DISCLOSURE. IN ACCORDANCE WITH THE REQUIREMENTS OF ORDINANCE 8 OF BNB ON THE CAPITAL ADEQUACY OF CREDIT INSTITUTIONS (Art. 335 of Ordinance 8 of BNB)

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1 DISCLOSURE IN ACCORDANCE WITH THE REQUIREMENTS OF ORDINANCE 8 OF BNB ON THE CAPITAL ADEQUACY OF CREDIT INSTITUTIONS (Art. 335 of Ordinance 8 of BNB) Name of the bank and registered seat: CIBANK JSC is registered in the Republic of Bulgaria with registered seat at: Sofia, 1 Tsar Boris III Blvd. The Bank has a full banking license B 13, issued by the Bulgarian National Bank (BNB). The present disclosure was prepared in accordance with the requirements under Art. 335 of Ordinance 8 of BNB on the capital adequacy of credit institutions. The Bank prepares its financial statements in accordance with the International Financial Reporting Standards (IFRS), adopted by the Commission of the European Union and applicable in the republic of Bulgaria. For the preparation of its financial statements and reporting of assets and liabilities the Bank uses as a basis the historical price method, with the exception of securities for trade, investment for sale and derivative financial instruments, which are evaluated on a current basis, as well as land and buildings, which are estimated at impaired value. The reports are prepared in thousands of Bulgarian Leva. І. Scope and methods for consolidation The disclosed data are presented on an individual basis. The Bank is also subject to financial reporting requirements on consolidated level according to article 336 p.4 of Ordinance 8. ІІ. Risk Management Policies and Regulations Risk Management at CIBANK is implemented on the following levels of competence: 1. Supervisory Board under the proposal of the Management Board it adopts the internal regulations of the Bank on the scope and processes for the execution of operations, the capital and internal organization of the Bank. 2. The Management Board approves written regulations and procedures for risk management, provides the basic guidelines for the activities of the units responsible for the evaluation, monitoring, management and control of risk, determines parameters and limits for individual risks which the Bank may be exposed to; page 1 of 8

2 3. Local Risk and Capital Oversight Committee (LRCOC) assists the Management Board in taking decisions on: the local strategy for capital and risk management and the risk appetite. the local risk profile and capital adequacy towards risk appetite and capital allocation. the allocation of capital to individual business units, in accordance with their business plans and within the frame set by the Group. achievement of performance indicators to ensure the achievement of local targets. 4. The Risk Management Directorate identifies, monitors and measures risks which the Bank is exposed to, prepares the reports and information on risk exposure and its management, secures the functioning of the models for measurement, analysis and monitoring of risk, monitors the adherence to set limits; 5. The Internal Audit Department implements control over the activities of the risk management division, organizes inspections of the bodies and units responsible for risk management; 6. Bank Representatives the representatives take managerial decisions regarding risk management, operationally monitor the observance of rules and procedures regarding risk management, control the work of the units responsible for risk management, report to the MB on the occurrence of critical risk events. The following risk management tools are developed and implemented in the Bank: - rules and procedures regarding the identification and management of risk types; - a system of limits and controls for individual risk types; - clearly determined levels of registration, management and control on adherence to limits and competences regarding the management of processes related to diversification of risk types. ІІІ. Structure and Elements of the Capital Base 1. Overview The reports prepared by the Bank for supervisory purposes are drafted under the requirements of Ordinance 8 issued by BNB stipulating the requirements for capital adequacy in compliance with Basel ІІ regulations. The standardized approach is employed in relation to credit and market risk. The operational risk measurement is implemented through the basic page 2 of 8

