ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2017

Transcription

1 ANNUAL REPORT ON THE PERFORMANCE OF KOMERCIJALNA BANKA AD SKOPJE IN 2017 Skopje, February

2 Key financial indicators... 2 I. CONDITIONS IN WHICH THE BANK REALIZED ITS BUSINESS ACTIVITIES... 3 II. BALANCE SHEET... 7 III. INCOME STATEMENT IV. RISK MANAGEMENT AND SUPERVISORY STANDARDS V. CORPORATE LENDING VI. INTERNATIONAL DIVISION VII. LIQUIDITIY AND FINANCIAL MARKET VIII. VAULT OPERATIONS IX. RETAIL BANKING X. PAYMENT OPERATION WITH LEGAL ENTITES XI. MARKET SHARE OF KOMERCIJALNA BANKA AD SKOPJE IN TOTAL DEPOSITS AND LOANS XII. INFORMATION TECHNOLOGY XIII. MARKETING ACTIVITIES XIV. COMPLIANCE OF THE BANK S OPERATIONS AND ANTI-MONEY LAUNDERING ACTIVITIES XV. ORGANIZATION AND PERSONNEL XVI. INTERNAL AUDIT XVII. FINANCIAL DEPARTMENT XVIII. BRANCH NETWORK MANAGEMENT DEPARTMENT XIX. OPERATIONS OF THE BANK S BRANCHES XX. CORPORATE GOVERNANCE REPORT XXI. CORPORATE SOCIAL RESPONSIBILITY CONCLUSION ORGANIZATION CHART OF KOMERCIJALNA BANKA AD SKOPJE

3 Key financial indicators Change Indicators of the Balance Sheet * (in million MKD) Total assets 100, , % Net-loans to clients 45, , % Impairment of loans (special reserves) 7, , % Deposits of clients 87, , % Equity and reserves 10, , % Own funds 9, , % Capital adequacy 15.23% 15.99% 0.76 pp Net loans/deposits 51.5% 49.4% -2.1 pp Net-loans/Total assets 44.7% 43.1% -1.6 pp Deposits of clients/total assets 86.9% 87.3% 0.4 pp Quality of credit portfolio Total credit exposure (balance and off-balance) in million MKD 108, , % Participation of the risk category in total credit exposure А 87.8% 87.6% -0.2 pp B 3.5% 4.5% 1.0 pp C 0.9% 0.8% -0.1 pp D and E 7.8% 7.1% -0.7 pp Total impairment (balance and off-balance exposure) in million MKD** 8, , % Rate risk of the credit portfolio 7.49% 6.74% pp Interest margin Average weighted loan interest rate 3.84% 3.40% pp Average weighted deposit interest rate 0.68% 0.87% 0.19 pp Interest spread 3.16% 2.53% pp Net interest margin (NIM) adjusted annually 3.64% 3.21% pp Indicators of profitability and efficiency Gross financial result % ROA before taxation 0.9% 0.9% - ROE before taxation 8.3% 8.3% - Profit before impairment 3, , % Net impairment of financial assets*** 1, , % Net interest income ****/ Total operational income 69.2% 50.8% pp Salary costs/ Total operational income 20.0% 16.3% -3.7 pp Net impairment/net interest income 60.7% 89.1% 28.4 pp Operating costs/total income 36.3% 32.3% -4.0 pp Total number of employees 1,055 1, % Financial result/total operating income 18.5% 17.4% -1.1% Presented financial result/total number of employees (profit per employee in 000 MKD) % Indicators from the business activities Disbursed denar loans to legal entities (million MKD) 29, , % Disbursed F/X loans to legal entities (million EUR) % Disbursed denar loans to individuals (million MKD) 3, , % Issued F/X guarantees (million EUR) % Received F/X guarantees (million EUR) % Newly approved denar guarantees (million MKD) 5, , % Open export L/C (million EUR) % Received import L/C (million EUR) % Newly issued cards (number) 27, , % Total number of active accounts 733, , % Total number of sale points with POS terminals***** 5, , % Total transactions in the sale network of KB (million MKD) 27, , % Domestic payments number of transactions (legal entities and individuals) 13,310, ,825, % Domestic payments value of transactions (legal entities and individuals) MKD million 566, , % Domestic payment operations E - orders (legal entities and retail) number 2,603, ,769, % International payment operations total payments corporate & retail (million EUR) 1, , % International payment operations total collections corporate & retail (million EUR) 1, , % Realized turnover with securities (MKD million) 1, , % Average trading price of KB shares (denars) 2, , % Total f/x operations turnover (EUR million) 1, , % * Reclassified Balance sheet net ** Improved indicators as a result of the written-off claims of the non-performing receivables according to the new Decision for credit risk *** According to methodology of NBRM. For the purposes of the plan, the impairment is presented on gross basis; ****NII doesn`t include impairment of interest income ***** According to new Methodology by NBRM for calculation of total number of POS terminals 2 5 1

4 I. CONDITIONS IN WHICH THE BANK REALIZED ITS BUSINESS ACTIVITIES 1. On a global level, in 2017, the focus was aimed at the presidential and parliamentary elections held in the Netherlands, France and Great Britain. The results from the elections enabled a stable Euro and a better outlook for the economic conditions in the EU and the UK. Although the uncertainty from the elections in Germany and the referendum for Catalonia had an influence, the Eurozone kept the positive macroeconomic situation. In the US, the reforms conducted by president Trump led to a decline in the value of the Dollar compared to the Euro. In Macedonia, 2017 was marked by a period of a prolonged political crisis that affected the economic activities, with a decline in corporate lending due to constraints of the real sector from new investments. The economic activity in the second quarter declined, whereas the estimated data for the third quarter indicate a modest growth of 0.2%. The revised growth rate of the GDP for 2017 according to NBRM is 0.5%. 1. The economic ambient in the Republic of Macedonia in the course of 2017 is characterized by the following indicators 1 : Indicator Period Increase/Decrease Living costs based Inflation Ø 2017 / Ø % Physical volume of industrial production I-XII 2017 / I-XII % Volume of trade exchange Export = USD 5,671 million I-XII 2017 / I-XII 2016 Import = USD 7,719 million Import coverage = 73.5% Trade deficit = USD 2,048 million 16.0% GDP 3rd quarter % Credit rating for R.M. 2 : Rating agency Current rating Previous rating ( ) Fitch ratings BB (1) BB Standard & Poor s BB- with a stable outlook(2) BB stable (1) Confirmed on as a result of the credible monetary and macro prudent policy, enabling long-term stability of the f/x exchange rate, low inflation and stable economic growth. (2) Confirmed on as a result of the balanced risks between the public debt and the political uncertainty and the favorable economic perspectives of the country on the other side. According to the data from the Ministry of Finance, the public debt in 2017 amounts to EUR 4,786.9 million or 46.7% of the GDP. 2. Capital market The total value of the turnover realized at the Macedonian Stock Exchange (MSE) in the reporting period reached the amount of EUR 154 million, which is 58% higher compared to last year. 1 Source: State Statistical Office 2 Source: Ministry of Finance

5 Significant activities of the Securities exchange commission (SEC) A new investment fund KB Publikum-MBI 10 was established. The funds will be invested in: - shares of issuers which are an integral part of the Macedonian stock exchange index MBI 10, - government debt securities issued by the Republic of Macedonia, - deposits with authorized banks from the Republic of Macedonia with a maturity shorter than one year and - Open-end investment funds with the lowest level of risk that invest exclusively in deposits and debt securities. Issued consent for the brokerage house to accept and transfer orders for buying and selling securities on foreign securities markets. With this it is the last of the eleven members of the Macedonian Stock Exchange that fulfilled the conditions for joining the SEE Link Regional Platform. Issued approval to extend the license for working with two new services: asset management for the account of an individual clientowner of a portfolio and conducting investment consulting. Issued permission for establishing Securities Services Department (trading with securities) Issuance of license for giving an offer for takeover of Triglav Insurance AD Skopje. An approval has been issued to ProCredit Bank AD Skopje to issue long-term securities through a private issue - the fifth issue of ordinary shares by transforming a loan into equity investment given by the sole shareholder of ProCredit Holding AG & Co Bank. KGaA, Frankfurt am Main, Federal Republic of Germany. Issued approval to Kapital Banka for issuance of a corporate bond for known buyers-first issue of 1,000 bonds with a total value of EUR 1,000,000. It is a long-term bond with interest yield (coupon) in nonmaterialized form, non-convertible, issued to a specific name and it has unlimited transferability. Shareholding companies Investment Fund Management Company KB Publikum AD Skopje Brokerage house Inovo Broker AD Skopje Investment Fund Management Company "VFP FUND Management" AD Skopje Sparkasse Banka Macedonia AD Skopje Triglav INT Holding Company dd Ljubljana, Republic of Slovenia ProCredit Bank AD Skopje Capital Banka AD Skopje 3. The monetary policy in 2017 was characterized by normalization, which reflects the stabilization of the expectations and confidence of the economic entities. The interest rate on treasury bills was maintained at the level of 3.25% with offer of MKD 25,000 million. Regarding the regulation of banking operations, the following decisions and guidelines were adopted: Decision on the methodology for identifying systemically important banks; Decision on the methodology for elaboration of recovery plan for systemically important banks; Decision on the methodology for determining the rate of countercyclical capital buffer for exposure in the Republic of Macedonia; Decision on the methodology for determining the maximum amount of distribution of the result of operation and manual for implementation of this Decision, Decision on the methodology for managing the debt risk; Decision on amending and supplementing the Decision on the accounting and regulatory treatment of foreclosures; Decision on amending the Decision on mandatory reserve, Decision on amending and supplementing the Decision on the manner of supervision; Decision on the methodology and recording the accounting items and on preparation of 4 5 1

6 financial statements for the purpose of complying with the new International Financial Reporting Standard (IFRS) 9; Decision on the types and contents of the financial statements of banks and the notes thereto; Decision on amendments and supplements to the Decision on the banks chart of accounts etc. NBRM kept its mandatory reserves rates 3, which are as follows : Liabilities (1) Mandatory Applied from: reserve rate - In MKD currency 8% in MKD with F/X clause 50% (2) - in F/X currency 15% ) Exceptions from these rates: liabilities to non-residents financial entities in F/X currency with an agreed term of up to 1 year = 13%, liabilities under repo-transactions in MKD currency = 0% and liabilities to individuals, non-residents and non-residents financial entities in accordance with certain prescribed terms = 0%. (2) The rate has been increased from 20% to 50% in order to keеp а low interest of the economic subjects in placing this kind of deposit. The system for cross-border payments in euros started to operate by linking the Macedonian Interbank Payment System (MIPS) with the Trans-European Automated Real- Time Gross settlement Express Transfer System of the Eurosystem. In this way, an alternative channel for euro payments through the central bank of Italy has been created for banks that have a license to deal with payment operations abroad. In order to join TARGET 2, MIPS was upgraded, which turned it into a two-currency payment system for payment in MKD and EUR. In order to increase the lending activity of banks to net-exporters and domestic manufacturers of electricity for additional two years, NBRM at the end of December again started to apply the measure to reduce the basis for mandatory reserve in MKD for the banks for the amount of such newly approved loans. In the banking sector, the saving house MAK BS DOO Skopje was transformed into a financial company, after which the license for its establishment and operation was revoked. According to the recommendation of the Governor of NBRM for minimization of the legal risk, the banks started with activities for leaving the regime of adjustable interest rates and appliance of fixed and variable interest rates. In the reporting period, the banking system of the Republic of Macedonia kept the stability and security despite the uncertain domestic environment and the political developments in the country that affected both the deposit base and the credit market. Total deposits of individuals and legal entities increased by 5.4% as of December 2017 (6.1% increase in households and 2.1% increase in legal entities). On the other hand, the total loans increased by 5.7% (9.2% increase in households and 2.8% increase in legal entities). In addition, the capital adequacy at the level of the banking system has increased in order to harmonize banks with the regulatory requirements for the maintenance of capital buffers; thereby the stability of the financial system was further strengthened during The foreign currency reserves in the reporting period achieved the amount of EUR 2,336.3 million and in comparison to December 2016, they are decreased for around EUR million. 3 Source: NBRM

7 4. In the reporting period, Komercijalna Banka AD Skopje performed its activities in accordance with the Program for measures and activities of the business policy of the Bank for the reporting year, the goals of the Monetary Policy of NBRM and the Government s priorities for the current period and continued to perform its activities successfully. Acknowledgment for the rating and successful operations of the Bank are the awards received during 2017, as follows: from the European Bank for Reconstruction and Development for the thirteenth time as the most active participant in the EBRD TFP - Trade Facilitation Program - for the promotion of international trade in global terms; Awards from the Macedonian Stock Exchange: Crystal Bell" for the second place for the most transparent listed joint stock company on the Macedonian Stock Exchange for 2016 and Plaque for the second place in total turnover and number of transactions realized in Award from Commerzbank for Straight Through Processing (STP) for 2016 for excellent quality in execution of payments and financial transfers; - Award from Global Finance Best FX Provider for Republic of Macedonia (Best service provider in the area of fx markets in Macedonia for 2018). This is the fourth consecutive awarded acknowledgment for successful operations of Komercijalna Banka AD Skopje in the domain of trading with financial instruments in RM

8 II. BALANCE SHEET 1. Liabilities Significant items within the total liabilities of the Bank in 2017 showed the following dynamics and structure: Тable 1 Review of the Bank s Liabilities (in million MKD) Index Amount % Amount % 4: Short-term and long - term borrowings 1, , Deposits 87, , Equity and reserves 4 10, , Other liabilities 1, , TOTAL LIABILITIES 100, , The total liabilities of the Bank, as at increased in the amount of MKD 4,123 million compared to 2016 and are due to: - the growth of total deposits, - increase of the equity capital and reserves under increased reserve fund after the distribution of the net profit for 2016 and the effect of the undistributed net profit for 2017 and - accrued interest and other liabilities. 1. Liabilities under short-term and long-term borrowings 1.1 Liabilities under short term borrowings note a decrease as a result of the reduced amount of due liabilities under loans used from the credit lines of the International Fund for Agricultural Development (IFAD 2). 1.2 Long-term borrowings note a decrease as a result of repaid due instalments from the credit lines EIB I, II, III and IV; the Revolving fund of the Italian commodity credit line; MIDF B.V., as well as from the credit line from the International Fund for Agricultural Development IFAD In the first half of the year, total deposits had a ddeclining trend due to the prolonged political crisis in the country. Yet, in the second half of the year, the situation got stabilized and, at the end of the year, the deposits increased compared to 2016 by 4.5% or MKD 3,956 million. The main driver of the growth of total deposits are the demand deposits noting increased balance on the MKD and F/X current accounts of the household sector, as well as the f/x current accounts of non-resident legal entities. In terms of the deposits currency structure, the MKD deposits have a bigger growth dynamic compared to the F/X deposits. 4 With included undistributed profit 7 5 1

