Annual Report 2011 Banka Celje, d.d., and the Banka Celje Group

Transcription

1 Annual Report 2011 Celje, March 2012

2 Banka Celje, d.d., and the Banke Celje Group Annual Report 2011, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union. 2

3 Content A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD 5 REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d. 6 I BUSINESS REPORT 9 1 HIGHLIGHTS 11 2 PRESENTATION 12 3 STRATEGY 13 4 SIGNIFICANT EVENTS 14 5 ECONOMIC AND BANKING ENVIRONMENT Economic environment Banking environment 15 6 REPORT ON THE OPERATIONS IN Financial results Financial position Operations according to key areas Shareholder information Assuming and managing banking risks Development Social responsibility Internal Audit Department operations 33 7 MANAGING BODIES OF THE BANK 34 8 ORGANIZATIONAL STRUCTURE OF THE BANK 35 9 STATEMENT OF CORPORATE GOVERNANCE STATEMENT OF MANAGEMENT S RESPONSIBILITIES REPORT OF THE AUDITORS 42 II FINANCIAL STATEMENTS 45 1 INCOME STATEMENT 47 2 STATEMENT OF COMPREHENSIVE INCOME 48 3 STATEMENT OF FINANCIAL POSITION 49 4 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY 50 5 STATEMENT OF CASH FLOWS 51 NOTES TO THE FINANCIAL STATEMENTS 53 1 GENERAL INFORMATION 53 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis for the presentation of financial statements Comparative information Consolidation Segment reporting Foreign currency translation Interest income and expenses Fee and commission income Dividend income Financial instruments Impairment of financial assets Offsetting Sale and repurchase agreements Cash and cash equivalents Accounting for leases Investment property Property and equipment Intangible assets Inventories Taxes Employee benefits Loans taken, deposits and debt securities issued Provisions Financial guarantees Share capital 62 3

4 2.25 Management of bank risks Critical accounting estimates and judgements Segment reporting 97 NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS Net interest and similar income Dividend income Net fee and commission income Gains less losses from financial assets and liabilities not classified at fair value through profit or loss Gains less losses from financial assets and liabilities held for trading Gain less losses from financial assets and liabilities designated at fair value through profit or loss Changes in fair value from hedge accounting Gains less losses from foreign exchange differences Gains less losses from derecognition of assets Other net operating profit / loss Administrative expenses Amortisation and depreciation Provisions Impairment charges Income tax expense Basic and diluted earnings per share Cash and balances with the Central Bank Financial assets held for trading Financial assets designated at fair value through profit or loss Available for sale financial assets Loans and advances to banks Loans and advances to customer Held to maturity investments Hedging derivatives Property and equipment Investment property Intangible assets Investments in subsidiaries Income tax assets Other assets Deposits from Central Bank Financial liabilities held for trading Financial liabilities designated at fair value through profit or loss Financial liabilities at amortised cost deposits from banks Financial liabilities at amortised cost due to customers Financial liabilities at amortised cost borrowings from banks Financial liabilities at amortised cost borrowing from customers Debt securities Subordinated liabilities Financial liabilities associated with transferred assets Derivatives - hedge accounting Provisions Other liabilities Share capital Dividend per share Contingent liabilities and commitments Cash and cash equivalents Related party transactions Information on the results of organizational units abroad Events after the reporting date 140 4

5 A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD 2011 was marked significantly by the economic and financial crises, with the debt crisis joining the fray. Due to the aforementioned, the Bank took measures to ensure secure and stable operations, preserve good operational and structural liquidity and to keep capital adequacy stable. The capital adequacy ratio amounted to 14.42%, with tier 1 capital ratio coming in at 10.65%. Based on the cost rationalisation programme in place, these having decreased by 6% in 2011, the Bank improved its overall cost efficiency. The cost to net income ratio amounted to 51.90%. In spite of the difficult conditions, the Bank was successful in selling bonds in an amount of EUR 34 million in the domestic market and was able to raise a syndicated loan in an amount of EUR 65 million. In December it participated successfully in the European Central Bank's auction. The Bank made a profit of EUR 34.7 million before impairment and provisioning. The challenging market conditions, apparent in the operations of the Bank's customers and subsequently in the deterioration of the credit portfolio quality, influenced the requirement for impairment and provisioning. The Bank covered the negative net financial result in the amount of EUR 14.9 million from other profit reserves. Compared with 2010, impairment costs and provisions were 73% higher. This past year was a year that saw country and bank credit ratings decrease. Due to the economic conditions, the decreased country rating and the decrease in the rating of the banking system as a whole, the international rating agency Fitch Ratings also changed its rating for Banka Celje. In spite of the decreased credit rating we did not see any larger repayment requirements in relation to the loans raised abroad. Of the more significant events from last year, the due diligence by a potential buyer in the second half of May warrants special mention (later the owners temporarily suspended the sale of the Bank) and the constitution of a new Supervisory Board. Macroeconomic forecasts for 2012 are negative, which is why the Bank is not yet planning growth in total balance sheet business. The Bank will encourage increased investments in loans to non-banking clients and it will increasingly direct its efforts into attaining stable funding from the non-banking sector to decrease its dependence on international funding sources. Despite less than promising forecasts the Bank's objective is to improve key operational ratios from Respected owners, business partners and co-workers, speaking on behalf of the Management Board, I would like to express my sincere appreciation of the trust you have shown us and thank you for the good cooperation. Dušan Drofenik, M.Sc. President of the Management Board 5

6 REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d. The framework of the Supervisory Board's operations and its responsibilities as well as its obligations is determined by the applicable legislation (the Banking Act, the Companies Act, the Regulation on the diligence of members of the management and supervisory boards of banks and savings banks) and the Bank's internal acts (the Articles of Association and the Rules of procedure related to the operations of the Supervisory Board and its committees) as well as other legal norms, which pertain to the Bank's operations. In its decision-making process during 2011, the Supervisory Board was supported by the Audit Committee. Operations of the Supervisory Board In May 2011 the term of office of the Supervisory Board elected in May 2007 expired. It held three regular meeting prior to the expiry of its term, where it dealt with 39 items on the agenda, also adopting the annual reports of Banka Celje, d.d., and the Banka Celje Group, d.d., for 2010 with the Auditor's reports and the Letter of the Auditor to the Bank's Management Board and the Supervisory Board. It also approved the materials for the calling of the 26 th Annual Regular Meeting of Shareholders and submitted a list of candidates for membership in the Supervisory Board for the new term. At the 26 th Annual Regular Meeting of Shareholders held in May 2011 the new Supervisory Board of the Bank was elected, comprising: Jure Peljhan, M. Sc., as President, Zvonko Ivanušič, M. Sc., as Vice-President and with the following members: Uroš Čufer, Ph.D., Melita Malgaj, Tomaž Subotič, Ph.D., Bojan Šrot, and Zdenko Zanoški, M. Sc. The Supervisory Board members term of office expires on fourth anniversary of their election, being the General Meeting of Shareholders in After election the Supervisory Board in its new make-up met at four regular meetings, where it dealt with 50 items on the agenda and held a correspondent session. At its meetings the Supervisory Board acquainted itself with the Bank's interim results on the basis of reports prepared by the Management Board. It addressed letters the Bank received from the Bank of Slovenia, acquainted itself with the Bank's measures implemented in relation to risk management and reviewed the Bank's policies and strategies on risk management and the risk profile for The Supervisory Board adopted the operational policies and the financial plan of the Bank for 2012 as well as its strategies and financial plans for the period from 2012 to At its 6 th regular meeting in 2012 the Supervisory Board also reviewed and approved the annual report of the Bank and the Group for 2011, the disclosures document for 2011, the report on the operations of the Internal Audit Service for the period from July to December 2011, gave its consent to the auditor's report and confirmed the Bank's Statement on Compliance with the Corporate Governance Code. It also reviewed the proposal by the Audit Committee on the naming of the auditor for Additionally, it reviewed the entire documentation relating to the 27 th Annual Regular Meeting of Shareholders and adopted the report to the Meeting of Shareholders on it own operations during The President of the Supervisory Board was in constant contact with the Management Board, which allowed the Supervisory Board constantly supervise the operations of the Management Board. The Supervisory Board invited the authorised auditor to its regular meetings, thus making it possible for the auditor to present the findings related to audit of the Bank. Based on the decision of the Bank of Slovenia, stating that, according to its criteria, Banka Celje has the status of a bank with systemic significance, the Supervisory Board named a Remuneration Committee, which all systemically significant banks in the Republic of Slovenia must name in accordance with the regulations by the Bank of Slovenia. The Remuneration Committee comprises: Jure Peljhan, M.Sc., as President and members: Zvonko Ivanušič, M.Sc., and Tomaž Subotič, Ph.D. In January 2012 the Committee reviewed and confirmed the Remuneration Policies at Banka Celje, which were subsequently adopted by the Supervisory Board. The Supervisory Board also ascertains the in 2011 its' members were not subject to conflict of interest and have performed their duties as Supervisory Board members autonomously and independently. The members attended the Supervisory Board meetings regularly, based on which it was able to meet in full composition, with all members actively participating in the creation of decisions by taking part in discussions related to individual items on the agenda. The members of the Supervisory Board attended a training course for supervisory board members and acquainted themselves with the most recent views related to the role and the meaning of membership. Based on the scope of activities conducted during 2011 and due to the fact that the Supervisory Board operated in full composition at its meetings, the President and the members of the Supervisory Board assess the operations of the Supervisory Board in 2011 to have been performed with all due diligence and care without any deviations from good practice. Operations of the Audit Committee In audit committees were in operation at the Bank. The old committee comprised Borut Stanič as President, Tadej Tufek as Vice President and Marina Poboljšaj as an external independent member. The committee performed its duties until its term of office expired in May 2011 (the term of office of Audit Committee members expires with the expiry of the term of office of the Supervisory Board). Until the expiry of its term the Audit Committee met at a single meeting, where it reviewed with the annual reports of the Bank and the Group together with the Letter from the Auditor to the Management Board. It was also presented with the document on the Bank's disclosures, prepared a proposal to the Supervisory Board on the naming of the auditor for the 2011 business year, it reviewed the report on its own operations during 2010 and approved the plan for its operations until the expiry of its term and the report on the operations of the Internal Audit in 2010 (semi-annual and annual) and the Report to the Bank of Slovenia on the execution of the ICAAP process. 6

7 The new committee was named at the 1 st meeting of the newly appointed Supervisory Board in June 2011 and comprises: Uroš Čufer, Ph.D., as President, Tomaž Subotič as Vice-President and Zdenka Habe, authorised auditor, as the external independent member. In 2011 the new Committee met three times (in September, October and in December). It dealt with 28 items on the agenda. The materials it reviewed pertained to the adoption of the plan of operation of the Audit Committee in 2011 (since being named), to the presentation of the Rules of Procedure on the operations of the Audit Committee and the proposal on changes to the aforementioned document, to the report on the operations of the Internal Audit during the first half of 2011 and to the plan of operations of the Internal Audit for the second half of The Committee was also informed of the threeyear strategic plan of the Internal Audit ( ) and the programme of the Internal Audit's operations for 2012, of the review by the Bank of Slovenia (ICAAP process); it reviewed the strategies and policies on risk management, the trading strategy and the Bank's risk profile all for 2012, as well as the report on the implementation of both strategies during the first ten months of It also monitored the Bank's interim results, the Bank's exposure to credit risk (on a quarterly basis), its five-year development plan, its business policies and financial plan for It was presented with the Agreement on the Audit of the Bank's Operations in 2011, with the findings of the external auditor after the completion of the initial phase of the audit for 2011 and with the report on the operations of the Posest subsidiary. The President of the Audit Committee kept the Supervisory Board informed of the committee's activities on a regular basis through reports at the Supervisory Board meetings. The Committee was successful in the execution of all planned assignments during the first months of its active operation all the while offering the Supervisory Board support with its advice, which is what it was established for. The Bank s and the Group's financial statements have been prepared in line with the International Financial Reporting Standards as adopted by the EU. In 2011 the annual audit of the Bank s and the Group's financial statements was conducted by the authorized auditors of PricewaterhouseCoopers, d.o.o., Ljubljana, which approved the Bank s financial statements without reservation and confirmed the content as being in line with the Bank s business report. It also issued a special auditor's report on the compliance with the regulations pertaining to risk management as requested by the Bank of Slovenia, which does not form part of the annual reports of the Bank or the Banka Celje Group. Resolutions and positions of the Supervisory Board The Supervisory Board reviewed the audited annual report for 2011 at its 6 th Regular Meeting on April 18, 2012, giving its consent and approval without remark. The auditor's report, forming an integral part of the annual report, was approved. The Supervisory Board also confirmed the proposal of the Management Board on covering for loss from other profit reserves in line with the legislation. In addition to the aforementioned the Supervisory Board members ascertain that the macroeconomic conditions in 2011 were extremely unfavourable and that the Bank, in spite of a net loss from operations, ensured safe and stable as well as cost efficient operations during the past business year. Jure Peljhan, M. Sc. President of the Supervisory Board Annual Report 2011 In line with the legislative requirements the Bank prepared annual reports for the Bank and its Group. Both reports were merged into a single report in 2011 for the first time. The Group comprises the Bank and its subsidiary Posest, d.o.o., Celje, wherein the Bank holds a 100% interest. The subsidiary deals mainly with the realisation of bad debt, the marketing of own and the Bank s real estate, own and other property engineering, property leasing, real estate and equipment appraisals and the supervision of purposeful use of loans granted to investors. 7

