Laundering Department Manager Head of Internal Audit Department Biljana Mitevska Aneta Velevska Jasmina Bucevska Margarita Ognenovska Milica Georgieva Vesna Maslinko 54

55 Notes to the financial statements for the year ended 31 December 2008 B Operating Environment of the Bank The year 2008 was a year with outstanding growth rates compared to the previous few years, and the whole picture of strong domestic demand and increasing investment would have been favourable if it hasn't been the slowdown of fourth quartile, influenced by financial turmoil. Industrial production growth reached double digits and unemployment decreased to 33%, although still high. Still, strong investment growth (reflecting higher foreign direct investment and higher investment in tangible assets), and the high unemployment rate, suggested few capacity constraints in domestic economy and considerable scope for continuing favourable supply response. The slowdown in the world economy especially EU countries as strategic export markets for Macedonian companies put under a pressure the whole operating environment and decreasing of exports, increase of foreign currency outflows of the companies and decrease of foreign individuals remittances inflows. Reduced export demand, falling export prices, and slightly weaker remittances boosted foreign trade deficit over 2 billion EUR and significantly pressed the current account. The year was characterized by increasing inflation, mainly due to external influences and price spill over. Thus it has jumped to around 10% in early 2008, similar to other countries in the region, mostly because of oil, electricity and food price increases. By the end of the year it has stabilized around 8.3%, and combined with higher nominal wage increases a fall in real incomes was prevented. In 2008 the central government budget was in balance, although fiscal policy has been turning expansionary. Tax revenue increased despite substantial tax cuts in previous years, owing to improved tax administration, domestic demand growth (which boosts VAT), and a near-doubling of corporate income tax revenues. During 2008 the growth rate of loans increased to almost 40% annually. In order to protect the system from potential worsening of credit portfolio combined with intention of providing stable macroeconomic indicators NBRM started to undertake various measures and to tighten the monetary policy. NBRM has increased CB bill rates to 7% p.a. (5% p.a. in 2007), raised capital requirements for overdrafts and credit card loans up to 125%, and introduced controls on household credit growth. The measure of inhibiting the retail credit growth continued and by the end of the year the NBRM imposed stricter limits of 11% annual growth on household loans for The denar exchange rate is pegged to euro. Despite the pressure on currency market, Macedonian denar (MKD) has slightly depreciated (0.34%) against Euro in The official EUR exchange rate of NBRM increased from MKD at 31 December 2007 to MKD at December 2008 [and MKD at 26 January 2009], while the foreign currency reserves of Macedonia decreased from EUR 1,524 million at 31 December 2007 to EUR 1,495 million at 31 December It is expected that the current account deficit will be the main risk to continued growth in The forecasts for growth are at 3% with macroeconomic stability and expectations for further slowdown of the world economy. The declining export which has started to fall in second half of 2008, lower foreign direct investments, portfolio investments, and remittances could additionally create pressure on balance of payments. Despite the fact that Macedonian Banks were not directly influenced by the impact of the crisis, the negative impact in the industrial sector is very likely to grow. 55

56 Notes to the financial statements for the year ended 31 December 2008 Additionally recent increases in commercial interest rates and measures of NBRM to limit the credit growth will have strong influence on the banking growth and profits. Yet, liquidity of the banking sector in Republic of Macedonia remains strong, mostly supported by stable private savings. Future economic direction of the Republic of Macedonia is largely dependent upon the effectiveness of economic, fiscal and monetary measures undertaken by the Government and their timely adjustment. It is expected that the protection of the exchange rate will remain priority of monetary policy in The Bank's, management is unable to predict all developments which could have an impact on the banking sector and the wider economy and consequently what effect, if any, they could have on the future financial position of the Bank. Recent volatility in global and Macedonian financial markets. The ongoing global liquidity crisis which started in spring 2008 has mostly resulted in a lower level of capital market funding while liquidity levels across the banking sector remained high. It is expected that there will be no liquidity shocks in domestic banking in Hence, to preserve structural liquidity NBRM has imposed minimum 100% fulfilment of obligatory one and six month liquidity limits. Additionally, starting from 2009 NBRM will organize foreign currency deposits auctions with interest rates equal to those of Central Banks in euro zone, international financial institutions and yields of government bills of countries in euro zone. Impact on liquidity: The funding base of the Bank is mostly dependant on stable deposit base, which is to be under pressure of increasing interest rates bidding by the Banks' that are changing financing strategies. This may influence the costs' of funding, but it is not expected to have significant influence on the deposit base. Impact on customers/borrowers: The Bank s clients both the borrowers and depositors may be affected by declining market consumption which could in turn impact their liquidity and their ability to repay the amounts owed or deposits placed with the Bank. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments. Impact on collateral (especially real estate): The amount of provision for impaired loans is based on management's appraisals of these assets at the balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Macedonia for many types of collateral, especially real estate, has not been severely affected by the recent volatility in global financial markets since the supply of real estate especially residential is still lower than demand. Nevertheless, expected lower incomes of households and possible lower liquidity of companies in 2009 may decrease liquidity for certain types of assets. As a result, the actual realizable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. Fair value of financial assets and liabilities: The fair values of quoted investments in active markets are based on current bid prices (financial assets) or offer prices (financial liabilities). If there is no active market for a financial instrument, the Bank establishes fair value using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and 56

57 Notes to the financial statements for the year ended 31 December 2008 other valuation techniques commonly used by market participants. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date management has reviewed its models to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads. 2 Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below: A Basis of presentation The financial statements of Komercijalna Banka AD - Skopje have been prepared in accordance with International Financial Reporting Standards (IFRS) and are presented in Macedonian Denars (MKD). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets held at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Those areas where assumption and estimates are significant to the financial statement are disclosed in Note 4. (a) Adoption of New or Revised Standards and Interpretations Certain new interpretations became effective for the Bank from 1 January 2008: IFRIC 11, IFRS 2 Bank and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007); IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008); These interpretations did not have any significant effect on the Bank s financial statements. Reclassification of Financial Assets Amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures and a subsequent amendment, Reclassification of Financial Assets: Effective Date and Transition. The amendments allow entities the options (a) to reclassify a financial asset out of the held to trading category if, in 57

58 Notes to the financial statements for the year ended 31 December 2008 rare circumstances, the asset is no longer held for the purpose of selling or repurchasing it in the near term; and (b) to reclassify an available-for-sale asset or an asset held for trading to the loans and receivables category, if the entity has the intention and ability to hold the financial asset for the foreseeable future or until maturity (subject to the asset otherwise meeting the definition of loans and receivables). The amendments may be applied with retrospective effect from 1 July 2008 for any reclassifications made before 1 November 2008; the reclassifications allowed by the amendments may not be applied before 1 July 2008 and retrospective reclassifications are only allowed if made prior to 1 November Any reclassification of a financial asset made on or after 1 November 2008 takes effect only from the date when the reclassification is made. Bank has not elected to make any of the optional reclassifications during the period. (b) New Accounting Pronouncements Certain new standards and interpretations have been published that are mandatory for the Bank s accounting periods beginning on or after 1 January 2008 or later periods and which the Bank has not early adopted: IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity should report such information. Management is currently assessing what impact the standard will have on segment disclosures in the Bank s financial statements. Puttable Financial Instruments and Obligations Arising on Liquidation IAS 32 and IAS 1 Amendment (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Bank does not expect the amendment to affect its financial statements. IAS 23, Borrowing Costs (revised March 2008; effective for annual periods beginning on or after 1 January 2009). The revised IAS 23 was issued in March The main change to IAS 23 is the removal of the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalize such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January The Bank does not expect the amended standard to have a material effect on its financial statements. IAS 1, Presentation of Financial Statements (revised September 2008; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. 58

59 Notes to the financial statements for the year ended 31 December 2008 The Bank expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances. IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously minority interests ) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Bank does not expect the amended standard to have a material effect on its financial statements. IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss. Acquisition-related costs will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. IFRS 3 is not relevant to the Bank as it does not expect a business combination to occur. IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Bank does not operate any loyalty programme. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for 59

60 Notes to the financial statements for the year ended 31 December 2008 sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Bank does not expect the amendments to have any material effect on its financial statements. IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. The amendment requires benefits arising from government loans at below-market interest rates to be accounted for as government grants, with the benefit calculated as the difference between the proceeds and the initial fair value of the loan, net of transaction costs. The amendment applies prospectively to government loans received in periods beginning on or after 1 January IAS 40, Investment Property (and consequential amendments to IAS 16). Property that is under construction or development for future use as investment property is brought within the scope of the revised IAS 40. Where the fair value model is applied, such property is measured at fair value. Where the fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed or the date at which the fair value becomes reliably measurable. The Bank will amend its accounting policies accordingly and will apply the amendment prospectively from 1 January IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 is not relevant to the Bank s operations because it does not distribute non-cash assets to owners. 60