9 Таble 2 Maturity structure of total deposits (in million MKD) Index Amount % Amount % 4: Demand deposits 40, , Short-term deposits 34, , Long-term deposits 12, , TOTAL DEPOSITS 87, , MKD deposits 46, , F/X deposits 41, , TOTAL DEPOSITS 87, , Тable 3 Structure of total deposits by clients (in million MKD) Index Amount % Amount % 4: Deposits by clients non-financial legal entities 20, , public sector non-profitable institutions 1, , financial institutions 1, , households 61, , non-residents 1, , TOTAL DEPOSITS 87, , Assets The total assets of the Bank as at realized a volume and dynamics adequate to the liabilities. The growth of the assets arises mainly from the increased money in cash and placements with NBRM, as well as increased investments in securities. During 2017, the quality of the loan portfolio was additionally deteriorated, with the negative events associated with the operation of several major clients contributing to the loss for impairment of financial assets, which significantly exceeded the projections for the year. Therefore, the Bank undertook efforts to overcome the situation through prudent asset management, organizational changes in the direction of strengthening the collection of problem loans and continued with more intensive activities for selling the foreclosed property. In terms of structure of the assets, placements in and loans to other banks registered significant decrease on account of cash and cash equivalents with NBRM, as well as investments in securities whose share is increasing. This mainly arises from the abolition of the possibility of placing foreign currency deposits with the NBRM at favorable interest rates, whereby the matured deposits (recorded in positions placements with banks) were partially placed on short terms in foreign banks (recorded in the position of cash funds), and in risk-free treasury bills

10 Тable 4 Review of the Assets of Komercijalna Banka AD Skopje (in million MKD) Index Amount % Amount % 4: Cash and cash equivalents with NBRM 33, , Placements with, and short-term loans to other banks 10, , Loans to customers 45, , Investments in securities 7, , Investments in associate companies Property 3, , Other assets 1, Total assets 100, , Cash and cash equivalents note an increase, with a simultaneous increase in the MKD and F/X assets. The denar cash assets note an increase as a result of the increased deposits with a maturity of up to 7 days, placed with NBRM, as well as the higher amount of subscribed treasury bills than due treasury bills. Within the position MKD cash assets from September 2017, the assets placed in the Guarantee fund of KIBS are also recorded, in accordance with the Decision on the criteria and standards for operations of payment systems adopted by NBRM (Official Gazette No.17/2016) 5. The fx cash note increase as a result of the short- term deposits in foreign banks that were repurposed from the matured f/x deposits in NBRM 6, which can t be placed again under the same conditions. The deposits with NBRM which represent a mandatory reserve of the Bank in fx currencies have been decreased. 2. Placements with, and short-term loans to other banks noted a decrease compared to The decrease within this position is due to the maturity of the f/x deposit placed with NBRM in May 2016 as a response to the shock that destabilized the banks deposit base and conditioned an increased demand for f/x cash, whereas part of the matured assets have been placed in short-term deposits in foreign banks, due to the inability to be placed with NBRM again, and part are place in low-risk government securities. 3. Net loans to customers as the largest item in the Bank s total assets note an increase on a net basis relative to The growth of the net-loans in the reporting period is the result of the increased retail loans (mainly housing loans with an f/x clause, due to the favourable conditions), whereas the loans to legal entities note a decrease, which is due to restraints from any larger additional new exposures that would worsen the portfolio further, as well as the performed write-offs in accordance with the Decision to manage the credit risk 7. The write-off reached the amount of MKD 2,042 million. The impairment provision and the special reserve noted a decrease that is the result of the net-effect from additional impairment and the performed write-offs during the year. 5 A more detailed explanation in chapter VII Liquidity and financial markets 6 The instrument with a maturity of 1-2 years was activated at the beginning of May 2016, as a response to the shock that destabilized the Banks deposit base and conditioned a higher demand for F/X cash. The Banks had the opportunity to place deposits at more favourable conditions compared to the placement of assets in Euro abroad, while simultaneously reducing the cost of placing F/X assets of the Banks in order to enable growth of the passive interest rates and stabilize the deposit base as the primary source of loans of the banking system. As of , NBRM stopped auctioning F/X deposits with a decision made on the Session of the operating monetary policy Committee 7 The write-offs refer to exposures classified in category E longer than 2 years and are completely impaired

11 Gross loans Net-loans Таble 5 - Review of the total loans (in million MKD) Index Amount Str. Amount Str. 4: Short-term loans, due receivables and bad and doubtful claims 10, % 12, % Long-term loans 34, % 32, % 96.4 Total net-loans 45, % 45, % Total performing loans (gross) 44, % 44, % Total due receivables and bad and doubtful claims (gross) 8, % 8, % 95.8 Impairment provisions/special reserve -7, % -7, % 93.6 Net-loans 45, % 45, % Тable 6 - Currency structure of total loans (in million MKD) Index Amount Str. Amount Str. 4: Denar loans 34, , F/X loans 4, , Denar loans with f/x clause 13, , Impairment provisions -7, % -7, Total net loans 45, % 45, % The Bank s investment in securities noted an increase as a result of the securities available for sale. The increase is due to the investments in government bills in MKD and with a currency clause over 3 months. The item securities available for sale, includes the investments in subsidiaries in the amount of MKD 12,738 thousand. In accordance with the law regulations, the financial reports of the subsidiary are included into the consolidated financial reports from the date when the control begins. Total assets on consolidated basis amounted to MKD 104,869.5 million, total equity and reserves MKD 11,073 million and total consolidated net profit is in the amount of MKD million. The total assets of the subsidiary are lower than 1% from the total assets of the Bank. In compliance with the Decision of NBRM for consolidated supervisions (Official Gazette of RM number 17/2008), when the total assets of the subordinated entity are lower than 1% from the total assets of the parent entity, the subordinate is not obliged to include its financial reports into the consolidated financial reports for the needs of the consolidated supervision. Based on the above mentioned, the capital adequacy is not calculated on a consolidated basis. The securities held for trading have increased as a result of purchased structural

12 government bonds for denationalization shares and valuation of the stakes of KB Publikum Invest balanced and KB Publikum Invest cash by fair valuation. The securities held to maturity note a decrease due to the matured government bills in MKD and with f/x clause with maturity over 3 months. There is also an increase in the bonds for denationalization because of a purchased continued government bond with F/X clause and in denars. 5. Investments in associate companies noted an increase as a result of recorded share in the profit from the Investment Fund Management Company KB Prvo penzisko drustvo AD Skopje in the amount of MKD 55.1 million and correction of the book value by applying the principal method on the basis of dividend paid from the Company in the amount of MKD 30.1 million. 6. Fixed assets noted a decrease as a result of calculated amortization of intangible assets, immovable property and equipment. 7. The increase in the accrued interest and other assets is mostly a result of the increase of foreclosures, customer receivables and different claims. The foreclosed assets relative to December 2016 increased due to newly foreclosed assets. Also, in the reporting period value of foreclosures was decreased under sales and recorded impairment of 20% in accordance with the regulation by NBRM. III. INCOME STATEMENT In the reporting period, the Bank realized a gross positive financial result in the amount of MKD million relative to the same period last year when the gross profit was MKD million, which represents a growth of 4.6%. Тhe income tax for 2017 amounts to MKD 91.8 million. The net-profit for 2017 is in the amount of MKD million. The profit realized before impairment provisioning, which is an indicator of the operational ability of the Bank to cover the expenses is 18.2% higher compared to last year as a result of the increase of equity investments and capital gain and collected previously written off claims. The net impairment provision of financial assets, calculated according to the methodology of NBRM, as at amounted to MKD 2,381 million and compared to the same period last year when it amounted to MKD 1,753 million, showed an increase of 35.8%

13 Table 7 - Review of the Income statement of Komercijalna Banka AD Skopje (in million MKD) Realized Realized Index 3: Net interest income 2, , Net fee & commission income Net f/x gains Other income * , Total operating income ( ) 4, , Total administrative expenses 1, , Other expenses Total operating expenses (6+7) 1, , Profit before impairment provision (5-8) 3, , Impairment provision of financial assets 3, , Release of impairment provision of financial assets 2, , Impairment provision of non-financial assets Profit before tax ( ): Income tax Net-profit * including collected previously written-off claims Net interest income is the main component in creation of the total operating income and it marked a decrease of 7.5% in terms of the same period last year as a result of decreased interest income from loans to non-financial entities, due to the worsening of their balance and further deterioration of the quality. Within the total interest income, the interest income from non-financial entities has dominant share, while within the total interest expenses the interest paid to households takes dominant part. Net fee & commission income have decreased 4.5% relative to the same period last year as a result of the more dynamic growth of the fee and commission expenses compared to the income. Fee income increased mainly due to the reclassification of income from membership fees by bank cards from the position of other income in the position of fee income, while the most significant increase in fee and commission expense arises from interbank fees and expenses related to transactions with bank cards issued by other banks in the Republic of Macedonia and abroad. The total other income category in the analyzed period has noted an increase of 96% relative to the same period last year, mainly as a result of the increased income from capital investments and capital gains from sale of foreclosed assets, as well as collected previously written-off claims. The other expenses are decreased by 9% as a result of the decreased deposit insurance

14 premiums 8 and other expenses. Total administrative expenses and amortization noted an increase of 1.5% compared to the same period in Within this position, MKD million represents amortization, which notes a decrease of 3.4% relative to the same period from Impairment provisions of financial assets (on gross basis) amounts to MKD 5,053.1 million. Release of impairment provision of financial assets (on gross basis) as at amounted to MKD 2,509.3 million. Impairment provision of non-financial assets as at amounted to MKD million and relates to: calculated 20% impairment of assets taken over after in accordance with the regulation (MKD 82.9 million), the additional impairment of the newly foreclosed assets, which represents a difference between the 20% from the initial book value and the value for the closed impairment of the foreclosed assets in accordance with the regulation (MKD 18.3 million) and 20% impairment of the newly foreclosed assets (MKD 1.3 million). IV. RISK MANAGEMENT AND SUPERVISORY STANDARDS The modern concept of banking in the market economy cannot be performed successfully without adequate approach in the risk management, as well as strict adherence to the supervisory standards which are regulated by the Law and represent the fundament of a successful performance of every bank. The risk management of Komercijalna Banka AD Skopje is based on the Strategy of risk management and established policies for managing distinctive risks, whereby the Bank consistently complies with the limits for risk exposure determined according the law regulation as well as with the internal limits for risk exposure. 1. Within the frames of credit risk management, the analysis of classification of the Bank s risk assets has shown the following: As at , the Bank s total exposure to credit risk is MKD 113,920.5 million and compared to notes an increase of 5.47%. Impairment of the financial instruments exposed to credit risk as at , that means determination of impairment of performing balance sheet items and special reserve of performing off-balance sheet items is calculated according to the NBRM regulation. Impairment and classification of the credit risk exposure as at is performed on individual basis for all exposures to credit risk of the Bank. The additional impairment/special reserve for the period is MKD 2,449 million, and compared to the amount of additional impairment/special reserve for the same period in 2016 (MKD 1,709 million) represents an increase of 43.31%. In addition, in the reporting period according to the Decision on the credit risk of the NBRM, the Bank made write-off of the balance sheet claims that are fully impaired for more than two years in the amount of MKD 2,042 million, based on the principal debt and other claims. The write-offs are made according to the Decision of the NBRM on amending the Decision on credit risk management 8 Starting from November 2017, the Fund for deposit insurance reduced the premium, considering that the total assets paid on the basis of insurance exceeds the legally prescribed 4% from the total deposits

15 (Official Gazette number 223/15). The risk ratio, calculated as a ratio between the impairment and the total credit exposure of the Bank as at is 6.74%, versus 7.49% as at as a result of made write offs. The Bank has not larger concentration of credit risk exposure by sectors, because the sectors with over 15% participation in the structure have internal dispersed structure. In fact, the sector individuals with a participation of 15.5% has dispersed internal structure, the concentration in other sectors with a participation of 22.1% refers to different industries, while the concentration in the sector financial and insurance activities refers to exposures to NBRM and first-class banks. 2. Bank's exposure to currency risk in the period moved within the legal limit of 30% of their own funds. 3. In the period January-December 2017 the Bank performed the legal obligation to compulsory reserves by calculation in denars and in foreign currency. Thus: The obligatory reserve in denars ranged from MKD 4,984.6 million to MKD 5,237.7 thousand denars, while obligatory reserve in foreign currency ranged from MKD 4,276.5 million to MKD 4,378.2 million. Percentage of average achievement of the reserve in MKD ranged from % in September as the lowest up to % in august as the highest rate. the interest rate of the treasury bills in 2017 was reduced only once from 3.50% in January to 3.25% in February and it remained at this level until the end of the year. The interest rates of government bills and government bonds during the year have been changed and at the end of the year were 1.61% of the government bills and 3.56% of the government bonds. Regarding the stability and concentration of the deposit base it can be concluded that the Bank does not have significant deposit concentration. The percentage of participation of the 20 biggest depositors in the average deposit base is moving from 6.19% to 7.76%, while the highest level of concentration of the 20 biggest depositors in the total average amount of transactional accounts and demand deposits is between 10.79% and 14.65%. During 2017 liquidity indicators were fully complied with the internal limits. In the period January-December 2017, the achieved liquidity ratios (LR 30 and LR 180) are above the minimum level (1). i.e. they are in accordance with the requirements of the regulation. Based on the monthly monitoring and analysis of the expected maturity structure of assets and liabilities (balance and off-balance records) which has built-in element of forecasting the movement of certain balance and off-balance positions it can be concluded that during 2017 the Bank had a stable current liquidity position and shows positive liquidity gap in all terms. In accordance with the methodology of NBRM, the Bank s own funds as at amount MKD 10,205.0 million and the same are increased for 7.4% in terms of as a result of the increase of the Bank`s reserve funds on the basis of partial allocation of the profit for 2016 into reserves, as well as due to application of the new methodology that came into force on As at , the capital adequacy ratio is 15.99% and it is increased by 0.76 pp compared to It is within the legally determined limit above the 8% and capital adequacy ratio above 12% defined in the strategy for managing the risks of Komercijalna Banka AD Skopje. As at , the Bank fulfills the capital requirements for maintaining the protective capital layer