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9 I BUSINESS REPORT

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11 I BUSINESS REPORT 1 HIGHLIGHTS Bank GROUP Balance Balance Balance Balance Balance Balance 1. Statement of financial position (on 31 December) Total assets 2,490,913 2,598,080 2,559,083 2,492,765 2,599,217 2,560,233 Total deposits from the non-banking sector 1,485,029 1,507,808 1,453,439 1,485,025 1,507,805 1,453,436 - corporates 756, , , , , ,181 - retail 728, , , , , ,255 Total amount of loans to the non-banking sector 1,693,360 1,710,049 1,705,475 1,690,161 1,707,367 1,700,739 - corporates 1,355,464 1,378,530 1,399,426 1,352,198 1,375,778 1,394,652 - retail 337, , , , , ,087 Total equity 181, , , , , ,391 Impairment of financial assets at cost and provisions 152, ,297 88, , ,318 88,892 Commitments and contingent liabilities 676, , , , , , Income statement (from 1 January to 31 December) Net interest and similar income 48,927 55,067 53,888 48,895 55,008 53,505 Net non-interest income 23,171 20,837 22,734 23,939 21,595 23,462 Labour costs, general and administrative costs 33,658 35,992 36,349 34,298 36,384 36,818 Depreciation and amortisation 3,764 3,757 3,876 3,791 3,771 3,914 Impairment and provisions 53,266 30,730 27,880 53,275 30,763 27,910 Profit before income tax (18,590) 5,425 8,517 (18,530) 5,685 8,325 Income tax expense (3,715) 925 1,746 (3,715) 926 1, Number of employees (on 31 December) Shares Number of shareholders Number of shares 508, , , , , ,629 Nominal share value (in EUR) Book value per share (in EUR) Ratios in % Capital Capital 277, , , , , ,729 Capital adequacy ratio 14,42 15,19 15,35 14,46 15,21 15,36 Asset quality Impairment charges on financial assets, measured at amortised cost, and provisions for guarantees and commitments / classified balance and off-balance sheet asset items 6,68 4,79 3,80 6,68 4,79 3,80 Profitability Interest margin 1,95 2,14 2,17 1,95 2,13 2,15 Financial mediation margin 2,88 2,95 3,08 2,91 2,97 3,09 Return on assets - before tax -0,74 0,21 0,34-0,74 0,22 0,33 Return on equity - before tax -9,49 2,70 4,34-9,42 2,82 4,23 Return on equity - after tax -7,60 2,24 3,45-7,53 2,36 3,33 Operational costs Operational expenses / average assets 1,49 1,54 1,62 1,52 1,56 1,64 Liquidity Average liquid assets / average short-term deposits from non-banking sector 49,14 49,95 40,65 49,14 49,95 40,65 Average liquid assets / average assets 19,06 20,38 19,25 19,06 20,38 19,25 Business report

12 2 PRESENTATION On 31 December 2011 the Banka Celje Group comprised: Banka Celje, d.d. (the ''Bank''), as the parent bank and Posest, d.o.o., Celje (the ''Subsidiary''). The Bank owns 100% of the Subsidiary. Head office The Bank's head office is located in Celje, at Vodnikova 2. Subsidiary's head office The Posest, d.o.o., subsidiary's headquarters is situated in Celje at Vrunčeva 1. Scope of operations The Bank is an independent financial institution, established as a joint-stock company to execute all banking and other financial services based on the Banking Act (Zban-1) and the Companies Act (ZGD-1). Based on the authorisations it holds, it is licensed to perform the following mutually recognised financial sevices in accordance with Article 10 of the Banking Act: - accepting deposits; - lending that also includes: consumer loans, mortgage loans, factoring with or without recourse, financing of commercial transactions, including forfeiting; - payment services and»e-money«issuing; - issuing and managing of other payment instruments (such as travellers cheques and bank notes); - issuing guarantees and other commitments; - trading for own account or for the account of customers in: foreign exchange, including currency exchange transactions, financial futures and options, exchange and interest rate instruments; - trading for own account in: money market instruments, transferable securities; - safe custody services; - investment services and operations. History The beginnings of the Bank reach as far back as 1864, when Hranilnica mestne občine Celje was established. As the Kreditna banka Celje it joined Ljubljanska banka in The Bank was transformed into a joint-stock company in at the end of 1989 and remained part of the Ljubljanska banka system as a subsidiary bank until Since 15 June 1994, the Bank has been operating independently under the name it holds today, namely Banka Celje, d.d. In line with the strategy of extending its operations outside the Celje region, the Bank acquired Banka Noricum, d.d., Ljubljana in 1996 and transformed it into its main branch in Ljubljana, named Glavna Podružnica Ljubljana. The Bank also acquired Hmezad banka, d.d., Žalec in 1998 and first transformed it into a branch, namely Podružnica Hmezad (Hmezad branch), later making it a business unit at the start of In 1999 the Bank signed a Strategic partnership and business cooperation agreement with Nova Ljubljanska banka, d.d., thus becoming an associated member of its banking group. The Posest subsidiary company was established in 1991 as a limited liability company. The Bank may also perform the following other financial services in accordance with Article 11 of the Banking Act: - insurance brokerage in accordance with the act governing insurance business; - marketing of mutual funds, sale of investment coupons or mutual fund shares. The Bank complements its range of services on offer through its specialist subsidiary company Posest, d.o.o., Celje, which deals in real estate and offers leasing products, while also providing advisory services in the recovery of bad debt. Subsidiary's scope of operation The company is registered to perform a number of different types of activities, with its core business comprising: - repayment of the Bank's bad debt; - marketing of real estate owned by the company and the Bank; - owned and other property engineering; - property leasing; - property and equipment appraisals; - supervision of the purposeful use of loans granted to investors. 12 Business report 2011

13 3 STRATEGY In December of 2011 the Bank prepared a strategy of operation for the period from 2012 to 2016 as well as the business policies and the financial plan for The strategy for the coming five-year period includes the decision that the Bank must remain a universal bank with emphasis on operations with low-risk customer segments, a subsequently more diversified portfolio of investments and funding sources and an offer of banking and financial services, which will, while using minimal capital, ensure good profitability and full worktime utilisation at the Bank. A stable strategic owner will play an important role in the further long-term sustainable development of the Bank, supporting its tradition and preserving its universal banking status through the offer of comprehensive banking services in domestic and international operations. In setting strategic indicator goals the Bank took into consideration the risk profile, a decrease in dependency on international funding, a dividend policy, which should enable retained profits to become the main generator of capital and an increase in profitability based on increased cost efficiency and a more optimal structure of operations. A stable capital position remains one of the Bank s key objectives in coming five-year period. To attain its strategic goals, the Bank set key objectives for 2011, including the maintenance of the ratio of net loans to deposits from the non-banking sector, acquisition of other long-term funding sources by taking dedicated long-term loans from domestic and foreign financial institutions, active credit risk management aimed at decreasing receivables due, ensuring the adequate amount of capital and capital adequacy, further rationalisation of operations and the optimisation of the number and structure of employees. The Bank will improve the organisation of operations in the coming years through internal optimisation measures and by streamlining business processes. At the same time it will actively adjust its product mix to market conditions, develop new, marketable services and introduce modern marketing approaches. In the area of promotion, it will focus on product advertising, while boosting the Banka Celje brand awareness at the same time. Due to the unfavourable macroeconomic forecasts on economic growth, employment and funding the Bank does not plan to increase the volume of operations in 2012, it does however expect the volume to gradually start increasing in the coming years. In investment operations it plans for a moderate growth of lending to the non-banking sector. Special emphasis will be put on the quality of investments and on accelerated recovery to reduce the volume of outstanding claims. The objective of the Bank is to focus on clients while using less capital and offering services with lower capital requirements. The volume of securities investments will gradually be decreased. Investment activities in prime debt securities will be adjusted to suit the requirements of secondary liquidity reserves, whereby matured debt securities will be reinvested in government bonds with the best quality ratings. With regard to risk the Bank will focus on adequately covering the risk portfolio with impairments and provisions, all the while decreasing the share of bad debt in gross loans. It will ensure an adequate liquidity position, with special attention given to upgrading the system of liquidity risk management in accordance with European guidelines. By regularly monitoring and with timely action, the Bank will maintain a stable capital position, whereby it will carefully monitor the new capital accord set to come into effect on It will also continue to develop the procedures of measuring and estimating capital requirements and internal capital, while using the findings in the decision-making process. Due to the global financial and economic crisis the Banks saw a dramatic slide in business results and the coming years likely will not allow for the achievement of the level of return on capital as was the case prior to the crisis. In spite of this, the Bank has planned for a positive financial result in 2012, with special attention put on ensuring stable income. Net interest income is set to remain at the 2011 level, with non-interest income coming in lower, as the Bank does not expect major effects from the sale or valuation of financial instruments. Operating costs will continue to decrease with continued rationalisation of operations, while the volume of impairments and provisions will gradually begin to go down subject to effective risk management procedures. In 2012 the Bank will continue to gradually reduce the number of employees, which it will attain by providing for flexibility in substituting for absence and during temporarily increased workload. New jobs will be minimal, which is why the process of employment will require a high level of selectivity. To ensure adequate quality of IT support to operational processes, the Bank will, within the framework of its key strategic activities, provide for uniformity in IT support, upgrade the data warehouse, move to more modern software, update the content of application software, upgrade computer hardware by transitioning to a modern setup in the form of slice computing. The Subsidiary prepared its plan of operations for 2012, wherein it wrote that it will continue to follow its core mission, being the performance of activities to satisfy the Bank s needs. It plans to perform analyses of investment projects, perform appraisals and monitor the purposeful use of loans granted to investors. It also plans to sell housing in Velenje, continue to actively disinvest the housing facilities in the Ljubljanska building and increase the volume of real estate brokerage, while also devoting more attention the recovery of property of the Bank s debtors. Business report

14 4 SIGNIFICANT EVENTS 2011: - issue and successful sale of regular long-term bonds in the domestic market amounting to EUR 34 million in March 2011 and their listing on the Ljubljana Stock Exchange; - due diligence of the Bank s operations by a potential buyer in the second half of May 2011, with an ensuing temporary suspension of the sale by the owners; - closure of the Prešernova branch on 16 May 2011 based on the analysis of the usage of modern banking services, which are increasingly replacing the traditional operations; - at the 26th Regular Meeting of Shareholders on 24 May 2011 all of the proposed resolutions were adopted new members of the Bank s Supervisory Board having been named as well; - signing of the agreement on a long-term syndicated loan in an amount of EUR 65 million with a consortium of 8 foreign banks on 8 June 2011; - the first constitutive meeting of the new Supervisory Board on 8 June 2011; - dividend payment on 22 June 2011 in an amount of EUR 2.1 per ordinary and preference shares pursuant to the decision made at the Meeting of Shareholders; - since 26 September 2011 clients have a new service at their disposal, the E-account, which allows for the exchange of invoices between their issuers and recipients in electronic form; - rating received at the end of September 2011 (long-term BB, short-term B, individual C/D, support 3, outlook negative), which was lowered due to the harsh economic conditions, the downgrade of the country rating and the downgrade of the banking system as a whole. 14 Business report 2011

15 5 ECONOMIC AND BANKING ENVIRONMENT 5.1 Economic environment The international economic and financial crisis, persisting since 2008, have been joined by the debt crisis in Economic conditions were harsh in most developed countries, especially in the euro area, which was driven mainly by weak demand and uncertainty pertaining to the funding of peripheral eurozone countries. The final quarter of 2011 saw economic growth in the US strengthen, while contracting in some of the euro area countries, with 2012 forecasts even lower still was marked by rating downgrades of European countries and banks, including Slovenia and Slovene banks, which results in more expensive borrowing. Rating agencies downgraded Slovenia and its banks on account of political instability within the country and due to the delay in the increasing of capital at the banks. According to the latest data economic growth in Slovenia decreased in real terms by 0.2% in Quarter-on-quarter growth was negative for the entire year, with conditions deteriorating in the second half of the year in particular, due an acceleration in the decline of domestic consumption and the simultaneous deterioration of conditions in the international markets. The continuing decrease in the volume of investments in fixes assets, with total volume of investments having decreased since the start of the economic crisis in 2008 by approximately 40%. Economic growth was also negatively impacted by the restriction in government consumption, which was especially evident in the final quarter of the last year. With employment dropping further and due to a real decrease in salaries, endconsumption by households fell also. In spite of an increase in exports these were not sufficient to compensate for the drop in domestic spending. Slovenia exported 12.2% more goods in 2011 than in 2010, with import coming in higher by 11.1%. The import to export ratio thus reached 92.4%. Industrial production increased by 2.5% in The registered number of unemployed persons exhibits a seasonal increase in December 2011, though less than in previous years and the end-of-year figure reached 112,754 persons. Loss of fixed term employment was the most frequent reason for registering as unemployed. Among the persons no longer registered as unemployed approximately half were employed again, with the other half no longer registered due to increased retirement, especially by persons registered at the Employment Service of Slovenia in December 2010 with the intention to wait so that they could retire in accordance with the more favourable stipulations of the old pension legislation. The registered unemployment rate in 2011 amounted to 12.1% according to December data, having stood at 11.8% in December Despite the increase the trend in the job market in 2011 was more favourable as compared with the past crisis ridden years. Especially the large number of new jobs was encouraging. The public finance deficit reached 4.2% of gross domestic product in 2011 according to November data, thus coming in lower than planned by the supplementary budget. State budget revenues were 4.1% higher year-on-year, while expenditure increased by 0.7%, wherein pension payments, transfers to the unemployed and interest payments increasing most. Revenue from the European Union budget was highest ever in For the purposes of reducing the deficit in 2012 to 3.6% of the gross domestic product, a new act on the further intervention measures was adopted in December 2011, followed in January 2012 by the measure of suspending the execution of the budget until a supplementary budget is adopted, which is required due to the deterioration of economic conditions. In 2011 consumer prices increased in Slovenia by 2.0%, where goods prices increased by 2.7% and prices of services increased by 0.4%. The annual inflation rate, measured by the harmonised index of consumer prices, reached 2.7% in the European Monetary Union member states, whereas it came in at 2.1% in Slovenia. Energy and food prices contributed most to the inflation rate due to higher commodity prices in the world markets in early In spite of increases in some sectors with limited competition, inflation is expected to decrease in Banking environment The Slovene banking system maintained adequate liquidity in 2011, also with the assistance of increased use of funding from three-year refinancing auctions with the European Central Bank in December. The worsening of economic conditions was very much reflected in the balance sheets of Slovene banks in These reduced the volume of lending to the non-banking sector, with factors having had a negative impact on credit activity for quite some time including the decreased credit ratings and high borrowing costs, deteriorating macroeconomic conditions and the position of some industries, high indebtedness and poor company solvency. Reduced lending also meant that the total assets of the Slovene banking system decreased by 3.0% in The deterioration of economic conditions also affected the increased need to make additional impairments and provisions, which led the banking system to a loss after tax. Credit risk, measured by the share of receivables in banks classified as being over 90 days overdue, remained high. Financing terms at banks abroad deteriorated both in size and maturity, with the banks adjusting to this by deleveraging at foreign banks and borrowing from the Eurosystem. This funding source will remain reliable and relatively favourable in 2012 as well. Business report

