SKB Banka d.d. Audited Annual Report in accordance with International Financial Reporting Standards

Transcription

1 Annual Report 2004

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3 Annual Report 2004 in accordance with International Financial Reporting Standards

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5 Contents SKB Banka profile 6 Values in the Société Générale Group 10 The Société Générale Group 11 SKB Banka reports 15 Statement of the Management Board 16 Statement of the Supervisory Board 19 Statement on the Corporate Governance Code 22 Corporate Governance in Profiles of the Management Board 28 Operations of SKB Banka in the year Strategy, future business policy and objectives in Preparations to Basel II, international accounting standards, the euro introduction 31 General Economic and Banking Environment 32 Review of SKB Banka's Operations in the year Distribution Channels 38 Financial result 39 Financial position of the bank 41 Risk exposure 42 Information for Shareholders 46 SKB Banka's Internal Development 48 Integration of SKB Banka in the Environment 51 Subsidiary Companies in SKB Banka Organisation Chart 55 SKB Group Organisation Chart 56 Post balance sheet event 56 Bank balance sheet 57 Bank income statement 57 Bank statement of changes in equity 58 Bank cash flow statement 59 Capital adequacy 60 Annual report on internal auditing for the year Consolidated Financial Statements 2004 () 65 Report of independent auditors 66 Consolidated Financial Statements 67 Consolidated balance sheet 67 Consolidated income statement 68 Consolidated statement of changes in equity 69 Consolidated cash flow statement 70 Notes to the Consolidated Financial Statements 71 General information 71 Basis of preparation 71 Summary of significant accounting policies 72 Notes to the consolidated financial statements 76 Risk evaluation 89 Related party transactions 95 Fair value of financial instruments 96 Difference between SAS and IFRS 97 Addresses and contacts 98 Annual Reports for the years 1999 through 2004 are available online in PDF format at

6 SKB Banka profile Vienna, Graz Budapest 06 ITALY Venice, Trieste Salzburg Kranjska Gora Bled Radovljica Kranj kofja Loka Idrija Nova Gorica Vrhnika AjdovšËina Postojna Koper Sežana Ilirska Bistrica AUSTRIA In the year 2001, joined the Société Générale Group, one of the leading banking groups in the euro zone. SKB Banka is a universal bank providing retail, commercial, investment and international banking services. It has an extensive network of branches throughout the country and correspondent relationships with 1,131 banks around the world. The Bank also owns two subsidiaries SKB Leasing and Plasis, by which the Bank extends its activities on leasing services and credit card processing. SKB Banka: Being a part of the international network of one of the largest banking groups in the euro zone offers SKB's customers access to particular services within the Société Générale Group as well as banking support to international operations; Among the leading commercial banks in private ownership, offering a wide range of services; Operations with more than 200,000 clients; Slovenj Gradec Velenje Mozirje Žalec Kamnik Celje Domžale Rogaška Slatina Trzin Zagorje ob Savi Litija Ljubljana Sevnica Krško Trebnje Brežice Novo mesto Cerknica Ribnica Metlika KoËevje»rnomelj Maribor Ptuj CROATIA Zagreb 56 outlets across Slovenia; 972 employees in the bank and 1,057; employees in the SKB Group. International ratings by Moody s*: Long-term deposits: Aa3 Short-term deposits: Prime-1 Bank financial strength: D+ Gornja Radgona Murska Sobota Lendava Ljutomer Ormož HUNGARY Legend Head office Regional Branch (8) Outlets (56) * On January 11 th, 2005 the International agency Moody's Investors Service has upgraded the longterm foreign currency deposit rating assigned to SKB Banka from A1 to Aa3 with a stable outlook, following a similar rating adjustment with Société Générale of France. Following this action, SKB Banka is for the moment the only Slovenian bank rated at the sovereign ceiling for foreign currency deposits.

7 SKB Banka within the Société Générale Group The Société Générale Group, with head offices in Paris, is one of the largest banking groups in the euro zone, with a successful track record in acquiring retail banks in Central and Eastern Europe. The Société Générale Group will continue to provide SKB Banka with access to know-how, new products, and business opportunities, and will ensure the achievement of synergies with the parent bank. After the takeover on 20 April 2001, Société Générale acquired 96.47% of shares in SKB Banka. In December 2002, Société Générale and SKB Banka presented a final opportunity to minority shareholders to sell their shares. After completion of the offer, the ownership stake of the Société Générale Group increased to 99.58% of SKB Banka s capital. Financial Highlights Group Financial Highlights SIT million Profit/(loss) before taxation 6,251 3, Total assets 411, , ,649 Funds employed (total equity) 42,708 35,083 36,095 Earnings/(loss) per share (SIT) 601 (52) - Net assets per share (SIT) 3,376 2,774 2,854 No dividend will be proposed for BIS Capital adequacy ratios the Group SIT million % SIT million % SIT million % Tier 1 33, , , Tier 2 11, , , Capital base 44, , , Official exchange rates (31 Dec.): (1 EUR = SIT) 239, , ,2673 (1 USD = SIT) 176, , ,0708 Annual inflation (%) Number of employees 1,056 1,109 1,052 SKB Banka Financial Highlights SIT million Profit before taxation 6,059 3, Total assets 390, , ,286 Funds employed (total equity) 42,829 35,127 36,095 Earnings/(loss) per share (SIT) 587 (50) - Net assets per share (SIT) 3,386 2,777 2,854

