A N N U A L R E P O R T

Transcription

1 A N N U A L R E P O R T

2 We Grow. We Follow the Sun. We Turn Towards People.

3 A N N U A L R E P O R T

4 CONTENTS KEY 2006 PERFORMANCE INDICATORS 3 REPORT OF THE MANAGEMENT BOARD 4 REPORT OF THE SUPERVISORY BOARD 7 BUSINESS REPORT FINANCIAL HIGHLIGHTS BANK PROFILE REPORT ON BUSINESS OPERATION IN General Economic Environment Corporate Policy Performance Review Financial Result Financial Position Governance and Risk Management Capital Adequacy and Compliance with other Bank of Slovenia Requirements Shareholders Equity and Shareholders Development of the Bank GOVERNING BODIES ORGANIZATION CHART STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE 45 INDEPENDENT AUDITOR S REPORT 46 FINANCIAL STATEMENTS FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS Significant accounting policies, guidelines and valuation methods applied to balance sheet items Notes to the Balance Sheet Notes to the Income Statement Significant transactions Segment analysis RISK MANAGEMENT TRANSITION TO IFRS 113

5 KEY 2006 PERFORMANCE INDICATORS Key 2006 Performance Indicators Balance sheet total (in 000 SIT) 135,394, ,875,259 Total equity (in 000 SIT) 5,010,915 4,110,907 Net profit (in 000 SIT) 451, ,994 Book value of a share (SIT) 14,072 13,225 Return on equity a. before tax (%) b. after tax (%) Return on assets before tax (%) Operating costs to average assets (%) Capital adequacy (%) Balance sheet total in millions of SIT ,000 60,000 90, , ,000 Net profit in thousands of SIT , , , , ,000 Operating costs to average assets %

6 REPORT OF THE MANAGEMENT BOARD Dear business partners, shareholders, and associates, Behind the Slovene economy is yet another successful business year marked by final preparations for the introduction of the euro, a high 5.2-percent growth of the gross domestic product, and a stabilised inflation rate on the level of 2005, when it attained the lowest level after Slovenia s independence, i.e. 2.5 percent. Again, the main generators of economic growth were foreign trade with a 10-percent increase, and gross investments in fixed assets, particularly in the field of construction. Such a vibrant business environment, supported by a relatively stable political situation, enabled the accelerated growth of the economy, in particular the entire banking sector in Slovenia was also a successful year for Poštna banka Slovenije, d.d. bančna skupina Nove Kreditne banke Maribor d.d. (hereinafter: the Bank or Poštna banka Slovenije), as is evident in both the results disclosed in the financial statements and the attained business goals, which have contributed to the increased value of the Bank. In the previous year, the Bank conducted two conceptually and technologically very complex projects, i.e. the switch from Slovenian Accounting Standards to International Financial Reporting Standards (hereinafter: IFRS), and final preparations for the introduction of the euro as the national currency. The introduction of the euro was undoubtedly one of the most important projects conducted by our Bank. Pošta Slovenije, d.o.o. was also an active participant, primarily as regards the adjustment of information support at post-office counters, logistic support, and the conversion of tolars into euros. All phases of the project were successfully completed without major risks. The transition from Slovenian Accounting Standards (hereinafter: SAS) to IFRS was successfully concluded both in terms of content and deadline. For the first time, the Bank has compiled its financial statements for the 2006 financial year in line with IFRS, and has adjusted all comparable data for the previous year accordingly. The activities and development of the Bank continue to be focused on attaining a favourable position in selected segments of the market, and depend strongly on cooperation with both of our owners, i.e. Pošta Slovenije, d.o.o. and Nova Kreditna banka Maribor d.d. (hereinafter: Nova KBM d.d.). A significant element of development is the possibility of expanding the sale of financial services via the post-office network and postal employees across Slovenia, and searching for synergy effects with Nova KBM d.d. In the past year, we therefore intensified our cooperation with this bank within the group, particularly as regards acquiring new sources of financing investments, securities trading, liquidity management, risk management, coordinating market performance, standardizing operating conditions, introducing IFRS, and preparing for the introduction of the euro. Despite fierce competition in the Slovene banking market, reflected in the trend of decreasing interest margin continuing from 2005, we concluded the financial year with financial results that surpassed the forecast. The Bank increased its volume of on-balance-sheet operations by 10 percent, resulting in a balance sheet total of SIT 135,395 at year end and a 1.7 percent market share. The Bank recorded a significant level of growth in 2006 (above the Slovene average) primarily in lendings to the nonbanking sector (31-percent growth, particularly in the corporate customers sector with a 36-percent growth). An important role in this growth was played by the Bank s owners, which increased the Bank s share capital and capital reserves with cash contributions in the value of SIT 501 million, as well as a long-term deposit in the amount of SIT 1,000 million 4

7 Drago Pišek, M.Sc. Viktor Lenče having the character of a hybrid instrument. By acquiring sources in this way, the Bank was able to realise a high growth of lendings to the nonbanking sector and at the same time retain its capital adequacy ratio above 10 percent (10.37 percent at year end), which is in line with our corporate policy. Alongside the above-mentioned increase in capital and subordinated liabilities, the Bank also managed to increase its primary sources by 15 percent. A large portion of the increase can be attributed to deposits from retail customers, while the long-term portion was acquired by raising inter-bank foreign currency loans. Given the structure of assets and liabilities of banks, it is logical that interest rates had the highest impact on the final operating result. Net interest income rose 9 percent and reflected the increased volume of operations, restructuring of investments, and the acquisition of more favourable sources of financing. Owing to the continuing trend of falling interest rates and the resulting decrease in the interest rate margin, we endeavoured to replace this loss in the income segment with operations generating non-interest income, the development of new services, and more intensive securities trading. As a result, the Bank increased its net non-interest income by 11 percent or SIT 200 million. Another characteristic of 2006 was that the entire banking sector was burdened with high additional operating costs relating to the implementation of IFRS and preparations for the introduction of the euro as the new national currency. By implementing rationalization measures, the Bank managed to effectively control operating costs, whose share in the average assets dropped from 2.85 percent in 2005 to 2.74 percent in In addition to economy measures, this was also achieved through the modernisation of technological processes, investments in technology, and the rational conduct of all employees. Considering the entire economic and banking environments and the flows confronted by our Bank, the results disclosed in our Income Statement for 2006, prepared in line with IFRP, are pleasing and highly satisfactory. Despite the fierce competition in the market, lower interest margins, and additional expenses related to the adoption of IFRS and the introduction of the euro, the Bank increased its net profit by 10 percent, attaining a 9.89 percent return on equity. Our good business results in the past have confirmed that our long-term and short-term business objectives were properly chosen. For this reason, all our activities in future will be focused on implementing the adopted development strategy of the Bank, enhancing marketing activities in conjunction with Pošta Slovenije, d.o.o. and the strategic development objectives of the Nova KBM d.d. banking and financial group, and implementing the goals targeted for the year

8 The goals set for this year are realistically attainable and anticipate a 14-percent increase in balance sheet total, improved quality of services, development of new services, increased cost and income efficiency of operations, and a percent return on average equity (ROAE). Alongside the above-mentioned targets, the year 2007 will be marked by preparations for a new European regulation relating to the implementation of the new Basel II Capital Accord. In 2007 Poštna banka Slovenije will celebrate the 15th anniversary of its independent operation. Trust, innovativeness and good business results have accompanied the Bank since its establishment. We are well aware that the Bank would not be as successful without the good cooperation and trust of all employees on one side, and of our owners and customers on the other side. In concluding, allow us to express our thanks to all members of the Supervisory Board for their constructive proposals and ideas as well as for the regular monitoring of our operations, to our owners for ensuring the necessary operating conditions, and especially to you, our business partners, for the trust you have shown, as well as to all employees for their hard work and endeavours in attaining our jointly set goals. Viktor Lenče Member of the Management Board Drago Pišek, M.Sc. President of the Management Board 6

9 REPORT OF THE SUPERVISORY BOARD Activities of the Supervisory Board The Supervisory Board of Poštna banka Slovenije is comprised of five members. Four substitute members were appointed at the 17th General Meeting of the Bank held on 27 June 2006: Aleš Hauc, M.Sc., Darko Tisaj, Igor Šujica and Jurij Blatnik. Matjaž Kovačič was appointed member of the Supervisory Board at the 16th General Meeting of the Bank held on 1 October At its constitutive meeting held on 29 August 2005, the Supervisory Board comprised of the above-mentioned members elected Aleš Hauc as President of the Supervisory Board and Matjaž Kovačič as Deputy President of the Supervisory Board. In the 2006 financial year, the Supervisory Board carried out its activities in the above-mentioned composition, without any changes. The Supervisory Board carried out its work in line with its basic task of supervising the management of the Bank with due skill, care and diligence, and observing the powers vested in it by applicable legal and statutory provisions. In the 2006 financial year, the Supervisory Board held nine regular sessions and conducted four correspondence sessions. The latter were primarily devoted to the granting of approval for the Bank s large exposure to individual customers. At its regular meetings the Supervisory Board discussed in detail the numerous materials submitted by the Management Board of the Bank. There were no changes in the make-up of the two-person Management Board of Poštna banka Slovenije in Drago Pišek, M.Sc., President of the Management Board who took office on 10 February 2005, and Viktor Lenče, member of the Management Board who took office on the same day, submitted reports to the Supervisory Board on the regular business operations of the Bank in the 2006 financial year, and regularly reported to the Supervisory Board on other relevant issues relating to the management and operation of the Bank. In Slovenia, the 2006 financial year was marked primarily by the transition from financial reporting under Slovenian Accounting Standards to financial reporting under International Accounting Standards, as well as by preparations for entry into the European monetary union and the adoption of a common European currency, the euro. The Supervisory Board was regularly informed on activities performed by the Bank in both key projects as well as other projects, work tasks, and regular business activities. Due to the effect of the change in financial reporting on equity, the Supervisory Board adopted appropriate resolutions for guaranteeing the Bank s capital adequacy, and devoted considerable attention in 2006 to the equity category, assuring capital adequacy, regulating liquidity ratios, and meeting other requirements of the Bank of Slovenia. The Supervisory Board also took note of the information provided by the Bank of Slovenia on inspections performed at Poštna banka Slovenije in 2006 in the areas of market risks and the euro implementation project. The Supervisory Board regularly monitored the execution of activities performed by the Bank for the purpose of eliminating any deficiencies found during the inspections of the Bank of Slovenia. Within the scope of regular reports on the Bank s operation, the Supervisory Board was informed in more detail on the movements of individual items of the balance sheet and income statement, called attention to any possible digressions and, on the basis of control points, monitored the implementation of the Bank s business policy and budget for the year 2006 as approved at its 58th regular meeting held on 16 December The Supervisory Board monitored the attained results also in connection with movements in the general economic environment, as well as by financial and other comparisons in the Slovene banking environment. With respect to certain facts, the Supervisory Board called attention to the imminent changes in the operating conditions of Slovene banks upon Slovenia s inclusion in the eurozone, particularly from the aspect of new business opportunities, coupled by the emergence of new risks. 7