16 6 REPORT ON THE OPERATIONS IN 2011 Report on the operations in 2011, including assuming and managing banking risk is based on the Bank's operations, being the dominant entity within the Group. Based on permission issued by the Bank of Slovenia the subsidiary company is not included in the consolidated supervision in accordance with the decision by the Bank of Slovenia on Supervision of Banks and Savings Banks on a Consolidated Basis, as from the aspect of the aim of supervision the Subsidiary does not represent any significant effect. 6.1 Financial results The Bank s financial result Due to the global financial and economic crisis resulting in the subsequently greater requirement for additional impairments and provisioning, Slovene banks saw their performance deteriorate markedly in The Bank was faced with similar problems afflicting the entire Slovene banking system. In 2011 it recorded a profit before impairments and provisions in the amount of EUR 34,676 thousand. After decreases by the impairments and provisions made, however, the result was a pre-tax loss in the amount of EUR 18,590 thousand and a net loss of EUR 14,875 thousand. Data shows that the decrease in gross profit mainly resulted from the requirement for additional impairments and provisions. Analysis of the Bank s net income and expenses in 2011: Net income and expenses Realization Realization Change Index =1-2 4=1:2 Net interest and similar income 48,927 55,067 (6,140) 89 Dividend income Net fee and commission income 16,386 16, Net gains from financial operations 6,253 4,307 1, Net other operating loss (344) (459) Administrative expenses (33,658) (35,992) 2, Depreciation and amortisation (3,764) (3,757) (7) 100 Impairment charges and provisions (53,266) (30,730) (22,536) 173 Profit / loss from operations (18,590) 5,425 (24,015) (343) Income tax expense 3,715 (925) 4,640 (402) Net profit / loss (14,875) 4,500 (19,375) (331) Other comprehensive income (2,687) (689) (1,998) 390 Comprehensive income after tax (17,562) 3,811 (21,373) (461) Net interest came in at EUR 48,927 thousand, being 11% or EUR 6,140 thousand less than in Compared with 2010, interest income was 3% higher and interest expenses increased by 16%. The average lending rate rose by 0.13 percentage points, while the average deposit rate increased by 0.37 percentage points. The cumulative interest margin amounted to 1.95% for the year, having come in at 2.14% in Dividend income reached EUR 876 thousand, increasing in comparison with the 2010 figure by 20% or by EUR 148 thousand. The Bank made 52% of all dividend income from investments in securities held for trading, with the other 48% coming from dividends on securities available for sale. Net fee and commission income from banking services rendered amounted to EUR 16,386 thousand in The increase of EUR 125 thousand as compared with 2010 was mainly a consequence of higher net fees and commissions from card operations. The services accounting for the majority of the Bank s net non-interest income from fees and commissions in 2011 have included payments and card operations, as has been the case for the past few years now. Financial transactions resulted in a profit totalling EUR 6,253 thousand. Compared with the results from 2010 the profit increased by 45% or by EUR 1,946 thousand. The Bank generated most of the positive effects from the valuation of bonds issued and the related interest rate swaps, amounting in total to EUR 5,092 thousand. Positive effects also came from the sale of mutual funds, resulting in a profit of EUR 1,017 thousand. 16 Business report 2011

17 Net other operating loss reached EUR 344 thousand, while amounting to EUR 459 thousand in The loss in 2011, for the most part, came from the implementation of tax on total assets, as the tax liability amounted to EUR 291 thousand. In 2010 the loss mainly came from the payment of refunds for withdrawals from ATMs of other banks in the Republic of Slovenia, totalling EUR 298 thousand. Administrative expenses accounted for EUR 33,658 thousand in 2011, thus decreasing by EUR 2,334 thousand as compared with Labour costs amounted to EUR 18,752 thousand, being EUR 1,801 thousand lower than in 2010 and coming in EUR 957 thousand lower than the estimated figure for The decrease in labour costs is mainly a result of a decreased number of employees, lower severance payments from terminations for business reasons and a lower holiday bonus. Costs of materials and services at EUR 14,906 thousand were EUR 533 thousand less than in 2010, with IT, maintenance and advertising costs decreasing most. Depreciation and amortization amounted to EUR 3,764 thousand, holding steady at the 2010 levels. The Bank s cost efficiency, measured with the share of operating costs in the Bank's assets, improved from 1.54% to 1.49% in The cost/income ratio (the CIR) came in at 51.90%, also improving on the 2010 figure of 52.37%. Impairments and provisions were made in a total amount of EUR 53,266 thousand, being 73% higher than in 2010, when they amounted to EUR 30,730 thousand. In 2011 the Bank made a total of EUR 39,574 thousand of credit risk provisions, impaired EUR 13,510 thousand of financial assets, provisioned for the denationalisation procedure in an amount of EUR 108 thousand and made provisions for employees in an amount of EUR 74 thousand The Group s financial result Analysis of the Group s net income and expenses in 2011: Net income and expenses Realization Realization Change Index =1-2 4=1:2 Net interest and similar income 48,895 55,008 (6,113) 89 Dividend income Net fee and commission income 16,385 16, Net gains from financial operations 6,253 4,313 1, Net other operating loss Administrative expenses (34,298) (36,384) 2, Depreciation and amortisation (3,791) (3,771) (20) 101 Impairment charges and provisions (53,275) (30,763) (22,512) 173 Profit / loss from operations (18,530) 5,685 (24,215) (326) Income tax expense 3,715 (926) 4,641 (401) Net profit / loss (14,815) 4,759 (19,574) (311) Other comprehensive income (2,687) (689) (1,998) 390 Comprehensive income after tax (17,502) 4,070 (21,572) (430) The gross loss that the Group recorded was EUR 60 thousand lower than the gross loss recorded by the Bank, with the Group s net loss lower by the same amount. The Group s income statement differs from the Bank s income statement under other net operating profit, mainly due to income from real estate sales. The Subsidiary sold part of the flats and parking spaces and a portion of the merchandise inventory. Business report

18 6.2 Financial position Financial position of the Bank End 2011 the Bank s total assets amounted to EUR 2,490,913 thousand. As compared to 2010 the figure decreased by EUR 107,167 thousand or by 4%. The Bank s assets according to individual items: Bank s assets 2011 Str Str. Change Index =1-3 6=1:3 Cash and balances with Central Bank 168, , , Financial assets 533, , (106,350) 83 Loans and advances 1,748, ,795, (47,543) 97 - loans and advances to banks 55, ,908 3 (30,854) 64 - loans and advances to customers 1,693, ,710, (16,689) 99 Fixed assets 22, ,827 1 (2,104) 92 Investments in subsidiaries, associates and joint ventures 2,257-2, Other assets 16,204-7,213-8, Total 2,490, ,598, (107,167) 96 The Bank s most liquid assets increased by 31% or EUR 39,839 thousand in Cash fell by 4% to amount to EUR 10,241 thousand, while balances with the Central Bank increased from EUR 117,633 thousand to EUR 157,923 thousand and include obligatory deposits and overnight deposits as well as other shortterm deposits with the Central Bank. Investments in financial assets decreased by 17% or by EUR 106,350 in 2011 in line with business objectives, thus amounting to EUR 533,152 thousand end Their share in the Bank s assets decreased from 25% to 22%. According to value the largest portion of the Bank s portfolio consists of investments in financial assets held to maturity. Loans and advances to banks decreased by 36% amounting to EUR 55,054 thousand end The decrease of EUR 30,854 thousand mainly came from short-term deposits with domestic banks with maturities up to 30 days. Investments in property and equipment and intangible assets amounted to EUR 22,723 thousand, having decreased by 8% in 2011 due to amortisation in spite of new acquisitions and investments, primarily in computer equipment. Investments in subsidiaries, associates and joint ventures include an investment in the Posest, d.o.o., company, 100-percent owned by the Bank. In 2011 the amount of the investment did not change. Other assets include receivables from the valuation of derivative financial instruments in the amount of EUR 4,838 thousand, receivables for the payment of current advances and deferred taxes in the amount of EUR 9,208 thousand and other assets totalling EUR 2,158 thousand. Although loans and advances to customers dropped by 1% or EUR 16,689 thousand in 2011, reaching EUR 1,693,360 thousand, these still represent the strongest category in the Bank s investment operations with a 68% share. The gross value of loans to customers came in at EUR 1,826,713 thousand, with impairments amounting to EUR 133,353 thousand having increased by EUR 36,402 thousand in a year. Loans to corporates, comprising loans to companies and private entrepreneurs, fell by 2%, while retail loans were up 2%. Across the board lender categories exhibited an increase in long-term loans. 18 Business report 2011

19 The Bank s liabilities per item have been realized as follows: Bank s liabilities 2011 Str Str. Change Index =1-3 6=1:3 Deposits from Central Bank 90, , , Financial liabilities designated at fair value through profit or loss 36, ,050 2 (3,904) 90 Financial liabilities at amortised cost 2,159, ,227, (67,378) 97 - deposits and borrowings from banks 417, , (56,742) 88 - due to customers 1,485, ,507, (22,779) 98 - debt securities in issue 185, , , subordinated liabilities 72, ,358 3 (12,941) 85 Financial liabilities associated to transferred assets ,993 1 (30,993) - Provisions 12, ,237 1 (639) 95 Other liabilties 10,760-16,489 - (5,729) 65 Total liabilities 2,309, ,398, (88,574) 96 Total equity 181, ,926 8 (18,593) 91 Total liabilities and equity 2,490, ,598, (107,167) 96 Short-term financial liabilities from deposits from the European Central Bank increased by 29% to EUR 90,082 thousand. Of this, EUR 10,060 thousand pertains to a short-term loan, taken in August, while EUR 80,022 thousand are long-term liabilities maturing in three years. Financial liabilities at fair value through profit or loss recorded EUR 36,146 thousand end 2011, thus falling by 10% due to interest payments and negative valuation. This item includes subordinated bonds issued in 2007 and maturing in 2017 as well as certificates of deposit maturing in 2012, which the Bank includes in the capital requirement and the capital adequacy ratio calculations in the amounts allowed. Financial liabilities at amortized cost decreased by 3% compared to 2010 and their amount of EUR 2,159,994 thousand represents 87% of the Bank s total liabilities. Deposits and borrowings from banks amounted to EUR 417,028 thousand, which represents EUR 56,742 thousand less than the 2010 figure. Even though their share in the structure of the Bank s liabilities has gradually been decreasing, it remains the second most important funding category with a 17% share. In 2011 access to long-term funding from abroad remained limited due to the euro debt crisis, in spite of this however, the Bank was able to acquire some new funding, while regularly repaying liabilities due. Due to a decrease in its rating the Bank also prepaid part of its loans. Due to customers decreased by 2% or by EUR 22,779 thousand, amounting to EUR 1,485,029 thousand end Retail deposits increased by EUR 2,092 thousand, while deposits from corporates dropped by EUR 24,871 thousand. The ratio of net loans and deposits from the nonbanking sector was 1.15, which was favourable when compared with the average of the banking system. Liabilities from debt securities in issue amounted to EUR 185,520 thousand end 2011 and include liabilities from issued plain vanilla bonds and certificates of deposit. In 2011 liabilities pertaining to this item increased by 16% or by EUR 25,084 thousand due the 15th bonds issue. Subordinated liabilities decreased by 15% or by EUR 12,941 thousand due to the maturity of the eighth subordinated bonds issue. The Group did not issue any new subordinated bonds in Financial liabilities associated with transferred assets, include interbank short-term repo transactions. At the end of 2010 liabilities from interbank repo transactions amounted to EUR 30,993 thousand, the Bank however did not enter into any interbank repo transactions end End 2011 the Group made provisions amounting to a total of EUR 12,598 thousand. Compared with 2010 provisioning went down by 5% or EUR 639 thousand. Provisions for denationalization proceedings decreased by EUR 1,059 thousand amounting to EUR 7,110 thousand at the end of the year, due to the fact that the Bank used part of the provisions formed to pay compensation for the use of the office building, which is the subject of the proceedings. Provisions for liabilities toward employees were made at the end of 2011 in a total amount of EUR 2,171 thousand while the remaining provisions pertained to commitments and contingent liabilities in an amount of EUR 3,042 thousand and the provisions from the National Housing Savings Scheme in the amount of EUR 275 thousand. Business report