8 08 Historical background 1978: SKB Banka was established as Stanovanjsko- Komunalna Banka, a mortgage subsidiary of Ljubljanska Banka, specialising in housing loans to individuals and enterprises and the financing of municipal construction. 1990: Transformation of the Bank into a joint-stock company named SKB Banka, and the formation of a new strategy as a general commercial bank : Rapid expansion of operations and strong international orientation. 1997: Successful conclusion of the first GDR offering; SKB Banka s shares were the first Slovenian shares traded on international stock exchanges. 2000: Loan activities declined due to portfolio restructuring. SKB Banka focused on implementing a strategic alliance with a foreign partner, which successfully concluded when SKB Banka joined the Société Générale Group. 2001: Operations of the previously existing Société Générale bank in Slovenia, BANKA SOCIÉTÉ GÉNÉRALE LJUBLJANA, were merged with SKB Banka; Société Générale injected EUR 71.8 million of new capital into SKB Banka, which enabled the Bank to increase its credit activities and raise its provisioning in line with the more conservative rules implemented in the Société Générale Group; A new organisation of the Bank was established, with new credit granting rules and procedures, as well as bad debt management and decisionmaking procedures. 2002: Completion of two very important phases of the Symbols information system deployment, which enabled the opening of new transaction accounts and the introduction of new payment instruments; The Bank abolished TOM indexation for shortterm loans and deposits; the conform method was replaced by the linear method of calculation, which is more transparent and easier for clients; The Bank broadened and strengthened its previous range of products with project financing, M&A advising, and a unique offer for a cobranded VISA Gold Affinity card in cooperation with the Medical Chamber of Slovenia; After the delisting of shares from the London Stock Exchange in the year 2001, SKB Banka s shares were also delisted from the Ljubljana Stock Exchange; In December 2002 the international rating agency Moody s upgraded the long-term foreign currency deposit rating assigned to SKB Banka from A2 to A1, which is the highest among the ratings that were assigned to Slovenian banks by the rating agency Moody s. 2003: The Bank entered into the final stage of implementing the Symbols information system, which has enabled appropriate support for extending the range of products and services, increasing productivity, improving the quality of services and continuing the process of rationalization and cost optimization; Successful completion of a massive migration of individual current accounts into personal accounts and different types of new multi-currency accounts; The Bank introduced long-term loans and deposits with interest rates linked to a new reference SIOM, which is linked to the 3-month Euribor and the price of the EUR/SIT swap of the Bank of Slovenia; New saving products were introduced (TRIS insurance package, bank assurance ) along with an upgraded offer of banking products more adjusted to clients needs; Completion of the consolidation process of the Bank s subsidiaries leasing activities were incorporated within SKB Leasing, while the Pension Fund Company SKB was acquired by Pension Fund Company A. Important events in 2004 SKB Banka successfully performed the final phase of its IT modernization process. By the end of the year, the major portion of operations from older and unconnected applications were migrated to the new Symbols IT system; The Individual and Corporate Banking and the Capital Markets and Investments divisions merged into a new organizational unit called Commercial Management, in charge of setting up business policy, marketing and sales activities, relationships with clients, and individual banking; SKB Banka became the first among Slovene banks to replace classical savings books with modern and electronically managed savings

9 accounts in July the Bank successfully concluded the migration of 120,000 savings books by transferring them to the new IT support system; A renewed loan offer for corporates and individuals was made complete with the inclusion of an offer for FX loans in; Customers were given new savings possibilities based upon insurance products such as Skladba 1 life insurance, as well as investment opportunities in the international fund Agileo P2, managed by SGAM, a specialized company of Société Générale; Together with the insurance company Generali, new types of insurance products were offered (automotive insurance, health assistance insurance, life-accident insurance); By offering an internet exchange office, e-salaries, and new information and search capacities, SKB Banka has further strengthened its leading position in the development of e-banking in the Slovene market; The opening of a new outlet in AjdovπËina in June and the November opening of a specialized outlet named Golden point in the Bank's headquarters introduced a complete range of financial service for the Bank's wealthiest clients; In an effort to provide higher quality products tailored to customers' needs and to enrich the current offering of leasing services, the Bank organized intensive training sessions for employees with the aim of improving expertise in leasing services, as well as the management of car fleets, which had been offered since May 2004 by ALD Automotive, a part of Société Générale Group. of savings and loan products, e-banking business operations, banking-insurance products and financial leasing services; to intensify partnership relations with sole proprietors, small and medium size companies, as well as with the public sector by adapting services specifically to their needs; to become a reference bank for big corporates and their business partner for a whole range of banking operations through quality services and efforts to provide optimal business solutions. The cross-selling of products and services of the Bank and its affiliates will enable us to improve the synergy effects within the SKB Banka Group and Société Générale Group as well. One of the main tasks of the Bank under the current competitive environment will be to optimize costs and to decrease the expense income ratio. In addition to a positive cost effect, new IT system will also enable the Bank to increase the quality of operations and execute the demanding tasks that will be faced with preparations for the euro introduction, the 09 transition to new accounting standards, and the implementation of Basel II. Main orientations The main orientation of the Bank is to remain a development-oriented universal bank, building a global long-term relationship with customers by providing them with a quality range of products and services. Our goals are as follows: to pursue strong growth in the field of individual banking and to increase the Bank's market share the basis for attracting new customers and intensifying business relations with existing clients will consist of offering a high quality; segmented range of services including all sorts

10 Values in the Société Générale Group Generating value from our values 10 Professionalism, team spirit and innovation have been the major contributors to 141 years of the Société Générale Group s success and performance. These values still represent the key to the future development of Société Générale, one of the biggest banking groups in the world. With a goal to strengthen and promote such values, an internal communication campaign was launched for the Société Générale Group s nearly 92,000 employees. An extensive campaign based on the theme Innovation incentives was launched in 19 languages via various media (brochures, internet, etc.) to promote the values that foster cohesion within the Group, define its identity and stimulate the creativity of employees. selected because it represented an outstanding business move. The employees in the Bank are strengthening values in everyday activities as well as in the management of the Bank s projects and commercial approach, including its organisation with cross-functional links and transversal relations, which are all based on the values of professionalism, team spirit and profiting from the knowledge of both the Slovene and French employees, as well as through the adoption of the innovations that the Group offers. By promoting and strengthening values, SKB Banka will also contribute to generating value for clients, shareholders and employees. Professionalism Assuring better quality of services Preserving professional and personal development Team spirit Learning from different standpoints Exchanging experience Innovation Stimulation for new solutions Proposals for new solutions SKB Banka s employees also participated in the campaign. Innovations, which SKB Banka s employees invented and implemented, attracted special attention within International Retail Banking and was ranked among the nine best innovations within the whole group worldwide. In the campaign, SKB Banka s innovation committee selected three proposals and rewarded them. The first innovation, titled new postage form brings an edge in cost cutting was rewarded because of its contribution to cost reduction. The second innovation, learning approach method designed especially for better understanding and cooperation between customer relationship officers and risk analysts, was rewarded because of its innovative solutions. And the third, successful issuance of co-branded cards, was The values of professionalism, team spirit, innovation are genuinely shared within SKB, and are linking us together more and more. The values that link up parts of Société Générale Group are also demonstrated within the objective of the Global Employee Share Ownership Program within which employees get the opportunity to participate in successful operations of the Bank as its shareholders. The program enables employees to buy Société Générale's shares under favourable, unified, and specially defined terms. In the year 2004 employees of SKB Banka and its two subsidiaries were invited to join the program for the first time. More than a half of all employees decided to become a shareholder of the one of the biggest financial group in the euro zone.