61 Notes to the financial statements for the year ended 31 December 2008 B Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Bank has only one business segment. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns different from those of segments operating in other economic environments. The Bank has operations only on the territory of the Republic of Macedonia which represent one geographic segment. C Foreign currencies Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates ( the functional currency ). The financial statements are presented in MKD thousands, which is the Bank s functional and presentation currency. Transactions and balances Assets and liabilities denominated in foreign currency are translated into MKD at exchange rates ruling at the balance sheet date. Transactions denominated in foreign currency are translated into MKD at the exchange rates valid at the date of the transactions. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Exchange rate: 31 December December 2007 MKD MKD USD EUR D Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and when there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. E Interest income and expense Interest income and expenses for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within interest income and interest expense in the income statement using the effective interest method. Interest income and expense are recognized in the income statement for all interest bearing instruments on an accrual basis using the effective interest method. When loans become doubtful of collection, they are written down to their recoverable 61

62 Notes to the financial statements for the year ended 31 December 2008 amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. F Fee and commission income Fees and commissions consist mainly of fees received from enterprises arising from guarantees and letter of credits and fees arising from domestic and foreign payment traffic and other banking activities. Fees and commissions are generally recognized on an accrual basis when the service has been provided. G Rental income Rental income from investment property is recognized in the income statement on a straight line basis over the term of the lease. Lease incentives granted are recognized as an integral part of the total rental income. H Financial assets The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. There are no financial assets at fair value through profit and loss that are not held for trading. A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the near term and for which there is evidence of a recent actual pattern of short-term profit-taking. The only trading assets held by the Bank are Treasury bills and government treasury bills. Income from debt and other fixed-income instruments is recognised in interest income. Income from equity investments and other non-fixed income instruments is recognised in dividend income. 62

63 Notes to the financial statements for the year ended 31 December 2008 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money to a debtor with no intention of trading the receivable. Loans are recognized when cash is advanced to the borrowers and are carried at amortized cost using the effective interest method. Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Were the Bank to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. Available-for-sale Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity. Available-for-sale financial assets are subsequently carried at fair value. The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. Unrealized gains and losses arising from changes in the fair value of securities classified as available-for sale are recognized in equity. All regular way purchases of available-for-sale investments are recognized at trade date, which is the date that the Bank commits to purchase the asset. I Impairment of financial assets Assets carried at amortized cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example, equity ratio, net income percentage of sales); Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower s competitive position; and Deterioration in the value of collateral; 63

64 Notes to the financial statements for the year ended 31 December 2008 The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. Any accrued interest on impaired loans is immediately subject to impairment allowance recognised in the income statement (as part of carrying value of the loan measured at amortized cost). Assets classified as available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available for - sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement. J Property and equipment All property and equipment is stated at cost or valuation less accumulated depreciation. Assets in course of construction are reported at their cost of construction including costs charged by third parties. No depreciation is charged on assets during construction. Upon completion, all accumulated costs of the asset are transferred to 64

65 Notes to the financial statements for the year ended 31 December 2008 the relevant tangible property and equipment category and subsequently subject to the applicable depreciation rates. Gains and losses on disposal of property and equipment are recognized in the income statement. Depreciation on all assets except assets in the course of construction is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings Furniture and equipment 40 years 4-10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. K Intangible assets Intangible assets consist of computer software and licences. The initial cost of acquiring the intangible asset is recognised as an asset and amortised on a straightline basis over the estimated useful life, not exceeding a period of 5 years. L Investment property Investment property is defined as property held by the owner to earn rental income. Investment property is stated at cost less accumulated depreciation. The depreciation rate based on the estimated useful life is 40 years. M Assets held for sale Collected collateral is classified as assets held for sale. Collected collateral include apartments, equipment and business premises which are not used by the Bank for its core operations. These assets are stated at the lower of carrying amount and fair value less costs to sell. The Bank plans to dispose the collected collateral within three years of forced acquisition. N Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with NBRM and treasury bills and government treasury bills. O Provisions Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. P Employee benefits The Bank, in the normal course of business, makes payments on behalf of its employees for pensions, health care, employment and personnel tax that are calculated on the basis of gross salaries and wages, food allowances and travel expenses according to the legislation. The Bank makes these contributions to the 65

66 Notes to the financial statements for the year ended 31 December 2008 Government s health and retirement funds, at the statutory rates in force during the year, based on gross salary payments. The Bank pays contributions to public pension insurance fund on a mandatory basis. Once the contributions have been paid, the Bank has no further payment obligations. The regular contributions constitute costs for the year in which they are due and as such are included in staff costs. The cost of these payments is charged to the income statement in the same period as the related salary cost. The Bank does not operate any other pension scheme or post retirement benefits plan and consequently, has no obligation in respect of pensions. In addition, the Bank is not obliged to provide further benefits to current and former employees. The Bank recognizes liability and expense for share in profit and payments for bonuses to employees, members of the managing board and management. Q Taxation Income tax on the profit or loss comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. The tax on income in accordance with the Law on Profit tax is at a rate of 10%. Deferred income tax is provided in full, using the liability method, for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used in the determination of deferred income tax. Deferred tax assets are recognized to extend that it is probable that future taxable profit will be available against which the temporary differences can be utilized. R Borrowings Borrowings are recognized initially at fair value net of transaction costs incurred. Subsequent to the initial recognition, interest-bearing borrowings are stated at amortized cost. If debt is settled before maturity, any difference between the amount repaid and the carrying amount is recognized in the income statement for the period. S Share capital Share capital comprises ordinary and preference shares. Share issue costs Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends on ordinary shares are recognized as a liability in the period in which they are declared. 66

67 Notes to the financial statements for the year ended 31 December 2008 Treasury shares Share capital consists of ordinary and non-voting shares. The consideration paid for purchase of Bank s own share capital is deducted from total shareholders equity as treasury shares until they are cancelled or sold. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders equity. T Investment in associates An associate is an entity over which the Bank has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. U Financial guarantees contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due. Such financial guarantees are given to Banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the Bank s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization calculated to recognize in the income statement the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the income statement under other operating expenses. 3 Financial risk management The Bank s activities expose it to a variety of financial risks, so the adequate risk management is basic Bank s aim. The efforts to maintain adequate balance between accepted risk level and business stability and profitability are permanent. Also, operative risk is monitoring, evaluating and managing on regular basis. The most important types of risks identified, evaluated and mitigated by the Bank s risk management policies are credit risk, liquidity risk, interest rate and currency risk, market risk and operational risk. Risk management framework Bank s Shareholders Assembly appoints the members of the Supervisory Board and the Audit Committee. Supervisory Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. The Supervisory Board has established the Board of Directors, Credit Committee, Risk Management Committee and Liquidity Committee, which are responsible for 67

68 Notes to the financial statements for the year ended 31 December 2008 monitoring and developing risk management policies in specific areas. Regarding the organizational structure of the Bank, the Risk Management and Planning Division is responsible for monitoring and reporting of global risk exposure, while the organizational units of the Bank which creates risk exposure are responsible for operative risk management. Internal audit is responsible for the independent review of risk management. According to the Bank s risk management policies which includes set of appropriate risk limits and controls, identifying, monitoring and risk s analysis are made on regular basis Credit risk The Bank takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Credit risk is the most important risk of the Bank s business, so the Bank carefully manages its exposure to credit risk. Principally, credit exposure arises in the lending activities and investment activities. Taking in consideration the latest events arising from the global financial crisis, the Bank applies more restrictive credit policy (higher precautious in assessing the creditworthiness of customer and projects subject to financing) and increased the interest rates of loans and advances. In line with the current circumstances, the Bank maintains a high quality loan portfolio, which is closely monitored, with tightening the credit collection activities. Furthermore, the Bank restructured its low interest rate placement in foreign banks which are considered more risky into higher interest rate placement in the country mainly to loans to customers which are considered less risky. A Credit risk management Decision-making authorities of the Supervisory Board are defined by law and by-law regulations of Central Bank according to which the Supervisory Board makes decisions for rescheduling of claims and write-off of Bank s claims. Supervisory Board is responsible for creation and implementation of the Credit Policy and Procedures for monitoring the implementation of the policy and procedures for assessment of loans and their management. All credit exposures exceeding 10% of the of the Bank up to the legally determined limit of exposure towards single client (up to 25% of regulatory capital) are subject to approving of the Supervisory Board. Credit Committee oversees the overall credit operation of the Bank. Also, Credit Committee is mainly responsible for approving and proposing to the Risk Management Committee and Board of Directors, all policies, procedures and amendments thereto relating to the extension of credit, to ensure that these policies are applied consistently and complied with throughout the Bank, to approve credit exposure between 3% and 10% from the regulatory capital. Board of directors, Corporate Lending Division Manager and Department Managers of the Bank are authorized for approving credit exposures up to 3% of the Bank's regulatory capital. 68

69 Notes to the financial statements for the year ended 31 December 2008 B Credit risk assessment (a) Loans and advances In assessing credit risk of loans and advances to customers and to Banks at a counterparty level, the Bank uses three components: (I) the probability of default by the client or counterparty on its contractual obligation (expected cash flows); (ii) the likely recovery ratio on the defaulted obligations, the loss given default ; (iii) the amount and quality of the collateral for the exposure. These credit risk assessments, which reflect expected loss (the expected loss model ) and are required by the IAS 39, are based on losses that have been incurred at the balance sheet data (the incurred loss model ) rather than expected losses. (i) The Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the group are segmented in four rating classes. The Bank s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. These means that, in principal, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the rating and their predictive power with regard to default events. Bank s internal rating scale Bank s rating A B C D+E Description of the grade Pass/acceptable for financing Watch (careful) Sub-standard Suspicious (doubtful)+loss Bank s rating grade A (Pass/acceptable for financing) includes: Claims from National Bank of the Republic of Macedonia and the Republic of Macedonia; Credit exposure towards customer who settles its obligation towards the Bank at maturity or up to 15 days overdue; Credit exposure being fully secured by first class security instruments, as defined in NBRM Decision on classification of claims of Banks, up to realization of the instrument, provided that the realization is not in term longer than 30 days after the claim's maturity. Bank s rating grade B (Watch (careful)) includes: Credit exposure towards customer, for whom on the basis of credit worthiness evaluation, the Bank assesses that the cash flow will be sufficient for regular settlement of the due obligations, regardless to the presented current financial weaknesses, showing no signs of further worsening of the customer's condition; Credit exposure towards customer who repays its due obligations up to 30 days or by exception in period from 31 up to 90 days, if the delay is only periodical in the interval of 31 to 90 days. 69