20 Other liabilities include financial liabilities held for trading, liabilities from hedging derivative instruments and other liabilities. Compared with 2010 this item decreased by 35%, while in value liabilities from the valuation of derivatives decreased the most, namely by EUR 3,847 thousand. The Bank s capital decreased by EUR 18,593 thousand or 9% in 2011 and stood at EUR 181,333 thousand at the end of the year. Net loss achieved during the 2011 business year impacted the decrease the most Financial position of the Group The Group s assets according to individual items: Group s assets 2011 Str Str. Change Index =1-3 6=1:3 Cash and balances with Central Bank 168, , , Financial assets 533, , (106,350) 83 Loans and advances 1,745, ,793, (48,060) 97 - loans and advances to banks 55, ,908 3 (30,854) 64 - loans and advances to customers 1,690, ,707, (17,206) 99 Fixed assets 23, ,914 1 (1,237) 95 Investments in subsidiaries, associates and joint ventures 3,270-1,807-1, Total 19,288-11,395-7, Skupaj 2,492, ,599, (106,452) 96 The Group s total assets came in EUR 1,852 thousand higher than the total assets of the Bank, comparing the figure with 2010 when total assets were EUR 106,452 thousand higher. Looking at Group assets, the higher total assets pertain mainly to the inventory and investment property of the Subsidiary. Investment property includes the net carrying value of land and buildings purchased for the purpose of an operating lease. The Group s liabilities per item have been realized as follows: Group s liabilities 2011 Str Str. Change Index =1-3 6=1:3 Deposits from Central Bank 90, , , Financial liabilities designated at fair value through profit or loss 36, ,050 2 (3,904) 90 Financial liabilities at amortised cost 2,159, ,227, (67,378) 97 - deposits and borrowings from banks 417, , (56,741) 88 - due to customers 1,485, ,507, (22,780) 98 - debt securities in issue 185, , , subordinated liabilities 72, ,358 3 (12,941) 85 Financial liabilities associated to transferred assets ,993 1 (30,993) - Provisions 12, ,268 1 (638) 95 Other liabilties 11,747-16,822 - (5,075) 70 Total liabilities 2,310, ,398, (87,919) 96 Total equity 182, ,702 8 (18,533) 91 Total liabilities and equity 2,492, ,599, (106,452) 96 The liabilities of the Group are higher than the liabilities of the Bank mainly in the items of capital and other liabilities, wherein the majority pertains to the liability of the Subsidiary to the contractors. 20 Business report 2011

21 6.3 Operations according to key areas Corporate banking Corporate banking, pertaining to businesses and individual entrepreneurs, represent a key area for the Bank, as it is the strongest segment of its operations. The Group s credit operations with corporates came in EUR 3,266 thousand lower than the Bank s credit operations due to the elimination of mutual claims, while deposit operations with corporates were only lower by EUR 4 thousand. Turning to the Bank s credit operations the gross value of loans to corporates amounted to EUR 1,479,382 thousand, while impairments totalled EUR 123,918 thousand, having increased by EUR 35,411 thousand in a year. The net value of loans to corporates decreased by 2%, representing a decrease of EUR 23,066 thousand. With the net amount of EUR 1,355,464 thousand the share of loans to corporates increased within the structure of the assets from 53% to 54%. As the procedures pertaining to compulsory settlement, bankruptcy and insolvency continued in the corporate sector, which holds a large share of outstanding liabilities toward the Bank, this meant that the Bank put a lot of effort into recovery activities. It carefully collected information on the business environment, monitored enforcement procedures and prepared proposals for the rehabilitation of companies. The Subsidiary successfully continued the business cooperation it started in 2005 with a lessee, who is regularly paying off two financial leasings for the manufacturing facility in Prebold. Deposit operations have seen deposits from the non-banking sector decrease by 3% or by EUR 24,871 thousand, thus amounting to EUR 756,301 thousand end Deposits from the Central Bank remained at the level from 2010, representing 26% of all corporate deposits. In lending to corporates the Bank devoted special attention to the selection of borrowers, actively focusing on commercial and additional after-sales activities. Successful cooperation with SID banka continued, allowing the Bank to attain guarantees for certain projects as well as favourable long-term funding dedicated for lending activities. 1,600,000 1,400,000 1,200,000 in thousands of EUR 1,000, , , , December December December ,000 0 Loans to corporates Deposits from corporates Business report

22 6.3.2 Retail operations The Bank also puts a lot of emphasis on retail operations, having put in place a broadly diversified retail network, which it uses to bring its services to as many clients as possible. The retail credit operations of the Group were larger than the credit operation of the Bank by EUR 67 thousand, while retail deposit operations of the Group did not differ from the operations of the Bank. Retail loans increased by 2% in 2011 reaching EUR 337,896 thousand. The gross value of loans amounted to EUR 347,244 thousand, with impairments amounting to EUR 9,348 thousand, having increased during the year by EUR 904 thousand. To promote retail loans, the Bank introduced new form of housing loans with a combined interest rate, it also added to its offer of NATUR housing and mobile loans. During the summer months it introduced special offer consumer loans dedicated to storm damage repair and special deals for university students. Throughout the year special retail loan offers were available with favourable interest rates. Retail deposits increased in value by EUR 2,092 thousand in 2011, representing 29% of the Bank s total liabilities. They are extremely important for the Bank s stability, which is why it actively adapts its deposit services to cater for the needs and wishes of its clients. The Bank provided its clients with numerous savings offers, based on which it attained a substantial number of new clients. It actively marketed the ''Prava odločitev'' (''Right Choice'') package, which in addition to free account management for the first year of operation also includes other more favourable or free services. The ''Plus paket'' (''Plus Package'') special offer enabled new clients to perform basic banking services at markedly lower costs. To further increase the amount of deposits and to sell other services, the Bank introduced the ''Novoletni paket'' (''New Year's Package') at the end of the year, while offering its clients favourable deposits of different maturities during the year. 800, ,000 in thousands of EUR 600, , , , December December December , ,000 0 Retail Loans Retail deposits Alternative savings instruments are also something the Bank provides its savers with. It has been selling investment products and insurance services for a number of years now, thus complementing the traditional banking and financial transactions on offer. In relation to investment products on offer it accepts and forwards orders to buy or sell asset units of the NLB Skladi umbrella fund with the related sub-funds and the NFD umbrella fund with the related sub-funds. Within the framework of insurance services it offers its clients a number of different insurance types, with insurance in the event of unemployment requiring special mention due to increased volumes, as well as tourist insurance and additional payment card holder insurance. The Bank holds a licence for insurance brokerage and cooperates with insurance companies NLB Vita, Zavarovalnica Maribor, Zavarovalnica Triglav and Adriatic Slovenica. 22 Business report 2011

23 In addition to the classical counters, the Bank has been offering its clients more modern services that it continuously develops and has been upgrading for a number of years. These comprise non-cash and self-service operations, phone banking, bank letters and the ever more popular E-banking. A modern E-banking branch has been available to clients since July 2000 and it enables quick, safe and simple performance of most of the services offered by the Bank. E-banking is constantly adapting to new modern technologies. Safety has been provided for with the use of the most modern internet technologies. In 2011 the Bank enabled users of the NLB Klik to perform electronic banking using mobile phones and tablet PCs, while all clients of the Bank have been enabled to use E-accounts from September onward. In non-cash operations the Bank offers a wide spectrum of card services. It issues payment cards of the Activa Maestro, Activa / Mastercard and Activa / Visa brands, distinguished by recognition value and applicability in Slovenia and abroad. These may be used at numerous points of sale equipped with POS terminals, banks, post office counters, ATMs and over the internet With regard to self-service operations clients had at their disposal 92 ATMs at the end of 2011, connected into the BA network across Slovenia. Constant monitoring of the number of transactions at ATMs allowed the Bank to correspondingly relocate existing ATMs to locations more accessible to clients, as well as enhance the safety of ATM transactions by upgrading the system of technical security and video surveillance as well as mechanical protection Banking operations Operations with other banks are performed by the Bank, with the Subsidiary only dealing with the parent bank. In 2011 the Bank was efficient in liquidity management and it adopted measures leading to the strengthening of the operational as well as structural liquidity. The Bank s liquidity position in 2011 was good, with the trend continuing in 2012 as well. It maintain surplus operational short-term liquidity, while placing liquidity surpluses in the inter-bank market and the European Central Bank in the form of overnight deposits or weekly liquidity placements at bided interest rate, which should not be higher than the reference interest rate. The Bank obtained liquid assets for banking operations from the European Central Bank on the basis of long-term funding operations, from the SID banka, the EIB and from the inter-bank market. It holds sufficient eligible financial assets to acquire funds from the European Central Bank or to enter into inter-bank repo transactions. Liabilities to commercial banks decreased by 12% in The deepening of the euro debt crisis and the subsequent credit-rating downgrades of European countries and financial institutions resulted in limited access to long-term foreign funding and higher borrowing costs. In spite of this the Bank signed an agreement on a syndicated loan in the amount of EUR 65 million in June, it took new and renewed some existing bilateral loans and drew funds from the European Central Bank, dedicated to funding the longterm development of the economy and the public sector. New dedicated long-term funding sources were also attained from SID banka. At the same time the Bank was also regularly repaying instalments and the principal due and prepaid part of the loans to foreign banks in an amount of EUR 49 million on account of the credit rating downgrade, even though it holds EUR 133 million worth of loan agreements with a compulsory prepayment option within 30 days of notification that the credit rating dropped below BBB-. Due to the reluctance for interbank lending, especially in the longer term, the Governing Council of the European Central Bank adopted additional measures for the stabilisation of the situation in the banking system and offered the banks the option of 36-month financing. The first operation was carried out on 21 December and it replaced the 13-month facility. In this operation the Bank replaced the EUR 40 million 13-month loan taken in October with a three-year facility, while also taken another three year EUR 40 million loan. Additionally, the Bank raised a short-term loan with the European Central Bank in August in an amount of EUR 10 million. Business report

24 700,000 in thousands of EUR 600, , , , December December December , ,000 0 Loans and advances to banks and ECB Deposits and borrowings from banks and ECB Financial instrument operations The Bank conducts transactions with securities and derivative financial instruments, while the Subsidiary does not. The total volume of investments in securities fell in comparison with 2010 by 17%. Investments in all categories of financial assets decreased, with investments in financial assets held-to-maturity decreasing in value the most. Held for trading financial assets include investments in equity and debt securities, which the Bank holds in its portfolio and the valuation of derivate financial instruments. In line with the business policies of the Bank 2011 saw investments in trading securities decrease by 19%, with investments in shares decreasing as well as forwards agreements on certificates of deposit. Financial assets designated at fair value through profit or loss include structured bonds and bonds hedged with interest rate swaps. This item decreased by 73%, being EUR 21,622 thousand in value, mainly as a consequence of bonds maturing. Available for sale financial assets represent part of the secondary liquidity reserve and are used for the management of currency, exchange and interest rate risk. In 2011 investments in this category of financial assets fell by 14%, or by EUR 32,828 thousand. Investments in equity securities decreased due to impairments, the sale of an equity investment and the sale of mutual fund units. At the same time the Bank decided to buy shares of two companies in 2011, its stake in the companies capital is small. Investments in debt securities decreased due to the lessening of reinvestment from bonds due and sold. The Bank classifies fixed income securities as held to maturity investments, which it provisionally expects to hold until final maturity. In 2011 the Bank reduced this investment category, as it did not reinvest all of the matured securities. The Bank predominantly bought government bonds and treasury bills with a government guarantee as well as prime-rated bank bonds. The Bank does not state any assets pledged in 2011, whereas the figure amounted to EUR 32,390 thousand in The Bank recorded pledged securities in its books, however in a separate item, with related repurchase obligations shown under financial liabilities associated with transferred assets. Liabilities from securities in issue increased by a total of 3% in Financial liabilities at fair value through profit or loss decreased by 10% in 2011 and include subordinated bonds at a nominal of EUR 37 million, issued in 2007 and maturing in 2017 as well as certificates of deposit at a nominal amount of EUR 1.5 million, maturing in The Bank has hedged these securities with interest derivatives. Debt securities in issue increase by 16% and include regular bonds and certificates of deposit. In March the Bank issued a new series of long-term regular bonds in the amount of EUR million with the intention of increasing its long-term assets, thus providing for an adequate structure of funding sources and substituting matured subordinated BCE8 series bonds. The volume of certificates of deposit decreased due to larger maturities in 2011, even though the Bank regularly issued new series of longand short-term certificates. 24 Business report 2011