11 The Société Générale Group NORTH AMERICA Canada French West Indies Mexico Nassau Panama The Bahamas United States SOUTH AMERICA Argentina Brazil Chile Venezuela Austria Belgium Bulgaria Cyprus Czerch Republic Danemark Finland Germany AFRICA Algeria Benin Burkina Faso Cameroun Equatorial Guinea Chad Ghana Guinea Ivory Coast Madagascar Marocco Réunion Senegal South Africa Tunisia France Gibraltar Greece Guernesey Hungary Ireland Italy Jersey EUROPE Luxembourg Monaco Netherlands Norway Poland Portugal Romania MIDDLE EAST Bahreïn Égypt Iran Jordan Kazakhstan Lebanon Turkey United Arab Emirates Uzbekistan Russia Serbia & Montenegro Slovakia Slovenia Spain Sweden Switzerland Ukraine United Kingdom OCEANIA Australia New Caledonia French Polynesia ASIA Azerbaïjan China Hong-Kong India Indonesia Japan Malaysia Philippines Singapour Taiwan South Korea Thaïland Vietnam 11 The Société Générale Group, with head offices in Paris, is one of the largest financial services groups in the euro zone. Its business portfolio is based on three core activities: Retail Banking and Financial Services; Global Investment Management and Services; Corporate and Investment Banking. It follows a policy of long-term growth based on selective development of its products and services, with strong emphasis on innovation aimed at customer satisfaction in its various markets, as well as steady internal and external growth. The Group s fundamental values are professionalism, team spirit and innovation. Profile of the Société Générale Group One of the largest financial services groups in the euro zone; Among the highest rated banking groups in the euro zone; More than 92,000 employees; Over 16.4 million individual customers in retail banking and financial services; A European leader of business finance and services (equipment finance, IT and operational leasing); 4 th largest bank in the euro zone with EUR billion of assets under management; A leader in equity derivatives and structured finance; 8 th largest market capitalisation on the Paris Bourse at December 31 st 2004.

12 12 Société Générale Group s main areas of development, Retail Banking Acquisition of Crédit du Nord, France Private Banking Acquisition of Hambros, United Kingdom 1998 Investment Banking Acquisition of Cowen and Co., United States Asset Management Takeover of Yamaichi ICM, Japan Creation of SGAM UK, United Kingdom 1999 Retail Banking Acquisitions of the Romanian Development Bank, Romania Acquisitions of Express Bank, Bulgaria Acquisitions of BFV, Madagascar Acquisitions of BTCD, Chad 2001 Retail Banking Acquisition of SKB Banka, Slovenia Acquisition of KomerËni Banka, Czech Republic (with its subsidiary in Slovakia) Specialized Financial Services Acquisition of GEFA and ALD, Germany Acquisition of Fiditalia, Italy Private Banking Acquisition of Banque de Maertelaere, Belgium Asset Management Acquisition of TCW, United States 2002 Retail Banking Acquisition of International Union of Banks, Tunisia Specialised Financial Services Acquisition of Hertz Lease Acquisition of Eqdom, Morocco Specialised Financial Services Strong organic growth in Europe and through the international retail banking networks Asset Management Launch of the first mutual fund in China through a joint venture with the Baosteel Group Private Banking Acquisition of Compagnie Bancaire Genève, Switzerland Investment Banking Acquisition of Constellation Financial Management 2004 Retail Banking Acquisition of General Bank of Greece Increase of the stake in Development Bank of Romania to 58.3% Specialised Financial Services Acquisition of Hanseatic Bank, Germany Acquisition of Elcon Finans Launch of a joint venture in Russia in consumer credit Asset Management Acquisition of Resona AM, Japan Partnerships signed to promote distribution joint ventures in China, South Korea and India Key figures for 2004 Over the full year 2004, Group net income totalled EUR 3,125 million, up by 25.4% from the year This very good performance was the result of sustained top-line growth, a drop in the cost/ income ratio and the low cost of risk. All of core business activities reported strong growth and contributed significantly to the reported financial result. Group ROE after tax rose to 18.9%, compared with 16.2% in Retail Banking Acquisition of Banque Française Commerciale Océan Indien, La Réunion Acquisition of SSB Bank - Ghana Launch of a network in Russia via an existing subsidiary (Banque Société Générale Vostok)

13 Group Consolidated figures Results (in EUR million) Net banking income 16,416 15,637 14,573 Operating expenses (10,967) (10,568) (10,526) Gross operating income 5,449 5,069 4,047 Net allocation to provisions (541) (1,226) (1,301) Operating income 4,908 3,843 2,746 Net income 3,125 2,492 1,397 Group ROE (after tax) 18.9% 16.2 % 9.4 % Activity (in EUR million) Total assets 601, , ,392 Customers loans 209, , ,769 Customer deposits 213, , ,085 Assets under management (in EUR billion) Consolidated shareholders' equity 18,576 16,877 15,734 Tier-1 ratio 8.5 % 8.7 % 8.1 % Stock market data Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2002 Common Stock (number of outstanding shares) 445,153, ,434, ,170,265 Market capitalisation (in EUR billion) EPS (in EUR) Book value per share - At year-end (in EUR) Share price (in EUR) High Low Close Ratings of the Société Générale Group AA- (Standard & Poor s) Aa2 (Moody s) rating upgraded in January 2005 AA- (Fitch)

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15 SKB Banka reports 15

16 16 Statement of the Management Board * Strategic Goals Achieved The business year 2004 was very successful for SKB Banka. The Bank achieved the best financial results compared with those of the previous 5 years and also achieved its strategic goals set for After having successfully introduced a new IT system in 2003, SKB Banka effectively concluded the migration of operations from the old IT support system to the new Symbols system. Most of retail and corporate credits, deposits and savings deposits were transferred to the new system. The Bank, simultaneously with the migration, eliminated retail savings books, which were replaced by a new product client savings accounts. Besides the migration projects, the Bank carried out numerous other projects and activities in the area of information support in 2004, namely: the upgrading of software in the field of support and court collection for the Bank s clients, software solutions for the new tax legislation, compiling of various new reports for the needs of SKB Bank and the Bank of Slovenia, and improvement and modernisation of products in the new system. Thanks to the new IT system, the Bank can offer new products and services of higher quality to its clients, and at the same time continue with cost-cutting measures. The existing range of products and services was broadened and enriched by the introduction of new banking products and services, which have already gained ground among the Bank s clients. In electronic banking, SKB Banka offered new products and services to its clients, including the possibility for realtime foreign-exchange operations, e-salaries, new information and queries and began to introduce electronic signatures. All of the above further strengthened SKB Banka s position in electronic banking in Slovenia. In June 2004, the Bank offered more modern savings products to all its clients as a substitute for traditional savings books and accounts, and also broadened its range of insurance products and services offered through a partnership agreement with the insurance company Generali by selling automotive insurance, accident and life insurance and medical assistance insurance. In line with current saving trends, the Bank introduced a bank assurance product known as Skladba 1. Marketing of card transactions was redesigned, especially concerning the Business MasterCard. In July of the previous * The Statement of the Management Board represents a translation of the statement given in line with the local regulations and is based on the financial results according to Slovenian Accounting Standards.