16 with a rate of 2.5% from the risk weighted assets and protective layer for systemically significant bank with rate of 1% from the risk weighted assets. 4. Market risk In the period January-December 2017, participation of the securities portfolio (net) in the Bank s total activities was between 10.72% and 13.68%. In the period January-December 2017, the trading portfolio expressed as percentage of participation in the total activities of the Bank (0.33%-0.46%) and as an absolute amount (MKD million), does not produce any obligation for the Bank to allocate capital needed to cover the market risk. Movement of the structure of the securities portfolio by type, during the period January December 2017, is as follow: held for trading (HFT): from 2.66% up to 3.42%, held to maturity (HTM): from 18.79% up to 62.5%, available for sale (AFS): from 34.14% up to 78.05%. When analyzing the currency structure of the securities portfolio, it can be concluded that the investments in denars have dominant participation. 5. Basis for management of risk of change in the interest rates in the banking book represents the Decision on the interest rates and the effects from its implementation on the Income Statement. During the period January- December 2017, the following significant amendments were made to the Decision on changes and amendments to the interest rates of the Bank: The Bank has defined new criteria and interest rates of newly approved denar loans, denar loans with FX clause and foreign currency loans to non-financial legal entities as well as for the denar loans approved to new or to existing borrowers of the Bank for purchasing problem claims, purchasing of property pledged in the Bank as collateral for bad and doubtful debts or purchasing property for recovery of bad and doubtful debts, or purchase of property owned by the Bank (Bank s foreclosures) Interest rates on term denar savings deposits, time savings deposits in EUR and other currencies, denar deposits of legal entities were lowered, as well as the interest rate for the regular housing denar loans and denar loans for business premises and interest rate rate for current (transaction) accounts in Denars and in foreign currencies; the manner of expressing the interest rates was changed, i.e. the adjustable interest rates for new credit and deposit products for contracts concluded after were abolished, the term-deposits in other currencies (DKK, SEC, NOK, JPY) were abolished and fixed interest rate will be applied for the new deposits with a maturity of maximum 12 months (legal entities and individuals). The average weighted loan interest rate on amounted to 3.40% (versus 3.84% at ), and the average weighted deposit interest rate is 0.87% (versus 0.68% at ). Interest margin (spread) of amounted to 2.53 pp. (versus 3.16 pp. at ), while the net interest margin (NIM) on a yearly basis amounts to 3.21%. The total economic value of the portfolio of banking activities is 9.78% as at December 2017 and does not exceed the regulatory limit of 20%

17 6. Operational risk is defined as a risk from loss resulting from inadequate or failed internal processes, people and systems or from external events. The operational risk includes legal risk, as well as the risk from money laundering and financing terrorism, risk from inadequacy of IT systems and other operational risk. Komercijalna Banka AD Skopje, in its everyday operation, continually follows, records and analyzes the loss events i.e. events that had caused damage/loss or are potential operational risk. Based on the information gathered and analyses made, the Bank undertakes certain measures for mitigation and elimination of the consequences from loss and for elimination/limitation and control of the risk in future. In the period January-December 2017, the Bank does not have significant exposure to the operational risk. In the reporting period, the Bank did not have any significant damage from the exposure to legal risk, i.e. it does not have significant influence on the Bank`s profit and own funds, caused by violation of the law and by-laws, agreements, provided practices, ethical standards, or as a consequence of wrong interpretation of rules, agreements and other legal documents. Within the activities established in accordance with the law regulation, the Bank controls the risk from money laundering and financing terrorism, though measures and activities which are undertaken in the Bank, and the same is kept on a low level. Reputation risk is current or future risk that may affect the profit or own funds of the Bank due to unfavorable assessments of the Bank made by customers, creditors, shareholders, investors and regulatory bodies. In the period January - December 2017, complaints did not cause any material damage or significant exposure to reputation risk. The available information and indicators for monitoring the reputation risk indicate that in the period January - December 2017, the Bank has no significant exposure to reputation risk, which could influence the profit or own funds of the Bank. 7. In its operations, the Bank strictly adheres to the legal framework (standards) of the credit exposure and its investments, whereby they were completely fulfilled in regards to: the initial capital required for establishing the Bank, which, according to the law, should be MKD 310,000,000; the amount of own funds required for performance of the following activities: international lending, factoring, financing of commercial transactions, trading with FX resources, securities, financial derivatives, managing resources and securities portfolio by order of and for the account of clients, providing custodian services and purchase-sale, guaranteeing and placement of new issue of securities, which, according to the law, should be at least MKD 560,000,000; the Bank s own funds in terms of the initial capital, which, according to Article 64 of the Banking Law should not be less than the basic capital;

18 the Bank fulfills the supervisory standards in accordance with Article 15 of the Banking Law (the total nominal amount of shares without voting rights in the Bank in the total nominal amount of the total shares not exceeding 10%); the capital adequacy is 15.99% and is within the prescribed minimum of 8%; the regular capital ratio is 15.99% and is within the prescribed minimum of 4.5% and 6% respectively; As at the Bank has extra capital available for coverage of the capital buffers for capital maintenance of 2.5% and for systemically important bank of 1% in accordance with the dynamics prescribed by NBRM. For this reporting period the Bank does not have obligation to allocate assets for a countercyclical capital buffer; The Bank fulfills the supervisory standard in accordance with Article 71 of the Banking Law (Exposure to a person and persons related to it should not exceed 25% of own funds of the Bank). The Bank have exposure towards a branch of 3,18% of the Bank s own funds (which should not exceed 10% of the Bank s own funds); the Bank doesn t have exposure higher than the prescribed 10% of the own funds towards shareholder of the Bank with qualified participation and related individuals with them, which directly or indirectly have at least 5% of the total number of shares or issued shares with voting rights which can significantly influence the Banks managing process and fully complies with this supervisory standard; the exposure towards the management of the Bank and the related parties represents 3.15% of the Bank s own funds in total and is within the legally prescribed 3% of the Bank s own funds towards the management of the Bank and the related parties; total exposure towards a branch, shareholders with qualified share and individuals with special rights and responsibilities is 6.33% and it is under the limit of 65% of the Bank s own funds; the Bank has large exposure towards individual and individuals related to them which is equal or largest than 10% of the Bank s own funds, but total amount of large exposures is 2 times of the Bank s own funds and does not exceed prescribed eight-fold amount of own funds; the Bank does not have any loan approved or other type of credit exposure for purchase of Bank s shares or upon pledge of Bank s shares from the Borrower; the Bank does not have shares in other bank and does not use the legal opportunity to acquire up to 5% of shares from other bank; the Bank fulfils the standard from the article 75 to purchase own shares to 10% of the nominal value of total shares, but amount of the purchased own shares should not exceed the amount of retain profit; The Bank s property in buildings, land, equipment and capital parts in other banks, non-banking financial organizations and non-financial institutions is 31.43% of the own funds and is within the prescribed 60% of the own funds; The aggregate amount of capital parts with non-financial institutions is 0% of the Bank s own funds compared to the prescribed one of 30% of the own Bank s funds; The Bank does not control any non-financial institution; The Bank fulfils the obligation for obligatory reserve in MKD and FX according to the Methodology of NBRM; The open FX position of the Bank (daily open FX position) is within the prescribed 30% of the Bank's own funds. The Bank fulfils the standard of the Companies Act according to which the mandatory general reserve of the Bank may not be lower than 5% of the profit until the reserves reach the amount which is equal to one tenth of the capital

19 V. CORPORATE LENDING In the domain of lending activities for legal entities, the Bank continued to provide credit funds to support their current operations, strictly obeying the principles of profitability, efficiency and security of the placements which bear acceptable credit risk. During 2017, the Bank faced an unforeseen deterioration of statement of several major corporate clients, which resulted in a significant amount of impairment / special reserve. As a result, intensive activities were undertaken for prudent management of credit growth, an organizational unit was created specialized for managing problem loans and finding outbound solutions for clients who experienced problems in working and servicing liabilities, and also facilitated the conditions for lending on purchase of the foreclosed property offered by the Bank in order to improve the financial effects. In the reporting period, several significant supplements and amendments were made with the business acts of the Bank: supplements and amendments to the Decision for the Credit Policy and Procedures of the Bank in accordance with the amendments to the Banking Law i.e. within competencies of the Supervisory Board and Risk Management Committee and in accordance with the findings from the off-site supervision performed by NBRM in order to improve the credit analysis and the rating of the clients, amendments were made to the Procedures on the manner to answer the questions for determination of the credit ability of the clients non-financial entities and general indicators of impairment procedure for classification. 1. Denar loans - Within the corporate lending, the Bank s activity was mostly focused on providing short-term loan assets to support the day-to-day operations. The participation of the disbursed short-term loans is 84% of the total disbursed loans, whereas the disbursed long-term loans participate with 16%. The number of loan sub-accounts on the basis of disbursed short-term denar loans is 2,183 in total amount of MKD 26,359.5 million and notes an increase in its value for 10.5% compared to 2016, while the number of the loan sub-accounts on the basis of disbursed long-term denar loans is 536 in the amount of MKD 5,179.9 million and notes a decrease in its value of 15%. In the course of 2017, the cooperation regarding the credit line from the Agricultural Credit Discount Fund through MBDP, intended for agricultural entities in the Republic of Macedonia continued, whereas the total amount of disbursed loans is MKD 5.7 million, versus the amount of MKD 2.8 million disbursed last year. In 2017, Komercijalna Banka AD Skopje approved 69 loans from the credit line of the commission operation between the Bank and MBDP within the frames of the Program for self-employment by lending and the Project for lending to legal entities (micro and small entities) for opening new jobs in the amount of EUR 335 thousand (compared to 2016 when there were 57 approved loans in the amount of EUR 272 thousand)

20 2. F/X Loans In the reporting period, the Bank continued to approve F/X loans from the funds of foreign credit lines and FX loans from the Bank`s resources (fx loans and denar loans with fx clause). In the period January-December 2017, active credit line administrated by MBDP is the credit line EIB IV. In the reporting period, 3 loans were used from the EIB credit line in the amount of EUR 0.5 million which note a decrease relative to 2016 (when the amount of disbursed loans was EUR 1.9 million), while 64 FX loans in the amount of EUR 55.6 million were approved from the Bank s own resources which is an increase relative to 2016 (when EUR 26.9 million were disbursed). Other than approving, the Bank also administered f/x loans from the credit lines of the Fund for Social Development of the European Council, the Revolving fund of Italian commodity credit line, the EIB credit line and the credit line of MIDF B.V. The Bank concluded a Framework Agreement on participation in the Program for lending to micro, small and medium enterprises in support to investment projects, export projects and the provision of working capital with MBDP. In accordance with this agreement, the Bank may approve MKD loans with f/x clause and f/x loans. The amounts of the loans range from EUR 10,000 to EUR 2,000,000, depending on the project. This agreement is operational, but there were no loans approved in Komercijalna Banka AD Skopje with MIDF B.V. and with EBOR concluded an Agreement for Transfer and Amendment and Restatement due to a business decision of MIDF, which is the sole founder of MIDF B.V., to be closed, thus liquidating all the companies founded by it. With the agreement, the existing financier is replaced with a new one, EBRD. With this transfer, all the obligations and rights arising from FRPA are renewed and transferred to EBRD, thus making the Bank debtor to the new creditor - EBRD. Withdrawal of funds from the credit line from MIDF for the project in Municipality of Center. The Bank has paid the last installment of the credit line from the Council of Europe Social Development Fund. 3. Denar guarantees Within the denar operations with legal entities, the Bank has issued payable and performance denar guarantees. In the reporting period, the newly approved denar guarantees noted a decrease in value of 18.4%. In the reporting period, the Bank issued 112 electronic bid bonds in total amount of MKD 74 million, versus 32 issued electronic guarantees in the amount of MKD 49.8 million last year. 4. Problem loans workout from legal entities The statement of the portfolio of increased risk placements (performing and nonperforming) imposed the need for internal reorganization in the Bank as well as the modes of managing this portfolio in accordance with the latest banking practices. With the establishment of the Independent Department for Problem Loan Management, the operations are aimed at improving the process of managing the problematic claims, more