25 Subordinated liabilities dropped by 15% in 2011 due to the maturing eighth series in the amount of EUR 12.5 million. In 2011 the Bank did not issue any new subordinated bonds. 800, , ,000 in thousands of EUR 500, , , December December December , ,000 0 Securities investments Securities issued In 2011 the Bank, in line with its business objectives, carried out foreign currency forward transactions and share futures transactions, dealt in certificates of deposit and bonds. To hedge its interest rate positions it entered into interest rate swap transactions. The total volume of derivative transactions at the end of 2011 was 1% higher than in It mainly increased on the basis of interest rate swaps Risk bearing commitments and contingent liabilities Risk bearing commitments and contingent liabilities increased by 8% in ,000 in thousands of EUR 270, , , , , December December December ,000 Commitments and contingent liabilities Risk bearing commitments and contingent liabilities saw the volume of guarantees issued increase by 20% or by EUR 16,351 thousand. According to maturity the volume of shorter term guarantees grew more. Business report

26 Assumed liabilities, having increased by 3% in 2011, include liabilities from the undrawn stand-by credit lines and overdraft accounts, liabilities from approved and undrawn loans, liabilities from spot transactions, liabilities from issued letters of intent and liabilities from short-term loans to cover for letters of credit. Undrawn loans to corporates increased the most in value for the year. Other categories within commitments and contingent liabilities also include liabilities based on an agreement to gradually invest into foreign investment funds, potential liabilities from premiums received in accordance with national housing savings schemes and a potential exposure from derivatives. The total volume of risk bearing commitments and contingent liabilities of the Group was EUR 1,911 thousand less in 2011 as compared with the Bank due to an undrawn credit line granted to the Subsidiary Payment operations The Bank performs international and domestic payment operations, while the Subsidiary does not. On 1 June 2011 the Bank became part of the E-account system through the central Bankart processor, with limited functionality at first and with full functionality provided to its clients in September. All integration testing as well as performance testing was completed successfully. Based on the prepared detailed report the E-account was introduced as a new service offered by the Bank, which is already working on the project of issuing own E-accounts. In 2011 the Bank executed 8.6 million payment transactions totalling EUR 58,841 million. The majority is represented by domestic payments, with Germany still standing out in international payments according to number of orders and value with a 33% share of the total international payments flow. End 2011 the Bank maintained 6,506 corporate transaction accounts and 5,793 transaction accounts belonging to private entrepreneurs and to private undertakings, which represents a 2% increase as compared with the end of A total of 349 corporate accounts amounting to EUR 97.4 million as well as 396 private entrepreneur and private undertaking accounts in the amount of EUR 16.4 million were frozen. The Bank was also authorised to execute final court decisions in a total amount of EUR 48.5 million. In 2011 the Bank put a lot of emphasis on activities related to SEPA payments (Single Euro Payments Area), namely the unified area for euro payments which includes payment instruments most frequently used in Europe, being credit payments, direct debits, payment cards and euro cash. The migration of credit payments to SEPA compliant was successfully concluded for most of the aforementioned payments. The processing of special payment orders and direct approvals through the processing centre was eliminated, with the special payment order and the BN02 order being entirely replaced by the new UPN payment order. In 2011 the Bank also prepared to migrate direct debits. For the purposes of migrating the direct debit authorisations, all mandatory testing was completed. 26 Business report 2011

27 6.4 Shareholder information The Bank s equity comprises share capital, share premium, revaluation reserve, profit reserves and net profit, while own shares decrease it. In 2011 the equity decreased by EUR 18,593 thousand to amount to EUR 181,333 thousand at the end of the year. During the year the Bank did not acquire or dispose of own shares. As at 31 December 2011 it held 251 regular own share in an amount of EUR 31 thousand in its portfolio, representing in total only 0.05% of its share capital. The Bank did not hold any indirectly acquired own shares, while 1,354 shares were pledged as security. Equity in 2011 is shown in the table below: Equity 2011 Str Str. Change Index =1-3 6=1:3 Share capital 16, , Share premium 51, , Revaluation reserve 1, ,971 2 (2,687) 32 Profit reserves 126, , , Treasury shares (31) - (31) Profit for the year (14,875) (8) 2,250 1 (17,125) (661) Total 181, , (18,593) 91 The share capital of the Bank in the Group comprises 508,629 no par value shares after the increase of capital from approved capital completed in Changes in 2011 pertain to the net loss for the year, the fluctuation of the revaluation reserve and the distribution of profit for The revaluation reserve decreased by EUR 2,687 thousand to EUR 1,284 thousand in 2011 due to the valuation of most available for sale securities to a lower fair value. After the Meeting of Shareholders in May, the Bank paid dividends for 2010 totalling EUR 1,068 thousand, with the remaining distributable profit for 2010 having been allocated to profit reserves. Unpaid dividends from previous years were also transferred to profit reserves in a total of EUR 37 thousand saw a net loss in an amount of EUR 14,875 thousand, reducing the Bank s capital. The Group equity end 2011 amounted to EUR 182,169 thousand exceeding the Bank equity by EUR 836 thousand, with EUR 162 thousand of the figure pertaining to the share premium, EUR 614 thousand pertaining to the revaluation reserve and net profit representing EUR 60 thousand. The book value of the Bank s share amounted to EUR 357 as at 31 December 2011 and was the same for regular and preference shares. More detailed information on the structure of share capital and the rights and obligations based on the shares of an individual class are shown in Chapter I of this annual report. End 2011 the share register of the Bank showed 704 shareholders, 220 of which were corporates while 484 were private individuals. Nova Ljubljanska banka remains the Bank s largest shareholder, holding a 40.99% ownership share and a 49.42% share of the voting rights end of The following companies represent the Bank s 10 largest shareholders: - in % 10 largest shareholders as at 31 December 2011 Ownership share Nova Ljubljanska banka d.d. Ljubljana Slovenska odškodninska družba d.d. Ljubljana 9.36 Vzajemni sklad NFD 1 Delniški 9.21 Abanka Vipa d.d. Ljubljana 4.00 Unior d.d. Zreče 3.88 Zavarovalnica Triglav d.d. Ljubljana in Kritni sklad 3.75 Nova Kreditna banka Maribor d.d. Maribor 2.67 Juteks d.d. Žalec 2.43 Opus Invest d.o.o. Velenje 1.79 Polzela d.d. Polzela 1.53 Total Business report

28 6.5 Assuming and managing banking risks In its operations the Bank is exposed to a number of different risks, which is why it developed a number of different procedures and methods for their management. The quality of assessing all risk types and responding to them in a timely manner as well as decreasing exposure to risk are important factors for the attainment of the Bank s strategic goals. It has prepared a strategy of assuming and managing risk together with nine policies, which feature detailed descriptions of procedures in connection with identifying, measuring or assessing, managing and monitoring risk. The strategy and policies of assuming and managing risk are updated annually, whereby environmental conditions and their effect on the Bank s operations are taken into consideration as well as the newly acquired experience and know-how in the area of risk management. The Bank s largest exposure pertains to credit risk, followed by liquidity and capital risk, profitability risk, market, operational, strategic and interest rate risk as well as reputation risk. The following includes definitions of individual banking risk types. Credit risk Credit risk, representing the risk of loss resulting from a debtor's inability to meet its obligation to the Bank, is considered one of the most important banking risks. The aim of assuming and managing credit risk is for the Bank to ensure up-to-date management and assessment of debtor risk or the risk related with investments and the credit portfolio. The Bank measures the risk associated with a debtor prior to granting a loan as accurately as possible and measures the exposure to credit risk for the entire duration of the credit relationship thereafter. The Bank directs investments toward debtors with a high rating and toward less risky sectors and regions. It builds the risk associated with the investment into the interest rate and ensures the best possible collateral. The Bank limits portfolio concentration by setting up limits toward debtors or toward groups of related entities, by setting limits in connection with portfolio structure (according to sector, region, type of transaction, activity). Most of the transactions are entered into within the Republic of Slovenia, with treasury transactions and low risk investments being performed in other European Union members, while selectively entering the SEE region with corporate lending activities. The Bank has set up a system of early increased credit risk detection and is actively working on recovery of receivables past due. In the event of objective evidence on increased credit risk, the Bank assesses loss from credit risk and recognizes impairment charges and provisions in line with international financial reporting standards, while ensuring their adequacy on an ongoing basis later on. The Bank calculates credit risk capital requirements using the standardised approach. It also calculates an internal assessment of capital requirements to cover for unexpected loss from credit risk on a quarterly basis. It also estimates the assessed internal capital requirements based on external factors and performs stress tests, while also measuring the effect extraordinary, but probable, events have on income and the Bank s financial position. The problems faced by the domestic economy and the uncertain conditions in the European financial markets and economies further impact the deterioration of the credit portfolio. With the number of insolvency proceedings increasing and with rising unemployment in 2011, the share of defaulters and nonperforming assets increased also. An economic recovery is not yet expected in 2012, which is why the Bank will continue to implement the measures to mitigate the negative effect of the crisis (regular monitoring of debtor operations and their rating, active recovery of receivables due, stricter lending conditions, acquiring additional collateral, granting new loans to financially stable companies and financing investments in core business, granting housing loans, etc.). It will also continue to follow the strategy of maximizing diversification of its credit portfolio and reducing exposure individual debtors and groups of related parties all the while limiting investments in sectors and regions it estimates as high risk. Market risk In its operations the Bank assumes market risk, being the risk of a change in the fair value of financial instruments due to the change in risk factors, namely interest rates, currency rates and financial instrument prices. The most significant risk type within market risk is positional risk in equity and debt financial instruments and derivatives. Exposure to currency risk is low. In trading with financial instruments the Bank is predominantly active in the Slovene financial market, the European Union (securities transactions with prime banks and sovereigns) and, to a lesser extent, in other low risk countries (investment-grade countries). The Bank defines investments and trading in financial instruments by applying limits to a number of different factors (according to issuer, transaction type, region, etc.), which the Bank constantly adjusts to take into account the conditions in the financial markets and the Bank s business strategy. Additionally, it has also adopted stop-loss limits. The Bank enters into transactions with foreign currency and interest rate derivatives. Its basic policy in connection with derivatives trading is entering into transactions for the purpose of hedging own positions and client positions, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks. In relation to foreign currency risk, the Bank s policy is that of a closed position across individual foreign currencies. Managing the open currency positions is performed through prompt transactions and with the use of foreign currency derivatives in line with the limits set. Limits are low and are meant for the management of currency open positions within the scope of regular operations, not intended for speculative trading. The Bank calculates market risk capital requirements using the standardised approach. At the same time it also calculates capital requirements with the use of advanced methods such as the statistical method of value-at-risk (VaR). Additionally, it calculates the internal estimated capital requirement to cover for unexpected 28 Business report 2011

29 loss from market risk by using the value-at-risk method (VaR) and performs stress tests. It also measures the effect of extraordinary, but probable, events on income and the financial position of the Bank. By continuously adapting the system of limits to cope with the uncertain conditions in the financial markets and by implementing the investment policies aimed at decreasing equity holdings and at channelling investments into prime debt instruments, the Bank is decreasing its exposure to credit risk. Interest rate risk The risk of change in interest rates pertains to the exposure of the Bank s financial balances to unfavourable fluctuations in interest rate. It affects the Bank s earnings and the economic value of its equity. The Bank analyses exposure to interest rate risk using the method of interest rate gaps, calculating the effects that changes in interest rates have on net interest income. It also analyses interest rate risk with the use of the duration model, where it assesses the effect that of change in interest rates on the economic value of equity. In relation to interest rate risk the Bank follows the policy of a closed net banking book position, meaning that the objective is to minimise the amount of interest rate gaps. The interest rate risk associated with the trading book is analysed within the framework of market risk. In the event that the implementation of measures to decrease interest risk is required, the Bank uses traditional balance sheet transactions, such as lending, securities purchases, deposit taking, issue of securities, etc. In addition to the aforementioned transactions, the Bank also enters into agreements based on interest derivatives to hedge individual transactions and close interest rate gaps. It does not enter into interest derivative transactions for speculative purposes. The Bank will continue to close interest rate gaps in 2012 by using on-balance sheet instruments and by entering into interest derivatives, which will allow it to decrease the impact on the income statement resulting from a change in the fair value of an interest derivative with the use of hedge accounting. On a quarterly basis the Bank calculates internal capital requirement estimates to cover for unexpected loss from banking book interest rate risk in line with internal methodologies. Liquidity risk Liquidity risk is the risk type that includes the risk of providing liquidity funding, when the Bank is unable to settle all of its due obligations or is forced to obtain sources of liquidity at significantly higher costs. It also includes market liquidity risk, pertaining to positions in financial instruments, which cannot be sold or replaced in a short period of time without significantly affecting the market price. From the aspect of time liquidity risk management is separated into operational liquidity management and structural liquidity management. The Bank provides for efficient management of operational and structural liquidity, representing the management of cash flows for a chosen time interval while taking into consideration the liquidity of available assets and the stability of asset sources. Based on simulations done in relation to the maturity of asset sources on the one side and the maturity of assets and the categorization of assets according to their capacity for prompt realization on the other, limits pertaining to the largest open liquidity position have been set. In connection with structural liquidity the Bank has defined target value indicators and limits for the management of liquidity risk. Structural liquidity limits have been set up so as to ensure the required reserves on the basis of structural liquidity surpluses in accordance with the Decision on minimal requirements for ensuring adequate liquidity for banks and savings banks. Based on scenarios pertaining to extraordinary liquidity conditions, the Bank determined the structure of the liquidity reserve and set its minimum amount, while also defining the contingency plan for its actions at the first sign of a liquidity crisis. By employing a system of limits, the Bank is also following its goal of maximizing diversification of funding sources. The Bank calculates the internal estimate of capital requirements to cover for unexpected loss from liquidity risk in line with its internal methodologies on a quarterly basis. In doing so it takes into account stress test results. In line with its specific characteristic the Bank utilises the conservative approach to liquidity risk management, which is reflected through its system of limits, the spectrum and size of banking book investments in securities and in the methodology of monitoring liquidity flows. In 2011 the Bank managed liquidity risk in line with adopted policies, however the conditions in relation to accessing liquidity changed. The Bank did not have any problem in relation to operational liquidity, as it provided for sufficient liquidity reserves (highly liquid assets, which are also eligible to be pledged as collateral pertaining to obligations toward the European Central Bank and in the interbank repo market) to manage the required level of operational liquidity. More of its activities were aimed at providing adequate diversification of liquidity sources, which allowed it to follow the goal of an optimal structure of these while emphasizing stable liquidity sources. It also followed its objective of an adequate ratio of loans to the non-banking sector with deposits from the non-banking sector. In 2011 the Bank started with preparations for the calculation of the value of the Liquidity Coverage Ratio (the LCR) as defined by Basel III. It will continue to intensively perform these activities in It also prepared a simulation of the LCR ratio calculation and ascertained that the amount of its high-quality liquid assets exceed the net liquidity outflows in extreme liquidity conditions (30 days), which is why it will continue to work toward ensuring an adequate amount of top-quality liquid assets in relation to the expected liquidity inflows and outflows. Business report