17 year, the Bank started to offer Euro loans to individual clients and considerably increased the volume of all types of consumer loans to individuals. By restructuring commercial activities, the Bank concluded its process of reorganisation. It widened the branch network by opening the 56 th outlet of SKB Banka in AjdovπËina and extended a welcoming hand to major clients by opening a Golden Spot department aimed at attracting affluent customers to the Ljubljana-Center Branch. The Bank s subsidiary SKB Leasing, which specialises in financial and operating leasing of movable and immovable property, achieved outstanding financial results in The volume of newly concluded agreements in the previous year exceeded the company s plans and significantly improved its market share. The company Plasis continue to carry out card processing services not only for SKB Banka, but also for two other banks within the Société Générale Group located in Bulgaria and the Republic of Serbia and Montenegro. Also, the newly founded company ALD Automotive, which specialises in operating leasing of transport fleet vehicles and also offers maintenance services for such vehicles, contributed to synergies within the Société Générale Group. In 2004, the employees of SKB Banka were included for the first time in the World Equity Plan of the Société Générale Group, enabling the Bank employees to purchase its shares. More than 50% of SKB staff participated in this offer. The international credit rating agency Moody's Investors Service upgraded SKB Banka s credit rating for long-term security of foreign-currency deposits from A1 to Aa3, which was due to the improved credit rating of SKB Banka s parent bank Société Générale. In 2004, SKB Banka continued to sponsor various cultural, sporting and other events. As the main sponsor of the Slovene Olympic teams, SKB proudly celebrated all four medals won by Slovene athletes at the Olympic Games held in Athens, as well as the numerous outstanding results achieved by the Slovene team. 17 Financial Performance In 2004, SKB Banka operated in an economic environment mainly characterised by the following factors: consumer prices increased considerably less than in the previous two years (3.2% in 2004, vs. 4.6% in 2003 and 7.2% in 2002), the EUR exchange rate grew slower (1.3% in 2004 vs. 2.8% in 2003 and 4% in 2002) and the tolar interest rates continued to decline sharply. Slovenia's entry into the European Union on 1 May, 2004 and its integration into the European exchange rate mechanism ERM II both had a favourable effect on economic growth in The downward interest rate trend considerably lowered net interest income, but this decrease was largely and successfully compensated for by income from services and increased commercial activity. In 2004, net banking income was by SIT 1.4 billion lower than the year before, but the amount of granted loans increased by SIT 27.7 billion, while income from services grew by SIT 0.8 billion. In 2004, SKB Banka continued to pursue a conservative risk management and provisioning policy. In line with this policy and the policy of improving capital adequacy, it established SIT 4.65 billion of provisions for general banking risks. The Bank s operating costs went up by SIT 0.4 billion. In 2004, SKB Banka earned SIT 313 million of profit before tax according to Slovene Accounting Standards and SIT 6.2 billion according to International Accounting Standards.

18 The number of staff was reduced from 1,024 at the beginning of the year to 972 at the end of the year. In spite of closing inactive accounts in 2004, SKB Banka retained its 13% market share in total corporate transaction accounts and increased its market share in transaction accounts of individual clients from 6.1% to 6.6%. Outlook The universal banking strategy which has been pursued in the past few years has enabled the Bank to provide services to more than 200,000 clients throughout Slovenia, which reflects consistent implementation of the said strategy and indicates that the Bank will follow the same strategy in the years to come. The Bank intends to further increase business activities with individual clients based on client segmentation, and offer them adequate credit facilities and different types of savings products. Business activities with sole proprietors, small and medium-sized companies, and the public sector will be further developed in line with the Bank's business policy for this segment. Another goal of the Bank is to become the reference bank and partner of major corporates, offering them a comprehensive range of banking products and services. 18 In 2005, the Bank will face important tasks. It will have to deal with a history of high expenses and increase the performance of its key divisions, which is a continuous process requiring ever stronger commitment. The Bank's results will be influenced by fierce competition, therefore, more effort will have to be devoted to marketing activities and developing stronger relationships with clients. In 2005 and 2006, the Bank will need to prepare for the Euro changeover. Moreover, we have plans to modernise several aspects of our business processes as well as the range of products and services and approaches to satisfying clients. These goals will be reflected in the workforce structure as well. In addition to the favourable impact on costs, the Bank will, as the previous IT system is abolished and the new system implemented, improve the quality and timeliness of data and the reliability of the entire IT system in the future. At the same time, the new IT system will serve as a basis for the development of modern products and services offered to clients. In developing new banking products and services the Bank will provide its clients with high quality services and optimal business solutions, which will support, as much as possible, their business policies. By accelerating the cross-selling of banking products and services we will further improve the synergetic effects within the SKB Group. The prospects of SKB Bank and its continuous growth in the future are based on constant efforts, dynamism and innovation devoted to the key fields of development as well as the wish to improve cooperation and team work. We are grateful to the shareholders and clients of SKB Banka for the trust they have placed in us so far. We look forward to future business challenges and are convinced that we will prove to be worthy of their trust in the coming year as well. On this occasion we would like to thank, above all, the employees of SKB Banka and the SKB Group, since each of them has made a contribution to the successful operations of the SKB Group in Bernard Koenig Vice-President of SKB Banka's Management Board Cvetka Selšek President of SKB Banka's Management Board

19 Statement of the Supervisory Board of SKB Banka on the Work of the Supervisory Board and Reviewing of the Annual Report for the year 2004 * Competence of the Supervisory Board In 2004, the Supervisory Board of supervised the management of the Bank in compliance with its competencies, stipulated by the Companies Act, the Banking Act and the By-Laws of The Supervisory Board supervises the management of the business operations of the Bank, primarily inasmuch as it: examines and approves annual reports; examines the distribution of profits proposed by the Management Board and gives its opinion thereon to the General Meeting of Shareholders; supervises the adequacy of procedures applied by the Internal Audit Department and its effectiveness, and gives grounds for its opinion on the Annual Internal Audit Department Report to the General Meeting of Shareholders; discusses the findings of the supervisory bodies resulting from their supervision of the Bank. 19 The Supervisory Board approves the Management Board s decisions regarding the business policy and budget of SKB Banka, the organisation of the internal control system and internal auditing, rules regulating the functioning of the Internal Audit Department and its framework annual programme. Furthermore, the Supervisory Board approves the business operations for which its approval is required by law. Supervision of the Bank's management By means of expert-written material and oral reports given by the Management Board, the Supervisory Board was regularly and promptly informed about the Bank's operations throughout the whole year. On the basis of regular reports on the operations of the Bank, the Supervisory Board promptly followed the implementation of the business plan for In 2004, the Supervisory Board of held two regular and two correspondence sessions focused on the implementation of the business plan and supervision over the management of the business. The 9 th Regular Session, held on 25 February, 2004 The Supervisory Board discussed the preliminary unaudited Annual Report of SKB Banka for 2003 and the Internal Audit Department Report for In addition, it acknowledged the interim report on the audit of financial statements for 2003, given by the independent auditing company Ernst & Young d.o.o. Ljubljana; * The Statement of the Supervisory Board represents a translation of the statement given in line with the local regulations, which prescribe the procedure on reviewing an Annual Report prepared in accordance with Slovenian Accounting Standards and does not relate to this Annual Report or the included consolidated financial statements prepared in accordance with International Financial Reporting Standards.