10 Aleš Hauc In monitoring regular performance reports, the Supervisory Board took note of the attainment of additional synergy effects in the sense of optimizing and rationalizing work processes according to individual fields of activity, which the Bank realised in 2006 in cooperation with Nova KBM d.d. Some of the major activities in 2006 were conducted primarily in the areas of unifying procedures for the granting of loans and computer monitoring, as well as the alignment of rules and instructions. The Bank s strategic partnership with Pošta Slovenije, d.o.o. was monitored by the Supervisory Board in the sense of giving guidelines for intensifying the development of new services or expanding the range of bank products and the introduction of financial products at post office counters. In 2006 the Supervisory board also monitored the course of events relating to the settlement of income relations between Poštna banka Slovenije and Pošta Slovenije, d.o.o. in the payments segment, with the goal of ensuring the further development and harmonised price policy of Pošta Slovenije, d.o.o., Nova KBM d.d., and Poštna banka Slovenije. In line with its powers, the Supervisory Board monitored the adequacy of procedures used and the effectiveness of activities performed by the Internal Audit Department in 2006 by discussing the quarterly reports on the work of the Internal Audit Department. The Supervisory Board was briefed on the findings of and recommendations given by the Internal Audit Department after the completion of audits of individual fields of activity, and monitored the implementation of these for each audited area. The areas audited in 2006 were: corporate banking, retail banking, cash operations, as well as an audit of the IT environment and five other audits regular annual inventory, operations with credit brokers, IFRS implementation, euro implementation, and the loan portfolio, all of which were conducted by the Internal Audit Department of Nova KBM d.d. subject to the agreement of both banks. In cases involving a lack of clarity regarding implementation or when recommendations were not implemented by the relevant deadlines, the Supervisory Board requested additional clarifications and put forward guidelines for further implementation. It was also briefed on the Internal Audit Department s other permanent duties, such as cooperating with Bank of Slovenia inspectors in control audits of the Bank s operations, working with external auditors and the internal audit departments of Nova KBM d.d. and Pošta Slovenije, d.o.o., as well as conducting consultancy services. At its meetings the Supervisory Board also gave, in line with its powers, approvals for transactions in which the Bank s credit exposure to single customers would be exceeded, or involving exposure to persons in a special relationship with the Bank. It determined the net debt ratio, and in 2006 gave its consent to the proposed write-off of receivables from two companies in an amount exceeding SIT 50 million. At its last, 68th regular meeting in 2006, held on 19 December, the Supervisory Board discussed the approval of the Bank s business policy and budget for the year 2007, as well as the approval of the Internal Audit Department s framework plan of work for the 2007 business year. 8

11 The Supervisory Board approved the business policy and budget for the year 2007, and instructed the Management Board to intensify endeavours for attaining a higher growth of accumulated profit and a higher return on capital than originally planned. The Supervisory Board shall discuss the Internal Audit Department s framework plan of work for 2007 at its first meeting in 2007, after having requested the amendment of the said plan with the more strongly represented audits of the Internal Audit Department in the area of loan portfolio Annual Report The Supervisory Board is of the opinion that it received the required data and information in the 2006 financial year allowing it to supervise the management of the Bank, monitor the implementation of the Bank s business policy, and evaluate the attained results in line with its powers. In accordance with the Companies Act, the authenticity of presented data and information is the responsibility of the Management Board of the Bank. The Management Board submitted the audited Annual Report of the Bank for the year 2006, together with the Audit Report, to the Supervisory Board by the legally prescribed deadline. At the same time it also submitted the annual internal audit report for The Supervisory Board discussed these reports at its 71st regular meeting held on 25 May On the basis of the submitted reports, the Supervisory Board has established that the Bank s assets were managed appropriately. The regular annual audit of the Bank s financial statements for 2006 was conducted by the licensed auditing company KPMG Slovenija, d.o.o., which expressed an unqualified opinion on the financial statements and confirmed that they comply, in terms of substance, with the business report. The auditor s report confirms that the financial statements of the Bank present fairly, in all material respects, the Bank s financial position as at 31 December 2006, the results of its operations and cash flows in the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union. The Supervisory Board expressed a positive opinion on the Auditor s Report, which is a constituent part of the Annual Report. In line with applicable legislation, the Supervisory Board also approved the Management Board s proposal for the appropriation of accumulated profit. On the proposal of the Management Board, the Supervisory Board proposes that the General Meeting of the Bank approve the proposed appropriation of accumulated profit. On the basis of the above-mentioned, the Supervisory Board approved the Annual Report of Poštna banka Slovenije for 2006, together with the report of the auditing company KPMG Slovenija, d.d. on the financial statements, in accordance with Article 282 of the Companies Act. The Supervisory Board does not dispose with any information pointing to any violations of applicable laws, the resolutions of the General Meeting and the Supervisory Board, or the general acts of Poštna banka Slovenije in connection with the Bank s operations. Aleš Hauc President of the Supervisory Board 9

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13 B U S I N E S S R E P O R T 11

14 1. FINANCIAL HIGHLIGHTS in thousands of SIT Balance Sheet 31 Dec Dec 2005 Balance sheet total 135,394, ,875,259 Total deposits from non-banking customers 105,223,376 92,763,952 corporate customers 15,879,615 16,257,710 retail customers 89,343,761 76,506,242 Total loans and advances to non-bank customers 56,042,755 42,775,792 pravnim in drugim osebam 41,829,615 30,644,396 prebivalstvu 14,213,141 12,131,396 Total equity 5,010,915 4,110,907 Allowance for financial assets at amortised cost and provisions 6,857,116 6,449,004 Off-balance sheet items 51,892,322 15,590,014 Income Statement 1-12/ /2005 Net interest income 3,178,814 2,910,103 Net non-interest income 1,945,113 1,745,364 Staff cost, general and administrative expenses 3,197,819 3,000,012 Depreciation and amortisation expense 335, ,287 Impairment charge and provisions 964, ,031 Pre-tax profit from ordinary activities and discontinued operations 626, ,137 Income tax on profit from ordinary activities and discontinued operations 175,012 95,143 Employees Number of employees Shares Number of shareholders 2 2 Number of shares 356, ,845 Par value of share (SIT) 4,000 4,000 Book value of share (SIT) 14,072 13,225 Capital Equity 7,077,454 5,447,069 Weighted risky assets 68,279,115 51,578,977 Capital adequacy Asset quality Allowance for financial assets at amortised cost and provisions for assumed liabilities/classified on-balance sheet and off-balance-sheet assets Profitability Interest margin Financial intermediation margin Return on assets (before tax) Return on assets (after tax) Return on equity (before tax) Return on equity (after tax) Operating costs Operating costs / average assets Liquidity Liquid assets / current deposits from non-banking customers Liquid assets / average assets

15 2. BANK PROFILE Poštna banka Slovenije was established by the former Slovene PTT organizations as a stock corporation engaged in the performance of banking and other financial services in accordance with the Banking Act and the Companies Act. The Bank became operational on 1 July 1992, when it promptly took over the business of Poštna hranilnica Beograd (Belgrade Postal Savings Bank) and rapidly expanded its operations both in terms of volume and types of services. Today the Bank offers a comprehensive range of banking services. In 2004 Poštna banka Slovenije became a member of the Nova KBM d.d. banking group thus a member of a broader financial group of Nova KBM d.d. which through various companies provides a broad range of financial services. The inclusion of Poštna banka Slovenije in this banking group represents a new chapter in the Bank s further development. Registered office The Bank has its registered office at Ul. Vita Kraigherja 5 in Maribor. Ownership Structure The Bank s ownership is divided between Nova KBM d.d., which has a 55-percent shareholding, and Pošta Slovenije, d.o.o. with a 45-percent shareholding. Activities For the entire period of its operation, the Bank has possessed all relevant operating licences and authorizations of the Bank of Slovenia, and currently has an authorization for the performance of the following services: acceptance of deposits from natural and legal persons and the granting of loans from such funds for its own account, issuing of guarantees and other commitments, lending, including consumer credits, mortgage credits, and financing of commercial transactions, factoring, trading in foreign means of payment, including foreign exchange transactions, issuing and administering other means of payment (e.g. debit and credit cards, travellers cheques, banker s bills), purchase or sale of securities on the order and for the account of customers (trading for own account), execution of payments. Governing bodies General Meeting of Shareholders, Supervisory Board, Management Board. The General Meeting of Shareholders is the supreme body of the Bank. The two shareholders of the Bank exercise their rights at general meetings. The Supervisory Board is comprised of five members who are appointed and recalled by the General Meeting of Shareholders. The Bank has a two-person Management Board comprised of a President and a Member, who are appointed and dismissed by the Supervisory Board of the Bank. Past Development of the Bank Poštna banka Slovenije began its operation on 1 July Since then, it has undergone a very expansive and rapid development, thanks in part to the intensive broadening of the post-office network, which is accessible to the widest circle of users. Major emphasis was laid on increasing the scope of business and expanding its offer of products in retail banking with the addition of new products and services. By the subsequent establishment of marketing units, the Bank came yet another step closer to customers in the area of corporate banking. 13

16 In past years, Poštna banka Slovenije entered a new phase of its development focusing on the quality of operations performed in the Bank, which is reflected both in the range of services and in the Bank s attitude towards customers. While increasing its volume of operations and developing business functions, the Bank also strengthened various support functions, particularly with respect to the introduction of new forms of application support for mass banking. The Bank has been adjusting its internal organization to the needs of market activities. For this purpose, two commercial centres operate in Maribor and Ljubljana, where emphasis is given to the quality of specific services offered to customers. With the aim of bringing its services closer to the needs and wishes of customers, the Bank has established branch offices in Murska Sobota, Celje, Kranj and Koper. The Bank s development also calls for the permanent strengthening of human resources through appropriate training and experience. To keep pace with continuous development, the Bank encourages employees to regularly upgrade both their theoretical and practical knowledge and skills. 14

17 3. REPORT ON BUSINESS OPERATION IN GENERAL ECONOMIC ENVIRONMENT In 2006 the Slovene economic and political environments were marked primarily by final preparations for changeover to the euro. With its membership in the European Union, Slovenia has chosen a common European future and has thereby accepted the single European currency euro. The introduction of the euro in Slovenia, which on 1 May 2004 became a member of the European Union, was subject to the fulfilment of certain Maastricht criteria, whose key characteristics include a low inflation rate, comparable interest rates, a stable exchange rate between the domestic currency and the euro, and sound public finances. The introduction of the euro as a national currency in Slovenia was conducted in three periods: the ERM II period (entry on 28 June 2004), the pre-entry period (as of 1 July 2006), and the introduction of the euro (1 January 2007). The last requirement for introduction of the euro as a national currency in Slovenia was met on 11 July 2006, when the final exchange rate between the Slovene tolar and the euro was fixed at SIT for one euro. With the introduction of the euro on 1 January 2007, Slovenia became the 13th member of the eurozone and its powers for implementing monetary policy were thus transferred to the ECB s Governing Council. The changeover to the euro also concluded the gradual nominal convergence between the Bank of Slovenia s interest rates and those of the ECB. The year 2006 saw a notable acceleration of economic growth both in Slovenia and in the European Union. Except for the visibly intensified growth of domestic product and the relatively accelerated growth of investments, the economic activity sector was marked by continuing trends from After attaining its lowest level since Slovenia s independence in 2005, inflation continued to grow at a stable rate in The average annual inflation remained on the 2005 level and amounted to 2.5 percent. Following an extended period of accelerated industrial production, the employment rate gradually began to strengthen in the final months of 2006, but was slightly lower than expected in view of the high economic growth. The average wages visibly stabilised in 2006 as the result of changes in salary regulation rules and policies in the country. The Bank s lending activities continued to intensify in Loans to nonbanking sectors grew at an average monthly rate of 1.8 percent. Though foreign currency loans recorded a considerably higher growth, tolar loans strengthened in particular at the end of the year. Retail banking operations also increased in 2006, with total net lendings to individuals rising by as much as 30 percent in comparison with the previous year. While monthly deposits from individuals did not exceed the growth rate of 1.5 percent in the first eleven months of the previous year, they did increase by 3.2 percent in the last month of the year, which was the highest growth in the last two years. There are primarily two reasons for this increase, the first being the payment of Christmas bonuses and thirteenth salaries, and the second being the introduction of the euro was also characterised by the continuing high growth of mutual funds, particularly stock mutual funds, which was reflected in the volume of deposits with banks CORPORATE POLICY In December 2006 the Supervisory Board of the Bank approved the overall corporate policy and the budget for All activities in the current year will thus be oriented towards implementing the Bank s development strategy, enhancing marketing activities in conjunction with Pošta Slovenije, d.o.o., and implementing the strategic development policies of the 15