30 Operational risk Operational risk pertains to the risk of loss as a consequence of inadequate or unsuccessful execution of internal processes, the actions of individual persons or the functioning of systems or due to external factors. Due to its fast development and the characteristics of the financial system, the importance of operational risk is growing. It requires the setting up of a solid and reliable system for assuming and managing this risk type. In defining the way it assumes and manages operational risk, the Bank takes into consideration its size and development as well as the nature and complexity of its business activities. It has prepared a comprehensive review of its potential exposure to operational risk according to business processes, which is based on exposure according to category of operational risk, the frequency of an event occurring and the risk impacts. The Bank has prepared a list of operational processes, which served as basis for the preparation of a profile of potential exposure to operational risk according to individual processes, for the Bank as a whole, for the preparation of a catalogue of all operational risk it identifies and for the preparation of a matrix of links between organisational units in the business processes. It calculates operational risk capital requirements according to the basic indicator approach. The calculation of the internal capital assessment and the capital requirements to cover for unexpected loss from operational risk is done in line with adopted methodologies on a quarterly basis. Continuous operation of the Bank is regulated by the rulebook defining procedures, activities and processes of operation and organisation in the event of a crisis, which are part of operational risk. The purpose of the plan for continuous operation is to ensure the safety of employees and clients and to set up smooth operation of key business processes in the shortest possible time at the existing and the alternate location. All business processes performed by the Bank have plans in place for their performance in the event of non-functional IT. The goal of organised operations is to reduce operating and financial damage, which would materialise should activities and procedures defined in the continuous operation plans for the Bank and in the recovery plan be suspended. Capital and capital adequacy In its operations the Bank must always have at its disposal an adequate amount of capital, which depends on the volume and types of services the Bank provides and on its strategy. An adequate capital base represents a contingency reserve pertaining to different risk types, which the Bank is exposed to in its operations. To cover unexpected loss, the capital of any bank must always amount to at least the sum of the capital requirements for the credit, market and operational risk, while capital adequacy, representing the ratio between capital and the sum of risk-adjusted items, must always amount to at least 8%. The management of the capital and capital adequacy within the Bank is based on adopted policies of assuming and managing capital risk and in line with annual business principles, also expressed in the need for adequate regulatory capital. With an aim to provide for safe and profitable operations, the Bank maintains an adequate level of capital at all times along with its appropriate structure. With the intention of assessing the capacity for assuming risk, the Bank prepares a plan of movement in capital and capital requirements once a year as well as the plan of the internal capital assessment and capital requirements for a period of three years in line with its annual business plan and the three-year development plan, which shows the fluctuations of capital adequacy ratios in accordance with the planned volume of operations. In the event that planned fluctuations of capital adequacy ratios deviate from target values, the Bank will commence activities to decrease exposure to risk or increase regulatory capital. As a matter of priority the Bank increases capital with an adequate dividend policy and allocation of net profit to other profit reserves. Thus it ensures an adequate amount of capital pertaining to the volume and types of services it provides and in relation to the risks it is exposed to while performing these services. Within the framework of capital structure and quality, the Bank provides continuity, availability for the coverage of loss and legislative subordination to the right of investors and other creditors. The Bank also assesses the ownership structure, as a responsible dividend policy defined by the owners is essential from the aspect of capital risk, as well as the capital structure and quality. In 2011 a proposal of the new capital directive CRD IV was published in response to Basel III, which provides the framework for amending and supplementing the legislation to improve the resilience of banks to risk. New legislation will come into effect with Key requirements of the new capital regulations pertain to increased amounts and quality of capital, the harmonisation of regulatory adjustments and detailed disclosures. The major features of the new regulation that will affect the calculation of Bank capital, relate to more stringent criteria on the inclusion of hybrid instruments in the calculation of capital, the consideration of unrealised profits and losses from securities at fair value and the introduction of capital buffers. A transitional period is provided for in relation to the introduction of these changes. The Bank started to prepare for the changes in the capital regulations in To detect the need for a potentially required increase in capital in the coming years it prepared simulations of capital and capital ratios in line with the provisions of the new capital regulations. Profitability risk Profitability risk pertains to an inadequate structure or diversification of income or to the Bank s inability to provide ample and constant levels of profitability. Underlying documentation for profitability risk management within the Bank is based on adopted policies of assuming and managing profitability risk. The methodology of assessing profitability risk is based on determining the adequacy of the structure of the financial position, the income statement items, the interest margin, the return on assets and the capital and cost efficiency. The profitability risk management methodology includes measures and rules of assuming, reducing, dispersing, transferring and avoiding risk, which the Bank has identified and measured. 30 Business report 2011

31 The Bank prepares monthly quantitative and qualitative analyses of the statement of financial position, the income statement, the statement of comprehensive income and the statement of cash flows. To assess the adequacy of internal capital the Bank calculates the internal estimate of capital requirements to cover for unexpected loss from profitability risk on a quarterly basis in line with the adopted methodology. Strategic risk Strategic risk pertains to the risk of loss from erroneous operational decisions, the inappropriate implementation of decisions made or due to too low responsiveness to the changes in the operating environment. Managing strategic risk is based on the adopted policies of assuming and managing strategic risk. The management of strategic risk within the Bank is based on the definition of own vision, the clarity and conservative nature of strategy, on ensuring correct strategic policies and the required capital and personnel as well as technology to support the execution of strategic goals. Regular assessment of the elements of strategic risk ensures that the Bank implements high standards of internal culture and the corporate value system as well as a clear strategy, which is adequately supported with required calculations. To this aim the Bank prepares framework strategic documents and regularly verifies their implementation, which allows it to adapt to the changes in the internal and external business environments on time. In line with its risk profile the Bank did not calculate any capital requirements in Reputation risk Reputation risk represents the risk of loss due to a negative image, which the Bank has in the eyes of its clients, business partners, owners, investors and supervisors. This image impacts the establishment of new business relationships and services as well as the managing of existing ones. Negative effects may include loss of revenue, a deterioration of operational results, a decrease in at sight deposits and other funding sources, a decline in the number of clients, drop of share value, etc. ICAAP process In line with the new Basel II capital accord the Bank has set up a process of assessing adequate internal capital (the ICAAP process), which: - is based on the identification, measurement and assessment of risk, the preparation of an aggregate risk estimate and the monitoring of significant risk types; - allows for ensuring adequate internal capital levels in relation to the risk profile of the Bank; - is appropriately included in the management process (decisionmaking, risk management, etc.). For the purpose of assessing internal capital the Bank calculates internal capital requirement estimates for risks it deems significant on the basis of the risk profile or it determines through the procedure of risk identification, measurement or assessment, management and monitoring, so that these might significantly impact its operations, thus requiring it to ensure appropriate capital levels. The Bank calculates the internal capital assessment and capital requirements on a quarterly basis, with the calculation being confirmed at the Risk Committee and considered at ALCO. In 2011 the Bank continued to perform a number of activities in relation to the implementation of the ICAAP process. It developed new methodologies and perfected existing methodologies for the calculation of internal capital requirement estimates, prepared and implemented stress tests, calculated the amount of internal capital assessment on a quarterly basis and planned an internal capital estimate as well as the internal capital requirements for the coming five-year period. The Bank re-assessed the level of the exposure to individual risk types in major business lines and the quality of the control environment. It calculated the Bank s risk profile and prepared a risk matrix. Based on the risk profile the Bank s exposure to risk is acceptable, with it being most exposed to credit, liquidity, capital, profitability, market, operational, strategic and interest rate risk as well as profitability risk. The calculated risk profile minimally exceeds the desired risk profile, as defined in the Strategy of assuming and managing risk, it does however still allow for the Bank s stable and safe operations in the ordinary and extraordinary course of business. The Bank manages reputation risk by ensuring safe and stable high quality operations, by having the Management Board and Supervisory Board conduct themselves with in accordance with professional prudence and the highest ethical standards of management, by providing for transparent operations, monitoring its media image, systematically communicating with the varied public groups, managing its human resources with utmost care and by being socially responsible. The Bank s business policy has been set up so as to ensure that at achievement of the goals set, the image it has will not represent a greater element of risk than usual. The Bank pays special attention to communication at special or extraordinary events. Business report

32 6.6 Development The Bank provides its clients with universal banking services. It has taken care of its further development during the entire course of its operation by investing in efficient IT support systems, its business network and in its human resource potential. Retail and internal organisation The Bank only has business units in Slovenia. Through a welldeveloped business network it operates in all major towns of the Celje region as well as in Ljubljana, being the financial centre of Slovenia and has opened a business unit in Maribor in September 2009 as well as one in Koper in July Within 8 business units operate 8 branch offices with 22 agencies for individuals and 6 branch offices for corporates and private individuals. The Bank follows modern trends and is adapting to individual client needs by investing in its retail network. Based on an analysis of the volume of operations the Bank closed a branch office in Celje in 2011 and the Vitanje agency in It also implemented some organisational changes in It reorganised its Main Branch in Ljubljana, the Public Relations Department and Secretarial Services Department as well as electronic banking, the coordination of inventory-taking and the monitoring of recovery activities. The Subsidiary does not have any subsidiaries or affiliates. Investments The Bank earmarked EUR 1,594 thousand for investments in Most of the funds were used for the ATM upgrades, POS terminal purchases and signal safety devices, application upgrades, licenses, external advisory services pertaining to the setting up of a data warehouse, the upgrading of retail IT and for equipment purchases. IT support Most of the activity in IT support pertained to the adjustments and upgrading of software related to the migration of card operations to the excat within the Activa system, the streamlining of operations and to providing alternative solutions regarding IT support in the area of retail banking. Part of the software adjustments was related to legal requirements, the changes in the environment and the provision of sufficient hardware and software capacities to support increased volumes of payment transactions. The development of a data warehouse, which the Bank started in line with the recommendations of the Bank of Slovenia as early as 2005, was completed in January 2011, with its upgrading continuing in 2011 due to the advantages that it brings in terms of improved quality of reporting and a better management of operations. In 2011 the Bank also started a partial renovation of its own IT system, under which configurations of hardware and software were selected, a methodology for the management and supervision of projects was prepared, with basic infrastructure of new application support under construction. A development environment is being prepared, the process however is comprehensive and lengthy due to its complexity. Human resources In 2011 the number of employees in the Bank decreased from 538 to a total of 530, with the average complement over the past year amounting to 535 employees. During the year there were 21 employment terminations and 13 new employees were taken on. At the end of the year 11 employees were employed on temporary employment contracts. The structure of employees by age shows the group of 51 to 55 years was dominant, followed by the group of 46 to 50 years of age. Younger employees, aged up to 30 years represented only 3.8%, which points to a relatively high average age at the bank, which was 44.8 years of age in The educational structure of employees improved at the higher education and master s levels in line with the personnel policy if compared with 2010, namely by 2.8%. The share of employees with at least university level education was 58.6%, while the secondary education group held a 38.5% share. The average work time efficiency was 80.2%, with absenteeism predominantly coming from use of annual leave. Achievement of strategic goals requires investments focused in the development of employee skills and abilities. The Bank subsequently manages the quality of employee education. In 2011 employees attended 198 training events in all areas of banking operations. The Bank also encourages part-time study, which is why it has 29 education agreements in place with employees, 17 of those are acquiring university level education, while 12 are attending specialist studies and master s degree studies. The subsidiary company employed 4 people at the end of In addition to its regular employees the company also cooperates with external appraisers, is in a contractual relationship with a real-estate broker and has outsourced its accounting. One of the employees in the subsidiary company holds a Master's Degree in Economics, two have university degrees in finance and architecture, while another holds a high school diploma. The head of projects and the head of property sales both have acquired individual licenses in the field construction, real estate operations and real estate appraisal. 6.7 Social responsibility The Bank has successfully been operating for over 145 years, continuously improving its operations in every way. The Bank s Management Board continues to operate with due professional diligence, manages the Bank with prudence, takes care of investor interests and fulfils liabilities toward shareholders, the Supervisory Board and the general public, all the while actively and transparently communicating with the interested public as well as operating within the framework of established risk management mechanisms. All of the above is done with the purpose of sustainable long-term development and with an aim of increasing the Bank s reputation. 32 Business report 2011