20 The Supervisory Board was informed of the Bank's credit portfolio as at 31 December, 2003, the Report on the Bank s large exposure and the Report on net indebtedness of the Supervisory Board Members and their related parties as at 31 December, 2003; The Internal Audit Department presented to the Supervisory Board its Report on internal audits in the fourth quarter of The Supervisory Board was also informed of the Bank's business results for January 2004; The Supervisory Board was informed that in 2003 the Securities Market Agency had not performed any inspections in SKB Banka; The Supervisory Board acknowledged the summary of the tax inspection's record on the Inspection of the Bank s Operations from 1999 to 2002 and supported the position of the Bank's management that in the further procedure the Bank should defend its claims and complaints; The Supervisory Board drafted a report on its work in 2003; The Supervisory Board acknowledged the Bank's business plan for the period. The 10 th Correspondence Session - 5 April, Before convening the General Meeting of Shareholders, the Supervisory Board discussed all relevant documents and gave its approval to the submitted resolutions to be voted on by the shareholders at the 16 th General Meeting of Shareholders of SKB Banka; The Supervisory Board reviewed the Report on the Operations of SKB Banka for 2003, which was prepared by the Management Board, and the auditor's report on the audit of financial statements and enclosures as well as the review of the Annual Report for On the basis of a positive auditor s report, the Supervisory Board ascertained that the Management Board prepared the Annual Report and items in financial statements and other parts of the Annual Report in line with the rules defined by the Companies Act, the Decision on Accounting Records and Annual Reports of Banks and Savings Banks, as well as with Slovene Accounting Standards; Pursuant to Article 274a of the Companies Act, the Supervisory Board approved the Report on the Operations of for 2003; The Supervisory Board concluded and approved the report for shareholders on its work in 2003 and the examination of the Annual Report; The Supervisory Board proposed to the General Meeting of Shareholders to appoint the auditing company Ernst & Young d.o.o. Ljubljana to audit the financial statements of and the SKB Group for 2004; Based on the resignation of its member and Deputy Chairman, Jacques Tournebize, the Supervisory Board recommended to the General Meeting of Shareholders to discharge Jacques Tournebize and proposed Philippe Vigué to become a new member of the Supervisory Board of SKB Banka. The 11 th Correspondence Session - 8 July, 2004 The Supervisory Board acknowledged the Report on the Operations of SKB Banka in the first five months of 2004; The Supervisory Board acknowledged the Report on the Bank's credit portfolio as at 31 March, 2004, the Report on the Bank s large exposure and the Report on net indebtedness of the Supervisory Board Members and their related parties as at 31 March, 2004;

21 The Supervisory Board discussed the Internal Audit Report for the period between 1 January, 2004 and 31 May, The 10 th Regular Session, held on 10 November, 2004 The Supervisory Board acknowledged the Report on the Operations of SKB Banka in the first nine months of 2004, the Report on the Bank s large exposure, the Report on net indebtedness of the Supervisory Board members and their related parties, the Report on the Bank's credit portfolio and the regular Internal Audit Department Report, all as at 30 September, The Supervisory Board also adopted the proposed plan of the Internal Audit Department for The Supervisory Board specially focused on the SKB Group's business plan for 2005, whereby it was informed in particular of the planned activities regarding the improvement of the Bank's operations as well as the preparations for the Euro changeover and new capital regulations (Basel II). The Supervisory Board approved the annual business plan prepared by the Management Board. Reviewing the Annual report for the year 2004 On 16 February, 2005 the Management Board submitted to the Supervisory Board for preliminary discussion the unaudited Report on the Operations of SKB Banka and the SKB Group for 2004 and the Report on the Bank's credit portfolio. The chartered auditing company Ernst & Young audited the Report on the Operations of SKB Banka and the SKB Group for 2004 including the financial statements and enclosures. The audit was carried out pursuant to Slovene and International Accounting Standards. The auditor gave a positive opinion on the financial statements and the Annual Report. The Management Board submitted to the Supervisory Board the audited Annual Report together with the auditor's report within the legal deadline. The Internal Audit Department Report was submitted simultaneously. 21 Between the day they received the unaudited report and the day they discussed the Annual Report of SKB Banka and the SKB Group, the Supervisory Board members became privy to additional insights into the operations of the Bank and were given access to all information related to the examination of the Annual Report. The Supervisory Board established that its members received all the required information about the operations of SKB Banka and the SKB Group. The Supervisory Board concluded the discussion on the audited Report on the Operations of SKB Banka and the SKB Group for 2004 at its 12 th correspondence session, held on 5 th April The Supervisory Board had no objections to the audited annual report and the auditor's report by the auditing company Ernst & Young. Pursuant to Article 274a of the Companies Act and based on the regular supervision of the operations of SKB Banka and the SKB Group, periodical reports by the Internal Audit Department and the positive auditor s opinion by Ernst & Young, the Supervisory Board approved the Report on the Operations of SKB Banka and the SKB Group for 2004 together with the allocation of the Bank s net profit for 2004 in the amount of SIT 156,403 thousand to cover loss brought forward. Jean-Louis Mattei Chairman of the Supervisory Board