3 indicator method. The reports drafted and presented to the Central Bank under Ordinance 8 contain the sum of risk weighted assets by individual risk types, the capital base size, the capital adequacy coefficients. 2. Capital Base Elements The calculated equity capital (capital base) for regulatory purposes is analyzed regularly in terms of size, type and allocation of the necessary capital for the covering of risks to which the Bank is exposed. (Thousand BGN) Equity capital (capital base) Tier-one capital Tier-two capital The equity of CIBANK, in compliance with the requirements of Ordinance 8, is formed as a sum of tier-one capital and tier-two capital. The decrease of regulatory capital matches the intangible assets, the allocated specific provisions and the investments in shares in non-consolidated companies, which account for over 10 per cent of their capital. The allocated capital by risk types is the following: Risk type Thousand BGN Share Credit risk % Operational risk % FX Risk % ІV. Capital requirements Ordinance 8 of BNB determines minimum requirements for the adequacy of the capital as follows: overall capital adequacy not less than 12 per cent, tier-one capital adequacy not less than 6 per cent. However BNB requires banks to maintain tier-one capital adequacy ratio of 10%. page 3 of 8

4 As at CIBANK fulfills these requirements as follows: Capital requirements for credit, counterparty credit, dilution risks and free deliveries, after the multiplication under Art.7 (thousand BGN) Central governments and central banks 0 Regional governments and local authorities Institutions Corporates Retail Secured by real estate property Past-due items Other items Total capital requirements for credit, counterparty credit, dilution risks and free deliveries, after the multiplication under Art Total capital requirements for position, foreign exchange and commodity risks, after the multiplication under Art.7 Total capital requirements for operational risk, after the multiplication under Art.7 Other capital requirements of BNB, after the multiplication under Art.7 Total capital requirements, after the multiplication under Art Surplus (+) / shortfall (-) of equity Overall capital adequacy ratio (%) 17.69% Tier-one capital adequacy ratio (%) 11.97% V. Exposure to counterparty credit risk CIBANK employs the market valuation method to determine the counterparty risk. This risk arises in transactions with derivative instruments, repo transactions, transactions for provision or receipt as a loan of securities and others, specified in the regulations. The Bank has developed a system of limits for local and foreign institutions in view of the restriction of the undertaken risk. The closed repo transactions are secured with securities issued by the Bulgarian government. The same are assessed on the basis of their fair (market) price, which always exceeds the extended funds. page 4 of 8

5 VІ. Exposures to credit and dilution risks As per the definitions in Ordinance 8 of BNB, the Bank uses the Standardized Approach for the calculation of risk weighed assets for credit risk. Exposure class On-balance sheet value Off-balance sheet value Total Share (%) Central governments and central banks Regional governments and local authorities (thousand BGN) % % Multilateral development % banks Institutions % Corporates % Retail % Secured by real estate % property Past-due items % Other items % Total % On the basis of Ordinance 9 of BNB on the evaluation and classification of risk exposures of banks and the allocation of specific provisions for credit risk, the Bank has developed and implements a policy for assessment of risk exposures. An internal committee decides on the monitoring, valuation, classification and fixing of specific credit exposures. According to the internal policy, risk exposures are classified into two main groups standard with two sub-groups regular and watch, and problematic with three sub-groups special monitoring, non-performing and loss. The receivables with up to 30 days delay are subject to stricter control and analysis by the specialized structural units of the Bank. Exposures are monitored and analyzed in detail by geographical distribution, sector, contractor type, and maturity structure. page 5 of 8