21 efficient collection and faster resolution of the problematic placements in favor of the Bank, which will result in improvement of the quality of the loan portfolio. During the reporting period, the Bank continued its activities and measures for collection of the claims from its clients having the status of problem loans. Thus, claims were collected in total amount of MKD 3,225.4 million, out of which: 87% are collected claims from balance sheet records and 13% are collected claims from off-balance sheet records. From the total collected claims from balance sheet records and from off-balance sheet records 65.3% are cash collections and 34.7% are foreclosures. VI. INTERNATIONAL DIVISION In 2017, the L/C operations note a decrease due to the lower number of import and export L/Cs for which the amount thereof also contributed to total decline of L/Cs operations. The guarantee operations have also declined, with exception of received FX guarantees. In the course of 2017, the amount of issued FX guarantees is EUR 13.6 million which represents a decrease of 30.6% and the amount of recieved guarantees is EUR 14.6 million or for 49% more than in The L/C opperations of the Bank note an increase with the import L/Cs in total amount of EUR 96.8 million (2016: EUR 43.3 million). The export L/Cs notes a decrease, where the total amount is EUR 8.6 million (2016: EUR 25.7 million). The documentary collection notes an increase of 60.2% with export documentary collection and a decrease of 8.8% with import documentary collection. The checks sent for collection noted a decrease of 35.1%. In the reporting period, the Bank did not purchase any accounts receivables on the basis of export invoice (factoring), whereas in the same period last year 10 purchases were completed in total amount of EUR 347 thousand. The Bank continued to perform forfeiting on account receivables on the basis of export-trade operation. 17 forfeiting were completed in total amount of EUR 272 thousand, versus 22 forfeiting cases in total amount of EUR 404 thousand completed last year. VII. LIQUIDITIY AND FINANCIAL MARKET In the course of 2017, the Bank maintained an optimal level of its denar liquidity, which enabled smooth realization of the financial activities and fulfilment of legal obligations and liabilities towards client. The obligation for allocation of mandatory reserve in denars has been fulfilled in larger amount than prescribed. According to the Decision for the criteria and standards of operation of the payments systems by NBRM (Official Gazette No.17/2016) the Reserve Guaranteed Fund (RGF) of KIBS was established. Consequently, the amendments to the Decision for mandatory reserve (MR) were adopted, pursuant to which the Bank 9 fulfills the MR in Denars to the extent that the average daily balance of the assets on its account with the NBRM and the funds of the bank in the account of the RGF of KIBS for the fulfillment period is at least equal to the calculated mandatory reserve. 9 The amount for the same which the banks pay to the account of RGF represents the amount considered as part of the obligation for mandatory reserve

22 Foreign currency liquidity and currency structure in 2017 were maintained with consistent observance to the limits prescribed for management and quantification of open FX position. As of May, 95% from the calculated liability for mandatory fx reserve in Euros is separated on a separate fx account with NBRM and it is maintained in fixed amount during the period, and 5% from the calculated liability by mandatory reserve in foreign currency is maintained as average amount of the fx account of the Bank in euros in MIPS. In the reporting period, the average statement of current accounts in foreign and domestic banks decreased, as well as the average statement of term deposits in domestic banks, while the average statement in foreign banks increased. This structure of foreign currency placements in banks is determined both by the lower negative interest rates for placements in euros at shorter deadlines and by the unfavorable effects of the time deposits over 3 months on the capital adequacy. The surplus of liquidity assets was invested by Komercijalna Banka in treasury bills and government bills, available deposit with NBRM and approved loans to other banks. In the reporting period, the Bank did not use loans from other banks for its MKD liquidity needs, did not carry out repo transactions and did not place denar deposits in domestic banks. In the period , the Bank continued to participate in the auctions for treasury and government bills, whereas the value of subscribed government bills bought on behalf of the Bank note an increase of 1.7% in terms of The value of the subscribed treasury bills on behalf of the Bank noted an increase of 13.6%. The Bank s investments in equity securities available for sale as at reached the amount of MKD 64.9 million and are comprised of shares issued by domestic and foreign financial institutions. Investments of the Bank in equity securities intended for trading as at are in the amount of MKD million and are consisted of shares issued by domestic companies and stakes in KB Publikum Invest-Open investment fund balanced and in KB Publikum-Invest Open investment fund-cash. They noted an increase on the basis of fair value of the stakes. The investments in long-term debt securities held to maturity amounted MKD 1,698.8 million and the same have been increased compared to December 2016 on the basis of purchased continuous government bond with f/x clause. The investments in bonds held for trading amounted MKD 82.0 million and the same have been increased on the basis of increased investments in structural government bonds for denationalization. The investment in bonds available for sale are in the amount of MKD million and they have been decreased as a result of past due continuous government bonds. In the reporting period, the Bank bought government bills on its own behalf and for the account of its clients in the amount of MKD 96.2 million (versus MKD million in 2016) and government bonds on its own behalf and for the account of its clients in the amount of 5,657.8 million (opposed to MKD 1,831.2 million in 2016). As at , the Bank has investment in the associated company KB Prvo penzisko drustvo in the amount of MKD 235,164 thousand and, in terms of December 2016, it notes an increase as a result of the net positive effect on the basis of dividend paid out and recorded share in the profit of the company applying the method of capital. As at , the Bank has investments in the subsidiary KB Publikum Invest Investment fund management company AD Skopje in the amount of MKD 12,738 thousand

23 In the reporting period, trading at the Macedonian Stock Exchange note increase of 57.9% in terms of the same period last year, while the Bank s activities in this segment are increased for 13.2%. The largest part of the turnover of the Bank (75%) is realized through classical trading, 24% are block-transactions and 1% arises from the trading with shares and government stakes. At the end of 2017 Komercijalna Banka has launched the e-trader application intended for the ultimate beneficiaries (clients of the brokerage house) enabling them to send electronic orders to the Bank s brokers and allowing complete insight into the trading with securities at the Macedonian Stock Exchange - The share capital structure of Komercijalna Banka AD Skopje as at is consisted of 5,075 shareholders-legal entities and individuals out of which 69.8% are domestic and 30.2% are foreign shareholders. The shareholders with qualified majority in the Bank are East Capital Explorer Investments AB from Stockholm, Sweden. EBRD from London sold its stake of 5.245% in November In the reporting period, total 356,509 ordinary shares were traded at the MSE, compared to 265,006 shares in the same period last year. The average trading price of the Bank s shares in the period was MKD 2,778 compared to MKD 2,418 in Pursuant to the Decision for use and distribution of the undistributed profit until and the Decision on determining dates for payout of dividend for 2016, on the Bank made a dividend payout to the shareholders with shares in the amount of MKD 341,860 thousand, out of which MKD 210,401 thousand to legal entities and MKD 131,459 thousand to individuals. The dividend amounted to MKD 150 per share. - In accordance with the provisions of the Law on Securities, as at the Bank has 22 agreements concluded for performing custody services with securities with 18 non-residents legal entities and 4 non-residents individuals. Based on these agreements the Bank is managing a total of 54 portfolios with a market value of MKD 1,981 million (the market value in 2016 was MKD 2,675 million). - In the course of the reported period, the Bank offered services of custodian bank to one voluntary and one mandatory pension fund managed by one company, the Bank`s client. This segment of operations was influenced by the change in ownership of the pension fund for which the Bank performed the services as a custodian. In the first three quarters of 2017 the services of depositary bank were performed for eleven investment funds, managed by three of the Bank s clients, whereas in the fourth quarter, one of the Bank s client moved its operations to Sparkasse Banka AD Skopje due to the strategic commitments of the Group to which it belongs, so the Bank continued to perform this service for seven investment funds managed by two entities-bank`s clients. This situation on the market had effects on the profitability in this segment of operations. During the year the Bank started to cooperate with the two new investment funds: VFP 100% Bond managed by WFP Fund Management and MBI-10 which is managed by KB Publikum invest AD Skopje. - The realized turnover of the Bank s FX market notes a decrease of 0.9%, the total turnover of the FX trading notes an increase of 4.9%, while the number of concluded purchase agreements is increased for 3.3%

24 VIII. VAULT OPERATIONS The total number of active safe boxes for individuals on reached 4,695 compared to 4,704 active safe boxes in December 2016, while the number of safe boxes of legal entities in 2017 reached 112 safe boxes compared to 105 safe boxes in In the reporting period, activities were taken in order to strengthen the technical and physical security of the vault and to protect the spaces of the vault and safe from internal and external potential risks. Certain additional activities are currently taken in order to adjust to changes made during this year in the regulations by NBRM concerning certain technical aspects of vault operations. IX. RETAIL BANKING 1. In the reporting period, the total deposits of households in the Bank (including the non-residents) reached the amount of MKD 66,677.1 million and marked an increase of MKD 4,157.1 million or 6.6% compared to In the reporting period, 5,978 denar passbooks were opened noting a decrease compared to the same period last year when 6,663 passbooks were opened. The total number of newly opened F/X passbooks and accounts (residents and non-residents in total) is 12,315 compared to 12,727 opened in the same period last year. 2. The realized domestic payment operations for individuals in the reporting period amounted MKD 110,391 million which is a decline of 2.4% relative to Individually, the non-cash transactions are increased for 3.5%, thus the total turnover is MKD 30,030 million, while the cash transactions in the amount of MKD 80,361 million note a decrease of 4.5% relative to The value of the total realized international payment operations for individuals in the reporting period reached the amount of EUR million and compared to the same period last year noted increase of 16.4%. Individually, total payments note an increase of 24.5%, while the total collections note an increase of 14.3% in terms of In the domain of foreign currency exchange operations, the total realized turnover from purchase and sale of currencies and foreign currency cheques amounted MKD 4,954.8 million and noted a decline of 14.9% in terms of In the reporting period, the Bank s lending activities decreased, compared to the same period last year, analyzed by the amount of approved and disbursed loans, while the number of approved and disbursed loans increased. In the reporting period, total number of disbursed loans was 10,245 (in 2016: 10,058) in total amount of MKD 3,547.4 million (in 2016 was MKD 3,779.5 million). Dominant participation in the disbursed loans has the consumer loans with 50.1%, before the housing loans which participate with 40.9% in the reporting period. In the loan approving process, the Bank continued to apply a selective approach, taking into account the detailed credit analysis, the quality of collateral and the clients credit history, with the purpose to minimize and identify the credit risk on time. In the analyzed period, the Bank continued promoting the housing loan with an f/x clause with interest rates of 2.9% fixed for the first three years and 5.9% variable for the rest of the period and the promotion for approval of cash credits with a EUR clause free of charges, provided facilitation in the conditions for approval of consumer loans, reducing the amount of the minimum wage needed for applying for a loan and increasing the maximum loan amount to 15,000 euros in denar equivalence

25 5. Operations with bank cards in the reporting period were aimed at further increasing of the number of newly issued debit and credit cards and further expansion of points of sale and ATMs. As at , the number of newly issued cards is 45,530 and the same is increased for 66.6%. In the total issued cards, the highest increase was noted for issued debit cards - Debit Mastercard and Visa Electron for individuals and Visa Business Debit for legal entities, while for credit cards, for individuals, the highest increase is noted for Mastercard Skopje City Mall, and for legal entities Visa Business Revolving cards. The total number of Bank s active cards is 223,898 which is a decrease of 17.5%. The decline of total number of active cards is due to continuation of the closing action of unclaimed and cards without transactions, as well as their systematic change of status that had previously been included in the reports as active but was actually expired. For bigger customers and users of Maestro expiring cards, a new Debit Mastercard World, or Debit Mastercard was replaced, which additionally affects the number of closed cards. In the analyzed period 44,965 cards were closed. Taking into consideration the activities that the Bank undertakes to stimulate the use of the cards, the average number of transactions per card increased (65.9 transactions per card in 2017, while in the same period last year there were 49.3 transactions per card). During the year, 5,377 Gift cards with a total value of MKD 11.5 million were sold. During the reporting period, the Bank undertook the following activities: continued the replacement of cards with a magnet stripe with chip cards, i.e. contactless cards when renewed, activities for introduction of a mobile payment app with digitalized instead of plastic cards have started, preparation of offer for an introduction of a new type of a cobranded card, concluding of new agreements with clients for the service payment in instalments with debit cards and a payment on 24 installments was enabled beside the payment on 3,6 and 12 installments, concluding of new agreements for acceptance of cards on virtual POS terminals aimed to increase the use of e-commerce service, concluding of new agreements with retailers that have stores in the shopping centre Skopje City Mall, accepting gift cards and activities to enable discounts and loyalty points for the users of MasterCard SCM, active replacement of the existing terminals with new ones which have the ability to acquire cards with BINs that start with number 2, active withdrawal of nonactive terminals. The Bank began installing the first unattended terminals at the sales points of EVN for payment of electricity bills, in cooperation with Mastercard, a prize winning game for all of the Bank`s clients-users of these cards was organized, as well as a motivational campaign was organized for all the employees of the Bank. In the reporting period 909 new POS terminals were installed and as at , the total number of sale points with POS terminals is 5,235, while the total number of active ATMs is 157. In order to increase the efficiency of the terminal-network of the Bank, as well as their proper usage, the Bank has started with analyses of the number of active points of sale which perform transactions, or have a minimum of one transaction in a month. The average number of active points of sale in the analyzed period is 4,171 which represent an increase of 5.7% relative to the same period last year when the number of points of sale was 3,947. Operations with current accounts in the reporting period note an increase, as observed by the number of active current accounts, total inflows and number of accounts that have inflows on the basis of pension. The total inflows on the current accounts are for 0.3%

26 higher in terms of the same period last year. The number of companies which paid salaries to their employees through the Bank is decreased for 7.8%. The number of transaction accounts upon which the inflows on salary basis are transferred has noted a decrease of 4.6%, while inflows on the pension basis are for 0.7% higher than in The total placements on current accounts as an overdraft facility approved are decreased for 1.4%, while the usage of the overdraft facility used notes a decrease from 37.9% to 36.8% as at In this segment of operation the Bank puts greater accent on the development of alternative possibilities for using the funds from the clients accounts. For that purpose the Bank is continuously working on increasing the volume and the type of payments with standing orders and on increasing the functionality of the services of electronic and SMS banking. As at , the Bank registered 106,704 users of E-banking service, or for 11.8% more than in 2016, and the number of executed orders through the Internet Bank is increased for 19.8%, the interest for the usage of the service SMS banking has been increased, thus, as at , total 1,465 new subscriptions were granted to total number of 1,045 users, and 160,447 text messages are sent. For the service mobile banking for individuals, during 2017, 18,213 users successfully installed the application and 2,402 of them have already made a transaction. The total number of orders performed through the mobile banking in 2017 is 97,237 orders. The number of collected payment orders is decreased for 0.8% in comparison with Regarding the collection of due claims, regular measures and activities were undertaken in the past period telephone contact with debtors in order to inform them of the due outstanding liabilities, written information and warnings, activation of the administrative ban on salary to the guarantor in order to realize the collection process in a regular manner, initiation of forced collection. The Bank has concluded an agreement with an external company specialized in collection of claims based on credit cards. In the analyzed period, the Bank collected claims from citizens for which a procedure for forced collection was started in total amount of MKD 163 million. 7. Customer relationship management refers to the relations with the segmented group of clients, the regular activities in the Contact Center of the Bank, as well as the trainings of the agents from the Contact Center and personal bankers and visits to key clients in order to inform them of the possibilities that come with their status when concluding an Agreement for business cooperation and the opportunities offered from this service. The segmented group of clients is consisted of legal entities key clients where the main objective is aimed at the improvement of the relations with the special segment of clients with key client status, consisted of members of the management team or members of managing bodies of the corporate clients, and of 669 individuals consisted of 52 individuals employed in the legal entity, key clients category I 185, key clients category II 181, VIP clients 187 and one client with VVIP status * and 63 clients who don`t have any status granted but they use these services. Besides servicing the permanent clients of the segmented group, the intention of the unit was oriented to attracting potential clients who will use Bank s products and services through Personal Bankers. In the reporting period, a Decision on amendments and supplements to the Decision on criteria for key clients legal entities was adopted, defining special conditions for use of the products and services from the retail segment, the Decision on detraction of the status of a legal entity, as well as the Decision on awarding a status and categorization to a key client legal entity status revising and a new segmentation. 10 During December, key clients - legal entities were newly segmented and categorized after the expiration of two years since the last revision