18 Bank and the Nova KBM d.d. banking group, as well as the fundamental corporate policy for the year This includes the further growth of the volume of operations, improved quality of services, optimal management of all banking risks, income efficiency, and streamlining of operations. In the area of organization of operations, the Bank will continue activities relating to the reorganization of business processes begun in In 2007 the Bank has forecasted a 14-percent nominal growth of the volume of operations as well as major changes in the balance sheet structure, primarily due to the introduction of the euro as the new domestic currency and the renouncement of our own monetary policy in the country. The latter will primarily affect the decrease in the share of receivables due from the Bank of Slovenia and the restructuring of investments into foreign securities and the nonbanking sector. In the area of deposit transactions, the Bank still anticipates favourable growth of deposits from retail customers and government subjects, but a less pronounced growth of deposits from corporate customers. In 2007 the Bank also plans to seek additional resources through borrowings from a bank within the banking group, i.e. the Slovene Export and Development Bank, Inc., Ljubljana, and, if necessary, from other banks abroad. An important means of financing investments will be the issue of new bonds, where a 17-percent increase is planned. In investment operations, the Bank has optimistically forecasted a 20-percent growth of lendings to the nonbanking sector. The growth of corporate lending is planned on the basis of the announced relatively high economic growth in 2007, while the growth of retail lending is based on new services and a new market approach, as well as the forecasted relatively high growth of residential construction. In the area of investments in securities, the Bank will focus primarily on foreign securities and will predominantly purchase available-for-sale securities or securities held to maturity. A growth of 50 percent is planned for such securities. With the forecasted growth of the volume of operations, the Bank will endeavour to generate a profit before tax that will guarantee its shareholders a 15 percent return on average equity (ROAE). Owing to the planned further lowering of the interest margin (5-percent decline), the interest income will decrease and the Bank will attempt to replace such income by increasing non-interest income generated through the promotion of existing services and the implementation of new services in alternative forms of saving. Given the growing competition and the development of increasingly more complex banking services, effective risk management is becoming a necessity. For this reason the Bank will devote special attention to this area in 2007 by amending existing policies and methodologies for the management of various types of risks in line with the new Basel II Capital Accord and the new European regulation on capital adequacy. The Bank will also initiate the construction of a central data store primarily for the needs of reporting to the European Central Bank and meeting all the requirements of the new European capital system and internal analyses for the needs of business decision-making. The growth of the volume of operations, risk management, and the upgrading of information technology also call for staff recruitments. In 2007 the Bank plans to recruit 6 new employees with appropriate banking experience and other professional skills in specific areas of work PERFORMANCE REVIEW Corporate Banking In line with the adopted marketing strategy, corporate banking activities were oriented primarily towards small and medium-sized companies, sole traders and societies, as well as strengthening business cooperation with municipalities. Marketing activities were performed according to the territorial approach and following the principles of personal sales with emphasis on the acquisition of lending and savings business, the opening of transaction accounts, and factoring services. The Bank strengthened its business relations with existing customers and devoted special attention to attracting new customers. Marketing activities were generally planned on a monthly basis and focused primarily on: 16

19 personal sales of banking services through marketing staff and other employees of the Bank, comprehensive, quality and professional monitoring of customers through custodians, increasing the corporate identity of the Bank, strengthening partner relations with customers. The Bank increased investments in legal entities, sole traders and farmers by SIT 11,413 or 38 percent in comparison with the previous year. Volume of investments in millions of SIT in terms of value 31 Dec Dec 2005 Index Loans and advances 41,805 30, Guarantees 6,456 4, Note: The above data do not include interest. Year in terms of physical volume Index in terms of physical volume 1, Number of contracts 2,186 1, As at 31 December 2006 the Bank had 2,186 contracts concluded with 1,073 customers. In terms of maturity, current loans and advances accounted for 60 percent and noncurrent loans and advances accounted for 40 percent of the total loans and advances in In comparison with the previous year, the share of current loans and advances increased by 4 percentage points, while in terms of value current loans and advances increased by 46 percent. In terms of currency, tolar loans and advances and loans and advances with a foreign currency clause accounted for 69 percent, and foreign currency loans and advances accounted for 31 percent of the total loans and advances in In comparison with the previous year, foreign currency loans and advances increased by 93 percent, while tolar loans and advances and loans and advances with a foreign currency clause increased by 22 percent. Breakdown of loans and advances in millions of SIT Typ of loans and advances 31 Dec Dec 2005 Indeks Current 24,945 17, Noncurrent 16,861 13, Total loans and advances 41,805 30, Tolar loans and advances and loans and advances with a foreign currency clause 28,799 23, Foreign currency loans and advances 13,006 6, Total loans and advances 41,805 30, Note: The above data do not include interest. The Bank continued to pursue and intensify cooperation with municipalities, in particular by offering services in the areas of deposits, overnight deposits, cash supply, and lendings. Specific activities were focused on enhancing the development of small businesses in municipalities which allocate special funds for this purpose. This allowed the Bank to obtain relevant information from the local environment and provided an opportunity for attracting new customers and promoting the sale of other products of the Bank. 17

20 Retail Banking As in previous years, the Bank s activities in the retail banking segment were characterised by the continuing growth of the volume of operations in terms of both attracting funds and lending. The Bank attained the above-mentioned objectives by implementing various direct and indirect marketing campaigns which attracted new customers and consequently increased the volume of operations. With the introduction of a new service, international payments or money transfers, the Bank expanded its offer of services to include foreign exchange transactions. The Bank also introduced certain changes in lending conditions, thus making its lending services more competitive and attractive. In the area of attracting funds, despite having redirected personal deposits to alternative saving schemes (particularly to mutual funds), the Bank recorded a substantial, more than 25-percent increase in the volume of sight deposits (funds on personal accounts and sight savings deposits), and a 4-percent increase in the volume of other funds deposited with the Bank (deposits, various saving schemes). Deposits from individuals increased by almost 17 percent in 2006 and exceeded the amount of SIT 89 billion. Deposits by maturity Long-term deposits in millions of SIT Sight deposits Short-term deposits 0 10,000 20,000 30,000 40,000 50,000 60,000 inote: The above data do not include interest. The number of personal accounts with the Bank remained on the same level as at the end of 2005 (slightly over 120,000). The number of personal accounts with payment cards as an instrument of payment increased by 2,400, which in turn increased the share of these accounts in the total number of personal accounts from slightly less than 36 percent to just below 38 percent. The Bank was also quite active in placements to individuals (loans and advances, overdraft facilities on personal accounts), and increased the total lendings by 11 percent in comparison with the previous year. This consequently increased the total volume of placements to individuals by almost 16 percent. 18

21 Personal loans and advances (noncurrent and current consumer credits, housing and other loans) increased by almost 19 percent in comparison with 2005, while the total amount of utilised overdraft facilities on personal accounts increased by 3 percent in comparison with Loans and advances by maturity Current loans and advances In millions of SIT Current loans and advances 0 2,000 4,000 6,000 8,000 10,000 12,000 Note: The above data do not include interest. In 2006 the Bank again recorded a significant increase in foreign exchange transactions. The number of transactions (sale and purchase of foreign currencies) increased by almost 13 percent, while the volume of exchanged currency increased by more than 27 percent and exceeded the amount of SIT 44 billion. A share of this increase is due to the adoption of the euro in Slovenia. One of the Bank s most important activities in the area of retail banking in 2006 was the reorganization of the sector. As of September, commercial, support and technology services have been organised as separate sectors. In the field of IT support to retail banking, the Bank introduced various improvements aimed at streamlining and shortening certain computer-supported procedures, made several adjustments in accordance with legal requirements (transition to IFRS and introduction of euro as the national currency in Slovenia), and prepared adequate applicative support for recently launched services Treasury Operations The Bank s principal function in the area of treasury operations in 2006 was managing liquidity in line with its liquidity policy. The implementation of this policy is monitored daily by the Liquidity Committee. Liquidity is primarily managed by placing deposits in the interbank market, where the Bank is mostly a net creditor. At the end of 2006, the Bank recorded deposits with domestic banks in the amount of SIT 8,750 million and deposits from domestic banks in the amount of SIT 2,500 million. Owing to major outflows on individual days, usually on pension payday, the Bank on several occasions raised day loans with the Bank of Slovenia and always repaid them in due time. The Bank did not raise any lombard loans. In addition to the collected deposits of legal entities, municipalities, societies and sole traders in the amount of SIT 10,844 million, the Bank issued SIT 3,368 million in deposit certificates. 19

22 For the purposes of lending to corporate customers, the Treasury Division organised in 2006 the raising of noncurrent foreign-currency loans in a total amount of EUR 7.5 million, of which EUR 6.5 million were borrowed from banks in the Republic of Slovenia. At the end of 2006, the Bank recorded noncurrent deposits with the Bank of Slovenia in the amount of SIT 19,376 million, which is the same as in the previous year. Deposits with the Bank of Slovenia also include intra-group SIT treasury notes in the amount of SIT 12,000 million paid by the Bank to ensure liquid funds for the first portion of payment of frontloaded euro cash at the beginning of The Treasury Division also managed extensive investments in securities. In these activities the Bank focused on guaranteeing safety and an adequate return on securities. The majority of first-class securities were allocated to the Bank s items, of which 40 percent were classified as held to maturity and 60 percent were classified as available for sale. The Bank has a small portion of securities classified as held for trading. This portion of its portfolio mostly comprises shares and bonds of Slovene companies and points of mutual funds. First-class securities (issued by the Bank of Slovenia and the Republic of Slovenia, and securities guaranteed by the Republic of Slovenia) accounted for 91 percent of the entire securities portfolio, while the share of securities accounted for 29 percent of the Bank s assets. Securities as at 31 December in millions of SIT in millions of SIT Indeks Treasury notes of the Bank of Slovenia 12,000 19, Slovene government securities and government guaranteed securities 24,190 23, Shares of issuers domiciled in Slovenia Bonds of other issuers in Slovenia 2,233 2, Other securities of issuers domiciled in Slovenia Securities of foreign issuers TOTAL Note: The above data do not include interest. The Treasury Division also organises the issue and trading of issued bonds. In October 2006 the Bank filed a request for a change in the listing of issued bonds PBS2, PBS5, PBS6 and PBS7. As of 16 October 2006, the bonds of Poštna banka Slovenije are listed on the Ljubljana Stock Exchange (having previously been listed on the free market of the Ljubljana Stock Exchange). In 2006 the Bank discharged its liabilities arising from a matured PBS4 bond. There were no new issues. As at 31 December 2006 the Bank recorded four bond issues, the details of which are given in the table below. Bonds issued by Poštna banka Slovenije as at 31 December 2006 Bond designation Date of issue Date of maturity Issue value Subordinated liabilities PBS 2 20 Jun Jun ,500,000, SIT yes PBS 5 31 Jul Jul ,000, EUR - PBS 6 30 Sep Sep ,000,000, SIT yes PBS 7 6 Dec Dec ,000,000, SIT - In 2006 the Bank implemented numerous changes in treasury operations, primarily due to changes in the Bank of Slovenia s monetary policy for the purpose of adjustment to the European regulation. All the necessary modifications and adjustments required by the banking environment were carried out. Careful attention was devoted by the Bank to implementing measures upon the introduction of the euro, in particular ensuring adequate property for securing euro cash and planning cash flows. Within the scope of the euro introduction project, the Bank prepared a strategy for the transformation of investments of central bank instruments in foreign securities, which will be implemented in the initial months of In preparing the strategy, the Bank focused primarily on the safety and liquidity of investments. 20