70 Notes to the financial statements for the year ended 31 December 2008 Bank s rating grade C (Sub-standard) includes: Credit exposure towards customer who is confirmed and assessed to have inadequate cash flow which will enable fulfilment of its obligations at the maturity; Credit exposure towards customer being inadequately capitalized; Credit exposure towards customer with inadequate term structure of the assets and liabilities, i.e. insufficiency in the long-term sources for financing customer's long-term activities; Credit exposure towards customer for which the Bank does not have satisfactory information available, i.e. the Bank does not have the required documentation for the Credit File in accordance with the Guidelines for keeping credit files passed by NBRM; Credit exposure towards customer who has restructured obligations or other prolongation of repayment of loan or other types of credit exposure due to serious financial difficulties; Credit exposure towards customer for whom payment has been settled for the issued letters of credit, guarantees, banking guarantees and other forms of guarantee (warranty); Credit exposure towards customer who usually fulfils its obligations with a delay from 31 up to 90 days, or as an exception from 91 up to 180 days, if the delay is only periodical in the interval from 91 up to 180 days. Bank s rating grade D+E (Suspicious (doubtful) loss) includes: Credit exposure towards customer who is illiquid or insolvent and credit exposure towards customer in bankruptcy or liquidation; Credit exposure towards customer whose creditors has written-off their claims; Credit exposure towards customer in financial recovery; Credit exposure towards a customer for whom a proposal is submitted to the authorized court for initiating a procedure for liquidation or bankruptcy and out of which the Bank fairly expects to collect a part of its claims; Credit exposure towards customer with a suspicious legal base; Credit exposure towards customer whose debts collection depends on the realization of the security instruments; Credit exposure with expectations that the Bank will collect only a part of its claims from the customer; Credit exposure towards customer that is being subject to litigation and at the same time it is not being secured with a qualitative security instrument; Customer with undefined legal status; Credit exposure towards customer for whom there are firm expectations that the Bank will not be in position to collect its claims from the customer; Credit exposure towards customer who usually fulfils its obligations with a delay from 91 up to 180 days, or as an exception from 181 up to 365 days, if the delay is only periodical in the interval from 181 up to 365 days and credit exposure towards customer who fulfils its obligations with delay longer than 365 days or does not fulfil them at all. (ii) Loss given default or loss severity represent the Bank s expectations of the extent of loss on a clime should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigations. 70

71 Notes to the financial statements for the year ended 31 December 2008 iii) Amount and quality of the collateral depends on the terms, type (non movables, movables (inventories, receivables) and the possibility for its enforcement. The Bank divides the clients in two groups: one where the exposure of the Bank is secured with value of the collateral that is lower than the amount of the exposure and second where the value of the collateral is higher than the amount of the exposure. (b) Debt securities and other bills The Bank is striving to maintain acceptable level of credit risk exposure regarding debt securities, so investment activities are dominantly in government debt securities. C Risk limit control and mitigation policies The Bank manages and controls concentration of credit risk to individual and group basis, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. As measures for specific control and mitigation of credit risk prescribed in Bank s act that regulates credit activities and procedures are obtaining collateral and creditrelated contingencies. (a) Collateral Collateral always is considered as a secondary factor in granting a credit facility. Security by itself, in lack of ability to generate cash flow, is insufficient to justify the granting of credit facilities. The principal collateral types for loans and advances are: (i) For corporate entities Cash Property Equipment and vehicles Inventory Receivables Guarantees (Bank guarantees, guarantees from legal entities) Securities (Debt securities issued by the Government of RM, Securities issued by legal entities). Loans to corporate entities are generally secured. 71

72 Notes to the financial statements for the year ended 31 December 2008 (ii) For individuals Property Cars Deposits Securities (Debt securities issued by the Government of RM, Securities issued by legal entities) In some cases draft or draft with endorsers covering the total receivables. Loans to individuals are generally secured. (b) Credit-related contingencies The primary purpose to these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. The Bank issues collateralized and uncollateralized guarantees and letters of credit. The Bank monitors the term of maturity of these credit commitments, because long-term commitments have greater degree of credit risk than short-term commitments, also as uncollateralized commitments regarding collateralized commitments. D Impairment and provisioning policies The Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are specific loss component that relates individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been occurred but have not been identified on loans subject to individual assessment impairment, by using the available historical experience, experienced judgment and statistical techniques. According to the Bank s policy, there are four internal rating grades. The majority of the impairment provision comes from the bottom two grading. The table below shows the structure of Bank s loans and advances portfolio regarding internal rating system and the associated impairment provision for each internal rating grade: Loans % Impairment % Loans % Impairment % Pass/acceptable for financing (A) Watch (careful) (B) Sub-standard (C) Suspicious (doubtful)+loss (D) + (E) Total

73 Notes to the financial statements for the year ended 31 December 2008 E Maximum exposure to credit risk before collateral held or other credit enhancement Loans and advances to banks 5,550,640 13,833,618 Loans to customers Loans to individuals - overdrafts ( exemption off-balance sheet exposure) 1,044, ,249 - credit cards (exemption off-balance sheet exposure) 735, ,820 - loans 5,094,198 4,024,274 - other 14,136 18,934 Loans to corporate entities - Large corporate clients 8,862,131 5,882,869 - Small and medium size companies (SMEs) 19,297,494 13,372,917 Financial assets held for trading 3,353,838 3,191,943 Financial assets at fair value through Profit and loss 222,781 1,003,542 Financial assets available for sale 380,746 68,437 Financial assets held to maturity 176, ,544 Other assets 976,138 1,002,561 Off balance sheet items Financial guaranties 8,211,030 8,434,592 Latter of credit 853, ,026 Unused overdrafts for current accounts 2,262,602 1,504,068 Unused overdrafts for Master card 788, ,460 Overdrafts for legal entities for salary payments 628, ,616 The above table presents a worse case scenario of credit risk exposure to the Bank as at 31 December 2008 and 2007, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet items, the exposure set out above are based on net carrying amounts as reported in the balance sheet. As shown above, 69% of the total maximum exposure is derived from loans and advances to banks and customers (2007: 69%); 22% represents off-balance-sheet items (2007: 22%). Management is confident that in its ability to continue to control and sustain minimum exposure to credit risk to the Bank resulting from both loans and advances portfolio and off balance sheet items based on following: 87.2% of the loans and advances are categorized in top two grades on the internal rating system (2007: 83.7%); Loans and advances to customers are collateralized and loans to banks are mostly in first class banks; 57.64% of loans and advances are considered as to be neither past due nor impaired; The increase of off-balance-sheet items generally resulting of increase of unused overdrafts for current accounts as a result of the need in the whole economy for this kind of bank service. 73

74 Notes to the financial statements for the year ended 31 December 2008 F Loan and advances Loans and advances are summarized as follows: 31 December December 2007 Loans and advances to customers Loans and advances to banks Loans and advances to customers Loans and advances to banks Neither past due nor impaired 20,164,196 5,507,638 10,986,630 13,653,705 Past due but not impaired 4,862,725-2,804,981 - Impaired 13,956,047 44,532 14,206, ,731 Gross 38,982,968 5,552,170 27,997,854 13,835,436 Less: allowance for impairment (3,934,492) (1,530) (3,409,791) (1,818) Net 35,048,476 5,550,640 24,588,063 13,833,618 The total impairment provision for loans and advances is MKD 3,936,022,000 (2007: MKD 3,411,609,000) of which MKD 1,988,963,000 (2007: MKD 1,714,906,000) represents the individually impaired loans and the remaining amount of MKD 1,947,059,000 represents the portfolio provision (2007 MKD: 1,696,703,000). Further information of the impairment allowance for loans and advances is provided in Notes 17 and 18. (a) Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Bank s internal rating system. 31 December Degree of investment (A) 2008 Degree of investment (A) 2007 Loans and advances to banks 5,507,638 13,653,705 Loans to customers Loans to individuals - loans 378, ,347 Loans to corporate entities - Large corporate clients 6,982,005 4,279,257 - Small and medium size companies (SMEs) 12,804,191 6,373,026 Other assets Total 25,671,834 24,640,335 (b) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class of customer that were past due but not impaired were as follows: 74