27 X. PAYMENT OPERATIONS WITH LEGAL ENTITES In the course of 2017, the following activities were realized in the domain of domestic payment operations for legal entities: 1. Number of total newly opened denar accounts of legal entities noted an increase of 15%, while the number of newly opened f/x accounts was increased for 12% in terms to same period of The total number of closed denar accounts on different bases has decreased for 59% 11 relative to 2016 in mostly due to the amendments in the Companies Act according to which if the legal entity in the payment operation is an inactive entity, it will be deleted from the Central Registry and all accounts opened in the commercial banks will be closed. From the aspect of other activities related to operation with corporate entities, in the reported period were realized 971 written requests in the domain of denar corporate accounts, while in the domain of FX accounts there were 224 written requests for status and other changes in data for legal entities; 42,602 decisions for forced collection were received, out of which 63% initiate blocking of their clients accounts. The Decisions on enforced collection note a decrease of 45% as a result of the application of the new Law on Enforcement and the new Rulebook for the form of the orders, as a result of which in the Bank smaller number of Decisions for enforced collection were delivered by the Public Revenue Office and the City of Skopje relative to the same period last year. 2. The number of total realized transactions of legal entities noted a decrease of 2%, whereas both types of transactions have been decreased (non-cash for 1% and cash for 4%). Within the frames of the total number of non-cash transactions of legal entities, 56% of them are processed through internal clearing, 41% are processed through clearing inter-banking system (KIBS) and 3% of the orders are processed through MIPS. Within the cash transactions of legal entities, incoming cash transactions participate with 89%, while outgoing cash transactions represent 11% of the total. In consideration of the payment of salaries and other income, 161,968 transactions per folio number of legal entities are realized. Out of them, 124,844 transactions were made at the Bank's counters while 37,124 transactions are processed through the service E-Bank. These transactions increased in value by 11% compared to In the analyzed period, the increase in the number of users of electronic banking continued (10,197 users versus 8,713 in the analysed period in 2016) and the realized transactions through the system of electronic bank. Electronic transactions accounted for 49.7% of total non-cash transactions and increased by 5% compared to Total international payment operations for legal entities realized through the Bank in 2017 reached the amount of MKD 2,627.4 million and noted an increase of 0.3% relative to 2016, while the number of transactions is 168,864 and are for 0.5% higher compared with the same period of Thus, the downward trend from the previous period has been stopped. 5. The activities in the domain of FX e-banking in the reporting period note an increase regarding the number of new active users for 28.5%, the total number of active users for 23.5%, the number of performed orders for 10.7%, the number of new subscriptions for notification of payment executed abroad is increased for 11.1% and the number of new subscriptions for fx market for legal entities has been increased for 34.8% and the number of new subscription for notifying collections received from abroad for 17.5%. 11 To legal entities and humanitarian and contractors accounts to individuals

28 XI. MARKET SHARE OF KOMERCIJALNA BANKA AD SKOPJE IN TOTAL DEPOSITS AND LOANS Тable 8 Participation in the total deposits and loans of Komercialna Banka AD Skopje in the banking system of Republic of Macedonia 12 (in %) Total retail deposits MKD FX Total deposits from legal entities MKD FX Total placements to citizens MKD FX Total placements to legal entities MKD FX Total deposits according to Monetary Statistics of NBRM Total loans according to Monetary Statistics of NBRM XII. INFORMATION TECHNOLOGY In the reporting period, more significant activities were realised by the IT Division out of which more significant are the following: In the part of the BI system, changes to the set of templates for Capital Adequacy, changes in the economic value overviews, the comprehensive profit report, consolidated notes, as well as a series of simulations and adjustments in the credit risk module CRIS were made; The third phase of the project for Upgrade the ASEBA TEZAURI DWH Solution was realized; Special web applications were developed, such as Guide for the mbank for Individuals, Guide for the Internet Bank for Individuals and Guide for the Internet Bank for legal entities. An application was developed for online submission of application for opening a transaction account and issuing a debit card for individuals; The following functionalities were developed in the mbank for individuals: payment order for f/x banking card, notifications for the business card holders, notifications for inflows and outflows of accounts where the beneficiary is a legal representative; Development of mbank for legal entities was started; 12 The calculation for deposit and loan participation is created by the NBRM`s methodology and the comparison is made with the last published data

29 The following functionalities were made in the Internet Bank: changes in the signing policy by type of order, user groups and priority of the signatory, transfer order in f/x on own account in another bank for legal entities, integration of XML Signing Component for signing with tokens through other browsers, delayed activation of multiple lists of codes taken at ones and ordering a list of codes for delivery to an address by mail;. In accordance with the amendments to the Decision for the Mandatory Reserve and the start of operation of the new channel for cross-border payments TARGET2, substantial changes were made in the Bank's application solutions; The project for introduction of the National Reference Interest Rate was realized. Modifications were made to all application solutions (deposits and credits) for establishing, forming and recording interest rates (referent interest rate + interest margin), as well as automation to the process of changing the regular interest rate depending on the change in the reference rate; As support to the operation of several organizational units in the Bank, multiple changes to the software solutions were made; The following activities in the area of IT infrastructure have been realized: upgrading the virtualization infrastructure in the Primary Computer Center; replacement of outdated computer equipment from the backup and archiving system; migration of software solution for Depository Bank and Custodian Bank to new software and hardware platform; update of the system for tracking audit trails has been implemented; implementation of a modern solution for inventory, monitoring, scheduling and management of ICT infrastructure; implementation of an IP telephony system on a newer version; implementation of DDoS attacks and upgrade of the system for automatic archiving of the on newer version; implementation of solutions for discovering possible abuses with the usage of socalled skimming devices of the bank`s ATMs and upgrade of the system for antivirus protection; implementation of system for vehicles tracking for cash transport; creation of a system which provides free usage of Wi-Fi through the Bank`s premises; upgrade of the system for personalization of the payment cards for issuing Mastercard cards on the most modern M/Chip Advance platform from abuse protection; purchase of modern ATMs and POS terminals with a possibility for contactless transactions, instalment payments, acquiring Diners Cards and payments to budget users, etc. XIII. MARKETING ACTIVITIES In the reporting period, the marketing activities in Komercijalna Banka AD Skopje were conducted in accordance with the Program for marketing communication activities and sponsorships and donations for More significant activities realized in this segment of operation were: - assessing the customer satisfaction (individuals and legal entities) from the Bank's products and services using: on-line survey, , as well as a person-to-person survey conducted in 14 city branches of the Bank, - realized promotional campaigns: a prize winning game With MasterCard from Komercijalna Banka AD Skopje on the UEFA Super Cup, the new campaign for the Debit Mastercard cards with the slogan Kartichka za bezbroj zelbi (A card for myriad of wishes), additional activities to promote the credit card Mastercard Skopje City Mall, as well as sales actions to encourage the volume of transactions with Mastercard etc.,

30 - The Bank presented itself at the Fair for Banks and Financial institutions, a one day event was held: A day for you Safety challenges in the contemporary e-business, aimed for corporate clients, etc. 2. Sponsorship and donations as an integral part of the marketing and promotional activities of the Bank were approved for several events and projects from different areas, with which the Bank promoted the spiritual values, gave contribution to the sport development and healthy youth, also insisted to increase the public awareness for numerous social problems of citizens, etc. In the realization of the humanitarian projects the Bank gave financial support for treatment of the most socially vulnerable citizens. XIV. COMPLIANCE OF THE BANK S OPERATIONS AND ANTI-MONEY LAUNDERING ACTIVITIES 1. In order to provide compliance of the Bank s operation, the newly adopted regulation, amendments and supplements to the existing one were followed and all Organizational Units/Parts of the Bank were informed of the changes in the regulation; highlighting the activities and acts that the Bank had to undertake in order to comply with the new regulation; regular monitoring of the fulfilment of the obligations of the Bank in relation to timely reporting to external institutions; regular informing the Board of Directors and Supervisory Board on realization of activities connected with compliance of the Bank s operation and money laundering prevention on monthly and quarterly basis, etc. During 2017, the Bank acted upon received complaints, followed the findings from the Minutes of performed control; the activities for compliance with the FATCA regulation (Foreign Account Tax Compliance Act FATCA) continued; 2. In the reporting period, activities were undertaken for protection and prevention of any involvement of the Bank in criminal acts of its clients, as well as for money laundering prevention and retaining the good reputation. In terms of meeting the obligations associated with the prevention of money laundering and financing terrorism, the Bank collaborated with external institutions, continuously monitored and analysed entities and transactions that are classified as risky, according to the regulations and the Bank s internal acts and regular activities of following the domestic regulation and obeying the Decisions adopted in accordance with the Law on International Restrictive Measures and permanent following of the announcements of the European Council for the lists of risky countries and persons that have been sanctioned by EU (EU LIST, FATF, OFAC, SDN, CONSOLIDATED, GLOBAL lists); 3. Regarding the realization of the function of managing the security of the informational system and protection of personal data, during 2017, regular assessment of the risks was conducted for the assets of the information system and also the information book of the Bank was updated; a partial analysis was conducted and risk assessment of the information assets of the Bank for risk management in the digital area and a new Strategy for digital space threats management was revised. Performed regular revision of the Policy for security of the information system, performed update of the map for business processes in the Bank within the frames of the Analysis for nonspecific events in the business operations (Business Impact Analysis), revision of the Strategy for managing risks and continuity in the operations. The Manuals for manual labor in case of nonfunctioning IT and the continuity plan for operation of the organizational units have been revised, activities were taken in order to manage the registered security

31 incidents, cooperation with relevant or involved internal institutions, constant monitoring of the international standards, law regulations, technological changes. XV. ORGANIZATION AND PERSONNEL The organizational chart of Komercijalna Banka AD Skopje is comprised of (Annex chart No.1): 8 divisions, 32 departments (out of which 7 are independent departments), One independent department for Internal Audit under Supervisory Board, 103 Units (out of which 59 are in the HQ, and 44 within the branches), one independent unit for Internal inspection, 9 Sections (all are in the Bank`s HQ), Cabinet of Board of Directors, 11 branches (Prilep, Ohrid, Veles, Strumica, Kochani, Shtip, Kumanovo, Kavadarci, Gostivar, Bitola and Tetovo) and 57 city branches (out of which 18-city branches throughout the Republic under authority of the Branches and 39 city branches in Skopje). Depending of the education, work experience, responsibility and complexity of the work, 18 titles have been determined, separated in four groups: managerial, professional, professionally-administrative and technical and support. As at the total number of the Bank s employees was 1,041 out of which 788 employees are in the Head Office of the Bank and the city branches in Skopje and 253 in the Branches. In the course of 2017, the Bank continued to invest in professional training and qualification of its staff. Thereby, on professional training in the country 172 employees were sent, while on professional training abroad 39 employees were sent. 200 interns out of which 87 students in Skopje and 113 in the branches and city branches across the country did internship in the Bank. Due to the requirements of current operations, the employees attended internal trainings, such as: treasury operations, office and archiving operations, MasterCard sales for individuals, strengthening the team capacities, safety training, ethical code training, loan application analysis for legal entities, etc. Additionally, 13 managers attended a team building seminar and regular internal trainings were held for the novelties in the ongoing operations and other areas from the banking operations. According to the Remuneration Policy of Komercijalna Banka AD Skopje which is based on principles and regulations of corporate governance applied in the Bank s operations, with aim to ensure good performance and realization of aims and strategy of the Bank, the basis of the system of awards is established as well as the criteria which will be used to remunerate the members of Board of Directors, persons with special rights and responsibilities employees of the Bank and other employees of the Bank. Compensation for the members of the Supervisory Board is determined by a separate act that is approved by the Shareholders Assembly. Remuneration of the Board of Directors and persons with special rights and responsibility - employees of the Bank is consisted of: salary, other compensations established with the Manager Agreement, acts passed by authorized bodies of the Bank or by law and other regulation and annual compensation as a variable amount which is approved on the basis of the Decision on distribution of profit adopted by the Shareholders Assembly and reimbursed in the current year for the previous business year. During 2017, the Bank s activities were managed by: 3 members of the Board of Directors, 7 members of the Supervisory Board, 5 members of the Risk Management Committee, 5 members of the Audit Committee, 5 members of the Credit Committee, 7 members of the Committee for monitoring the information technology and management team according to the Bank s organization structure. In the reporting year, the Board of