23 Payments Payments and payment systems In 2006 the Bank upgraded its applicative support for payments with the addition of foreign currency payments. The international payment order standard was added to the domestic payment order standard. The Bank upgraded its settlement account with the management of multi-currency accounts. Absolute priority was given to the euro introduction project in The Bank carried out adjustments in all applicative solutions, both in its own solutions and in those of external suppliers. All internal and prescribed tests with the external environment were successfully completed. The above-mentioned activities ensured the Bank s smooth and successful transfer to the new currency, the euro. In 2006 the Bank processed the following through the domestic payments system: in billions of SIT Index RTGS* 2, , SPMV** INTERNAL ** RTGS real time gross settlement system ** SPMV - low-value payments system Index Number of orders RTGS 72,272 65, SPMV 7,109,538 6,836, INTERNAL 145, , Transaction accounts of corporate customers The Bank provided payment services to corporate customers through its own commercial centres, post-offices and electronic banking. In line with IFRS, the Bank made all adjustments in 2006 for the undisturbed management of corporate accounts. Within the scope of the euro introduction project, the Bank made adjustments in support to operations in the euro area. For this purpose all the required internal and prescribed testings with the external environment were performed. With the goal of attracting customers, the Bank prepared the Programme for Personal Sales Management and Partner Relations with Customers. This programme offered support to the service and sales segments with the aim of satisfying customers. The acquisition of new customers was again successfully conducted in 2006 in cooperation with Pošta Slovenije, d.o.o. Number of opened corporate accounts as at 31 December Type of corporate customer Index Companies Sole traders, civil legal entities, societies 2,196 1, Groups Electronic banking In the area of electronic banking for corporate and retail customers, the Bank carried out all the necessary adjustments for undisturbed changeover to transactions in euro currency. Electronic transactions are performed by 1,290 customers through the POSLOVNI PBSPikaNET system, of whom 858 are legal entities and 432 are sole traders and societies. Services and assistance to electronic banking customers are provided through the Bank s help desk. 21

24 22

25 Payments at Post Offices The Bank preserved the leading role in the acceptance and processing of payments for individuals. In comparison with the previous year, the physical volume of these documents dropped 5 percent 41.3 million payment orders were processed, while in terms of value their volume increased by 6 percent and amounted to SIT 463 billion. The number of transactions performed at post offices was down 4 percent from the previous year and amounted to 49.6 million, while in terms of value their volume was up 3 percent and amounted to SIT 2,100 billion in Most important services at post office counters Quantity Quantity Index Amount SIT millions Amount SIT millions Special deposit orders 36,108,330 38,057, , , BN cash orders 5,238,566 5,146, , , Transfer accounts pension payments 782, , ,539 65, Postal money orders 419, , ,647 5, Index The Bank also recorded an increase in the volume of the following services in 2006: services provided for other banks. The Bank performed more than 628,000 inward and outward payments for Nova KBM d.d. in a total amount exceeding SIT 35.8 billion, contractual payments (up 10% in terms of volume), acceptance and processing of postal money orders (up 6 percent in terms of volume, primarily on account of repayments to customers from cash-on-delivery parcels). A slight decline was recorded in the following services: cash pension payments (95 percent of previous year s volume, or decrease from the average monthly quantity of 68,795 paid in 2005 to 65,190 in 2006), payments of lottery winnings (81 percent of previous year s volume or 1.4 million transactions performed), payments of special money orders (72 percent of previous year s volume). In the area of payments for individuals, the Bank processed more than 45.7 million transactions, which points to a 4-percent drop in volume compared to the previous year. In terms of value, the transactions performed rose from SIT billion in 2005 to SIT billion in 2006, representing almost a 9-percent increase. In 2006 the Bank implemented a number of measures aimed at improving information support (both hardware and software), organization of work, and the streamlining of work processes. Several activities were also conducted in connection with the adoption of the euro, transfer of the foreign currency treasury service from Poštna banka Slovenije to Pošta Slovenije, d.o.o., and the exchange of information with Bankart d.o.o. (collection centre) arising from special postal orders, special money orders, direct approvals, direct debits, and standing orders. International payments In 2006 the Bank actively implemented its policy of attracting new customers, which is based on high-quality services and sound pricing. The Bank independently offered international payment services to customers in the previous year through the TARGET system, a contractual bank, and subsequently through the Nova KBM d.d. banking group. The Bank performs services for legal entities and sole traders through single transaction accounts for both tolar and foreign currencies, and for individuals through multi-currency personal accounts. By the end of 2006, the Bank concluded 580 contracts on the opening of foreign currency transaction accounts. 23

26 Number of accounts Index Accounts opened Active accounts In 2006 the Bank generated EUR 48.6 million in international payments, of which EUR 20 million represented inflows and EUR 28.6 million represented outflows, resulting in a 10-percent increase over The Bank s trading partners are mostly from other European countries, which is also reflected in the currency make-up of international payments, where the euro is the principal currency. Payments in terms of value in thousands of EUR Payments Index Inflows 20,000 19, Outflows 28,650 24, TOTAL 48,650 44, International payments are also executed on behalf of individuals by means of international postal orders. The Bank performs inward and outward payments by international postal order with 16 countries on the basis of concluded bilateral agreements. Payments are still executed by mail with eight post offices, and through the Eurogiro electronic system with others. International postal orders in thousands of SIT Payments Index Outward 332, , Inward 123, , TOTAL 455, , FINANCIAL RESULT The Bank generated a pre-tax profit of SIT 626 million in 2006, and consequently attained a percent ROE before tax. Income totalled SIT 9,589 million and expenses SIT 8,963 million. After deducting corporate income tax and deferred taxes, the Bank attained a net profit of SIT 451 million, which will be allocated to reserves and other equity items in accordance with the Companies Act (hereinafter: ZGD) and the Articles of Association of Poštna banka Slovenije. 24

27 The net income and expenses generated by the Bank in thousands of SIT Net income and expenses Amount Amount Changes Index /2005 Net interest and similar income 3,178,814 2,910, , Dividend income 10,766 19,192 (8,426) 56 Net fee and commission income 1,569,870 1,374, , Realised gains/losses on financial assets and liabilities at fair value through profit or loss (22) 0 (22) - Net gains/losses on financial assets and liabilities held for trading 370, ,033 46, Net foreign exchange gains (losses) (3,876) (8,146) 4, Other operating profit or loss (2,053) 36,035 (38,088) - Net profit or loss from financial operations 5,123,927 4,609, , Administrative expenses incl. depreciation and amortisation expense 3,533,275 3,333, , Provisions 55, ,517 (46,363) 54 Impairment loss 909, , , Profit or loss before tax 626, , , Corporate income tax and other taxes 175,012 95,143 79, Net profit or loss for the year 451, ,994 42, Net interest income In 2006 the Bank generated SIT 3,179 million in net interest and similar income, which is 9 percent more than in the previous year and 5 percent above the forecast. The interest income and similar income of the Bank in 2006 accounted for 62 percent of the total income, while interest expense and other similar expenses accounted for 31 percent of the total expenses. Interest income exceeded the planned figure by 4 percent, and interest expense was up 2 percent from the forecast. Net interest income increased in 2006 in comparison with the previous year, primarily as the result of the increased volume of operations, restructuring of investments, and the acquisition of more favourable sources of financing. The interest margin, calculated using the methodology of the Bank of Slovenia as the ratio between net interest and average assets, fell from 2.49 to 2.46 percent in 2006, but was 0.09 percent point above the forecast. Dividend income In 2006 the Bank generated SIT 11 million in dividend income, which is 56 percent of the previous year s figure and 60 percent of the planned figure. Net fee and commission income Net fee and commission income amounted to SIT 1,570 million and exceeded the 2005 figure by 14 percent and the planned figure by 16 percent. Fee and commission income in the amount of SIT 2,981 million accounted for 31 percent of the Bank s total income, and rose 9 percent over the previous year. The services which generated the largest share of non-interest income from fees and commissions include: fees and commissions for the execution of payments within the country and abroad (56 percent), fees and commissions for the provision of administrative services (relating to the management of personal accounts, transaction accounts, and card transactions) (33 percent) and fees and commissions for issued guarantees and loan commitment fees and commissions (11 percent). The fee and commission expense in the amount of SIT 1,412 million accounted for 15 percent of the total expenses and was up 4 percent from the previous year, primarily owing to the increased volume of operations. The fee and commission expense was 7 percent or SIT 111 million short of the forecasted figure. The largest, 71-percent share of fee and commission expense relates to fees and commissions for transactions performed for the Bank by Pošta Slovenije, d.o.o. at its branches. 25