75 Notes to the financial statements for the year ended 31 December December 2008 Up to 30 days Up to 90 days Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 4,155, ,794-4,862,725 Value of collateral 7,240, December 2007 Up to 30 days Up to 90 days Over 90 days Total Loans to corporate entities - Small and medium size companies (SMEs) 2,678, ,563-2,804,981 Value of collateral 4,431,350 (c) Loans and advances individually impaired (i) Loans and advances to customers The breakdown of individually impaired loans and advances to customers by class and the fair value of related collateral held by the Bank as security, are as follows: Loans to corporate entities 31 December December 2007 Loans with Value of individual collateral provision Loans with individual provision Value of collateral - Large corporate clients 2,923,786 3,508,543 2,323,540 2,265,300 - Small and medium size companies (SMEs) 3,910,288 3,832,082 3,163,837 2,231,294 Total 6,834,074 7,340,625 5,487,377 4,496,594 (ii)loans and advances to banks The total gross amount of individually impaired loans and advances to banks as at 31 December 2008 is MKD 44,532,000 (2007: MKD 181,731,000). Generally no collateral is held by the Bank. (d) Loans and advances renegotiated Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower s financial position and when the Bank has made concession that it would not otherwise consider. Once the loan is restructured it remains in the same rating grade at least two quarters independent of satisfactory performance after restructuring, except when the quality of the loan was improved and the loan was transferred in a less risky category. The renegotiated loans as at 31 December 2008 and 31 December 2007 are as follows: 75

76 Notes to the financial statements for the year ended 31 December December 2008 Carrying amount Re-structured loans 373, December 2007 Carrying amount Re-structured loans 575,543 G Debt securities, treasury bills and other eligible bills Issuer The table below presents an analysis of debt securities, treasury bills and other eligible bills regarding issuer as at 31 December Issuer of the investment securities is the Central Bank of the Republic of Macedonia and Republic of Macedonia. Standard & Poor s Ratings Services assigned its long and short term foreign currency ratings of BB+ and B respectively and BBB- for local currency sovereign credit ratings to the Republic of Macedonia. Issuers of the investment securities are Banks which are unrated. Treasury and other eligible bills Trading securities Investment securities Total Central bank of Republic of Macedonia 3,186, ,186,502 Republic of Macedonia 167, , , ,409 Banks , ,071 Total 3,353, , ,547 4,036,982 H Repossessed collateral During 2008, the Bank obtained assets by taking possession of collateral held as security as follows: Carrying amount Nature of assets Residential property 767, ,489 76

77 Notes to the financial statements for the year ended 31 December 2008 I Concentration of risks of financial assets with credit risk exposure (a) Geographical sectors The following table breaks down the Bank s credit exposure at their carrying amount, categorized by geographic region, based on the country of domicile of our counterparties: Republic of Macedonia EU Countries Non-EU Countrie s in Europe Other countries Total ASSETS Cash and balances with the National Bank of Republic of Macedonia 7,708,973 5,759, ,314 94, ,753 Treasury and other eligible bills 3,353,838 3,353, Financial assets at fair value through P&L 222, , Loans and advances to banks 5,550, ,301 4,897, ,226 - Loans and advances to customers 35,048,476 35,043,782-4,694 - Loans to individuals 6,888,851 6,888, Term Loans 5,094,198 5,094, Overdrafts 1,044,527 1,044, Credit cards 735, , Other 14,136 14, Loans to corporate entities 28,159,625 28,154,931-4, Large corporate customers 8,862,131 8,862, SMEs 19,297,494 19,292,800-4,694 - Investment securities 557, ,586 1, Other assets 976, , Total assets at 31 December ,418,068 46,310,038 5,821, , ,142 Total assets at 31 December ,281,336 36,523,212 11,368,435 3,222, ,182 77

78 Notes to the financial statements for the year ended 31 December 2008 (b) Industry sector The following table breaks down the Bank s credit exposure at their carrying amount, categorized by industry sector of our counterparties: ASSETS Total Industry Commerce and finance Retail customers Agriculture Gove. Instit. and local authorities Construction Transport Other Cash and balances with the National Bank of Republic of Macedonia 7,708,973-7,708, Treasury and other eligible bills 3,353,838-3,353, Financial assets at fair value through P&L 222,781 2, , ,138 8,344 Loans and advances to banks 5,550,640-5,550, Loans and advances to customers 35,048,476 9,132,166 8,763,275 6,888,851 1,255, ,193 3,688,911 1,678,314 3,077,847 Loans to individuals 6,888, ,888, Term Loans 5,094, ,094, Overdrafts 1,044, ,044, Credit cards 735, , Other 14, , Loans to corporate entities 28,159,625 9,132,166 8,763,275-1,255, ,193 3,688,911 1,678,314 3,077,847 - Large corporate customers 8,862,131 2,873,989 2,757, , ,243 1,160, , ,631 - SMEs 19,297,494 6,258,177 6,005, , ,950 2,527,972 1,150,131 2,109,216 Investment securities 557,222 2, , Other assets 976, , Total assets at 31 December ,418,068 9,137,479 27,111,072 6,888,851 1,255, ,193 3,688,911 1,686,452 3,086,191 Total assets at 31 December ,281,336 6,923,720 24,496,109 5,332, , ,270 2,586,586 1,340,429 9,115,

79 Notes to the financial statements for the year ended 31 December Market risk The Bank takes on exposure to market risk. Market risk arises from open positions in interest rate, and currency, all of which are exposed to general and specific market movements. The Bank estimates the market risk of positions held and the maximum losses expected based upon a number of assumptions for various changes in market conditions. The Board of Directors sets limits on the value of risk that may be accepted, which is monitored on a regular basis. A Market risk measurement Regarding market risk managing and measuring, the Bank s management on a regular basis through adequate analysis and reporting process, is monitoring: interest rate changes regarding market movements and internal decisions, and the influence on interest bearing assets and liabilities and the interest rate margin; changes of foreign currency rates regarding foreign currency assets and liabilities and maintain adequate structure regarding foreign exchange risk exposure; The aim of the Bank is maximizing the stability and profitability, by applying the optimum combination of foreign currency and interest rate structure of the assets and liabilities. B Foreign currency risk The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for overnight position, which are monitored daily. The table below summarizes the Bank s exposure to foreign currency exchange rate risk at 31 December. Included in the table are the Bank s assets and liabilities at carrying amounts categorized by currency. 79

80 Notes to the financial statements for the year ended 31 December 2008 Concentrations of assets and liabilities The Bank had the following significant currency positions: As at 31 December 2008 EUR USD MKD Other Total Assets Cash and balances with the NBRM 3,353,501 1,134,743 2,886, ,547 7,708,973 Treasury and other eligible bills - - 3,353,838-3,353,838 Financial assets at fair value through profit or loss 8, , ,781 Loans and advances to banks 2,814,782 2,039, , ,645 5,550,640 Loans and advances to Customers 15,546, ,636 18,557, ,666 35,048,476 Investment securities 486, , ,222 Investments in associates ,693-49,693 Property and equipment - - 1,582,488-1,582,488 Investment property - - 8,488-8,488 Intangible assets ,191-40,191 Deferred tax asset Other assets 64, , ,138 Total assets 22,274,982 3,456,392 27,845,008 1,522,984 55,099,366 Liabilities Deposits from banks 794, , ,882 10,197 1,572,461 Other deposits 19,856,004 3,135,242 22,073, ,209 45,769,870 Borrowings 835, , ,103 Provisions 57,300 10, , ,380 Current tax liability ,649-62,649 Other liabilities 3,424 10, , ,611 Total liabilities 21,547,435 3,375,534 23,200, ,892 48,840,074 Contingencies and commitments 3,968, ,959 7,830,604 36,500 12,562,840 Net balance sheet position 727,547 80,858 4,644, ,092 6,259,292 As at 31 December 2007 Total assets 22,392,656 2,761,131 26,100,244 1,610,672 52,864,703 Total liabilities 21,008,913 2,781,554 22,966, ,478 47,604,389 Net balance sheet position 1,383,743 (20,423) 3,133, ,194 5,260,314 Contingencies and commitments 4,038, ,294 7,010, ,087 11,982,168 At 31 December 2008, had the exchange rate between the MKD and EUR increased or decreased by 0.5%; between MKD and USD increased or decreased by 3%; between MKD and other foreign currencies increased or decreased by 1%; with all other variables held constant, the pre-tax profit for the twelve month period ended 31 December 2008 would have been approximately MKD 14,125,000 (2007: MKD 13,938,000) lower or higher. 80