32 Directors and the management team were paid a total amount of: MKD 126,974.8 thousand for gross salaries, MKD 10,591.2 thousand total amount of other remunerations (recourse, Christmas bonus, recovery of managerial insurance and severance), MKD 910 thousand for presence at meetings to the members of the Supervisory Board, MKD thousand to the members of the Audit Committee and MKD 26.7 thousand to one external member for presence at meetings of the Committee for monitoring the information technology. As at 31 December 2017 total approved loans and other forms of exposure to these persons (including their related parties) is MKD 357,681 thousand and the amount is fully complied with the Supervisory standards. XVI. INTERNAL AUDIT The Bank s internal audit aims to obtain objective and independent assessment of the adequacy and efficiency of the internal control systems, as well as adequacy of the implemented Bank s policies and procedures and their compliance with the law regulation, as well as with the aims of the business policy of the Bank. In the realization of the goal, considering the Bank s risk profile and main banking activities, the Internal audit focused its activities on revision of the adequate setup of the bank s internal control system for management with the relevant material risks, whereby the controls and systems for undertaking, measuring, following and managing with the credit, legal, reputational and operational risk were individually revised and tested. In accordance with the planned activities based on previously performed internal identification of the IT risks, regulatory demands and the degree of implementation of information technology in the Bank, IT revision was performed on significant segments in the functioning of the ICT system of the Bank. In accordance with the annual plan, during 2017, 31 regular audits were carried out in separate organizational units of the Banks and in four branches of the Bank the branches in Veles, Strumica, Kumanovo and Kochani. Two additional audits were conducted on the requests of client`s complaints. For the findings, identified weaknesses and recommendations on overcoming thereof, as well as to the bearers of the revised process and to the jurisdictional Bank s bodies 4 written reports were given. Despite the realization of the planned goals with the annual audit plan, in the reporting period the Internal audit also performed a consultancy and advisory role on the request of the responsible persons in order to provide efficient risk managing and was included in the reviewing of the draft regulation by NBRM and the Bank s internal acts. During 2017, significant activities carried out by the Internal Audit for realization of significant projects in the Bank from the aspect of consultation activity are as follows: implementation of the new Methodology of NBRM for recording and valuation of accounting items and preparation of financial statements in accordance with the new IFRS9 standard, revision of the interest rate policy of the Bank and selection of reference rates for calculating active and passive interest rates, as well as an advisory role in the working group for reviewing the established control system for security of the Bank s assets in several aspects

33 XVII. FINANCIAL DEPARTMENT During 2017, within the financial operations of the Bank, apart from regular activities from this domain, there were consultations on Bank level when supplements and amendments were made to the internal acts connected with the financial and material operations, monitoring and application of IAS and IFRS, above all the implementation of IFRS 9. New accounting policies were prepared in accordance with the new Methodology for recording and valuation of the accounting items and preparation of the financial statements, as well as continuous checking and consultation at the level of the Bank in each change and addition to certain policies related to the financial and material operations, the accounting procedures for separate business processes; verification and finalization of part of the program solution for generating the financial statements according to the NBRM Methodology, as well as their testing, change of the application solutions for recording in some of the application program solutions, in order to increase the connection of the programs with Glavna Kniga (Main Ledger) and avoid double entry data, as well as continuous consultation at the level of the Bank with proper application of the laws and regulations related to the fiscal regulation. XVIII. BRANCH NETWORK MANAGEMENT DEPARTMENT Within the activities of the Branch Network Management Department during 2017 the following activities were realized: providing two-way communication between the organizational units and branches in order to achieve timely and quality exchange of information for the operation s novelties, organization and coordination regarding the planning and implementation of the Bank s business policy in the branches, providing the highest level of services to the clients, efficient collection of claims, employees training and control of their performances, monitoring the statement and movement on the branches accounts, controlling of the branches reports, continuous technical and logistic support to activities related to the operation of the branches, submission of regular reports in the domain of operation of the branches, analysis of the retail loans, etc. In the reporting period, the branch in Bitola started to perform completely the transactions in the domain of payment operations for individuals and the branch in Gostivar started to perform completely the activities related to retail loans. XIX. OPERATIONS OF THE BANK S BRANCHES 1. The resources of the branches in Prilep, Ohrid, Veles, Strumica, Kochani, Shtip, Kumanovo, Kavadarci, Gostivar, Bitola and Tetovo participate in the Bank s total resources. As at , the total assets of the branches participated with 32.2% in the total Bank s assets (versus 31.9% in 2016) and the same with all branches noted increase, except with the Branch in Ohrid. 1.1 The total deposits as a most significant item in total resources of the branches further remain the major source of financing with each individual branch. Their participation in the total deposits of the Bank is 33.1%. Thus, compared to 2016,

34 the total deposits noted increase, with exception of the branches in Ohrid and Veles. 1.2 Corporate and retail lending is performed by all branches with the exception of a branch Gostivar that carries out lending only to individuals. The total net-loans of all branches represent 24.7% of the Bank s total net-loans. The net-loans of all branches, except the Bitola branch noted an increase in terms to December The Income Statement of Komercijalna Banka AD Skopje reflects the effects of the operations of the Bank s branches, thus, as at all of the branches, except the Gostivar and Bitola branch have realized a positive financial result. 3. Corporate lending of branches is realized within their abilities and in accordance with the authorities given in the Bank s Credit Policy and Procedures and other internal acts that regulate this matter as well. During 2017, the branches have continued to realize their loan activities towards corporate clients, thus they have realized an annual increase of the value of the disbursed short-term loans (except the Veles branch) and total participation of 22% in the short-term loans on the Bank s level. The long-term lending has noted an increase with the branches in Prilep, Strumica, Kochani, Kumanovo, Kavadarci and Tetovo, thus the total participation of the branches is 31.6%. The branches of Komercijalna Banka AD Skopje have their own Operative Credit Committees. In the course of 2017, the number of meetings was from 9 in Gostivar to 220 in Shtip branch, when 2,051 decisions and conclusions were adopted. 4. Retail banking of branches mainly encompasses taking savings deposits from citizens, opening current accounts, denar and FX passbooks and lending to citizens The retail deposits are mostly taken as savings deposits, while the assets on the current accounts note smaller participation. Their participation in the Branches is 37.8% within the total deposits and all of them note increase in terms of The total participation of the branches in the newly opened denar passbooks is 47.4%, and in the newly opened FX passbooks and accounts is 57.7% In the reporting period, the branches of Komercijalna Banka performed the activities from the international payment operation area by executing orders through the Bank s accounts and as at their participation in the total international payment operations with individuals is 47.6%. Bitola Branch has started to completely perform the transaction in the international payment operations for individuals. In the domain of the FX operations with individuals participation of branches is 41.9% The total volume of non-cash transactions (counter transactions, standing orders and Decisions for enforced collection) realized in the domestic payment operations is MKD 8,759 million, while the amount of the cash transactions (payment, collection and Western Union transactions) is MKD 42,406 million. Their participation in noncash transactions is 32.2% and in cash transactions is 52.8% In the period January-December 2017, the branches participated with 42.7% in total disbursed loans to citizens (from 1.0% with Gostivar branch to 6.9% with Shtip branch). Gostivar Branch started completelty to perform its activities with lending to individuals. According to the structure of the disbursed loans with all of the branches, dominant participation have the consumer loans, with exception of the Kumanovo Branch where their participation is identical with the one of the housing loans Within card operations, the Bank s branches have been actively involved in popularization of these products on regional level. Depending on the conditions in the region of operation, the number of the newly issued bank cards in the Bank s

35 branches varied from 531 cards issued in the branch in Gostivar, up to 3,355 cards in the Prilep Branch. The total participation of the branches in the newly issued cards is 39.5%. 5. In the domain of the international payment operations of legal entities, the branches of Komercijalna Banka AD Skopje continued to perform their activities, mainly through payment orders. Thus, the total turnover of the branches` international payment operations participated with 35.3% in the total turnover of KB. 6. During 2017, the Bank s branches have continued to perform its domestic payment operations within their scope of work, thus their participation on the Bank s level is the following: 44.7% in the newly opened accounts to legal entities, 37.2% in the number of active accounts of legal entities, 31.7% in the performed transactions of legal entities, 54.2% in the value of payments and 50.3% in the value of outflows. 7. In the course of 2017, the branches maintained liquidity at the level which enables continuous performance of their financial activity, followed by the statement of the sub account for functional activity and for holding certain amount of funds in the treasury, within the frames of the prescribed treasury maximum. Their participation in the total turnover on the FX market is 33.8%. 8. As at the total number of employees in the Bank s branches is 253 or 24% from the total number of employees in the Bank. XX. CORPORATE GOVERNANCE REPORT 1. Structure and performance of the Bank s bodies In the course of 2017, the Bank performed its activities through the Bank s bodies: Shareholders Assembly, Supervisory Board, Board of Directors, Risk Management Committee, Audit Committee, Credit Committee and Information Technology Committee Shareholders Assembly As at , the Bank has a total of 5,075 shareholders. Within its competencies, the Bank s Assembly performs all the duties set by the law regulations and the Bank s Statute. The Assembly held one regular meeting on , when it adopted the Financial reports of the Bank and their consolidated financial reports for 2016, audited by an audit company, adopted the Bank s Annual Statement for 2016, considered and adopted all reports and proposed materials for performance of the Bank in 2016, adopted the Decision on amendments to the Statute in accordance with the amendments to the Banking Law, adopted the Bank s Program for Measures and Activities of Business Policy and financial plan for 2017, Development Plan of the Bank with financial projections for the period , adopted a Decision on determining the audit company, adopted a Decision on accepting the Report for compliance of the Banks performance with the Corporate Governance Code for the companies listed on the Macedonian stock exchange and Decision on the adequacy of the Corporate Governance Code of Komercijalna Banka AD Skopje

36 1.2. Supervisory Board In 2017, pursuant to the Banking Law and Statute of the Bank, the Supervisory Board performed its activities with 7 (seven) members: Sava Dimitrova independent member and President, Ph.D Taki Fiti - Vice President, Margot Jacobs - member, Zvone Taljat - member, Goran Antevski - member, Sasho Naumoski member and Aleksandra Maksimovska independent member. Тable 9 Members of the Supervisory Board of Komercijalna Banka AD Skopje Sava Dimitrova, independent member and President age 68 sex Female Retired profession Data for material compensations and other rights under work agreements MKD 2,275 thousand (gross) annually Macedonian citizenship Date of first nomination years Duration of mandate Data for membership in other Is not a member of other managing bodies managing bodies Is not a member of other supervisory bodies Data for membership in other supervisory bodies MKD 21, is paid for participation in a meeting Compensation for membership in the Supervisory Board Taki Fiti, Vice-President age 67 Male sex Full-time professor at the University Ss. Cyril and Methodius Faculty of Economics Skopje and President of MASA (Macedonian Academy of Science and Art) profession Data for material compensations and MKD 3,670 thousand (gross) annually other rights under work agreements Macedonian citizenship Date of first nomination 4 years Duration of mandate Data for membership in other Is not a member of other managing bodies managing bodies Is not a member of other supervisory bodies Data for membership in other supervisory bodies MKD 21, is paid for participation in a meeting Compensation for membership in the Supervisory Board

37 Zvone Taljat, member age 67 sex Male profession Manager of Publikum Holding DOO Ljubljana Data for material compensations and other rights under work agreements The data on income under work agreements are confidential and cannot be released citizenship Slovenian Date of first nomination Duration of mandate 4 years Data for membership in other Is not a member of other managing bodies managing bodies - Member of the Supervisory Board of Publikum, investment company d.o.o. Ljubljana, Slovenia; Data for membership in other supervisory bodies - Member of Supervisory Board of ALTA Skupina, companies management d.d. Ljubljana Slovenia. Compensation for membership in the Supervisory Board MKD 21, is paid for participation in a meeting Sasho Naumovski, member age 49 Мale sex Chief Executive Director of Vitaminka AD Prilep production of conditory products profession Data for material compensations and other rights under work agreements MKD 5,537 thousand (gross) annually citizenship Macedonian Date of first nomination Duration of mandate 4 years Data for membership in other Is not a member of other managing bodies managing bodies Member of the Supervisory Board of the Company for Data for membership in other supervisory bodies production, trade and services VEDRINA DOO import export Prilep Compensation for membership in the Supervisory Board MKD 21, is paid for participation in a meeting Aleksandra Maksimovska, independent member age 43 Female sex Professor on Faculty of Law Justinianus Primus St. Cyril and Methodius University profession Data for material compensations and other rights under work agreements MKD 1,767 thousand (gross) annually citizenship Macedonian Date of first nomination Duration of mandate 4 years Data for membership in other Is not a member of other managing bodies managing bodies Data for membership in other supervisory Is not a member of other supervisory bodies bodies Compensation for membership in the Supervisory Board MKD 21, is paid for participation in a meeting

38 Goran Antevski, member age 45 sex Male Manager in Rade Koncar TEP - production of electric motors, generators, transformers and devices for distribution and control of profession electricity The data are appropriately presented in the Annual Report on the Data for material compensations and other rights under work agreements operation of Rade Koncar TPP Transformers and Electrical Installations citizenship Macedonian Date of first nomination Duration of mandate 4 years Data for membership in other Is not a member of other managing bodies managing bodies Data for membership in other supervisory Is not a member of other supervisory bodies bodies Compensation for membership in the Supervisory Board MKD 21, is paid for participation in a meeting Margot Jacobs, member age 53 sex Female profession Senior advisor in East Capital Private Equity AB Data for material compensations and other rights under work agreements The data on income under work agreements are confidential and cannot be released citizenship USA Date of first nomination Duration of mandate 4 years Data for membership in other Is not a member of other managing bodies managing bodies Data for membership in other supervisory bodies Compensation for membership in the Supervisory Board - Independent member of the Supervisory Board of the Public Joint-Stock Company "Pivdenniy", Odessa, Ukraine; - Non-executive member of the Board of Directors of the Asian Pacific Bank ("ATB"), Moscow, Russia. MKD 21, is paid for participation in a meeting The members Zvone Taljat and Margot Jacobs are financial experts, whereas Sava Dimitrova and Aleksandra Maksimovska are independent members of the Board. For the selection of the independent members all criteria for independency determined by the Banking Law were complied with. Independent members and persons related thereto are not employees neither are people with special rights and responsibilities in the Bank, they are not shareholders with qualified share in the Bank and are neither proxies of a shareholder with a qualified share in the Bank, they don t work, and in the past 3 years haven t been employees in the auditing company, which in that period audited the Bank s performance and in the past 3 years didn t have a material interest or business relation with the Bank in the amount which in average exceeds MKD 3,000, Sava Dimitrova atended 6 meetings during 2017 PhD. Taki Fiti atended 5 meetings during 2017 Margot Jacobs attended 6 meetings during 2017 Zvone Taljat attended 6 meetings during 2017 Goran Antevski attended 6 meetings during