28 Net gains/losses on financial assets and liabilities held for trading The Bank generated a net profit of SIT 370 million from transactions with financial assets held for trading, which is 14 percent more than in the previous year and 37 percent above the forecast. The Bank attained positive results both in securities trading and foreign currency trading. The profit generated from securities trading amounted to SIT 88 million and was SIT 2 million below the previous year s figure. The profit generated from foreign currency trading amounted to SIT 282 million, which is 21 percent above the 2005 figure and 17 percent up from the forecast. Net foreign exchange gains (losses) The Bank recorded losses from foreign exchange transactions in the amount of SIT 3.9 million as the result of changes in foreign currency rates. Other operating profit or loss Other operating income includes income from nonbanking services (rents) in the amount of SIT 20.7 million, income from previous periods in the amount of SIT 1.5 million, income from the indemnity fund in the amount of SIT 7.1 million, financing from SID Slovene Export Company in the amount of SIT 16.0 million, income from the sale of property, plant and equipment and intangible assets in the amount of SIT 3.5 million, and other income. This income is 17 percent below the previous year s figure. A significant deviation appears primarily in income from previous periods (only 2 percent of the previous year s figure). Other operating expenses in the amount of SIT 79.7 million comprise expenses relating to membership fees and donations (SIT 19.9 million), nondeductible expenses (SIT 7.4 million), and write-offs. Administrative expenses Administrative expenses, including costs of employee benefits, materials and services, totalled SIT 3,198 million in 2006 and accounted for 36 percent of the total expenses. In comparison with the previous year, administrative expenses increased by 7 percent and exceeded the planned figure by 1 percent. The excess is primarily the result of costs arising from the introduction of a new national currency, both in costs of employee benefits and costs of services. Despite the higher expense, the Bank s cost effectiveness, measured by the operating expense to average assets ratio, declined to 2.74 percent, which is 4 percent below the previous year and 2 percent short of the forecast. The employee benefits expense accounted for the largest share of administrative expenses (59 percent), followed by costs of materials and services (41 percent). The employee benefits expense increased by 5 percent over the previous year, surpassing the planned figure by 2 percent. The employee benefits expense amounted to SIT 1,876 and comprised gross salaries together with all contributions in the amount of SIT 1,667 million, and other employee benefits in the amount of SIT 209 million. The Bank pays gross salaries and all allowances to employees in accordance with the branch Collective Agreement as well as other relevant legislation and employment contracts. Cost of materials (SIT 156 million) primarily includes expenses related to office supplies and forms, including materials required by post offices in performing services for the Bank and which are paid by the Bank (forms, envelopes, instructions, etc.). The total cost of materials is 11 percent below the previous year s figure in the same period, and 16 percent below the forecast. This decrease is largely owing to the selection of new suppliers and the more rational purchase and use of materials. The cost of services in the amount of SIT 1,165 million exceeded the planned figure by 3 percent and was 13 percent above the previous year s figure. In spite of regular monitoring and the timely adoption of relevant decisions for their reduction, certain costs nevertheless exceeded the forecast, in particular postage costs and IT costs, mainly as the consequence of changes in software applications due to the transition to IFRS and the introduction of the euro. Depreciation and amortisation expense The depreciation and amortisation expense amounted to SIT 335 million and was on the previous year s level. 26

29 Provisions In 2006 the Bank set up provisions in the amount of SIT 55 million, of which retirement benefits and similar liabilities amounted to SIT 11.4 million, pending litigation amounted to SIT 74.2 million, and NHSS amounted to SIT 15.8 million. Provisions for off-balance-sheet liabilities were reversed in the amount of SIT 46.2 million. Impairment allowance In 2006 the Bank continued to implement a restrictive policy in reviewing the quality of the loan portfolio. Accordingly, debtors were classified into credit rating classes and additional adjustments were made. The Bank made continuous adjustments in the classification of customers shared with Nova KBM d.d. In 2006 the Bank calculated allowances for impairment in accordance with the Decision on the estimation of losses from credit risk and internal methodology for the estimation of losses from credit risk, which is in line with IFRS. The Bank thus made allowances for impairment in the amount of SIT 909 million, which is 27 percent more than in the previous year FINANCIAL POSITION The balance sheet total of the Bank at the end of 2006 amounted to SIT 135,395 million. The balance sheet total increased by SIT 12,519 million over the previous year, and was 1 percent or SIT 711 million above the forecast Items of balance sheet assets in 000 SIT % in 000 SIT in 000 SIT % Assets 31 Dec 06 Structure Changes 31 Dec 05 Structure Index Cash and balances with the central bank 5,221, ,500 5,153, Financial assets held for trading 2,572, ,855 2,429, Available-for-sale financial assets 22,502, ,908,554 7,593, Loans and advances 85,573, ,588,141 66,985, Held-to-maturity financial assets 15,799, (21,567,267) 37,366, Property, plant and equipment 2,280, ,948 1,907, Intangible assets 295,882 0 (15,330) 311, Deferred tax assets 106, ,719 57, Other assets 1,042,220 1 (27,796) 1,070, TOTAL ASSETS 135,394, ,519, ,875, Cash and cash equivalents Cash in hand and on accounts with the Bank of Slovenia amounted to SIT 5,222 million at the end of 2006, of which ready cash amounted to SIT 2,528 million, funds on settlement accounts amounted to SIT 2,494 million, and overnight deposits with the Bank of Slovenia amounted to SIT 200 million. Cash in hand and balances with the Bank of Slovenia are generally higher at the end of the month, when pensions are paid out by the Pension and Disability Insurance Institution, while average balances are lower. Financial assets held for trading Financial assets held for trading amounted to SIT 2,573 at the end of 2006, and increased by SIT 143 million or 6 percent over the previous year. These assets accounted for 2 percent of the total assets. The Bank invested SIT 1,754 million or 68 percent of the financial assets held for trading in debt securities, of which SIT 1,064 million or 61 percent in investments in banks. A portion of these assets in the amount of SIT 222 million or 13 percent was invested in foreign debt securities. In addition to investments in debt securities, the Bank invested 32 percent or SIT 818 million of its financial assets held for trading in the shares of banks or other issuers. Available-for-sale financial assets At the end of 2006, financial assets available for sale in the amount of SIT 22,502 million accounted for 16 percent of the Bank s investment portfolio, which is 196 percent more than at the beginning of the year. Despite this high increase, the forecasted targets were not fully attained, as indicated by the plan realisation index of 89 percent. 27

30 Available-for-sale financial assets comprise equity investments in financial and nonfinancial organisations in the amount of SIT 11.7 million, debt securities issued by the government and the Bank of Slovenia in the amount of SIT 22,338 million, and foreign currency debt securities of other issuers in the amount of SIT 153 million. Looans and advances Loans and advances amounted to SIT 85,573 million at the end of 2006, and accounted for 63 percent of the Bank s total assets. Loans and advances increased by 28 percent over the previous year, and were 8 percent above the forecast. Loans and advances were made to both banks and nonbanking customers. Loans and advances to banks amounted to SIT 29,530 million at year end, and accounted for a 35-percent share, which is 22 more than in the previous year and 32 percent above the forecast. At year end the ratio of short-term to long-term loans was 34 : 66, and, in terms of currency, the ratio of domestic currency to foreign currencies was 95 : 5. Legal entities (65 percent) and households (30 percent) accounted for the largest share of lendings to nonbanking customers, while other financial organisations and nonprofit institutions serving households jointly accounted for 5 percent. Compared to the previous year, lendings to nonbanking customers grew at an above-average rate within this group (32 percent growth). The highest absolute growth was attained by lendings to legal entities in the amount of SIT 9,402 million, which represents a 35 percent increase. Lendings to households grew at a slightly slower rate, increasing by SIT 2,813 million or 20 percent. At year end, the ratio of short-term to long-term lendings to nonbanking customers was 49 : 51, which, compared to the previous year, represents an increase to the benefit of short-term lendings. Held-to-maturity financial assets Investments in held-to-maturity financial assets amounted to SIT 15,800 million and comprise investments in securities which the Bank intends to hold, or is capable of holding, to maturity. Debt securities issued by the government and the Bank of Slovenia in the amount of SIT 13,997 accounted for the highest share (89 percent), followed by securities of other issuers in the amount of SIT 1,803 million representing an 11-percent share. 97 percent of all financial assets held to maturity are listed. Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets amounted to SIT 2,576 million (as at 31 December 2005: SIT 2,219 million). The major portion of additions comprises upgradings and purchases of computer equipment and a automated teller machine (ATM) in the amount of SIT 163 million, software applications, and the purchase of part of new business premises in Ljubljana (SIT 55 million) Items of balance sheet liabilities in 000 SIT % in 000 SIT % Liabilities 31 Dec 2006 Structure Change 31 Dec 2005 Structure Index Financial liabilities at amortised cost 128,450, ,246, ,204, Provisions 586, , , Income tax liabilities 356, , , Other liabilities 989,666 1 (1,844,055) 2,833, Share capital 1,424, ,020 1,243, Capital reserves 1,297, , , Revaluation surplus 32,305 0 (46,300) 78, Revenue reserves (incl. retained earnings) 2,095, ,859 1,734, Net profit or loss for the period 160, ,495 76, TOTAL LIABILITIES 135,394, ,519, ,875,

31 Financial liabilities at amortised cost At the end of 2006, the Bank had SIT 128,451 million in financial liabilities carried at amortised cost, which accounts for 95 percent of the total liabilities. These liabilities comprise deposits in the amount of SIT 103,136 million, loans and advances in the amount of SIT 10,588 million, debt securities in the amount of SIT 9,918 million, and subordinated liabilities in the amount of SIT 4,808 million. The Bank acquired significant additional sources of financing in 2006 in the form of deposits from the nonbanking sector, primarily sight deposits from nonbanking customers, which resulted in a total increase in local and foreign currency deposits in the amount of SIT 12,452 million. The Bank also raised long-term foreign currency loans in a total value of SIT 1,797 million, of which SIT 1,558 was raised from banks in Slovenia. Foreign currency loans amounted to SIT 8,871 million at year end. At the end of 2006, liabilities from issued debt securities amounted to SIT 9,918 million, of which issued bonds amounted to SIT 6,421 million and issued certificates of deposit to SIT 3,497 million. Liabilities from issued bonds relate to the fourth, fifth and seventh issues of bonds of Poštna banka Slovenije. The fourth issue of bonds dated 14 December 2001 in the amount of SIT 2,500 million matured at the end of Subordinated liabilities comprise long-term deposits in the amount of SIT 2,299 million, and the amount of bonds of the second and sixth issues, including interest and discounts, in the total amount of SIT 2,510 million. In 2006 the Bank received an additional hybrid deposit in the amount of SIT 1,000 million, of which SIT 450 million was from Pošta Slovenije, d.o.o. and SIT 550 million from Nova KBM d.d. Subordinated liabilities can be included in the calculation of the Bank s liable equity capital. In terms of maturity, 48 percent of financial liabilities carried at amortised cost are sight liabilities, 28 percent are current liabilities, and 24 percent are noncurrent liabilities. In addition to deposits and lendings to banks and legal entities, noncurrent liabilities also include issued debt securities, certificates of deposit, and subordinated liabilities. Provisions The balance of provisions at year end amounted to SIT 586 million, of which provisions for pending litigation amounted to SIT 109 million, for pensions and similar liabilities to employees SIT 182 million, for off-balance-sheet liabilities SIT 185 million, and for the national housing scheme SIT 109 million. Net provisions increased by SIT 48 million over the previous year. Equity In 2006 the Bank s equity increased by SIT 900 million, totalling SIT 5,011 million. This change relates, on the one side, to decreases resulting from the revaluation of financial assets available for sale and, on the other side, to the increased value resulting from capital increase in the amount of SIT 501 million and the net profit for 2006 in the amount of SIT 451 million Cash Flow Statement The Cash Flow Statement is compiled using the indirect and direct methods, and cash equivalents are determined in accordance with the Bank s accounting policy. At year end, the Bank recorded cash equivalents in the amount of SIT 27,374 million, as follows: cash at hand and balances with the Bank of Slovenia in the amount of SIT 5,222 million, available-for-sale financial assets (with original maturity up to 3 months) in the amount of SIT 12,063 million, and loans and advances to banks (with original maturity up to 3 months) in the amount of SIT 10,090 million. Net cash flows from operating activities after tax amounted to SIT 4,916 million (net disbursements). The cash flows from operating activities show that in 2006 the Bank s loans and advances were slightly higher (8 percent) than the funds collected from deposits, lendings and debt securities. Cash receipts from investing activities amounted to SIT 21,589 million, while payments amounted to SIT 750 million. The statement points to deinvestment. Cash receipts from financing activities amounted to SIT 1,706 million, while cash disbursements amounted to SIT 173 million. This means that the Bank s borrowings were higher in the observed period. 29