81 Notes to the financial statements for the year ended 31 December 2008 C Interest rate risk The Bank s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-bearing liabilities mature or reprice at different times or in differing amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in reprising characteristics of the various floating rate indices, such as the savings rate, and three or six months EURIBOR/LIBOR and different types of interest. Risk management activities are aimed at optimizing net interest income, given market interest rate levels consistent with the Bank s business strategies. As at 31 December 2008 Assets-liability risk management activities are conducted in the context of the Bank s sensitivity to interest rate changes. In general, the Bank is asset sensitive because of the majority of the interest-earning assets and liabilities; the Bank has the right simultaneously to change the interest rates. In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage compared to assets interest rate. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation. Upto1 month 1-3 months 3-12 months 1-5 years Over 5 years Noninterest bearing Total Assets Cash and balances with the NBRM 4,298, ,410,961 7,708,973 Treasury and other eligible bills 3,182, , ,148 3,353,838 Financial assets at fair value through profit or loss 8, , , ,781 Loans and advances to banks 4,302, , , ,494 5,550,640 Loans and advances to Customers 2,796,626 1,996,882 10,724,517 11,574,747 4,814,025 3,141,679 35,048,476 Investment securities , ,444-81, ,222 Investments in associates ,693 49,693 Property and equipment ,582,488 1,582,488 Investment property ,488 8,488 Intangible assets ,191 40,191 Deferred income tax asset Other assets , , ,138 Total assets 14,588,375 2,698,447 11,933,664 11,695,858 4,820,048 9,362,974 55,099,366 Liabilities Deposits from banks 765, , , , ,636 1,572,461 Other deposits 29,152,828 6,974,568 7,567, ,965-1,555,272 45,769,870 Borrowings 40, , , ,668 73, , ,103 Current tax liability ,649 62,649 Provisions , ,380 Other liabilities , ,611 Total liabilities 29,958,472 7,258,354 8,192, ,631 73,032 2,386,755 48,840,074 Total interest re - pricing gap (15,370,097) (4,559,907) 3,740,834 10,725,227 4,747,016 6,976,219 6,259,292 As at 31 December 2007 Total assets 26,700,984 8,217,948 7,425,511 2,432, ,432 7,349,672 52,864,703 Total liabilities 29,396,045 6,778,401 8,530, ,090 29,200 2,212,192 47,604,389 Total interest re- pricing gap (2,695,061) 1,439,547 (1,104,950) 1,774, ,232 5,137,480 5,260,314 81

82 Notes to the financial statements for the year ended 31 December 2008 The interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. At 31 December 2008, if interest rates had been 100 basis points higher/lower with all other variables were held constant, the Bank s pre-tax profit for the twelve month period ended 31 December 2008 would respectively increase/decrease by approximately MKD 7,169,000 (2007: MKD 1,228,000) and other equity components would respectively decrease/increase by 3,061,000 MKD (2007: nil) Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence of liquidity risk may be the failure to meet obligations to repay depositors and fulfil commitments to lend. A Liquidity risk management process Liquidity risk management policy of the Bank defines the method of managing the Bank s liquidity. Perception and monitoring of Bank s liquidity is a postulate of its stability and successful working. Implementation of the liquidity risk management policy is done using defined risk management process which includes planning and managing with cash flows, maintaining adequate structure of assets and liabilities, financial instruments for liquidity risk management, adequate diversification of deposits and other liabilities by maturity and client, procedures for identification and monitoring the deposit s stability, monitoring the maturity of assets and liabilities, monitoring the off-balance sheet items, monitoring liquidity ratios, liquidity stress testing and continuity plan in irregular conditions reporting to Bank s bodies and adequate management information system and responsibilities of Bank s organizational units in liquidity risk management process. The aim of the Bank is maximizing the profitability, by applying the optimum combination of maturity and foreign currency structure of the assets and liabilities. However, as a result of the ongoing financial crisis, the Bank strives to use adequate term structure of funds adjusted to term structure of placements, based on contractual and expected maturity of the deposit base. In such conditions, the primary strategy of the Bank is to maintain its liquidity on the highest level and not to promote significant increase of loan portfolio and increase of profit. In that direction the Bank increased the interest rates of deposits and introduced attractive deposit products. The table below analyses assets and liabilities of the Bank into relevant maturity buckets based on the remaining period at balance sheet date to the contractual maturity date for liabilities and expected maturity for assets. Although the Bank has shortage of short-term assets over short-term liabilities maturing within one month, one to three months, the Bank s management considers its deposit base as being stabile and liquidity not jeopardized. This is based on statistical data and calculations of expected maturity in order to determine the funding and stability of the deposit base. 82

83 Notes to the financial statements for the year ended 31 December 2008 Maturities of assets and liabilities As at 31 December 2008 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Liabilities Deposits from banks 949, ,433 94, ,621-1,633,319 Other deposits 30,647,382 6,981,381 7,537, ,468-45,800,741 Borrowings 47,411 28, , , ,473 1,055,458 Provisions 61,327 18,553 66,374 23,318 11, ,380 Other liabilities incl. current tax liability 197, , , ,260 Total liabilities (contractual maturity dates) 31,902,920 7,263,979 7,870,122 1,703, ,281 49,003,158 Total assets (expected maturity dates) 15,360,726 2,304,280 9,798,841 14,438,640 12,555,242 54,457,729 As at 31 December 2007 Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total Liabilities Deposits from banks 483, , ,548 44, ,045 Other deposits 29,771,208 6,650,284 8,377, , ,295,085 Borrowings 50,535 16, , , ,960 1,158,594 Provisions 56,769 34,639 44,605 31,711 7, ,595 Other liabilities incl. current tax liability 192, ,214 1, ,728 Total liabilities (contractual maturity dates) 30,554,970 6,953,516 8,696,372 1,272, ,916 47,720,047 Total assets (expected maturity dates) 23,223,193 5,456,899 7,020,083 10,983,485 6,240,286 52,923,946 B Off-balance sheet items (uncollateralized) (a) Guarantees The maturity buckets based on the remaining period to the contractual maturity date of guarantees are summarized in the table below. (b) Letter of credit The maturity groupings based on the remaining period to the contractual maturity date of letter of credit are also included in the table below. 83

84 Notes to the financial statements for the year ended 31 December 2008 (c) Other This item includes approved undistributed overdrafts on current accounts and cards and loans in MKD for out limiting of the condition of the funds on the current accounts of legal entities in domestic payment operation. The maturity buckets based on the remaining period to the contractual maturity date are summarized in the table below. As at 31 December 2008 Up to 1 year 1-5 years Over 5 years Total Guarantees 5,616,150 1,602, ,314 8,029,650 Letter of credit 853, ,353 Other 3,679, ,679,837 Total 10,149,340 1,602, ,314 12,562,840 As at 31 December 2007 Up to 1 year 1-5 years Over 5 years Total Guarantees 5,575,437 2,149, ,650 8,258,997 Letter of credit 921, ,026 Other 2,802, ,802,144 Total 9,298,607 2,149, ,650 11,982, Financial Instruments Fair value Fair value represents the amount at which an asset could be replaced or a liability settled on an arms length basis. Fair values have been based on management assumptions according to the profile of the asset and liability base. The following table summarizes the carrying amounts and fair values to those financial assets and liabilities not presented on balance sheet at their fair value. Carrying value Fair value Financial assets Loans and advances to banks 5,550,640 13,833,618 5,550,640 13,833,618 Loans and advances to customers 35,048,476 24,588,063 34,855,501 24,461,083 - Retail customers(individuals) 6,888,851 5,332,277 6,888,851 5,332,277 - large corporate customers 8,862,131 5,882,869 8,862,131 5,882,869 - SMEs 19,297,494 13,372,917 19,104,519 13,245,937 Investment securities 557, , , ,404 Financial liabilities Deposits from banks 1,572, ,918 1,572, ,918 Other deposits 45,769,870 45,272,556 45,769,870 45,272,556 Borrowings 948,103 1,065, ,103 1,065,592 84

85 Notes to the financial statements for the year ended 31 December 2008 Loans and advances to banks Loans and advances to other banks comprise inter-bank placements. The fair value of placements and overnight deposits is their carrying amount due to their shortterm nature. Loans and advances to customers Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. Investment securities Investment securities include interest-bearing assets held to maturity and assets classified as available for sale are measured at fair value. Fair value for held-tomaturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. Other financial assets The fair value of monetary assets that includes cash and cash equivalents is considered to approximate their respective carrying values by definition and due to their short-term nature. Deposits and borrowings The estimated fair value of deposits with no stated maturity, which includes noninterest-bearing deposits, is the amount repayable on demand. The fair value of the term deposits at variable interest rates approximates their carrying values as of the balance sheet date. Term deposits over 12 months represent insignificant part of the total deposits and do not have material impact on the fair value of the total deposits. Borrowed funds carry predominantly floating rates and due to the interest rate repricing carrying value is not materially different from their fair value. 85

86 Notes to the financial statements for the year ended 31 December Capital management The Bank s objectives regarding capital managements are: To comply with the capital requirements by the regulators; To safeguard the Bank s ability to provide returns to shareholders; To maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are regularly monitored by the Bank s management, using techniques prescribed by national regulatory authority (National Bank of Republic of Macedonia). The required information is submitted to regulatory authority on a quarterly basis. The regulatory authority requires that each Bank has to maintain capital adequacy ratio above 8%. The Bank s regulatory capital is divided in two groups: Tier 1 that includes: ordinary and non-cumulative non-voting shares and share premium, statutory reserves and retained earnings or loss, items as result of consolidation, less: intangible assets; Tier 2 that includes: cumulative non-voting shares and share premium, hybrid capital liabilities and subordinated liabilities. Investments in other Banks or financial institutions over 10% and investments in insurance and re-insurance companies and pension fund management companies are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital. According to national regulations, the risk-weighted assets (on-balance and offbalance) are measured by means of a hierarchy of five risk weights classified according to nature of assets, taking into consideration the collateral or guarantees. Calculation of capital adequacy ratio includes regulatory capital and total of credit risk-weighted assets and FX risk-weighted assets. The table below summarizes the compositions of regulatory capital and the capital adequacy ratio of the Bank for the years ended 31 December regarding the requirement of regulatory authority. During these two years, the Bank complied with all of the regulatory imposed capital requirements to which the Bank is subject. 86