22 Statement on the Harmonisation of Corporate Governance in SKB Banka d.d. with the Corporate Governance Code The Management Board of (hereinafter: the Bank) is aware of the importance of efficient corporate governance of the Bank and its responsibilities. 22 Efficient, responsible and independent relations between the Management Board, the Supervisory Board and the shareholders are laid out in the Bank's internal regulations (By-Laws, Rules of Procedure of the General Meeting of Shareholders, Rules of Procedure of the Supervisory Board and Rules of Procedure of the Management Board). The Bank's internal regulations are harmonised with specific system solutions, stipulated by the Banking Act. Since 2001, SKB Banka is 99.6% - owned by Société Générale Paris, meaning that the minority shareholders own only 0.4% of the Bank's equity. In 2002, the SKB share was delisted from the organised market. The only security remaining on the stock exchange is the SKB bond, which will fall due in June SKB Banka is a part of the international network of the Société Générale Group, one of the leading financial groups in the euro zone. The Société Générale Group it has a long tradition in responsible and efficient corporate governance. Therefore, the operations and governance of SKB Banka are adapted and harmonised with the methods and working procedures of the group of Société Générale Paris. The present Statement on the Harmonisation of Corporate Governance in with the Corporate Governance Code given by the Management Board of SKB Banka is limited only to the provisions and recommendations of the Code which are relevant to the Bank, in view of its above mentioned specific status. 1. Relationship Between the Corporation, the Shareholders and Stakeholders The Bank already complies with this paragraph, as it adhered to Provision upon the convening of its last General Meeting of Shareholders in May ( The company shall announce information relevant to the convening of the General Meeting of Shareholders, to proposed resolutions, the conditions for registration and additional/background materials, by publishing these documents on the company's web site, taking into account the rules on regular advising. ) Likewise, this year's replacements on the Supervisory Board were already in line with Provision ( When the election of members of the Supervisory Board is an item on the agenda of the General Meeting of Shareholders, the Supervisory Board shall, in cooperation with the Management Board, provide for timely public announcement of background information on the proposed candidates for the mandate (education, professional experience, age, memberships in supervisory boards of other public limited companies, etc. ). The Bank complies with all other provisions of this paragraph.

23 2. Management Board The Management and Supervisory Boards of the Bank are in compliance with this Paragraph. 3. Supervisory Board The Bank operates in line with this Paragraph, with the following particularities referring to Provisions 3.5.4, and 3.5.7: Regarding the Bank's specific status and in line with the established practice in Slovenia, some members of the Supervisory Board represent the majority shareholder (3 members out of 6). The employment of each member is regularly stated in the Bank's annual reports. The members of the Supervisory Board comply with the Companies Act and the Banking Act, which define their terms of reference and limit their relationship with the Bank. Thus, the Management Board estimates that the corporate governance of the Bank provides for the prevention of any conflict of interest : A member of the Supervisory Board has a conflict of interest if: he had or still has an important business relationship with the company or group company; he is a member of the wider management team of the company or group company; he has participated in drawing up a proposal of the Annual Report, he is a close relative of the manager or of the management of the company; he is a majority shareholder or a shareholder with a qualified stake in company's shares; he is a person with a business, financial or close family relationship with a majority shareholder or a shareholder with a qualified stake in the company's' shares; he is an important supplier of goods and services (including advisory and auditory services); he is in any other way connected to the above mentioned groups so that it could affect his decision making., ( The detailed criteria of conflicts of interest shall be determined by the company's Articles of Associations or by the company's corporate governance code. ) and ( In its report, the Supervisory Board shall inform the General Meeting of Shareholders of any conflicts of interest which have occurred, together with their remedy. Material conflicts of interest and those which are not merely of a temporary nature with respect to a Supervisory Board member shall result in the termination of his/her mandate. ) Cooperation Between the Management Board and the Supervisory Board The Management Board and the Supervisory Board govern the Bank in accordance with the provisions and recommendations of the Code. 5. Group Companies SKB Banka has two group companies (associated companies) and their mutual relationship is organised in accordance with these provisions. 6. Auditing and the System of Internal Control The Bank complies with these provisions and recommendations and implements them. 7. Public Disclosure of Information Provision of the Code shall be implemented in the Annual Report for : ( The company shall enclose a declaration of compliance with the Code to the annual report, disclosing how the company follows corporate governance principles and disclose and explain any discrepancy from the Code. )

24 The Bank shall prepare a financial calendar of expected essential announcements for 2005 and publish it on its web site : Financial calendar - The company shall publish a calendar of expected essential announcements (for example, of the General Meeting of Shareholders, announcements of the date for the payment of dividends, annual and interim reports ) for the next year. The calendar of essential announcements shall be available to the public via the company s web sites. The Bank operates in line with other recommendations and provisions, taking into account the fact that SKB shares are not traded on the organised market. Annual reports are available on the Slovene and English web site - they include financial data, the statement of the company's strategy, an introduction of the members of the Supervisory Board and their mandates, a presentation of the Management Board, a presentation of the company s sphere of activities, as well as information on the share ownership structure of the company and group companies (7.4.1). On its web site, the Bank also publishes important price sensitive information ( Resolutions of the Supervisory Board - The company shall as soon as possible publicly announce the resolutions of the Supervisory Board, which are classified as price sensitive information in line with provision of this Code ) 24 In 2005, a consolidated version of the By-Laws of the Bank will be published on the web site ( The website shall also offer the consolidated version of the company s Articles of Association (By-Laws). ) Jean-Louis Mattei President of the Supervisory Board Bernard Koenig Vice-President of the Management Board Cvetka Selšek President of the Management Board

25 Corporate Governance in 2004 SKB Banka s bodies include the following: General Meeting of Shareholders Supervisory Board Management Board General Meeting of Shareholders In accordance with the Bank s By-Laws and the Companies Act, the General Meeting of Shareholders must be held at least once during a calendar year. In the year 2004, the Bank s shareholders met once at the 16 th General Meeting of Shareholders on 20 May, 2004 and passed the following resolutions: 1. The General Meeting of Shareholders acknowledged the Report from the Bank s Supervisory Board on the adopted Annual Report of for the year 2003, with the audited Annual Report of for the year 2003, the opinion of the auditing company Ernst & Young d.o.o. Ljubljana and approved the Internal Audit Annual Report by the Internal Audit Department. 2. The General Meeting of Shareholders of SKB Banka d.d. nominated the auditing company Ernst & Young as auditors of the operations of for the year The Supervisory Board of SKB Banka consists of: Jean-Louis Mattei, Chairman (Société Générale S.A., Paris, France, Head of International Retail Banking) Jacques Tournebize, Deputy Chairman discharged as a member of the Supervisory Board at the Bank s 16 th General Meeting of Shareholders (Société Générale S.A., Paris, France, Deputy Head of International Retail Banking) Philippe Vigué, Deputy Chairman appointed member of the Supervisory Board at the Bank s 16 th General Meeting of Shareholders (Société Générale SA Paris, France, Deputy General Manager, International Retail Banking) Members: Bernard Coursat (Revoz, Novo mesto, Honorary Chairman) Milan Jelenc (Vice-President of the Management Board of Intereuropa d.d., Koper) Andrej LasiË (Managing Director of Velana d.d., Ljubljana) Jean-Jacques Ogier (Société Générale S.A., Paris, France, Head of French Retail Banking) The General Meeting of Shareholders of SKB Banka d.d. discharged Mr. Jacques Tournebize from the Supervisory Board of and appointed Mr. Philippe Vigué as the new member of SKB Banka s Supervisory Board. Supervisory Board According to the Bank s previous By-Laws, SKB Banka s Supervisory Board may consist of at least three members. The exact number is determined at the General Meeting of Shareholders. Management Board According to the By-Laws adopted at the 14 th General Meeting of Shareholders, SKB Banka s Management Board shall consist of at least two members. The Supervisory Board shall pass a resolution on nomination defining the number of members on the Management Board, which shall consist of the President, Vice-President and other members.