32 3.6. GOVERNANCE AND RISK MANAGEMENT Risk Management Policies and Measures For the purpose of managing risks related to its operations, the Bank has prepared a risk management plan comprised of the following measures: internal procedures for identifying and measuring risks, measures for managing risks and internal procedures for their implementation, measures for managing risks and internal procedures for their implementation, The objective of the risk management policy is the integral management of risks with the aim of attaining the targeted return on equity, managing the interdependence of risks and risk management on all organizational levels, defining the guidelines for risk management methods, and defining risk management responsibilities. Effective risk management is based on the following principles: alignment with the Bank s business strategy, integrity and integrality, mutual cooperation, personal responsibility, transparency and accuracy of procedures and work processes, regular monitoring and review, and independence. The guidelines for preparing the risk management policy are embodied in the definitions of risk factors stemming from the Bank s internal and external operating environments. The goals of the risk management policy of Poštna banka Slovenije include managing risks in all areas of operation, as well as managing and minimizing risks in the strategy, organization and governance of the Bank Liquidity Risk Liquidity and solvency are, besides capital adequacy, the principal concern of the Bank, which is required to conduct its operations in a manner reflecting its ability to fulfill any matured liabilities at all times. With the goal of protecting itself against liquidity risk, the Bank has created and implements a policy of regular liquidity management, which is an essential component of its safe operation. This involves sound decision-making with respect to the management of assets and liabilities, both in terms of daily cash flows and their dispersion. The Bank manages liquidity risk by compiling daily and monthly plans of liquidity flows according to the following groups of cash transactions: cash flows for individuals, cash flows for corporate customers, flows in the interbank market, flows from securities trading, cash flows for SIT payments and from foreign currency trading, cash-in-hand flows, and other cash flows. The plans are prepared separately for SIT transactions and for foreign currency transactions, which are denominated in euros. Besides compiling cash flow plans, the Bank also monitors deviations and the reasons for them. The Bank devotes special attention to customers with high balances in call deposits and on transaction accounts, and those with the right to draw on overdraft facilities and revolving loans. Since payments by individuals at post offices as well as cash withdrawals and deposits at cash counters represent the largest cash flows, the Bank strives to maintain a high quality level of planning of such flows Credit Risk Credit risk is the risk of financial loss as the consequence of a debtor s deteriorating creditworthiness. The Bank manages credit risk by means of an in-depth credit rating analysis and a conservative approach to establishing credit relations. Customers and claims are classified according to applicable regulations and internal rating criteria. A debt limit is calculated for each customer in accordance with the Guidelines for the determination of debt limits. Impairment allowances are created with regard to customer rating, payment discipline and adequacy of collateral. 30

33 A breakdown of rated gross claims Balance 31 Dec 2006 Balance 31 Dec 2005 in millions of SIT % in millions of SIT % Balance sheet claims 107, , Off-balance-sheet liabilities* 42, , Rated claims 149, , * The amount of 42,447 includes a pledge of financial assets for the introduction of the euro in the amount of SIT 35,126 million. Transition to IFRS In 2006 the Bank implemented IFRS. At the beginning of the year, the entire portfolio was reviewed and individual impairment allowances were made for all customers whose exposure exceeded the prescribed percentage of equity. Where required, individual impairment allowances were made for customers using the internal methodology for the estimation of losses from credit risk, and collective impairment allowances were made for the remaining customers. The percentages of collective impairment allowances were calculated using the methodology for the estimation of losses from credit risk. Portfolio analysis and impairment allowance In 2006 the Bank continued to pursue a restrictive policy of reviewing the quality of the credit portfolio; debtors were classified into credit rating classes and additional impairment allowances were created. Throughout this process the Bank also reconciled the ratings of customers shared with Nova KBM d.d. In 2006 the Bank calculated impairment allowances in accordance with the Decree on the estimation of losses from credit risk and internal methodology for the estimation of losses from credit risk, which is in line with IFRS. Risk-bearing investments At the end of 2006, the Bank conducted special collection procedures against 128 risk-bearing investments of corporate customers which, in terms of value, represent 6.9 percent of the total exposure of customers of Poštna banka Slovenije. The Bank made impairment allowances for these claims in an average amount of percent. Pursuant to the decisions adopted by the Loan Committee, claims against corporate customers in a total value of SIT million were transferred to risk-bearing investments in SIT 1,029.4 million was collected, whose effect on the income statement totalled SIT million. After exhausting all legal remedies, the Bank wrote off claims in a total amount of SIT In the retail banking segment, there was SIT million worth of claims in collection procedures, of which 887 claims were related to personal accounts and 41 claims were related to loans. In 2006 the claims of 190 parties totalling SIT 12.7 million were transferred to risk-bearing investments and SIT 42.9 million was collected during the year. Finally, the total debt of 121 debtors in the amount of SIT 4.6 million was written off. In the Retail Banking Division, provisions are created for lending activities and for account transactions. The claims are classified into groups A to E individually by debtor, based on the maturity of the claim. Appropriate impairment allowances are made in line with the ratings Market Risk The Bank s portfolio points to a conservative approach in securities trading, which means that its investments are less risky. Investments in Republic of Slovenia bonds represent part of the Bank s investments aimed at meeting requirements for the alignment of maturity dates of assets and investments. The source of payment upon maturity is the state budget, which influences the relevant stability of prices. The Bank allocates a minor portion of its securities to trading. The portfolio of other marketable securities is created on the basis of relevant resolutions on purchases and sales adopted by the Management Board, and on the basis of decisions of merchants, who have restricted authorizations. 31

34 The Bank does not calculate and provide capital for market risks, as its policy limits the amount of investments in marketable securities to SIT 3,600 million (EUR 15 million). The Support Services are responsible for regularly monitoring movements in prices of securities and price change risk. In case of any expected price fall risk, the Treasury Division proposes or adopts a decision on the sale of marketable securities. At the end of each month, the Bank carries out monthly valuations of the securities portfolio in accordance with IFRS and the adopted business and accounting policies of the Bank Interest Rate Risk In deciding on active and passive interest rates in 2006, the Bank was subject to the conditions created in the market by major banks. The Bank has an internal act, the Decision on interest rates, for the purpose of determining interest rates for individual types of monetary funds received and granted. The Bank has specifically defined authorizations for changing the interest rates of individual customers. In 2006 the Bank followed a methodology of interest rate risk management which covered the following: average interest rates and interest rate margin, monitoring of interest rates in the market, reporting on deviations, calculation of interest rate risk exposure (model of spread between interest-sensitive investments and liabilities), monitoring of discrepancies between the volume of assets & liabilities and contractually fixed interest rates, and separately with variable interest rates, calculation of interest margin, monitoring of average weighted lending and deposit rates for transactions with corporate customers. The Bank still partly revalues its assets and investments using the basic interest rate (TOM), and partly using a currency clause generally linked to the euro exchange rate. With respect to real interest rates, the Bank implements a policy of variable interest rates Currency Risk Currency risk is reflected in items on both the asset side and the liability side of the balance sheet, and is primarily the result of executed international payments, as well as the borrowing and placement of foreign currency loans. The Bank maintains a strict policy of closed foreign currency positions. The majority of liquid foreign currency investments represents lendings to corporate customers, cash in hand, balances with domestic banks, and deposits with domestic banks. In 2006 the Liquidity Committee conducted daily monitoring to ensure that liquid foreign currency investments met the prescribed structure, while Support Services conducted daily monitoring of the open foreign exchange position to ensure that it was within the prescribed limits. In addition, the Balance Sheet Management Committee conducted monthly monitoring of the open foreign exchange position, foreign currency risk-adjusted items, and the structure of liquid foreign currency investments. The buying and selling rates for effective foreign currency are determined on a daily basis by the Retail Banking Division, while the exchange rates for companies are proposed by the Treasury Division and approved by the Liquidity Committee. The increase in euro borrowings of corporate customers had the largest influence on the foreign exchange position. Despite the above-mentioned changes, currency risk did not represent a major risk to the Bank because the greater part of its transactions were in SIT. The Bank has defined exposure limits according to individual currencies. Following the announcement of the parity rate for conversion of SIT into euros, the management of currency risk became less significant for the euro. 32

35 Balance Sheet by currency as at 31 December 2006 in millions of SIT Foreign Total Balance Currency clause SIT currency clause clauses sheet total Assets 15,126 3,252 18, , ,395 Liabilities 13,040 3,836 16, , ,395 Difference +2, ,502 1, Operational Risk Operational risk refers to the risk of loss as the result of the inadequate or unsuccessful execution of internal processes, conduct of persons, functioning of systems, or due to the influence of external factors. Operational risk also includes IT risk, which is the risk of loss as the result of inappropriate information technology and processing, primarily from the aspects of scalability, access, integrality, supervision and continuity. Operational risk also includes legal risk, which is the risk of loss resulting from the violation or improper observance of laws, implementing regulations, instructions, recommendations, concluded agreements, good banking practices, or ethical standards. The Bank conducts monthly monitoring of losses resulting from operational risk according to the following segments: write-offs, indemnities and remunerations, costs of unwinding, compensations, legal responsibility, regulatory and tax penalties, losses resulting from damage to fixed assets, other. Basel II Preparations are under way at the Bank to ensure compliance with the new European regulation in the credit and operational risk group. The Management Board has decided that the Bank shall monitor credit risk using the standardised approach, and operational risk using the simple approach. Cooperation in the area of operational risk was organised in 2006 among banks in the Nova KBM d.d. banking group CAPITAL ADEQUACY AND COMPLIANCE WITH OTHER BANK OF SLOVENIA REQUIREMENTS The Bank is obliged to meet the requirements of the Bank of Slovenia in accordance with the Banking Act. Several requirements are based on the calculation of capital, which amounted to SIT 7,077 million at the end of Equity shares in other banks are not deducted from the equity (unless they exceed 10 percent of that bank s or the Bank s equity). Bonds of the sixth issue, classified as subordinated liabilities, in the discounted amount of SIT 800 million (the total issue being SIT 1,000 million), and a deposit in the amount of SIT 2,250 million, classified as a hybrid instrument, paid in by Pošta Slovenije, d.o.o. and Nova KBM d.d., were included in the capital. The ratio of capital to average risk-weighted assets (capital adequacy ratio) has to be at least 8 percent; Poštna banka Slovenije s ratio is 10.4 percent. Other restrictions based on capital percentage were also observed by the Bank in 2006 (investments in fixed assets and equity of nonfinancial organizations, capital investments in individual nonfinancial organisations, exposure to persons in a special relationship with the Bank, exposure to a single customer, and the sum of all large exposures) SHAREHOLDERS EQUITY AND SHAREHOLDERS 1. Number of shareholders: the Bank had two shareholders at the end of 2006: Nova KBM d.d. with a 55-percent shareholding and Pošta Slovenije, d.o.o. with a 45-percent shareholding. 2. Number of shares: As at 31 December 2006 the Bank s share capital amounted to SIT 1,424,400 thousand SIT and consisted of 356,100 ordinary shares (195,855 shares of Nova KBM d.d. and 160,245 shares of Pošta Slovenije, d.o.o.). 33