87 Notes to the financial statements for the year ended 31 December 2008 Tier 1 capital 2008 Ordinary and non-cumulative non-voting shares and share premium 2,214,206 Statutory reserves and retained earnings or loss 2,653,136 Items as result of consolidation - Deductions from Tier 1 capital (4,937) Total qualifying Tier 1 capital 4,862,405 Tier 2 capital Cumulative non-voting shares and share premium 18,563 Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital 18,563 Deductions from regulatory capital (96,267) Total regulatory capital 4,784,701 Credit risk-weighted assets On-balance sheet 38,940,270 Off-balance sheet 7,696,428 Total credit risk-weighted assets 46,636,698 FX risk-weighted assets 1,711,792 Capital adequacy ratio 9.9% Tier 1 capital 2007 Ordinary and non-cumulative non-voting shares and share premium 2,209,660 Statutory reserves and retained earnings or loss 2,020,929 Items as result of consolidation - Deductions from Tier 1 capital (57,922) Total qualifying Tier 1 capital 4,172,667 Tier 2 capital Cumulative non-voting shares and share premium 23,108 Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital 23,108 Deductions from regulatory capital (82,009) Total regulatory capital 4,113,766 Credit risk-weighted assets On-balance sheet 29,646,630 Off-balance sheet 7,847,258 Total credit risk-weighted assets 37,493,888 FX risk-weighted assets 1,602,001 Capital adequacy ratio 10.5% 87

88 Notes to the financial statements for the year ended 31 December 2008 The increase of the regulatory capital in 2008 is mainly result of including a part of the profit realized in 2007 in the Bank s reserves. The increase of risk-weighted assets reflects the expansion of lending and off-balance activities. 4 Critical accounting estimates, and judgments in applying accounting policies The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment on a monthly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Bank. The Bank uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio. (b) Held to maturity investments The Bank holds debt securities issued by the Republic of Macedonia, received in exchange for the settlement of certain non-performing loans, bearing interest at a rate of 2% per annum. The principal of bonds for frozen deposits is repayable in 20 equal semi annual instalments commencing from April 2002 to October 2011, the principal of bonds for denationalization IV issue is repayable in 10 equal annual instalments commencing from June 2006 to June 2015, and, the principal of bonds for denationalization V issue is repayable in 10 equal annual instalments commencing from June 2007 to June As at 31 December 2008 the outstanding balance of these receivables amounts MKD 176,476,000 (2007: MKD 228,544,000). 88

89 Notes to the financial statements for the year ended 31 December Net interest income Interest and similar income Loans and advances: - To banks 58,804 42,769 - To customers 3,088,928 2,252,972 Cash and short term funds 441, ,850 Investment securities 285,692 28,598 Other 12,185 22,355 3,886,908 3,123,544 Interest expense and similar charges Deposits from banks 26,330 9,296 Due to customers 1,228, ,922 Other borrowed funds 39,010 57,157 Other 15,928 16,255 1,309,455 1,001,630 6 Net fee and commission income Fee and commission income Payment operations -in the country 347, ,518 -abroad 258, ,927 Letters of credit and guarantees 176, ,093 Credit cards 23,128 17,469 Brokerage fees 14,429 75,252 Other 79, , , ,776 Fee and commission expense Payment operations -in the country 31,645 29,004 -abroad 65,343 66,163 Brokerage fees 535 2,002 Other 37,668 16, , ,894 7 Dividend income Investment securities 20,119 8,106 20,119 8,106 89

90 Notes to the financial statements for the year ended 31 December Other operating income Gain on sale of Property Plant and Equipment 11,593 3,003 Rental income 11,658 12,323 Recoveries on loans and advances previously written off 151, ,684 Other 126,756 77, , ,257 9 Administrative expenses Salaries and wages 442, ,231 Pension costs 136, ,177 Other staff costs 73,153 75,977 Taxes and contributions 70,286 73, , , Other operating expenses Materials and services 303, ,732 Insurance premiums 222, ,041 Depreciation of property and equipment (Note 21) 171, ,099 Administration and marketing costs 115,309 76,268 Bonuses to the Supervisory Board, Board of Directors, management and the employees 130, ,000 Impairment of assets - 3,250 Decrease in value of assets acquired through foreclosure procedure 12,677 - Amortisation of intangible assets (Note 23) 15,274 14,827 Loss on sale of collateral 18,953 22,529 Tax and contributions 5,466 5,236 Penalties 3,777 2,557 Depreciation of investment property (Note 22) 546 1,844 Other 2,307 18,273 1,001, ,656 90

91 Notes to the financial statements for the year ended 31 December Impairment charge for credit losses Cash and bank balances with the NBRM (Note 14) (67,549) (12,776) Loans and advances to banks (Note 17) (288) 1,818 Loans and advances to customers (Note 18) 549, ,589 Contingencies and commitments (Note 30) 5,785 50, , , Income tax expense Current tax 172,515 57,315 Deferred tax (Note 29) ,685 57,613 Further information about deferred income tax is presented in Note 29. The tax on the Bank s profit before tax differs from the amount that would arise using the basic tax rate of the Bank as follows: Profit before tax 1,551,352 1,069,501 Tax calculated at a tax of 10% (2007: 12%) 155, ,340 Increase for: - expenses non tax deductible according to local regulations 23,699 18,343 Decrease for: - dividends (2,004) (969) - non-taxable income according to local Regulations - (84,291) - tax exempt revenue (4,145) (3,810) Income tax expense 172,685 57,613 Tax decrease in 2007 was based on the proportion of an investment in the share capital of the Bank by foreign investors for which the Bank is no longer eligible. The tax authorities may at any time inspect the books and records up to 5to10 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The Bank's management is not aware of any circumstances, which may give rise to a potential material liability in this respect. 91

92 Notes to the financial statements for the year ended 31 December Earnings per share Basic earnings per share The calculation of basic earnings per share at 31 December 2008 was based on the net profit attributable to ordinary shareholders of MKD 1,377,014,000 (2007: MKD 1,009,865,000) and a weighted average number of ordinary shares outstanding during the year ended 31 December 2008 of 1,995,551 (2007:1,987,804), calculated as follows: Net profit attributable to ordinary shareholders Net profit for the year 1,378,667 1,011,888 Dividends on non-redeemable preference shares (1,653) (2,023) Net profit attributable to ordinary shareholders 1,377,014 1,009,865 Weighted average number of ordinary shares In number of shares Issued ordinary shares at 1 January 1,992,590 1,953,528 Effect of treasury shares sold in January - 30,132 Effect of conversion of preference shares in January Effect of conversion of preference shares in February Effect of conversion of preference shares in April 2, Effect of conversion of preference shares in May Effect of conversion of preference shares in June 83 1,058 Effect of conversion of preference shares in July Effect of conversion of preference shares in August Effect of conversion of preference shares in September Effect of conversion of preference shares in October Effect of conversion of preference shares in November - 18 Effect of conversion of preference shares in December 1 3 At 31 December 1,995,551 1,987,804 92

93 Notes to the financial statements for the year ended 31 December 2008 Diluted earnings per share The calculation of diluted earnings per share at 31 December 2008 was based on the net profit attributable to ordinary shareholders of MKD 1,378,667 (2007: MKD 1,011,888,000) and the weighted average number of ordinary shares outstanding during the year ended 31 December 2008 of 2,012,483 (2007: 2,009,281), calculated as follows: Net profit attributable to ordinary shareholders (diluted) Net profit attributable to ordinary shareholders 1,378,667 1,011,888 Net profit attributable to ordinary shareholders 1,378,667 1,011,888 Weighted average number of ordinary shares (diluted) In number of shares Issued ordinary shares at 1 January 1,995,551 1,987,804 Effect of issued potential ordinary shares 16,932 21,477 At 31 December 2,012,483 2,009, Cash and bank balances with the National Bank of Republic of Macedonia Cash in hand 1,098, ,734 Current accounts with local banks 7,229 6,616 Current accounts with foreign banks 1,949, ,421 Other short term highly liquid investments 9,135 22,637 Included in cash and cash equivalents (Note 35) 3,064,588 1,826,408 Restricted accounts 53,619 39,831 Current accounts with foreign banks 10 66,294 Balances with NBRM 4,591,036 5,499,924 Less: Provision for impairment (280) (67,829) 7,708,973 7,364,628 Cash and bank balances with the National Bank of Republic of Macedonia include accrued interest of MKD 2,569,000 (2007: 2,350,000). The Bank is obliged to provide mandatory reserve and mandatory deposit in MKD and mandatory reserve in foreign currency at the National Bank of the Republic of Macedonia. 93