6 VІІ. Information on the nominated External Credit Assessment Institutions (ECAIs) and Export Credit Agencies (ECAs) in applying the Standardised Approach for credit risk The credit quality of exposures is determined by reference to the credit assessments of the following rating agencies: Standard&Poor s, Moody s and Fitch Ratings. When there are two different assessments of recognized External Credit Assessment Institutions, the higher weight is applied. For the purposes of the calculation of capital requirements, the credit assessments of the ECAIs are compared to the approved by BNB and the supervisory bodies degrees of credit quality for determination of risk weights. VІІІ. Internal Ratings Based Approach information on exposures, distributed by categories and risk weights During this reporting year the Bank did not use the Internal Ratings Based Approach for weighing credit risk and did not apply Art. 63 (7) and Art. 66 of Ordinance 8. The Bank is in the process of preparation for future use of the Internal Ratings Based Approach. In December 2010 a model for valuation of the probability of default, developed together with KBC Group, was approved. In 2011 the PD assessment model is applied for all SME and Corporate clients. In September 2013 the PD model was reviewed and updated. ІХ. Capital requirements for position risk and settlement risk in respect of the trading book business, and for foreign exchange and commodity risks for the full scope of activities The owned debt and capital instruments are reported in the non-trading portfolio and thus no capital requirements for market risk are calculated. As at CIBANK s portfolio of owned debt instruments is entirely comprised of government bonds. Due to a lack of applicable operations the bank does not allocate capital for settlement risk. As per Chapter 12 of Ordinance 8 of BNB on the capital adequacy of credit institutions, banks calculate capital requirement for foreign exchange risk when the total net open foreign exchange position exceeds 2% of the equity. As at December 2013 CIBANK s net open foreign exchange position does not surpass that limit, hence the Bank does not have a capital charge for foreign exchange risk. page 6 of 8

7 Х. Internal market risk models The market risk is the risk of losses, arising from change in the market conditions or parameters impacting the market conditions. In 2013 the Bank did not use internal models for market risk measurement and therefore did not allocate capital in accordance with Chapter 15 of Ordinance 8 of BNB. ХІ. Operational risk exposure Operational risk is defined as the probability of loss arising from inadequate or ill-functioning internal processes, people, systems and external events and includes legal risk. The Bank has developed and adopts Rules for the assessment of operational risk as part of the overall process of risk management. These rules shall be used until the receipt of an approval by BNB for the use of other existing methods. The Bank uses the Group s web-based database for the gathering of information and the accumulation of historical data and sufficient statistical orders for internal operational losses related to all domains of its activities and types of events. The activities related to operational risk management are within the responsibilities of a unit within the Risk Management Directorate. In November 2010, as a consultative body of the Management Board, a Local Risk and Capital Oversight Committee (LRCOC) was established, assuming the duties of the Bank s Operational Risk Committee. Within LRCOC s competences are the preparation and formal approval of an operational risk management framework, the choice of operational risk capital allocation method to be used and the subsequent reporting of operational risk, the implementation and functioning of the system for operational risk management, as well as output and status reporting. For calculation of the capital requirements for operational risk, the Bank uses the Basic Indicator Approach the gross income of the Bank for the last three reporting years, multiplied by On the basis of Part 4 of Ordinance 8 of BNB Capital requirements for operational risk, taking into account the described income structure and technology of assessment, the Bank has allotted at the end of 2013 capital amounting to mln.bgn after the additional requirements under article 7. page 7 of 8

8 ХІІ. Equities as part of the non-trading portfolio As at December 2013 the equities and corporate shares owned by the Bank form 0.09% of its total assets. These investments do not have a substantial impact on the activity and overall performance of the Bank. XIII. Interest risk in the bank portfolio The interest risk is the likelihood of losses due to a decrease in the gained net interest income formed by financial instruments and portfolios as a result of negative changes in the market interest rate conditions. The monitoring of interest risk is implemented through day-to-day monitoring of the forecast cash flows, analysis and strict monitoring of the trends and processes on the local market and the banking system, efficient disposal of free resources, active management of the processes regarding the attraction of resources, analysis of the structure of assets and liabilities by major breakdowns, or on an optimal detailed basis, types of contractors, currency types. ХІV. Securitization The Bank is not an initiator or sponsor of asset securitizing transactions, as defined in Chapter 7 of Ordinance 8 of BNB. ХV. Recognition for supervisory purposes of internal models and techniques for credit risk mitigation The Bank does not use internal models for credit risk assessment. ХVI. Policy and practices on remunerations The Bank has updated within the given time frame its remuneration policy as per the requirements of Ordinance 4 of BNB on the Requirements for Remunerations in Banks. page 8 of 8