33 It is aware of the fact that its continued efficiency and success depend on the support of the environment and the trust given to it by different groups of interest. Therefore in line with its vision and strategy, the Bank operates with a high degree of social responsibility to the local community and the wider social and economic environment, its employees, all business partners and the natural environment. It supports sports and culture through sponsorship, takes part in a number of charity events and is actively engaged in community and social activities. It is also an active partner in social and welfare activities. The Bank enables it business partners to invest in environmental projects, the construction of treatment plants, the implementation of welfare and socially responsible projects. It facilitates the procurement of environmentally safe materials, waste separation, collects waste paper and cartridges and uses a centrally controlled thermal heating to promote rational use of energy. In its operations it show a special concern for underprivileged customer classes, as it offers special benefits to seniors, students, to humanitarian and other organisations. 6.8 Internal Audit Department operations The operations performed by the Internal Audit are consistent with the internal audit standards of professional practice, the code of internal auditing principles and the internal auditor s professional ethics code. In its operations the service also takes into account the provisions of the Banking Act pertaining to internal auditing and the Rulebook on the Operation of the Internal Audit. It is an independent department, which reports directly to the Management Board, at the Division General Manager level and the branch manager level. The aforementioned gives its employees the possibility to give opinions, assessments and recommendations while relying on internationally established professional internal audit standards and to operate independently of other parts of the Bank. The two basic planning documents of the Internal Audit comprise the three-year strategic plan and the annual operational program, which the Management Board adopts annually, with approval given by the Supervisory Board, after due discussion at the Audit Committee. Both documents are based on the Bank s risk profile, its annual and development plan, the fundamental characteristics of the environment in which it operates, while taking into consideration the requirements by the Supervisory Board on compulsory internal auditing of certain operational areas. The planned activities of the service are detailed in semi-annual operational plans, which the Management Board adopts. To monitor the Internal Audit s activities on an ongoing basis the Management Board and the Supervisory Board endorse semi-annual reports on its activities, showing the significant activities performed by it, as well as an overview of issued and implemented recommendations. The reports are also considered at the Supervisory Board s advisory body, the Audit Committee. In line with the legislation the Supervisory Board is regularly kept appraised of the audits conducted by external supervisory. Business report 2011 The assignments of Internal Audit are defined by the legislation and pertain foremost to quality assessment in connection with the management of all types of risk (including the setting up of an adequate system of internal controls) and the monitoring of compliance of the Bank s operations with regulations and internal rules as well as the principles of rational operations. A framework system for comprehensive monitoring of implementation of the annual operational program has been set up comparing the plan and execution of internal audits. The Bank s Management Board is made aware of the realization of all recommendations after internal auditing has been performed on at least two levels: first after every internal audit has been completed and after that a comprehensive annual report on the implementation of all the recommendations is given. The Internal Audit also coordinates activities in connection with the selection of the external auditors (through the Management Board, the Audit Committee and the Supervisory Board). The annual operational program provided for audits of the Bank s 23 business areas and the completion of 5 internal audits from 2010, with the assumption there would be no large scale extraordinary assignments (a total of 28 internal audits). Actually, 22 planned internal audits were completed by end January 2011, with 2 extraordinary audits having been performed (a total of 24 audits); 5 internal audits were completed by end of March 2012 and one to be completed in the beginning of 2012 in accordance with the decision of the Management Board. The Internal Audit prepared 41 expert opinions pertaining to different areas of operation. There were a total of 65 instances where internal audits were performed and expert advice was given in 2011, 6 are still running. The most significant areas of operation, which were audited in 2011 include: credit risk management, compliance with limits set pertaining to securities, management quality of continuous IT system operations, management quality of ATM and card operations, compliance of the Bank s operations in relation to the changes in legislation, adequate usage of acquired funding. In all internal audits and reviews special emphasis was given to: identification of procedures built-in for the management of risk, assessing the current situation, the quality of internal control systems, compliance with the legislation and internal rules, the possibilities for improvement of existing procedures, all aimed at further raising the quality of the Bank s operations. Special attention is directed at the areas subject to new regulations (external or internal), frequently in cooperation with the Compliance Department. The operations of the Subsidiary are usually audited every three years. All of the Internal Audit s assignments described were performed in 2010 by five employees (the figure includes the department s General Manager). One of the employees is a certified internal auditor, another is a certified information systems auditor (CISA) and is a Master of Science. All the employees are educated at the university level at least. Additionally, one employee holds an insurance broker licence and three employees hold the European Banking Certificate. One of the employees continued with a postgraduate Master s studies in As in previous years 2011 saw education and training of employees remain a constant mission, with additional knowledge attained in internal auditing, banking operations, IT skills, risk management and corporate governance. 33

34 7 MANAGING BODIES OF THE BANK GENERAL MEETING OF SHAREHOLDERS Audit Committee SUPERVISORY BOARD Remuneration Committee Credit Committee MANAGEMENT BOARD Liquidity Committee Management Committee Organisational units Assets and Liabilities Committee - ALCO IT Committee Other committees and councils 34 Business report 2011

35 8 ORGANIZATIONAL STRUCTURE OF THE BANK MANAGEMENT BOARD Member of the Management Board Aleksander Vozel, M.Sc. President & CEO Dušan Drofenik, M.Sc. Board & Deputy CEO Davorin Leskovar ACCOUNTING DIVISION EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR IT DIVISION LEGAL AFFAIRS, DEBT ENFORCEMENT AND COMPLIANCE OPERATIONS DIVISION CORPORATE DIVISION FINANCIAL MARKETS DIVISON RISK MANAGEMENT DIVISION GENERAL AFFAIRS MAIN BRANCH LJUBLJANA RETAIL DIVISION PAYMENTS AND OPERATIONAL SUPPORT DIVISION PERSONNEL AND ORGANISATIONAL SERVICES CELJE BUSINESS UNIT INTERNAL AUDIT SLOVENSKE KONJICE BUSINESS UNIT ŽALEC BUSINESS UNIT ŠENTJUR BUSINESS UNIT LAŠKO BUSINESS UNIT ROGAŠKA SLATINA BUSINESS UNIT MARIBOR BUSINESS UNIT KOPER BUSINESS UNIT Business report

36 9 STATEMENT OF CORPORATE GOVERNANCE The Bank s Corporate Governance statement is prepared in line with the provisions of the Companies Act (the ZGD-1) and pertains to the year It includes the Statement on compliance with the Corporate Governance Code made by the Management Board and the Supervisory Board under item 10.1 and additional Notes in accordance with Paragraphs 5 and 6 of Article 70 of the Companies Act under item Statement of the Banka Celje d.d., Management Board and Supervisory Board on compliance with the Corporate Governance Code As a public company Banka Celje, d.d., which has bonds listed on the Ljubljana Stock Exchange d.d., is compliant with the Banking Act (the ZBan-1) and the Companies Act as well as the Market in Financial Instruments Act (the ZTFI) and the Rules of the Ljubljana Stock Exchange and with all the additional general rules, dealing with topics that are dealt with in the Corporate Governance Code, which is in the public domain, attainable at the Ljubljana Stock Exchange website at under (''za izdajatelje/predpisi, brošure''). Banka Celje, d.d., Celje complies with the Corporate Governance Code dated 8 December 2009 (the Code) with the exception of some deviations or particularities, explained under individual item of the Code below. The Posest, d.o.o., as a non-public company, is not subject to any code in its operations. Clause 1 The Bank's goals are defined in its annual and development plan, both of which are approved by the Supervisory Board and are not separately defined in its Articles of Association. Clauses 2, 2.1 and 2.2 As of yet the Bank has not prepared or adopted a Bank Management Policy as an independent document, rather this area is regulated with different internal documents, such as prescribed by the Bank of Slovenia, the ZGD-1, the ZTFI and other sectorspecific legislation. Clause 4.2 The Bank would like to see large and institutional shareholders inform the public with their management policies, this decision however is up to them. Clause 5.2 (second paragraph) The Bank does not publish data on the costs it incurred from the collection of powers of attorney, these are included in the cost of the organisation and execution of the annual General Meeting of Shareholders. Clause 5.4 The Bank s shares are currently not listed on the stock exchange. Clause 5.5 The proposal to the General Meeting of Shareholders for the nomination of Supervisory Board members includes all of the legally required data, the rest is public domain data. Clause 5.6 The Bank, in line with general practice, as a rule, nominates the members of the Supervisory Board collectively. Clause 5.7 The Supervisory Board sets the policy of remuneration of the Management Board. Clause 5.8 The General Meeting of Shareholders of Banka Celje decides on the use of distributable profit separately, however it decides on the discharge of the Management Board and the Supervisory Board by single unified vote. Clause 5.9 Financial statements form part of the annual report, which together with the auditor s opinion is presented to the General Meeting of Shareholders. A representative of the Bank s authorised auditor is not invited to the Meeting. Were however the Meeting authorised to adopt the annual financial statements, a representative of the authorised auditor would be invited. Clause 8 Statements with which the Supervisory Board members would take a position on the fulfilment of each of the criteria pertaining to independence under item C.3 of Supplement C has not been signed as of yet, nor has there been any such announcement made on the website. In the future the Bank will endeavour to comply with the recommendation on this matter. Clause 8.9 The Supervisory Board of the company has not formed a Personnel Committee nor any other body, which would set the criteria and recommendations pertaining to the nomination of the Management Board in advance. The Bank will deal with this option in the future also. Clause 8.12 In its report the Supervisory Board also includes all of the requirements from the decision of the Bank of Slovenia pertaining to the due care and professional diligence of Management Board and Supervisory Board members and endeavours to include as much information as possible to adequately represent its activities during the year. In the future the recommendations from Clause 8.12 of the Code will be observed as much as possible. Clause 11 In its operations until now the Supervisory Board has not yet nominated a secretary. In accordance with consensus between the Management Board and the Supervisory Board this job is performed by the expert department of the company. 36 Business report 2011

37 Clause 12.2 The Bank will assess the option of a proposal to introduce reimbursement to the Supervisory Board members with a decision taken at the General Meeting of Shareholders in line with the stipulations from the Code. Clause 13.1 The Commission for Term Appointment finished its term on the day the new Supervisory Board was named. Clauses 16.5 and 16.6 The Bank has no option plan or comparable financial instruments in place which would provide for variable reimbursement of the Management Board members. Clause 17.2 Statements on compliance with individual items from supplement C.3 of Supplement C (Conflict of Interest) of the Code have not been signed by Supervisory Board members at replacement or at each change, nor were these presented to the Supervisory Board. Supervisory Board members were already signing Statements on Conflict of Interest pertaining to the Code previously in effect. The Bank will endeavour to comply with this recommendation in the future. Clause 20.2 Individual areas of communication have been regulated by individual internal acts until now, however the Bank will endeavour to comply with this recommendation in the future. Clause 20.3 The Bank has not special internal act in place in connection with the limitations and disclosures pertaining to treasury share transactions, as it considers this to be sufficiently regulated by the existing legislation. Clause 20.4 In making significant shareholder and public announcements the Bank considers statutory time limits, which is why it does not prepare a calendar of significant announcements. It will endeavour to comply with this recommendation in the future. Clause 22.2 The company does not prepare a separate sustainability report as this area forms part of the annual report. Clause 22.3 In line with the ZGD-1, the ZBan-1 and the ZTFI the Bank informs the competent authorities on the acquisition of a qualifying share. Clause 23 The Statement of Corporate Governance forms part of the annual report, which is published on the Bank s website. 9.2 Additional Notes in line with Paragraphs 5 and 6 of Article 70 of the ZGD The main characteristics of internal controls and risk management in connection with financial reporting The Bank has always had a system of internal controls set up during its operations, as it is the duty of the Bank's Management Board to conduct its operations in a manor ensuring an adequate risk management system in relation to all the business partners, owners and supervisory institutions. The system of internal controls is connected into a comprehensive whole in the sense of an umbrella act, determining all of the dimensions of control activities. The internal control system at the Bank, must be set up in a way as to provide adequate assurances on the following activities: - the Bank's operations must be managed with great care and conducted on the basis of the approved development plan as well as the Bank's approved annual policies and financial plan resulting in profitable operations, - all operational activities, which have the potential to increase the Bank's liabilities, must be approved by the authorized person, with a segregation of responsibilities clearly defined, - assets must be secured appropriately, receivables insured, liabilities monitored, - a strategy and policies for risk management must be prepared, special care must be given to the monitoring of the Bank's capital adequacy, liquidity and credit risk, interest rate and operational risk, profitability and market risk, - a system for the prevention of loss due to irregularities, especially in connection with timely detection of fraud, abuse, anomalies or errors must be set up, - the system of financial records needs to provide timely, reliable, up-to-date and complete information, - a system for the transmission of reliable, timely, up-to-date and complete information for reporting to owners and external institutions must be set up, - a supervised system for the introduction of new financial services and new banking products as well as entering new markets needs to be provided for Significant direct and indirect ownership of the Bank s securites Qualifying holdings, as defined by the law dealing with the market in financial instruments, in the Bank's equity are held by three companies, namely: - Nova Ljubljanska banka, holding 201,096 regular shares, thus having a 49.42% share in the voting rights, - NFD1 Investicijski sklad, holding 39,276 regular shares, thus having a 9.65% share in the voting rights and - Slovenska odškodninska družba, holding 27,247 regular shares, thus having a 6.70% share in the voting rights. The voting rights of the Bank's other owners do not exceed the qualifying shares as defined by the act dealing with the market in financial instruments. Business report