94 Notes to the financial statements for the year ended 31 December 2008 The Bank has to set aside MKD mandatory deposit in amount which equals the difference between the actual loan retail balance at the end of each month and the balance determined in accordance with the prescribed limits for growth for each month. This mandatory deposit was for the first time set aside on 18 August The mandatory deposit as at 31 December is MKD 150,533,000 and National Bank of Republic of Macedonia pays 1% interest rate per annum. The Bank has to set aside mandatory reserve in MKD at a rate of 10% on the average daily balance of the total MKD deposits on legal entities and retail customers during the preceding month. National Bank of Republic of Macedonia pays 2% (2007: 2%) interest on the mandatory reserve s amount in MKD. The Bank has to set aside mandatory reserve in foreign currency at a rate of 10% on the average daily balance of the total foreign currency deposits on legal entities and retail customers during the preceding month denominated in EUR by applying the middle exchange rate issued by the National Bank of Republic of Macedonia on the last date of the calculation. National Bank of Republic of Macedonia pays no interest on the foreign exchange mandatory reserves. The Bank is obliged to keep the amount of the calculated foreign currency mandatory reserve at a foreign Bank on a separate account of the National Bank of Republic of Macedonia. Restricted accounts represent deposits for opened letters of credit, on behalf of the Bank s customers. Movement in provisions for impairment are as follows: Cash and bank balances with the National Bank of Republic of Macedonia Balance at 1 January 67,829 80,605 Net release to income statement (Note 11) (67,549) (12,776) Balance at 31 December ,829 In 2008 the Bank succeeded to collect major part of the cash in a Bank under liquidation, which was fully provisioned. Based on this, the Bank has released the provision. 94

95 Notes to the financial statements for the year ended 31 December Treasury and other eligible bills Treasury bills 3,186,502 3,191,943 Government bills with maturity up to 90 days 167,336 - Included in cash and cash equivalents (Note 35) 3,353,838 3,191,943 3,353,838 3,191,943 Treasury bills are debt securities issued by the National Bank of Republic of Macedonia with maturity due of 28 days. Treasury bills are categorized as assets held for trading and carried at their fair value. Government bills of MKD 167,336,000 are with maturity up to 90 days bearing interest at a rate of 7.52% 7.59% per annum. 16 Financial assets at fair value through profit and loss Debt and other fixed-income investments Government bonds 159, ,718 Government treasury bills 41, , , ,979 Listed 200, ,979 Equity investments and other non-fixed-income instruments Equity investments 22,184 79,563 22,184 79,563 Listed 19,226 72,259 Unlisted 2,958 7, ,781 1,003, Loans and advances to banks Placements with foreign banks 5,152,706 13,639,318 Placements with domestic banks 399, ,118 Less: Provision for impairment (1,530) (1,818) 5,550,640 13,833,618 Current 4,409,764 12,819,221 Non-current 1,140,876 1,014,397 Loans and advances to banks include accrued interest of MKD 8,494,000 (2007: MKD 57,458,000). 95

96 Notes to the financial statements for the year ended 31 December 2008 Movement in provisions for impairment are as follows: Loans and advances to banks Balance at 1 January 1,818 - Net (release)/charge to income statement (Note 11) (288) 1,818 Balance at 31 December 1,530 1, Loans and advances to customers Individuals (retail customers): - Overdrafts 1,156, ,634 - Credit cards 823, ,500 - Term loans 5,504,902 4,329,747 - Other 15,077 19,796 7,499,973 5,774,677 Corporate entities: - Large corporate customers 10,000,379 7,021,931 - SMEs 21,482,616 15,201,246 31,482,995 22,223,177 Gross loans and advances 38,982,968 27,997,854 Less: allowance for impairment (3,934,492) (3,409,791) Net 35,048,476 24,588,063 Current 14,743,823 10,950,442 Non- current 20,304,653 13,637,621 Loans and advances to customers include accrued interest and other receivables of MKD 217,812,000 (2007: MKD 145,669,000). 96

97 Notes to the financial statements for the year ended 31 December 2008 Movement in provisions for impairment for 2007 are as follows: Retail customers Overdrafts Credit cards Loans Other Total Balance at 1 January ,596 25, ,414 2, ,444 Provision for loan impairment 26,975 27, ,723 (1,660) 170,806 Write off (186) - (664) - (850) Balance at 31 December 82,385 53, , ,400 Movement in provisions for impairment for 2007 are as follows: Corporate entities Large corporate customers SMEs Total Balance at 1 January ,228,315 1,500,180 2,728,495 Provision for loan impairment 219, , ,783 Write off (309,211) (4,676) (313,887) Balance at 31 December 1,139,062 1,828,329 2,967,391 Movement in provisions for impairment for 2008 are as follows: Retail customers Overdrafts Credit cards Loans Other Total Balance at 1 January ,385 53, , ,400 Provision for loan impairment 34,223 34, , ,248 Write off (5,104) (41) (381) - (5,526) Balance at 31 December 111,504 87, , ,122 Movement in provisions for impairment for 2008 are as follows: Corporate entities Large corporate customers SMEs Total Balance at 1 January ,139,062 1,828,329 2,967,391 Provision for loan impairment (814) 375, ,808 Write off - (18,829) (18,829) Balance at 31 December 1,138,248 2,185,122 3,323,370 Loans and advances to customers are all domestic. 97

98 Notes to the financial statements for the year ended 31 December Investment securities Debt and other fixed-income investments held - to - maturity Government bonds 176, , , ,544 Listed 176, ,544 Equity investments and other debt investments available-for-sale Debt non-fixed income investments available for sale Bonds issued by banks 306,071 - Equity investments available-for-sale Equity investments 74,675 68, ,746 68,437 Unlisted 380,746 68, , ,981 Current 54,461 55,378 Non-current 502, ,603 Investments securities include accrued interest and other receivables of MKD 3,384,000 (2007: 1,320,000 MKD). Government Bonds comprise MKD 176,476 (2007: MKD 228,544,000) received as a collection of certain non-performing loans, bearing interest at a rate of 2% per annum (2007: 2%). The principal is payable in 20 equal semi-annual instalments commencing from April 2002 up to October Equity investments before allowance are carried at cost. There is no active market for these investments and there are no recent transactions, which would provide evidence for their current market value. Income from debt instruments held-to-maturity is recognized as interest income. Income from equity investments is recognized in dividend income. Corporate bonds issued by domestic Banks classified as available for sale of MKD 306,071,000, represent bonds denominated in EUR, with variable interest rate, six months EURIBOR +1.2% annual. The corporate bonds were issued by NLB Tutunska Banka AD Skopje, with maturity of three years and semi-annual payment of interest. The bonds were acquired through Public announcement from NLB Tutunska banka AD Skopje- NLB TB1 and were registered in the Central depository for securities of Republic of Macedonia on 17 November The corporate bonds are not quoted on an official market. Income from debt securities available for sale is recognised in interest income. 98

99 Notes to the financial statements for the year ended 31 December Investments in associate KB Prvo Penzisko Drustvo AD Skopje 45,138 45,138 Share of results for the year ended 31 December 4,555 (9,618) 49,693 35,520 Summary financial information on the associate is presented below: 2008 Assets Liabilities Equity Revenues Profit Interest held KB Prvo Penzisko Drustvo AD Skopje 135,823 34, , ,387 28,926 49% 135,823 34, , ,387 28, Assets Liabilities Equity Revenues Profit Interest held KB Prvo Penzisko Drustvo AD Skopje 102,775 30,297 72,478 90,403 7,388 49% 102,775 30,297 72,478 90,403 7,388 99

100 Notes to the financial statements for the year ended 31 December Property and equipment Buildings Furniture & Equipment Assets in course of construction Leasehold improvements Total Year ended December ,089, ,405 22,301 16,689 1,448,151 Opening net book amount 1,124, ,230 42,529 12,254 1,452,113 Additions , ,098 Transfers 9, ,605 (188,271) 8,047 - Transfers to intangible assets - - (25,055) - (25,055) Transfer from leasehold improvements 1, (1,487) - Transfer to investment property (749) (749) Disposals and write off (6,773) (2,022) - (362) (9,157) Depreciation charge (Note 10) (36,441) (122,408) - (3,250) (162,099) Depreciation charge transfer from leasehold improvement (1,487) - - 1,487 - Closing net book amount 1,089, ,405 22,301 16,689 1,448,151 At 31 December 2007 Cost 1,448,366 1,088,493 22,301 30,676 2,589,836 Accumulated depreciation (358,610) (769,088) - (13,987) (1,141,685) Net book amount 1,089, ,405 22,301 16,689 1,448,151 Year ended December ,084, , ,903 13,390 1,582,488 Opening net book amount 1,089, ,405 22,301 16,689 1,448,151 Additions , ,951 Transfers 26, ,407 (154,990) 1,743 - Transfer to intangible assets - - (14,239) - (14,239) Transfer from investment property 5, ,977 Disposals and write off (461) (2,575) - (363) (3,399) Depreciation charge (Note 10) (37,584) (129,690) - (4,679) (171,953) Closing net book amount 1,084, , ,903 13,390 1,582,488 At 31 December 2008 Cost 1,482,408 1,000, ,903 28,344 2,682,622 Accumulated depreciation (397,821) (687,359) - (14,954) (1,100,134) Net book amount 1,084, , ,903 13,390 1,582,

101 Notes to the financial statements for the year ended 31 December Investment property At 1 January Cost 71,909 71,160 Accumulated depreciation (14,054) (12,210) Net book amount 57,855 58,950 Year ended December Opening net book amount 57,855 58,950 Transfer to property and equipment (5,977) - Additions Disposals and write off (42,844) - Depreciation charge (Note 10) (546) (1,844) Closing net book amount 8,488 57,855 At 31 December Cost 10,525 71,909 Accumulated depreciation (2,037) (14,054) Net book amount 8,488 57, Intangible assets Cost Balance at 1 January 118,434 93,378 Transfer from property and equipment 14,240 25,056 Disposals and write off (80) - Balance at 31 December 132, ,434 Accumulated amortisation Balance at 1 January 77,201 62,374 Charge for the year (Note 10) 15,274 14,827 Disposals and write off (72) - Balance at 31 December 92,403 77,201 Net book value at 31 December 40,191 41,233 Net book value at 1 January 41,233 31,