26 The Management Board consists of: Directors of departments as at 31 December, 2004: Cvetka Selπek, President of the Management Board Bernard Koenig, Vice-President of the Management Board Management Structure Executive Directors and Deputy Executive Directors as at 31 December, 2004: Mateja Papeæ, Director of Internal Audit Department Boæo Truden, Director of Human Resources Department Alenka MarkiË, Director of Communication and Market Survey Department 26 Finance Division: Jean-Michel Piffert, Executive Director of Finance Division Nataπa MohorËiË Zobec, Deputy Executive Director of Finance Division Risk Division: Patrice Grisey, Executive Director of Risk Division Anton Pengov, Deputy Executive Director of Risk Division Commercial Management Division: Jean-Marc Joulaud, Executive Director of Commercial Management Division Zdravko KukoviË, Deputy Executive Director - Distribution and Animation Stephane Grand, Deputy Executive Director - Strategy and Marketing Duπan KosanoviÊ, Deputy Executive Director - Financial Markets and Liquidity Banking Operations and Business Support Division: Vojka Ravbar, Executive Director of Banking Operations and Business Support Division Bojana Glavina, Deputy Executive Director of Banking Operations and Business Support Division General Means and Support Division: Fernand Clop, Executive Director of General Means and Support Division Igor Bergant, Deputy Executive Director of General Means and Support Division Tatjana KlanËnik, Director of Controlling Department Majda LenardiË, Director of Assets and Liabilities Management Department Polona Malalan, Director of Accounting Department Anton Pengov, Director of Risk Department Stanislava Bokal, Director of Bad Debt Collection and Prevention Department Bojana Novak, Director of Corporate Finance Department Manica Novak, Director of Distribution and Animation for Corporates Department Lidija Tepina, Director of Distribution and Animation for Individuals Jasna Puntar, Director of Strategy and Marketing for Individuals Maruπa kopac, Director of Strategy and Marketing for Sole Proprietors Jure Velikonja, Director of Marketing - Communications Department Andrej LasiË, Director of Big Corporates Department Matej Falatov, Director of International Desk Department Maksimiljan Zajc, Director of Institutional Investors Department Andrej Meæa, Director of Treasury Department Borut Medveπek, Director of Securities Brokerage Department Alenka Kerin, Director of International Banking Department

27 Zlatko Jamnik, Director of Domestic Payments Department Alenka Novak, Director of Securities Back Office and Custody Department Bojana Glavina, Director of Individual and Corporate Support Department Æeljka Beg, Director of Back Office Capital Market Department Gregor Strehovec, Director of Legal Department Olivier Bourbon, Director of Organisation Department Igor Bergant, Director of Information and Banking Technology Department Vojka Loparnik-Kleπnik, Director of General Services Department Martin MihelËiË, Director of Distribution Channels Support Department Branch Managers as at 31 December, 2004: Polona entjurc, Celje Branch Manager Don Schoeffmann, Gorenjska Branch Manager Dorjana BabiË, Primorska and Notranjska Branch Manager Almira Mlakar BoæoviË, Novo mesto and Krπko Branch Manager Luka OmrËen, Ljubljana Outskirts - Individual Clients Branch Manager Anita StojËevska, Ljubljana - Corporate Branch Manager Maja Kepic Osojnik, Ljubljana Center - Individual Clients Branch Manager Anamarija prah, Maribor and Murska Sobota Branch Manager Management Structure of Subsidiary Companies Plasis d.o.o. Patrick Debaene, President of the Management Board Samo avs, Member of the Management Board SKB Leasing d.o.o. Borut VujËiË, Director Bruno Plazanet, Deputy Director 27

28 Profiles of the Management Board 28 Cvetka Selπek President of the Management Board Academic qualifications: B.Sc. (Econ.), University of Zagreb Posts held: Traineeship in Siemens Austria 1976 Ministry of International Co-operation of the Republic of Slovenia Member of the Government of Slovenia and Minister of International Co-operation responsible for foreign trade and the foreign currency system 1991 SKB Banka, Executive Vice-President for International Banking 1995 SKB Banka, Executive Director of International Banking 1997 SKB Banka, Member of the Management Board, responsible for international and investment banking and equity investments 1999 SKB Banka, President of the Management Board Bernard Koenig Vice-President of the Management Board Academic qualifications: B.Sc.(Econ.), University of Strasbourg, France; Master in Industrial Property, University of Strasbourg; MBA degree, HEC Montreal, Canada Posts held: 1972 Lecturer in finance at HEC Montreal, Canada 1974 Société Générale Alsacienne de banque SOGENAL - associated company of Société Générale, International Commercial Department 1976 SOGENAL, Frankfurt, Head of Risk Department, Head of Commercial Department, Deputy and Director of the Branch 1989 Director of Capital Markets and Asset Management in SOGENAL, Strasbourg 1995 Executive Director in SOGENAL, Strasbourg 2001 Member of the Management Board of SKB Banka 2002 Vice-President of the Management Board of SKB Banka Memberships: Since 1989 Member of the World Economic Forum Since 1994 Member of BIAC - Business and Industry Advisory Committee to the OECD, Steering Committee for Central and Eastern Europe and since 1995 President of the National Sub- Committee for Slovenia Member and since 1998 the President of the Supervisory Board of the Ljubljana Stock Exchange Member of the Supervisory Board of the Merkur company Chairman of the Supervisory Board of the insurance company Generali Since 2000 Member of the City Council of the Municipality of Ljubljana Member of the Supervisory Board of the insurance company Generali Chairman of the Supervisory Board of Pokojninska druæba SKB Since 2003 Member of the Supervisory Board of Pokojninska druæba A Since 2003 Member of the Supervisory Board of SKB Leasing Other assignments: Since 2003 President of the Supervisory Board of SKB Leasing Since 2003 President of Advisers to the French government on international trade for Slovenia Since 2002 Vice-President of the Supervisory Board of Plasis