38 9.2.3 Holders of securities ensuring special rights of control The Bank's shares do not give their holders any special rights of control Restrictions related to voting rights The shareholder's voting right depends on the number of shares held and is not limited to a certain share or a certain number of votes. The right to vote at the General Meeting of Shareholders is given to shareholders holding registered shares with voting rights entered into the register at least 10 days prior to the General Meeting of Shareholders and which remain so registered until the end to the meeting. The convenor of the General Meeting may restrict the voting rights of an individual shareholder, which acquired shares contrary to the regulations. Agreements, which, with the Bank's cooperation, would mean financial rights based on shares have been separated from ownership of the shares, do not exist The Bank's rules on: - appointment and replacement of the management or supervisory body members - changes in the Articles of Association The Bank's rules on appointment and replacement of the members of its management or supervisory body and on the changes in the Articles of Association are defined in the Banka Celje, d.d., Articles of Association and in the Working Rules on the Operations of the Banka Celje, d.d., Supervisory Board. The Supervisory Board is appointed and discharged at the General Meeting of the Bank's shareholders. To be appointed Supervisory Board member one must fulfil membership conditions for bank supervisory boards as defined by the Companies Act and the Banking Act. Supervisory Board members are appointed for a period of 4 years and may be re-appointed. The term for Supervisory Board members expires on the day of the General Meeting held in the fourth year after appointment. In the event of an early termination of appointment of Supervisory Board members having been appointed at the General Meeting of Shareholders, replacements are appointed at the following General Meeting. The replacement is appointed until the end of the originally appointed member's term. Each member of the Supervisory Board may resign prior to the expiry of their term on giving three months notice. A written letter of resignation is to be sent to the President of the Supervisory Board, in the event of resignation by the President of the Supervisory Board it is to be sent to his deputy and the Bank's Management Board. At the General Meeting of Shareholders individual members of the Supervisory Board or the Supervisory Board collectively may be recalled early. Such a resolution shall be adopted with at least a three-quarter majority of votes present at the Meeting. Supervisory Board members appoint an Audit Committee, serving as a body of the Supervisory Board. The president and members of the Bank's Management Board are appointed and discharged by the Supervisory Board. Only a candidate, fulfilling all the conditions for appointment as defined by the Companies Act and the Banking Act may be appointed to the post of president or member of the Management Board. The President and Members of the Bank's Management Board are appointed for a term of five years and may be re-appointed. The President and Members of the Bank's Management Board may be recalled early in line with the applicable legislation. Each member of the Bank's Management Board may resign prior to the expiry of their term on giving six months notice. A written letter of resignation is to be sent to the President of the Supervisory Board. The Articles of Association may be amended based on the decision made at the General Meeting of Shareholders, such a decision having been adopted by a majority of at least three quarters of votes present. Should an amendment of the Articles of Association alter the existing ratio of the share classes to the detriment of one of the classes, consent by the affected shareholders is required, given by way of a special resolution. The General Meeting of the Bank's shareholders may authorize the Supervisory Board to amend the Articles of Association to harmonise the text with the adopted resolutions in effect Authorizations of the Management Board Based on the amendment to the Articles of Association having been entered into the Court's Companies Register on 28 May 2008 during a five year period following the entry the Management Board, under approval by the Bank's Supervisory Board, is authorized to increase share capital by no more than EUR 7,045, (authorized capital) by issuing no more than 211,061 new shares, being 168,849 regular and 42,212 non-voting rights shares. The Bank may acquire and dispose of own shares in line with the Companies Act. The Management Board decides on the conditions of the acquisition and disposal of own shares and must report own share transactions at the General Meeting. 38 Business report 2011

39 9.2.7 Data on the activity of the General Meeting of the Bank s shareholders, its key responsibilities, description of shareholder rights and how these are exercised The Bank's Management Board calls the Meeting of Shareholders. It convenes at least once a year. The Supervisory Board calls the Meeting in the following cases: - if the Management Board does not call it at least once a year; - if the Management Board does not call it upon request of the minority as stipulated in the Articles of Association. The General Meeting of Shareholders passes decisions on: - the use of distributable profit and the discharge to the Management Board and Supervisory Board; - the adoption of the annual report in cases as defined by the Companies Act; - the appointment and recall of Supervisory Board members; - amendments to the Articles of Association; - measures taken to increase or decrease capital; - changes in status; - the appointment of the auditor; - authorization of the Management Board to acquire own shares in accordance with the Companies Act; - other matters within the scope of its competencies in accordance with the Companies Act the Banking Act. Shareholders, holding 20% of the share capital in total, may request, in writing, the General Meeting to be convened. Such a request must include a reason for the Meeting to be convened and the matter that the Meeting is to pass decision on. In such an event the Management Board is required to call the Meeting no later than 5 weeks after receiving a written request. Shareholders, holding 20% of the share capital collectively, may request, in writing, for a certain item to be included in the agenda of the General Meeting of Shareholders. The Bank's Management Board must accede to such a request, if it includes a prepared proposition of a decision falling under the responsibilities of the General Meeting and if the request was made in writing three days after the call of the General Meeting at the latest, so that the item may be made public at least 10 days after the General Meeting has been called in the publications as defined by the Articles of Association Data on the composition and activities of management and supervisory bodies and their committees The Supervisory Board monitors and supervises the management of the Bank and its operations. It conducts its assignment in accordance with the provisions of the statutory acts dealing with the operations of banks and companies and in accordance with the Bank s Articles of Association. It was elected at the General Meeting of Shareholders in May 2007 and acted in the following composition until 24 May 2011: Alojz Jamnik as President, Tadej Tufek, M.Sc. as Vice President, Ivan Ferme, Matej Narat, M.Sc., Borut Stanič, Štefan Špilak, Ph.D. and Bojan Šrot as members. At the General Meeting of Shareholders on 24 May new Supervisory Board members were elected: Jure Peljhan, M.Sc. as President, Zvonko Ivanušič, M.Sc. as Vice President, Uroš Čufer, Ph.D., Melita Malgaj, Tomaž Subotič, Ph.D., Bojan Šrot, Zdenko Zanoški, Ph.D. In 2008 the Supervisory Board of Banka Celje, d.d., established a consulting body, namely the Audit Committee of Banka Celje, d.d., with the following members: Borut Stanič, President, Tadej Tufek, M. Sc., Member and Marina Poboljšaj, Member independent expert. Their term of office expired with the expiry of the Supervisory Board members term, namely at the General Meeting of Shareholders in 2011, when new members of the Audit Committee were named on 8 June 2011, namely: Uroš Čufer, Ph.D., President, Tomaž Subotič, Ph.D., Deputy and Zdenka Habe, Member, as an independent expert. The Supervisory Board named the Reimbursement Committee at its 3rd meeting on 19 October It comprises Jure Peljhan, M.Sc., as president, Zvonko Ivanušič, M.Sc., as vice president, Tomaž Subotič, Ph.D., as member and Bojan Salobir, Executive Director, as the Bank's representative with a standing invitation. The Management Board represents and manages the Bank s operations according to the principles of joint liability. In accordance with the Articles of Association it comprises three members: President of the Management Board, Dušan Drofenik, M. Sc., Vice President of the Management Board, Davorin Leskovar and Member of the Management Board, Aleksander Vozel, M.Sc. The Bank s Management Board usually meets once a week and considers materials from areas as defined by the Banking Act and the Banka Celje, d.d., Management Board Working Rules at its meetings. The President of the Management Board, Dušan Drofenik, M.Sc. is a member of the Supervisory Board at The Bank Association of Slovenia, a member of the Supervisory Board at the Slovene- German Chamber of Commerce and a member of the Supervisory Board at the Skupna pokojninska družba. Davorin Leskovar and Aleksander Vozel, M.Sc. are not members of any supervisory boards. The Credit Committee comprises nine members and defines the conditions and criteria for acquiring and placement of assets, makes decisions on lending and guarantee transactions and decides on distribution in line with its operational rulebook. In 2011 it comprised: the President of the Management Board at the post of President of the Credit Committee, the Vice President of the Management Board at the post of Vice President of the Credit Committee and the following members: Member of the Management Board, both Executive Directors, General Manager of the Risk Management Division, General Manager of the Retail Division and the General Manager of the Financial Markets Division and the General Manager of the Corporate Division. The President of the Credit Committee may invite other General Managers to the Credit Committee meetings. When proposals from the Retail Division are being considered, business unit Heads are also invited. The Liquidity Committee comprised seven members in 2011: General Manager of the Financial Markets Division as Committee President and the following members: President of the Management Board, Vice President of the Management Board, Member of the Management Board, Executive Director, General Manager of the Retail Division and General Manager of the Risk Management Division. The Liquidity Committee meets at least three times a week and supervises the Bank s liquidity position. It performs its duties in line with the Liquidity Committee Working Rules. Business report

40 The Bank s Management Committee operates as the Management Board s advisory and informative body. In 2011 it comprised the Bank's Management Board, the Executive Directors, General Managers of the functionally independent organisational units, who in accordance with their operative functions answer directly to the Management Board and the Director of the subsidiary company. The Management Board may also appoint other attendees to the Management Body s meetings. Operational rules are set with the Management Body Working Rules and meetings are usually held once a month and are intended for the presentation of the financial and income position of the Bank as well as the consideration of the execution of project assignments all the while allowing for discussion on other significant decisions to be made in relation to the Bank s operations. The Assets and Liabilities Committee the ALCO monitors the conditions in the financial markets, analyzes the balances and changes in the Bank s statements and prepares the decisions aimed at the attainment of an adequate balance sheet structure. In line with the Working Rules on its operations the Committee meets once a month. The members: Vice President of the Management Board as President of the Committee, the President of the Management Board at the post of Vice President of the Committee, Member of the Management Board, General Manager of the Accounting Division, General Manager of the Risk Management Division and the General Manager of the Financial Markets Division. The IT Committee is the Management Board s counselling body in connection with the execution of its rights and obligations related to IT. It meets once a month. In addition to the President of the Management Board, the Vice President of the Management Board and Member of the Management Board as the president of the IT Committee, it also comprises the General Manager of the IT Division and the Business Consultant for IT. Standing invitations were extended to the Assistant General Manager of the IT Division, the Business Consultant for the development of IT, the internal auditor in charge of IT and to the security systems engineer Structure of share capital, with special reference to: - rights and obligations, provided by shares or shares from individual classes, and - should multiple share classes exist, the proportion of share capital represented by an individual class Shareholders exercise their rights in the matters of the Bank's operations at the General Meeting of Shareholders. Regular shares are voting right shares, whereby each share ensures one vote at the Meeting. Preferred shareholders do not have the right to vote at the Meeting, except when deciding on the amendments to the Articles of Association, which pertain to the ratio of the number of these shares to the share capital and in connection with changes in status. In the event that the holders of preferred shares were not paid the entire dividend for an individual year they are allowed to vote as holders of regular shares for the period. In such an event preferred shares are taken into consideration in the calculation of the required majority of capital. Preferred shares carry the right to priority in the payment of fixed dividends in the amount of at least 6% of the amount attributed to a no par value share in the share capital. In cases where the payment of dividends in full is not possible it is effected partially Share transfer restrictions, especially: - restriction of security ownership and - explanatory note on the requirement to acquire permission from the company or other holders of securities for the transfer The Bank's shares are transferred in line with the regulations pertaining to dematerialized securities. Current shareholders have priority, in proportion with their portion of the share capital, to subscribe new shares from the authorized capital. There is no other shareholding restrictions imposed by the Bank, whereas acquiring a qualifying share requires the approval by the Bank of Slovenia. There is no requirement to get approval by the Bank or other shareholders to transfer shares Employee stock options The Bank does not have an employee stock option scheme in place Shareholder agreements that could result in the restriction of the transfer of shares or voting rights Agreements between shareholders that could result in the restriction of the transfer of shares or voting rights are not in force. The Bank's share capital is represented by 508,629 no par value shares, 406,904 or 80% of which are regular shares and 101,725 or 20% being preferred shares. Celje, 18 th April 2012 Aleksander Vozel, M.Sc. Member of the Management Board Davorin Leskovar Member of the Management Board Dušan Drofenik, M.Sc. President of the Management Board 40

41 10 STATEMENT OF MANAGEMENT S RESPONSIBILITIES The Management Board herewith confirms the financial statements of the Bank and the Group for the year ended 31 December 2011, on pages 47 to 52 and the accounting policies and notes to the accounting policies on pages 53 to 140 of the annual report. The Management Board is responsible for the preparation of the annual report in a way as to be a true and fair representation of the Bank s assets and the Group's assets and the results of their operations for the year ended 31 December The Management Board additionally confirms that appropriate accounting policies were consistently used and that the accounting estimates were prepared according to the principles of prudence and good management. The Management Board furthermore confirms that the financial statements together with the notes have been prepared on the basis of the assumption of continued operations of the Group and in line with the existing legislation and the IFRS, as adopted by the European Union. The Management Board is also responsible for appropriate accounting practice, for the adoption of appropriate measures for the insurance of property and for the prevention and identification of fraud and other irregularities or unlawfulness. The tax authorities may at any time within 5 years from the day of the tax charge examine the operations of the company, which in turn may cause the obligation of an additional tax payment, default interest payment and penalty from Corporate Income Tax or other taxes or duties. The Management Board is not aware of any circumstances, which could result in any such potentially significant obligation. Managment Board: Aleksander Vozel, M.Sc. Member of the Management Board Davorin Leskovar Member of the Management Board Dušan Drofenik, M.Sc. President of the Management Board Celje, 27 th March 2012 Business report

42 11 REPORT OF THE AUDITORS 42 Business report 2011

43 Business report

44

45 II FINANCIAL STATEMENTS