102 Notes to the financial statements for the year ended 31 December Other assets Collected collateral 767, ,489 Receivable for sold collateral previously collected 38,013 39,831 Advances for property and equipment 31,353 59,334 Receivable from KB Prvo Penzisko Drustvo 24,087 24,038 Inventory of office materials 19,780 18,208 Inventory of numismatic collections 15,850 16,559 Other assets 79,854 46, ,138 1,002,561 Current 253, ,998 Non-current 722, ,563 Collected collateral of MKD 767,201 (2007: MKD 798,489,000) represents collected business premises and apartments, received by foreclosure of collateral. The market for certain types of collateral in Macedonia is in an early stage of development. Management has made an estimate of the expected recoverable amount net of costs to realise the assets, based on a number of factors, including independent assessment. However, given the foregoing, actual amounts realised may differ from the estimates made. Other assets include assets leased out to customers under operating lease agreements for which the instalments fall due as follows: Not later than one year 2,592 12,566 Later than one year and not later than five years 7,751 4,372 Later than five years 5,611 6,485 15,954 23,423 The Bank has operating leases on an indefinite lease term and management can not estimate the exact lease term. The minimum lease payments for these operating leases not later than one year are MKD 676,000 (2007: MKD 1,121,000). No contingent rent was recognized as income in 2008 (2007: nil). 102

103 Notes to the financial statements for the year ended 31 December Deposits from banks and other financial institutions Demand deposits: Banks and other financial institutions 299, ,238 Insurance companies 149, ,362 Time deposits: Banks and other financial institutions 1,021, ,283 Restricted deposits: Banks and other financial institutions 101, ,572, ,918 Current 1,146, ,918 Non-current 425,763 44,000 Deposits from banks and other financial institutions include accrued interest payable of MKD 5,384,000 (2007: MKD 3,319,000). 26 Other deposits Public institutions - Current/settlement accounts 384,243 53,685 - Term deposits 89, ,572 Companies - Current/settlement accounts 10,053,815 9,022,515 - Term deposits 1,816,174 5,654,619 Retail customers - Current/demand accounts 12,008,485 12,348,481 - Term deposits 20,281,837 16,938,478 Restricted deposits Citizens 856, ,116 Companies 278, ,090 45,769,870 45,272,556 Current 45,166,273 44,799,302 Non-current 603, ,254 Other deposits include accrued interest payable of MKD 234,274,000 (2007: MKD 160,199,000). Restricted deposits represent deposits made by companies for payments to be made abroad by the Bank on their behalf, to facilitate the issuance of letters of credit, and the purchase of foreign currencies as well as collateral for loans and guarantees extended by the Bank to certain customers. 103

104 Notes to the financial statements for the year ended 31 December Borrowings Shortterm Longterm Shortterm Longterm Domestic borrowings Macedonian Bank for Development Promotion - 284, ,393 Agency for Managing Accounts - 115, ,970 NBRM - 8,809-8,809 Ministry of Finance 36, ,764-53,412 Foreign borrowings Macedonian Bank for Development Promotion 39, ,543 59, ,325 ICDF Taiwan ,036 Council of Europe Social Development Fund 15, ,663 15, ,568 Ministry of finance Agriculture Credit Discount Fund (former lender European Investment Bank EIB) 30,716 63,154 31,950 92, , , , ,691 Current 247, ,897 - Non-current - 736, ,695 Borrowings include accrued interest payable of MKD 6,428,000 (2007: MKD 8,056,000). The Bank s borrowings are secured with promissory notes. 28 Other liabilities Dividend payables 21,872 23,853 Suppliers payable 18,866 18,876 Fee and commission 3,900 5,154 Bonuses to the Supervisory Board, Board of Directors, management and the employees 130, ,000 Liabilities to Ministry of Finance 19,422 31,868 Other liabilities 75, , , ,063 Current 267, ,063 Non-current 1,

105 Notes to the financial statements for the year ended 31 December Deferred tax assets and liabilities Deferred tax is calculated on all temporary differences under the liability method using an effective tax rate of 10% (2007:12%). The movement on the deferred tax is as follows: At 1 January Income statement charge (Note 12) (170) (298) At 31 December Deferred tax assets are attributable to the following items: Deferred tax assets Property and equipment At 31 December Contingencies and commitments The following table indicates the contractual amounts of the Bank s contingencies and commitments by category: Guarantees - in domestic currency 4,416,484 5,025,311 - in foreign currency 3,794,546 3,409,281 Less: provision for impairment (181,380) (175,595) 8,029,650 8,258,997 Letters of credit 853, ,026 Limits on credit cards 788, ,460 Un- drawn overdraft facilities 2,262,602 1,504,068 Credit limits to legal entities for salary 628, ,616 12,562,840 11,982,

106 Notes to the financial statements for the year ended 31 December 2008 Movement in provisions for impairment are as follows: Balance at 1 January 175, ,880 Net charge to income statement (Note 11) 5,785 50,715 Balance at 31 December 181, , Related party transactions A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and borrowings. These transactions were carried out on commercial terms and at market rates. The Bank has transactions with Companies which executive Directors are members of the Board of Directors of the Bank. The volumes of related party transactions, outstanding balances at the year-end, are as follows: Companies with members in the Bank' s Board of Directors Associated companies Income statement Interest and commission income 7,346 26,048 1,624 1,887 Interest and fee expense 180 2,292 2,045 1,056 Balance Sheet Loans Loans outstanding at 1 January 346, , Loans issued during the year 99, , Loan repayments during the year (393,267) (193,643) (22) (148) Loans outstanding at 31 December 52, , Other assets Receivables ,087 24,

107 Notes to the financial statements for the year ended 31 December 2008 Companies with members in the Bank' s Board of Directors Associated Companies Deposits Balance at 1 January 63,314 48, , ,059 Deposits received during the year 2,579,669 4,163,010 3,418,034 3,827,433 Deposits repaid during the year (2,589,019) (4,148,323) (3,342,444) (3,711,719) Balance at 31 December 53,964 63, , ,773 Key management compensation Salaries and other short - term benefits 137,808 93, ,808 93, Funds managed on behalf of third parties Banks and other financial institutions 118, ,621 Companies 66,463 64,442 Individuals 40,309 54, , ,552 The Bank manages assets on behalf of third parties which are in the form of loans to companies for various investments. The Bank receives fee income for providing these services. Funds managed on behalf of third parties are not assets of the Bank and are not recognized on balance sheet. The Bank is not exposed to any credit risk relating to such placements, as it does not guarantee these investments, however, has a fiduciary responsibility to properly handle and invest these client monies. Income and expenses of the Funds managed on behalf of third parties are accrued to the account of the respective third party and the Bank has no liability in connection with these transactions. 107

108 Notes to the financial statements for the year ended 31 December Share capital and share premium In number of shares Ordinary shares Non-voting shares At 1 January 1,992,590 1,985,041 21,477 29,026 Conversion of Non-voting shares 4,545 7,549 (4,545) (7,549) At 31 December 1,997,135 1,992,590 16,932 21,477 Ordinary shares have a par value of MKD 1,000 (2007: MKD 1,000) and Non-voting shares have a par value of MKD 1,000 (2007: MKD 1,000). The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Bank. Non-voting shares give right to priority in the dividend payment, but do not carry the right to vote. All shares rank equally with regard to the Bank s residual assets. The below stated shareholders have more than 5% ownership of the Bank s ordinary shares: % of voting share capital Shareholder European Bank for Reconstruction and Development Other reserves Other reserves 109, ,717 Other reserves represent non distributable reserves. Statutory reserves 109, ,717 The Bank s statutory reserves represent the Bank s own capital serving as a loss covering resource, which comes as a result of the risk exposure during the usual activities of the Bank. 108

109 Notes to the financial statements for the year ended 31 December Cash and cash equivalents Cash and balances with the NBRM (Note 14) 3,064,588 1,826,408 Treasury bills (Note 15) 3,186,502 3,191,943 Government bills (Note 15) 167,336-6,418,426 5,018, Post balance sheet events Based on the Decision from the Supervisory Board s meeting, dated 26 February 2009, part of the 2008 profit of MKD 996,420,000 will be distributed in the statutory reserves. 109

110 110

111 ГОДИШЕН ANNUAL ИЗВЕШТАЈ REPORT 2008 SUPERVISORY BOARD Sava Dimitrova Taki Fiti, Ph.D. Michael Harold Taylor Zvone Taljat Simon Naumoski Aleko Angelovski President A.D. Evropa Skopje General Manager Vice-Chairman Faculty of Economics Skopje, Professor Member European Bank for Reconstruction and Development London, Banker Specialist Member Publikum Holding, Ljubljana Manager Independent member PI Vitaminka A.D. Prilep, General Manager Independent member 111

112 BOARD OF DIRECTORS Hari Kostov Ilija Iloski Maja Stevkova Sterieva, MA President Komercijalna Banka AD Skopje, Chief Executive Officer Member Komercijalna Banka AD Skopje, Chief Operative Officer Member Komercijalna Banka AD Skopje, Chief Finance Officer 112