36 3. The par value of a share is SIT 4, The shareholders equity as at 31 December 2006 amounted to SIT 5,010,915 thousand. 5. Book value of a share: as at 31 December 2005 = SIT 13,225 as at 31 December 2006 = SIT 14,072. Shareholders equity in thousands of SIT Share capital 1,424,400 1,243,380 Capital reserves 1,297, ,848 Revaluation surplus 32,305 78,605 Revenue reserves 2,095,728 1,734,869 Net profit for the period 160,700 76,205 TOTAL SHAREHOLDERS EQUITY 5,010,915 4,110,907 In 2006 the Bank issued its sixth issue of shares, which was divided into 45,255 shares with a par value of SIT 4,000 per share. Nova KBM d.d. and Pošta Slovenije, d.o.o. increased the Bank s share capital by cash contributions in the amount of SIT 181,020 thousand (ratio 55:45). The share capital of the Bank was thereby increased from SIT 1,243,380 thousand to SIT 1,424,400 thousand, and the capital reserves were increased by the amount of paid in capital surplus (SIT 319,934 thousand) DEVELOPMENT OF THE BANK Business Network In 2006 the Bank s business network was comprised of 556 post offices providing services for individuals and specific services for corporate bodies; 377 post offices also provide currency exchange services. The advantages of performing services through the postal network is primarily in its accessibility in terms of location and time (equal distribution of post offices across the country, non-stop business hours, post offices open on Saturday), and in its qualification for the performance of services in accordance with prescribed standards. The Bank s business network of post offices is complemented by four branch offices located in Koper, Kranj, Celje and Murska Sobota, as well as two commercial centres in Ljubljana and Maribor. The Bank has 22 automated teller machines (ATMs) which are linked to the BA ATM network throughout Slovenia. The holders of Activa/Maesto, Activa/Mastercard and Visa cards can withdraw cash in foreign currency at all ATMs carrying their logo. The Bank has 22 automated teller machines (ATMs) which are linked to the BA ATM network throughout Slovenia. The holders of Activa/Maesto, Activa/Mastercard and Visa cards can withdraw cash in foreign currency at all ATMs carrying their logo Internal Organisation The Bank s internal organisation structure was modified and upgraded in These changes primarily included the separation or integration of back offices, which resulted in changes in the number of employees in individual organisational units. These changes will continue with the aim of attaining the optimum organisation of operations. The Bank has the following staff services: Credit Rating, Risk Investments and Risk Management Department, Internal Audit Department, Security Policy Department. Some areas are directly subordinated to the Management Board: security policy, prevention of money-laundering, project management, consultancy in certain professional fields, and the secretarial staff of the Bank. 34

37 The Bank s business activities are performed by: the Retail Banking Division, the Corporate Banking Division Maribor, the Corporate Banking Division Ljubljana, the Treasury Division, the Payments and Electronic Banking Division. Support services are performed by: Management Accounting Division, IT Division, Legal and Corporate Affairs, Human Resources, and Marketing Division, Support Services, Technology and Organisation Department. The Corporate Banking Divisions in Maribor and Ljubljana have branch offices in Koper, Kranj, Celje and Murska Sobota, while the Retail Banking Division has two commercial centres in Maribor and Ljubljana. A unique feature of Poštna banka Slovenije is that part of its business activities are also conducted through post office units across the country. The post office employees who perform services for the Bank are employees of Pošta Slovenije, d.o.o Human Resources and Training The Bank had 222 employees at the beginning of 2006, and 221 employees at the end of the year. Of this number, 165 or 75 percent were females and 56 or 25 percent were males. The average age of females in 2006 was 42 years, and the average age of males was 41 years. Of the total 221 employees, 4 were on fixed-term contracts, and 217 were permanently employed. The staff turnover in 2006 amounted to 3.91 percent. The average number of employees in 2006 was 221. Eight persons joined the Bank and 9 employees left the Bank, of whom three went into retirement. Number of employees by organisational unit as at 31 December 2006 Organisational unit No. of employees % Senior management and staff units Retail Banking Division Corporate Banking Division Maribor 16 7 Corporate Banking Division Ljubljana 15 7 Treasury Division 4 2 Payments and Electronic Banking Division Management Accounting Division 17 8 IT Division 18 8 Legal and Corporate Affairs, Human Resources, and Marketing Division 12 5 Support Services Technology and Organisation Services 8 3 TOTAL

38 Education structure of employees as at 31 December 2006 Education level No. of employees % I. 4 2 II. 0 0 III. 0 0 IV. 9 4 V VI VII VIII TOTAL I. DEGREE IV. DEGREE VIII. DEGREE VII. DEGREE VI. DEGREE V. DEGREE Among the goals outlined in the business policy adopted by the Bank are HR development and training, to which the Bank devotes considerable attention and resources. Throughout the year, employees underwent training in a variety of specialised areas and attended seminars, workshops and conferences organised by educational institutions such as the University of Ljubljana s Center for Management Development and Training (CISEF), the Bank Association of Slovenia, and others. As at 31 December 2006 the Bank had 20 contracts for off-the-job training concluded with employees: 4 employees in post-graduate studies, 15 at university-level institutions, and one in two-year tertiary education, together accounting for 9 percent of the total workforce. In 2006 four employees undergoing off-the-job training under contracts with the Bank completed their studies: 2 employees completed their level VI qualification and the other two completed their level VIII qualification. The above data indicates that the Bank places special emphasis on knowledge, which is evident in the number of employees holding degrees or Master s degrees, who represent 33 percent of all personnel. Highly qualified and motivated employees like those of the Bank are the best guarantee of good performance and continuing development in future Information Support The Bank continued the process of integrating and upgrading its integral information system in Activities were conducted in line with a document entitled»it Strategy at PBS«, which calls for the consolidation of the information system in terms of location, hardware, data and applications, on the basis of the annual document»programme of tasks and projects for overhaul of the information system of the Bank«, and the annual document»it investment plan«. The main areas of activity included: investments in computer equipment and infrastructure, development and upgrading of in-house applications and those provided by external suppliers, 36

39 implementation of security policy measures in the area of IT, streamlining of the information system, preparation of the information system for changeover to the euro. The Bank carried out the following information system projects and tasks in 2006: Application software The Bank developed and integrated the following information system application packages: completed the development of in-house support for the second phase of foreign exchange transactions (DEV-2), upgraded the integrated data model and accompanying applicative solution for integral data management (CPB), upgraded the server and backup application support for new services via Pošta Slovenije, d.o.o. (treasury, custody, etc.), made adjustments in applicative solutions for the transition to IFRS, made adjustments in applicative solutions for the transition to transactions in euro currency (EURO), external suppliers developed the following support applications for the Bank: support for accounts and orders, support for treasury operations, backup support for new retail banking services, support for ECB reports. The Bank achieved a higher level of consolidation on the data and applications levels of the information system architecture. In the area of payments, the Bank integrated the execution of international payments and introduced complete subsidiary bookkeeping of accounts opened with the central bank and other business banks within the country and abroad. A new expert was employed for the development of support applications in the strategic environment of the information system. Communications network The Bank set up a network architecture enabling a higher level of availability and a redundant communication connection between the primary and reserve locations of the computer centre. Some measures for streamlining the network infrastructure were implemented. Investments in computer equipment The Bank began to consolidate hardware in the area of Windows servers by introducing the technology of server slices aimed at attaining a level of consolidation similar to that of the central server Security Policy Physical and Technical Security In the area of physical and technical security, the Bank follows the guidelines defined in the Bank Association of Slovenia s Minimum Requirements and Recommendations, and the guidelines of the Bank of Slovenia. Physical and technical security is provided under contract by certified companies performing 24-hour monitoring of alarms and interventions when necessary. The authorised and qualified company is a member of ZZVRS (Health Organisation of RS). The Bank has also concluded a contract with a certified company for the performance of professional tasks related to fire protection. Security is provided on the basis of elaborated and approved security plans. The transport of cash is organised in the same way, and is also performed by an authorised and qualified company. IT security policy The Bank continued to implement its IT security policy on the basis of its adopted security policy strategy and the resolutions of the Management Board. The Management Board actively monitors the introduction, upgrading and implementation of IT security policy elements. An IT security engineer is in charge of implementing the security policy, and regularly reports to the Management Board on the implementation of security policy and any discrepancies and risks. 37

40 38

41 In 2006 the Bank organised training programmes for its employees in the area of IT security policy. All employees are acquainted with the basics of handling information, procedures for the safe use of information technology, and procedures in the event of emergencies. The Bank s major suppliers and contractors are also required to act in conformity with its security standards. At its regular meetings, the Security Policy Monitoring and Supervision Committee examines the Bank s activities in the area of information security and accepts tasks for upgrading and improving the information security policy. Each year, the Bank conducts a test involving the setup of a reserve location and the setup of redundant payment systems at a reserve location. Based on the results of testing the setup of a reserve location, the Bank adopted in 2006 a resolution on the upgrading of the reserve location and reserve systems. The setup of a highly available cluster of systems and data striping will enable transfer to the reserve system with minimal or no loss of data and in the shortest possible time. In 2006 the Bank began preparations for upgrading both its reserve and primary locations. Following the recommendations of internal and external auditors, the Bank modernised its policy of access to business applications and implemented a new technology enabling central supervision and the management of business applications that were distributed at work stations The Bank and the Social Environment From the very beginning, Poštna banka Slovenija has been aware of its important role and responsibility towards the environment in which it operates. In line with its orientation, the Bank donates part of its generated profit to cultural, sports, humanitarian and environmental activities. Culture In the culture arena, the Bank cooperated with the international Lent Festival and the»vuberk 2006«Festival of ethnic popular music of Slovenia. For several consecutive years, the Bank has been the general sponsor of the Maribor Puppet Theatre and cooperates with the Mini Theatre, being well aware of the significance of investing in youth and their development. The Bank also supported the Reading Badge Society project, under which four books on the topic of money will be published. These books will be sent to all school libraries in Slovenia with the aim of making quality and interesting literature about money and finance more accessible to young people. Sport In 2006 the Bank supported top-level clubs and athletes in such sports as skiing, tennis, volley-ball, soccer and motocross, whose dedication, persistence and excellence have brought them outstanding results both on the national and international levels. Some of the Bank s major projects include longstanding collaboration with the Branik Ski Club. The Bank also supported the competition for the Slovenia Grand Prize and the European Open in motocross. Alongside these demanding projects, the Bank has also supported several smaller, yet high-quality sports events. Humanitarian activities The Bank donated funds in 2006 to many other humanitarian and health-care campaigns aimed at improving the lives of children, teachers and persons in need of medical and other assistance. Structure of sponsorship and donorship In 2006 the Bank allocated 45 percent to cultural activities, 44 percent to sports activities, and 11 percent of its funds to other, primarily humanitarian activities. Environmental activities The Bank continued to carry out activities aimed at attaining environmental goals and thereby contributed to the improved quality of life in society in By introducing electronic banking in various areas of its operations, the Bank is replacing paper transactions and thus reducing paper consumption. Through shredding and delivery procedures, the Bank hands over scrap office paper to specialised companies. In 2006 the Bank collected 76,050 kg of scrap office paper. 39