39 Sasho Naumovski attended 4 meetings during 2017 Aleksandra Maksimovska attended 6 meetings during The Supervisory Board, during 2017, held 6 regular meetings and passed: 89 decisions, 1 policy, 6 plans, considered 32 information, 73 reports, 2 Stress-testing, 23 reviews, 4 calculations, as well as other current issues under its competence. The Supervisory Board debated on essential questions from the scope of operation of the Bank, made monthly review of the liquidity and economic and financial situation and undertook necessary measures for prevention of the capital of the Bank and for collection of problem loans. According to the provisions of the Bank s Statute, the Supervisory Board within its competences, adopted the following documents: Policy and procedures for operation of the Independent Problem Loan Management Department, Amendments and Supplements to the Credit Policy and Procedures of Komercijalna Banka AD Skopje, Amendments and Supplements to the Policy and procedures for retail lending, Amendments and Supplements to the Policy on management with the risk from interest rates in the portfolio of banking activities, Amendments and Supplements to the Policy for Market risk management, Amendments and Supplements to the Policy of total exposure of Komercijalna Banka AD Skopje towards domestic banks and saving houses and towards foreign banks, Supplements and amendments of the Investment Policy in securities, Amendments and Supplements to the Methodology for the system of internal ranking of clients through a developed score model of Komercijalna Banka AD Skopje in the process of determining the impairment/special reserve of financial instruments, Decision on amending the Strategy for risk management of Komercijalna Banka AD Skopje, Decision on amending and supplementing the Decision on the manner of selection of an external credit rating institution for the purposes of using their credit ratings when determining the capital adequacy ratio of Komercijalna Banka AD Skopje, Decision on interest rates of Komercijalna Banka AD Skopje, Decision on the Bank s Terms and Conditions Applicable to Customers, Decisions on determining limits of total exposure of Komercijalna Banka AD Skopje towards certain clients and their related parties, Decisions on Determining limits of total exposure of Komercijalna Banka AD Skopje towards domestic banks and saving houses and towards foreign banks, Decision for naming members to the Risk management Committee of Komercijalna Banka AD Skopje, Business Continuity Plan. The Supervisory Board accepted Elaborates for write-off, Decisions on regulation of the claims and the impairment provision on the foreclosures, accepted the information for transfer of claims from certain clients, Annual and Semi-annual report on the Bank operation, adopted the reports on operation of Risk Management Committee, Reports of the audits carried out by the Internal Audit, Reports from the Compliance Department, as well as other information and reports of its competence

40 1.3. Board of Directors The Bank s Board of Directors is composed of 3 (three) members, with a mandate of 6 (six) years: - Hari Kostov, Chief Executive Officer and President of the Board of Directors, - Ilija Iloski, Chief Operating Officer and member of the Board, - Maja Stevkova Sterieva, Chief Financial Officer and member of the Board. The Decisions on nomination of members of the Board of Directors were adopted by the Supervisory Board of the Bank on and on Apart from the activities which were continuously executed in accordance with the Banking Law, the Bank s Statute and other Banks acts, in the course of the reported period, the Board of Directors passed 3,863 decisions on approving short-term denar loans, decisions on approving long-term loans, loans for permanent working capital, decisions on issuance of denar and FX guarantees, decisions on approving short-term FX loan to resident as a cover for opening and paying letters of credit, decisions on approving short-term denar loans as coverage for opening and paying letters of credit, decisions on approving framework revolving loans, loans for residential construction, consumer loans for purchasing cars, customer loans with non-identified purposes, loans for specialization and education in the country, loans for approving cash loans secured by fx or denar deposit, loan secured by pledged government bonds, decisions on approving credit limit and issuing MasterCard and Visa credit cards. Also, the Board of Directors passed decisions on procurement of working assets and equipment, decisions on selling the fixed assets of the Bank and determining its initial price, decisions on renting fixed assets etc. In 2017, the Board of Directors also passed guidelines, rules and procedures, programs and plans as follows: Guidelines of Komercijalna Banka AD Skopje for redistribution of the accounts by positions and business lines to determine the capital required to cover the operating risk by using the Standardized approach, Guidelines for operation with a system for promotional communication through ( marketing), Guidelines for servicing the ATM network, Manual for background operations, procedures of the domestic payment operations processes in Komercijalna Banka AD Skopje, Manual for approving sponsorships and donations in Komercijalna Banka AD Skopje, Manual for distribution of the accounts by positions and operating segments within Note 4A: Reporting by segment operating segments, Guidelines on the manner and procedure for execution of decisions on forced collection in Komercijalna Banka AD Skopje, Guidelines for the application of procedures in the performance of joint tasks between the Independent Treasury Operations Department and the Independent Branch Network Management Department, Guideline on the operation of the Software Development and Management Department, Procedures on the manner of answering the questions to determine the credit capability of clients non-financial legal entities and general indicators of impairment in a classification procedure, Procedures on acceptance of receipt of orders electronically at the Securities and brokerage department, Procedures on the manner of using the credit ratings when determining the capital adequacy ratio of Komercijalna Banka AD Skopje, Procedures to determine the capital adequacy ratio of Komercijalna Banka AD Skopje, Procedures for selection and supervision of the sub-custodian of pension funds and sub-depository bank of investment funds, Procedures for electronic request and issuance of requested consumable materials and request for small inventory from the Bank's warehouse, Procedures for identification, assessment, measurement, monitoring and control of the credit risk of Komercijlana Banka AD Skopje, Plan for deadlines and responsible persons

41 for submission of reports outside the Bank, Methodology for determination of quotations for SKIBOR items, Rules of functioning of the Commission for SKIBOR quotations Risk Management Committee The Risk Management Committee is consisted of 5 (five) members and 6 (six) deputy members with duration of 6 (six) years: Hari Kostov - President; Maja Stevkova-Sterieva - Deputy; Suzana Moskovska member, Biljana Maksimovska - Popovik - member and Teodora Guskova-Prodanova member. Deputy members of the Committee are: Tatjana Leskaroska Minoska, Vesna Kiprijanova, Irena Zivkovic Zareva, Biljana Hadzi Velkova, Nikola Dzambazovski and Lidija Ilic. All members and deputy members of the Risk Management Committee are selected from amongst the persons with special rights and responsibilities, employed in the Bank and they fulfill all the conditions provided by the Banking law and have experience in the banking sector of at least 3 years. The Decision on nominating members of the Risk Management Committee was passed by the Supervisory Board on In 2017, the Risk Management Committee held 52 meetings and with written consent by the members of the Committee passed 418 decisions, 39 conclusions, reviewed 154 information documents, adopted 106 reports and 27 reviews and adopted 1 Strategy and 7 instructions. The Committee monitored the overall operation of the Bank, took care of the implementation of the policies and procedures for evaluation of loans and their managing, monitored the implementation of the credit policy and procedures and passed separate decisions on approving the credit exposure to the clients and persons related with them within the frame of limits provided by the Decision of the Supervisory Board. The Committee decided for prolongation of the terms of maturity of Bank s claims on more than two occasions. In the course of 2017, the Risk Management Committee considered and approved draftdecisions and proposed them to the Supervisory Board for adoption. In accordance with the Banking Law and Statute of the Bank, the Risk Management Committee submitted reports on its operations to the Supervisory Board Audit Committee The Audit Committee is consisted of 5 (five) members with a mandate of 4 (four) years. In the procedure of nominating members of this Committee the principle of transparency has been applied. The Decision for nomination of members of Audit Committee was passed by the Bank s Assembly on and published in the regulated term

42 Members of the Audit Committee are: Sava Dimitrova, Ph.D. Taki Fiti, Aleksandra Maksimovska, Ph.D. Blazo Nedev and Marjan Andonov. PhD. Blazo Nedev and Marjan Andonov are independent members of the Committee. While electing the members of Audit Committee, the criteria for independence defined by the Banking Law have been fully applied. The independent members and related parties therewith are not employees and are neither persons with special rights and responsibilities in the Bank, they are not shareholders with qualified participation in the Bank nor are proxies of a shareholder with a qualified participation in the Bank, they don t work, nor in the last 3 years haven t been employees in the audit company, which in that period made an audit of the Banks performance and in the last 3 years didn t have a material interest of business relation with the Bank in amount up to MKD 3,000,000. During 2017, the Audit Committee held 4 regular meetings and adopted the Financial Statements of Komercijalna Banka AD Skopje for 2016 (separate and consolidated), audited by the Audit Company KPMG Macedonia DOO Skopje, reviewed Information on credit risk, Reports for operations of the Risk Management Committee and Reports of the Internal Audit for performed audits during Credit Committee The Bank s Credit Committee is consisted of 5 (five) members and 5 (five) deputy members with a mandate of 4 (four) years: Ilija Iloski President, Maja Stevkova-Sterieva - Deputy, Biljana Maksimovska Popovik - member, Gabriela Milenkovic - member and Suzana Moskovska - member. Deputy members of the Committee are: Tatjana Leskaroska Minoska, Biljana Hadzi-Velkova, Nikola Dzambazovski, Lidija Ilic and Zorica Pejkoska. The Decision for nomination of members and deputy members of Credit Committee was passed by the Supervisory Board on In the course of 2017, the Bank s Credit Committee held 52 meetings and with written consent of the members passed 1,540 decisions and 1 conclusion. At the meetings, the Committee considered and accepted many information, credit analysis, reviews and reports (monthly and quarterly), such as: executive procedures for enforced collection of claims, claims collected from legal entities and individuals, statement of the placements of certain clients, clients classifications by separate risk categories with a plan of measures and activities, overdrafts on the checking accounts and MasterCard cards with a plan of measures and activities for their collection etc. The Credit Committee also considered and accepted Draft-Decisions under the competence of the Risk Management Committee and Draft-Decisions under the competence of the Supervisory Board of the Bank Information Technology Committee The Information Technology Committee is consisted of 7 (seven) members with a mandate of 4 (four) years. The members of the Committee are: Ilija Iloski president, Zorica Cherepnalkoska Vice President, Ph.D. Ana Madevska Bogdanova member, Igor

43 Bislimoski member, Gabriela Milenkovikj - member, Milica Georgieva member and Tatjana Leskaroska Minoska - member. The Decision on nominating members and deputy members of the Information Technology Committee was adopted by the Supervisory Board on The Information Technology Committee of the Bank in 2017 held 2 meetings on which it passed 7 decisions. 2. Organization structure of the Bank The organization structure of Komercijalna Banka AD Skopje is attached in Annex Diagram No.1 of the Annual Report. More details in Chapter XV - Organization and Personnel. 3. Shareholders structure As at , the Bank has a total of 5,075 shareholders. As at , the total number of issued shares is 2,279,067 ordinary shares. As at the total number of voting shares is 2,276,681 shares. East Capital Explorer Investments AB is a shareholder with qualified majority in the Bank. East Capital Explorer Investments AB together owns 10.0% from the total number of the issued shares and % from the total number of voting shares on Margot Jacobs is a member in the Supervisory Board as a representative of the shareholders with a qualified majority in the Bank. 4. Rights arising from shares Owners of ordinary shares have the following rights: 1. voting rights at the meetings of the Bank s Assembly, 2. rights on payout of a part of the profit (dividend) and 3. Right of payment of the residue of the liquidation or bankruptcy estate of the Bank. Each voting share provides only one vote at the meetings of the Bank s Assembly. 5. Application of the Bank s Corporate Governance Code The Corporate Governance Code of Komercijalna Banka AD Skopje, was adopted at the regular meeting of the Bank s Assembly in At the Bank s Shareholders Assembly meetings held in March 2010, March 2011, March 2012 and March 2013, Decisions have been made for supplements and amendments to the Code for corporate governance of Komercijalna Banka AD Skopje, while on the Assembly held in March 2014, March 2015 and March 2016 Decisions on appropriateness to the Code of Corporate Governance of Komercijalna Banka AD Skopje were adopted. With the Code, the Bank has established the basic principles of corporate governance as a whole of mutual relations between the Board of Directors, other persons with special rights and responsibilities who perform management functions in the Bank, the Supervisory Board, the Banks shareholders and

44 the other parties involved. The Code is consisted of the obligatory elements defined by the Decision on basic principles of corporate governance of the Bank, passed by the National Bank. During its operation, the Bank fully adheres to the principles of corporate governance defined by the Code such as: guaranting the rights and interests of shareholders, transparency of the ownership structure, delegation of the responsibilities, regular and efficiency control and audit, respect of the regulations, ethical standards and practices, independence and objectivity and the other principles. The Bank s performance is complied with the provisions of the Corporate Governance Code related to the procedure of convening meetings of the Bank s Assembly, voting procedure, shareholders rights, cooperation between the Supervisory Board and Board of directors, type, terms and manner of delivering the informations and documents from the Board of Directors to the Supervisory Board and way of acting in the situations where there is conflict of interests. The obligations, responsibilities and way of performance of the Bank s bodies defined in the Code are fulfilled in whole by the members of the Bank s bodies. Members of the Bank s bodies during their regular operations adhere to the law regulation, by-laws, Statute of the Bank and other Bank s internal acts. 6. Policy for prevention of conflict of interest In 2017, the Bank performed its operations in accordance with the Policy for Prevention of Conflict of Interests (passed by the Supervisory Board in 2008) which defines principles for identification of the potentional conflicts of interests as well as defining the measures and activities that should be undertaken in cases when there are conflict of interests. Pursuant to the Policy, the Bank has established procedures for monitoring the potential sourses of conflict of interests. The Policy defined the obligations and responsibilities of persons with special rights and responsibilities and other employees in the Bank regarding avoidance of the potentional conflict of interests. Direct managers of the organizational units make hierarchy control of use and attention of the Policy orders and undertake measures and activities for removal and correction of the behavior of an employee, which is not in compliance with the Policy. The persons with special rights and responsibilities present a written statement on the existence, if any, of a conflict of their personal interest with the interest of the Bank, on a six month basis. Members of the Supervisory Board and Board of Directors are not present at the meetings where the decisions are passed by these bodies, if their objectivity is being questioned because of the existence of personal conflict of interest and interest of Bank. A Member of the Supervisory Board or Board of Directors shall make a written statement on the existence of conflict of interests before holding the session, which shall be delivered to the Supervisory and the Board of Directors stating the basis on which the conflict of interests had arisen from