42 By the separate collection of empty original cartridges and toners, the Bank is contributing to the environmental awareness of employees and the Bank as a whole, thereby reducing pollution of the earth with solid, harmful and not readily degradable wastes. Empty cartridges and toners are handed over to companies specialized in packaging management. The Bank hands over any worn out computer and other office equipment and machinery to companies specializing in environmental decomposition, sorting and use of wastes for raw materials, and the adequate depositing of unusable components Internal Auditing The Internal Audit Department is an independent organisational unit. In terms of organisation and function, it reports directly to the Management Board and is thus independent from the areas it audits and other organisational units of the Bank. The most important tasks of the Internal Audit Department include reviewing the internal control system designed for managing risks, supervising the conformity of the Bank s operations with regulations and internal acts, and observing the principles of rational operation. In 2006 internal auditing was conducted in accordance with the annual plan of work adopted by the Management Board, subject to the approval of the Supervisory Board. The emphasis was on monitoring the euro introduction project (project monitoring, conducting audits, reporting to the Bank of Slovenia, participating in the final testing of changeover to the euro and in the changeover itself). The Department conducted an additional 29 regular audits (14 of these at post offices) and 2 extraordinary audits. In addition to internal audits, the Department is responsible for coordinating the audit of the Bank s annual report, coordinating inspections of the Bank of Slovenia, and supervising the ordinary annual inventory of assets and liabilities. Internal Audit also reviews the operations of Pošta Slovenije, d.o.o., which provides payment and other services on behalf and for the account of the Bank. Reports on completed audits are submitted to the Management Board of the Bank. The Internal Audit Department also submits quarterly reports on its work and the implementation of recommendations, as well as the annual report, to the Management Board and the Supervisory Board. Internal auditing tasks are performed by the Head of the Department and two auditors, one of whom is a specialist for IT audits. All of them hold a degree, and the Department Head is a certified auditor holding a valid license. The employees of the Internal Audit Department regularly attend training programmes and follow novelties in their field of work and in the banking sector Transition to the Euro and IFRS Poštna banka Slovenije began to prepare for the introduction of the euro in the spring of The activities were organised as a project, which was conducted in conjunction with Pošta Slovenije, d.o.o. in the part relating to adjustments of information support at post office counters, logistic support, and the replacement of tolars with euros. The majority of activities and adjustments required for performing operations in euros, particularly technological adjustments, were completed in the Bank by the second or third quarter of Considerable efforts were devoted to the analysis of risks and measures for their effective management, as well as training activities related to the introduction of the euro and the resulting changes in operations. The project group also devoted considerable attention to communications with the public, and regularly informed customers and the public on changes in operations due to the introduction of the euro and on the course of preparations for euro operations in banks. 40

43 From the technological and organizational aspects, the euro introduction project was one of the most complex projects in the Bank. Since other significant projects were simultaneously conducted by the Bank, the workload of all employees in the previous year was very heavy. Irrespective of the complexity of this project, the introduction of the euro and the transition itself were successfully completed. This achievement is largely due to the following facts: the preparations for changeover to the euro were thorough, all adjustments were made in accordance with the planned activities, the organization of management was effective, and the employees of the Bank and Pošta Slovenije, d.o.o. performed their tasks on a high professional level. In line with the decision of the Bank of Slovenia published in the Official Gazette of RS, no. 15/2005, the Bank compiled its financial statements for the 2006 financial year in accordance with IFRS for the first time this year. Comparable data for 2005 were also adjusted accordingly. The new standards have brought changes in the disclosure and valuation of individual items of the Bank s operations, particularly in the disclosure of investments in fixed assets, the disclosure of financial instruments, and the determination of impairments and necessary provisions. The Bank aligned its chart of accounts, bookkeeping and information support to the new standards. The transition was implemented in April The effects of the transition, opening balance as at 1 January 2005, and relevant notes are presented in the section»transition to IFRS« Significant Events in 2006 February The Bank introduced rated personal accounts for customers with the highest credit ratings. April All activities were completed for the switch to International Financial Reporting Standards. May At its Koper branch, the Bank began to provide a new service crediting of individuals. October The Board for Admission of Securities to the Official Market of the Ljubljana Stock Exchange issued a decision to the Bank on the admission of bonds with the designations PBS2, PBS5, PBS6 and PBS7 to the official listing. In June, the General Meeting of Shareholders of Poštna banka Slovenija adopted a resolution on capital increase, in October the shares were paid in by the existing owners, and in December the register court issued a decision on capital increase. The share capital of the Bank was increased by SIT 181 million, the basic capital thus being increased by SIT 500 million. December The Bank completed all activities for changeover to the new national currency euro. 41

44 4. GOVERNING BODIES General Meeting of Shareholders The General Meeting met only once in At its 18th meeting held on 27 June 2006, the General Meeting examined the report of the Supervisory Board, approved the annual internal audit report, approved the proposed appropriation of accumulated profit, discharged the Management Board of its duties, approved the proposal that the total amount of retained earnings resulting from the transition to IFRS as recorded in the Bank s opening balance as at 1 January 2006 remain a component of equity, passed resolutions on capital increase and amendments to the Articles of Association relating to the conversion of shares into non par value shares, and appointed the Bank s auditor for Supervisory Board The members of the Supervisory Board are: 1. President Aleš Hauc, Pošta Slovenije, d.o.o 2. Deputy President Matjaž Kovačič, Nova KBM d.d. 3. Member Igor Šujica, KBM Fineko, d.o.o. 4. Member M.Sc. Darko Tisaj, Nova KBM d.d. 5. Member Jurij Blatnik, ZEER, d.o.o. Management Board The Bank has a two-person management board consisting of: Drago Pišek, M.Sc. President Viktor Lenče Member Senior management as at 31 December 2006: Name Office 1. Jožef Fošt Executive Associate of the Management Board 2. Jožica Capuder, M.Sc. Executive Associate of the Management Board 3. Mateja Unuk Head of Internal Audit Department 4. Duška Zalokar Head of Credit Rating, Risk Investments and Risk Management Department 5. Andreja Gjud Head of Technology and Organisation Department 6. Mojca Mak Head of Support Services 7. Aleksander Jerenko Director of Retail Banking Division 8. Rosanda Falež Director of Corporate Banking Division Maribor 9. Regina Jerman Director of Corporate Banking Division Ljubljana 10. Božena Blažič, M.Sc. Director of Treasury Division 11. Štefan Jakovac, M.Sc. Director of Payments and E-Banking Division 12. Boris Hauptman Director of Management Accounting Division 13. Roman Treven Director of IT Division 14. Janez Brenkovič Director of Human Resources, Marketing, Legal and Corporate Affairs Other Executive Bodies 1. The Professional Board consists of the Management Board, Executive Associates of the Management Board, Division Directors, and Department Heads. 2. Credit Committee 1. Drago Pišek, M.Sc. President 2. Viktor Lenče Deputy President 3. Aleksander Jerenko member 4. Regina Jerman member 42

45 5. Rosanda Falež member 6. Danijela Ilešič member 7. M.Sc. Štefan Jakovac member 8. M.Sc. Božena Blažič member 3. Liquidity Committee 1. Drago Pišek, M.Sc. President 2. Viktor Lenče Deputy President 3. Jožica Capuder, M.Sc. member 4. Božena Blažič, M.Sc. member 5. Karmen Terčelj member 6. Primož Kosi, M.Sc. member 7. Štefan Jakovac, M.Sc. member 4. Assets and Liabilities Committee 1. Viktor Lenče President 2. Drago Pišek, M.Sc. Deputy President 3. Jožica Capuder, M.Sc. member 4. Božena Blažič, M.Sc. member 5. Štefan Jakovac, M.Sc. member 6. Aleksander Jerenko member 7. Rosanda Falež member 8. Regina Jerman member 43

46 5. ORGANIZATION CHART MANAGEMENT BOARD Security Policy Department Internal Audit Department Secretarial Staff Credit Rating, Risk Investments and Risk Management Department Credit Rating Department Risk Investments Departement Retail Banking Division Corporate Banking Division Maribor Corporate Banking Division Ljubljana Treasury Division Payments and Electronic Banking Division Retail Accounts and Lending Corporate Investments and Deposits Corporate Investments and Deposits Securities Trading and Foreign Exchange Transactions Development and Cash Services Funds Transfer Department Branch offices in Celje and Murska Sobota Branch offices in Kranj and Koper Domestic Payments Commercial Centre Maribor International Payments Commercial Centre Ljubljana Legal and Corporate Affairs, Human Resources and Marketing Division Retail Banking Support Services IT Division Technology and Organization Services Support Services Legal Affairs Accounting IT Development Retail Banking Support Services Human Resources Marketing and Public Relations Planning, Analysis and Controlling IT Operations Corporate Affairs 44

47 6. STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE STATEMENT OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE FOR PUBLIC JOINT STOCK COMPANIES Poštna banka Slovenije, d.d. Nova Kreditna banka Maribor d.d. banking group as a public company whose bonds are listed on the organized market of the Ljubljana Stock Exchange carries out its operations in conformity with the Banking Act and the Companies Act, and observes the provisions of the Securities Market Act and the Ljubljana Stock Exchange Rules and other regulations governing issues embodied in the Corporate Governance Code for Public Joint Stock Companies. The Code is published in the Official Gazette of the Republic of Slovenia and is accessible on the web pages of the Ljubljana Stock Exchange, the Association of Supervisory Board Members of Slovenia, and the Managers Association of Slovenia. The Bank observes the Corporate Governance Code for Joint Stock Companies except for some minor deviations, which are explained below: The Management Board publishes notices of general meetings, the entire text of proposed resolutions and the conditions for participation on the SEOnet and on the web pages of the Bank, while the entire materials are available to shareholders at the Bank s head office. In view of the fact that there are only two shareholders, there is in reality no need for the more detailed publication of all materials on the Bank s official website , and Considering the fact that there are only two shareholders, it can be expected that all matters have been verified and there is no need for the publication of information So far the members of the Supervisory Board have usually been elected jointly The Bank does not have an adopted share option remuneration system and therefore does not implement it The Supervisory Board has not formed such a committee until now and has selected the nominees itself The grounds of culpable liability are not enumerated in the employment contracts of Management Board members, as these are defined in the first three indents of paragraph 2 of Article 268 of the Companies Act The provisions of the Banking Act relating to membership in the Supervisory Board are sufficiently accurate and binding, and their criteria fully allow for the adequate selection of members of the Supervisory Board, which is why the Bank has no additional internal criteria for supervisory board members So far the Supervisory Board has not had any such committees, but will establish them should the need arise The external auditor usually does not attend general meetings. However, this is a possibility and should the need arise, the external auditor will also attend a general meeting. Internal Audit is present at meetings of the Supervisory Board where decisions are taken regarding the annual report, the internal control system, or risk management The Bank makes public announcements in accordance with regulations If necessary, the Bank will also make public announcements in the English language Despite the fact that the Bank does not have a specially prepared financial calendar, significant announcements are regularly made and agreed between the two shareholders. The Statement of Compliance with the Corporate Governance Code for Joint Stock Companies relates to the period from its last publication until the publication of this Statement in the Annual Report. Management Board Supervisory Board Maribor, 22 February

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