45 7. Compliance of the Bank s performance and management with the Corporate Governance Code for the companies listed at the Macedonian Stock Exchange Komercijalna Banka AD Skopje, as a member of the Macedonian Stock Exchange, has complied its performance with the Corporate Governance Code for the Companies listed on the Macedonian Stock Exchange and in the course of 2017 it strictly kept on adhering to the prescribed principles of the Code. - The Bank published the information about the rights that arise from types and classes of shares issued by the Bank as well as the amendments and supplements of the Bank s Statute at its web site and at the web site of the Macedonian Stock Exchange, - During 2017, the Bank held the regular general Meeting of the Shareholders Assembly in April, adhering to the principle according to which family members of the individuals who are authorized to represent the Bank and their representatives or a representative of the member of the Supervisory Board or Board of Directors cannot be appointed as proxies, which has been fully met, - In 2017 there are no shareholders agreements concluded limiting the rights of the Bank s shareholders arising from shares, - The prescribed procedure for convening the Shareholders Meetings in April, accessibility to information, the procedure for registering the attendance as well as the manner of conducting the Assembly s meeting were fully met, - In 2017 there were changes made to the ownership structure of the Bank s capital referring to the shareholders with qualified majority over 5%. The EBRD a shareholder with a qualified majority, sold its share of 5.245% of the total capital on , - In 2017, no decisions were adopted to amend the Bank s identity and character, - Participation of foreign capital in the Bank as at is 30.21% in the Bank s capital. East Capital Explorer Investments AB is shareholder with a qualified share in the Bank. East Capital Explorer Investments AB holds 10.0% from the total number of shares, - By the Code of Ethics, adopted in 2008 and the Code of Ethics for the employees in Komercijalna Banka AD Skopje adopted in 2014, the Bank established professional standards and corporate values used by members of Supervisory Board, the Board of Directors, other persons with special rights and responsibilities and the rest of the employees which especially refer to: avoiding corruption and other illegal and unethical behaviour and activities, avoiding a conflicts of interest, transactions with related parties and keeping the banking secret, - In 2017, the Bank fully met the principle which stipulates timely and accurate disclosure of all material matters regarding the Bank, its financial situation, performance, as well as all price sensitive information at the Bank s web site and at the web site of the Macedonian Stock Exchange and in a daily newspaper. The Disclosure Policy passed by the Supervisory Board of the Bank regulates the ways of disclosure of reports and data by the Bank, types of data which are subject of disclosure, the form in which they are disclosed, frequency of disclosure and control mechanisms which shall be incorporated during the processes of disclosure, - The Bank s Supervisory Board realized an efficient system of control to the Bank s management in the course of 2017, - The Supervisory Board held 6 meetings during 2017, and the Report on the performance of this Board contains more details about its activities,

46 - The Supervisory Board fully met the principle of transparency during the procedure of the Board s member nomination and election. Zvone Taljat and Margot Jacobs are financial experts. Sava Dimitrova and Aleksandra Maksimovska are independent members in the Supervisory Board, - The principle which stipulates that the Supervisory Board President is responsible for regular functioning of the Board has been fully met in 2017, - The Director of the Legal Affairs Division, who manages the appropriate department for support of the Board of Directors operation, performs the function of Internal Legal Advisor in the Bank, - Pursuant to the Banking Law, the Audit Committee, as a Bank s body, performs the function of the Audit Commission, - In 2017, the Bank performed its operations in accordance with the Policy for remuneration, - In 2017, the Supervisory Board was responsible for achieving the Bank s aims and strategy, taking into account the interests of the concerned parties, - The principle which stipulates that the Supervisory Board members are responsible for compliance with the laws and other regulations for managing the risks associated with the Bank has been fully met. Namely, the Bank has established an efficient system for managing the internal risk and control, - In accordance with the Banking Law, the persons with special rights and responsibilities present a written statement on the existence, if any, of a conflict of their personal interest with the interest of the Bank, on six month basis. In case of conflict of interests, a written statement shall be submitted to the Bank s Supervisory Board and the Board of Directors indicating the reason underlying the conflict of the personal with the Bank s interest. The Bank did not conclude any major transactions in The affairs with the concerned party are approved in accordance with the Banking Law. XXI. CORPORATE SOCIAL RESPONSIBILITY During 2017, Komercijalna Banka AD Skopje continued with the activities for investment in the community through its Coordination Body for social responsibility and realization of activities for social responsibility through realization of concrete projects, encouraging internal processes for socially responsible practices and continuous education and involvement of the employees in this type of projects of the Bank. On the basis of the analysis of the previous activities, as well as the assessments of the future needs of the community, the Bank has adopted a Strategy for Corporate Social Responsibility for the period In order to realize its efforts for a healthy environment, the Bank provided 5 branded bicycles for employees during working hours. As more significant projects that the Bank undertook through its Coordinative authority for corporate social responsibility are the following: - started cooperation through donation to the National Gallery; - donations in the Day Care Center for persons with cerebral paralysis;

47 - continuation of the cooperation with the Center to educate kids on the street from Shuto Orizari; - awarded saving books Open children savings Ververicki for all children born on 31 st of October; - continuation of the collaboration with Red Cross of Republic of Macedonia for the project Better socialization of the children and youth with special needs ; - The Bank has continued the collaboration with the NGO HERA and the project Family center for family violence victim and the youth centers I want to know ; - inclusion of the employees in the action Share the luck with New Year s packages; - in cooperation with the Macedonian platform against poverty and the NGO Humanost, the employees and the management joined in recognizing the world day for battle against poverty with a donation; - the Bank started cooperation with the "One Can!" Association for single parents and offered its support for the realization of the vision for equal treatment, the visibility of their problems in the society, as well as the fight for parental rights; - Along with this association a sales event was organized with the title: Recycling, re-use and creative use through which the donated pieces of wardrobe, the single mothers turned into modern creations. In this manner, the Bank and the association want to increase the level of consciousness for recycling as one of the ways to save financial assets and protect nature. CONCLUSION In 2017, Komercijalna Banka kept on performing its activities successfully. 1. The total assets and resources of the Bank as at reached the amount of MKD 104,860.2 million and noted an increase of MKD 4,123.2 million or 4.1% compared to In the period the Bank realized positive gross financial results of its operation in amount of MKD million, while in the last year the Bank realized positive gross financial result in amount of MKD million which represents a growth of 4.6%. The income tax in 2017 amounted to MKD 91.8 million. The net-profit for 2017 amounted to MKD million. The realized profit before impairment provision, which represents an indicator for the operational ability of the Bank to cover its expenses is by 18.2% higher in terms of 2016 as a result of the increase of the capital gains from the sale of foreclosed assets. The net impairment of the financial assets calculated by the methodology of NBRM as at amounted to MKD 2,381 million and in the same period last year when it amounted to MKD 1,753 million notes an increase of 35.8%. During 2017, the quality of the loan portfolio further deteriorated, so the negative events related to the operation of certain larger clients contributed to the loss of impairment of financial assets to significantly exceed the projections for the year. Therefore, the Bank undertook efforts to overcome the situation through prudent asset management, organizational changes in the direction of strengthening the collection of problem loans and continued with more intensive activities for selling the foreclosed property on the basis of outstanding claims

48 3. Komercijalna Banka AD Skopje continued to successfully manage the banking risks and operated in accordance with and fulfills the prescribed legal supervisory standards completely. In the reporting period the Bank performed a write-off of the balance sheet claims that are fully impaired for more than two years in the amount of MKD 2,042.2 million according to the Decision of NBRM on amending and supplementing the Decision on credit risk management (Official Gazette number 223/15). The risk coefficient, calculated as a ratio between the impairment and the total credit exposure of the Bank as at is 6.74%, versus 7.49% as at Despite this write-off, the Bank will continue to try and collect the claims within the available legal frame. 4. With the lending to legal entities during 2017, the participation of short-term denar loans in total disbursed loans is 84% and the same notes an increase of 10.5%, whereas the participation of disbursed long-term loans is 16% and notes a decrease of 15%. The disbursed F/X loans from the credit lines are decreased by 73.7%, while the F/X loans from the Bank s own assets are doubled. In order to strengthen the collection of claims, the Independent problem loan management department was established which resulted in collection in the amount of MKD 2,803.5 million, out of which 87% are collected claims from balance - sheet records and 13% are from off - balance sheet records. 5. In the reporting year, the international division noted an increase in the received F/X guarantees (49%), opened import letters of credit (a growth above 100%). The value of issued f/x guarantees is for 30.6% lower compared to last year, as well as the export L/C for 66.5%. 6. The activities from the domain of investments in securities in the reporting period were realized through: participation of the Bank in the auctions of treasury bills and government bills, investments in long-term securities, opening of custodian accounts and trading with securities at the Macedonian Stock Exchange. The Bank also performed custodian activities for one voluntary and one mandatory pension fund and functioned as a depository bank for seven domestic investment funds. 7. In the reporting period, activities regarding retail banking are characterized by growth of total retail deposits by 6.6% and increased statement of retail loans for 2.1%. The dynamic activities within the cards operations characterized with increase of the newly issued cards for 67%, the number of card transactions is increased by 10.2% and their value has increased by around 6.2%, E-commerce transactions have increased for 44% (number of transactions), their value is increased for 60% and 909 new POS terminals were installed. There is also an increase in the services of the electronic, mobile and SMS banking. The domestic payment operations note a decrease in the value (for 2.4%); while the international payment operation for individuals is increased for 16.4% and the fx-exchange operations note a decline (for 14.9%). 8. In the period , in the domestic payment operations, the total number of active accounts of legal entities increased (by 7%), increasing the value of non-cash transactions (by 10%), reducing the number of cash transactions (by

49 3%), as well as reducing the value of payments (inflows and outflows). Significantly, the increase in the number of users (by 17%) and realized transactions from legal entities (by 11%) through the service "Internet Bank". 9. The total realized international payment operations measured by the payment instruments note a value increase for 0.3% and increased number of transactions for 0.5% relative to In the reporting period, Komercijalna Banka AD Skopje undertook adequate activities to ensure compliance of the Banks operations with the regulation as well as to prevent its involvement in possible criminal activities by its clients from money laundering operations, as well managing the security of the information system and personal data protection. 11. In 2017, regular and additional audits were performed and the concerned parties and authorities were continuously informed by written reports of the findings, identified weaknesses and recommendations to overcome them. 12. In 2017, the organizational chart of Komercijalna Banka AD Skopje is comprised of: 8 divisions, 32 departments (out of which 7 are independent departments), one independent department for Internal Audit, 103 Units, one Independent unit for internal inspection, 9 sections, the Cabinet of Board Directors, 11 branches and 57 city branches. As at 31 December 2017, the total number of the Bank s employees was 1,041. During 2017, the Bank s activities were managed by: 3 members of the Board of Directors, 7 members of the Supervisory Board, 5 members of the Audit Committee, 7 members of the Committee for monitoring the information technology and management team according to the organization structure. Komercijalna Banka AD Skopje has complied its performance with the principles of the Corporate Governance Code of Komercijalna Banka and the Corporate Governance Code for the Companies listed on the Macedonian Stock Exchange. 13. In the area of vault operations, the reporting period is characterized by a decrease of the number of active safe deposit boxes for individuals and an increase for the legal entites. 14. The Bank had significant activities in the segment of IT support of the banking performance. 15. In the reporting period, the marketing activities of Komercijalna Banka were conducted in accordance with the adopted Program and Budget realm for marketing-communication activities, sponsorships and donations for 2017, while through the Coordination Body for Social Responsibility, the Bank continued with the activities for investing in the community and managed to increase the level of awareness of corporate social responsibility by realizing concrete projects, encouraging internal processes for socially responsible practices and continuous education and involvement of employees in volunteer activities. SUPERVISORY BOARD

50 ORGANIZATION CHART OF KOMERCIJALNA BANKA AD SKOPJE SHAREHOLDERS ASSEMBLY Independent Vault Operations Department Independent Problem Loan Management Department Independent Internal Audit Department SUPERVISORY BOARD Independent Marketing Department Independent Branch Network Management Department Cabinet of the Board of Directors BOARD OF DIRECTORS Independent Compliance and AML Department - Information Security Officer Independent Finance Department Independent Domestic Payment Operations Department Liquidity and Financial Market Division Risk Management and Planning Division Corporate Lending Division International Division Retail Banking Division Human Resources and General Affairs Division Legal Affairs Division IT Division Financial Instruments Trading Department Custodian Operations Department Securities and Brokerage Department Liquidity and Back Office Operations Department Credit Risk Management Department Non-credit Risk Management Department Planning, Analysis and Capital Management Department Manufacturing Lending Department Agriculture Lending Department Trade and Tourism Lending Department Department for Construction, Transport and Other Activities Lending Loan Administration Department International Payment Operations and Foreign Currency Accounts Department Foreign Currency Loans and Foreign Currency Guarantees Department SWIFT Communication and Correspondence Unit Foreign Currency Accounting Unit Deposit Operations Department Bank Cards and Transaction Accounts Department Retail Lending Department Loan Collection Unit Customer Relationship Management Unit Organization, Human Resources and Salaries Department Investments and General Affairs Department Security Unit Independent Internal Inspection Unit Legal Affairs Department Management and Informing Department Real Estate and Equipment Appraisal Unit Software Development and Maintenance Department Infrastructure Support Department Operative Activities and Users Support Unit Ohrid Branch Prilep Branch Strumica Branch Veles Branch Shtip Branch Kochani Branch Kumanovo Branch Kavadarci Branch Gostivar Branch Bitola Branch Tetovo Branch