29 Jean-Michel Piffert Executive Director of Finance Division Patrice Grisey Executive Director of Risk Division Jean-Marc Joulaud Executive Director of Commercial Management Division Vojka Ravbar Executive Director of Banking Operations and Business Support Division Fernand Clop Executive Director of General Means and Support Division Mateja Papeæ Director of Internal Audit Department Boæo Truden Director of Human Resources Department Alenka MarkiË Director of Communication and Market Survey Department 29 Igor Bergant Deputy Executive Director of General Means and Support Division Bojana Glavina Deputy Executive Director of Banking Operations and Business Support Division Stephane Grand Deputy Executive Director - Strategy and Marketing Duπan KosanoviÊ Deputy Executive Director - Financial Markets and Liquidity Zdravko KukoviË Deputy Executive Director - Distribution and Animation Nataπa MohorËiË Zobec Deputy Executive Director of Finance Division Anton Pengov Deputy Executive Director of Risk Division

30 Operations of SKB Banka in the year 2004 Strategy, Future Business Policy And Objectives In 2005 Future business policy of SKB Banka continue to access know-how, products and business opportunities in co-operation with the parent bank Société Générale, which is one of the largest banks in the euro zone. 30 SKB Banka operates in line with the guidelines and goals set by business strategy for a period of four years. Our key orientation is to remain a development-focused universal bank that builds global long-term relationships with its clients by providing a quality range of products and services adapted to their needs: individual clients: with the aim of attracting new clients by offering them quality services and a wide range of savings and lending products, bank assurance services and mutual funds through a multi channel approach providing e-banking; small and medium-sized enterprises: by introducing products and quality services in line with the clients needs (loans, cash management, payments) and by promoting the use of electronic banking; large companies and institutional investors: with the aim of becoming a partner adopting an approach tailored to individual client s needs in term of loans, cash management, interest rates and FX risk management. To be a reference bank and use synergy with the parent bank to the maximum possible extent; sole proprietors: the aim is to comprehensively service both the business and private financial needs of a client. SKB Banka s daily operations are guided by four key strategic orientations, namely: ensuring the long-term respect and trust of clients, as well as the trust and support of shareholders, creating conditions which satisfy employees and provide for their development, and contributing to the development of the broader social environment. SKB Banka offers its services in 56 branches all over Slovenia. In the future SKB Banka will The Bank will work to preserve the trust and support of shareholders by achieving a stable return on equity and optimal performance indicators. The Bank s main goals are to generate new value, streamline its operations, increase productivity and optimize costs. The set goals have been obtained only through the teamwork of employees with high professional skills, their creativity and innovativeness. SKB Banka pays significant attention to employee satisfaction by creating appropriate conditions for permanent professional training, personal growth and employee motivation. The values of SKB Banka and its parent bank Société Générale are professionalism, team spirit and innovation. These represent the basis for future development of both banks, and connect employees in their daily activities and strengthen mutual relationships. SKB Banka participates in the life and work of local communities through its numerous branches all over Slovenia. The Bank builds its culture upon close connections with the environment where it operates, since it believes that only with cooperation in various areas of economic and social life can mutual goals and interests be satisfied. SKB Banka s business objectives in 2005 The Bank will improve the cost to income ratio through the rationalization of employees, increasing income from services per employee, as well as optimizing costs. In addition, the Bank plans to achieve a permanent return on equity. New clients will be attracted through expanded market activities and improved quality of services. As it expands its operations, the Bank will strive to anticipate risks and recognize opportunities. The Bank will

31 continue to focus on risk management, especially credit risk, by preserving a conservative approach with individualized treatment and careful selection of clients. Main activities for the implementation of objectives in Besides the preparations for Basel II and the introduction of the euro in the beginning of 2007, the Bank plans to carry out some major projects in the field of information technology; among the most extensive projects is the implementation of a data warehouse as the source of information for Basel II, the introduction of a new Management Information System, and reporting to the Bank of Slovenia. Other major projects refer to new electronic banking solutions for corporate clients, migration of the old General Ledger, and backup locations for information technology. 2. The Bank will use its resources in a costefficient and profitable way, by: standardizing the entire process of client operations; modernizing domestic and international payment transactions and settlements; introducing the investment approach in the creation of new products, activities and projects; centralizing corporate back-office operations; assessing operational, market and credit risks as part of profitability calculations; improving employee efficiency with management by objectives. 3. The Bank s principal goal is client satisfaction. It will be achieved with: establishing global client relationships; setting competitive prices of products and quality of services; enabling simple access to services with the following improvements: segmented organization that will enable Bank officers to get to know the clients better and work proactively; establishment of a call center with better and faster support to clients, also from the perspective of officers; modernization of electronic banking; promoting the multi-channel approach (ebanking) in order to reduce cash operations; direct access to products outside of the Bank, such as consumer loans initiated with merchants. 4. The Bank will complement the human resource management policy by: streamlining its employees on the basis of specific organizational needs; accelerating the introduction of career development management ; continuously remunerating employees on the basis of their efficiency, co-financing additional employee pension insurance, and enabling employee participation in the global ownership plan of the parent bank. Preparations to Basel II, International Accounting Standards, EUR Basel II During the past two years the Bank has been intensively involved in preparations for the Basel II capital adequacy rules. For that purpose a steering committee has been put into place, which involves the Management Board and all divisions of the Bank and regularly controls the work of the different sub-projects: corporate claims, by building up the probability of the default calculation module; retail claims, by defining the basic pooling structure; collateral management, as a part of loss given default definition; and data definition and collection. Among the various tasks of the Risk division team in charge of the project is the dissemination of Basel II or capital adequacy rules throughout the Bank by organizing internal seminars and other knowledge transfer approaches, permanent consultation with the team project in the SG group, and regular communication with the Slovene banking community. Preparations for the adoption of International Financial Reporting Standards Since 1990 SKB Banka has been compiling its financial statements according to Slovene Accounting Standards as well as International Accounting Standards applicable at the time. Both sets of financial statements compiled according to 31

32 32 the two sets of standards were each year audited by an external auditor. In 2005, like all other European listed companies, the parent bank Société Générale will also start reporting according to International Financial Reporting Standards. SKB Banka has been included into the preparations for this first reporting. Since 2003, SKB Banka has been preparing for reporting according to International Financial Reporting Standards. To this end it has reengineered its IT system, while some requirements have been met at an organisational level. The SG Group decided to implement International Financial Reporting Standards gradually in 2004 and Thus, SKB Banka implemented all aspects of the International Financial Reporting Standards on 1 January, 2004 except for standards 32 and 39. As of 1 January, 2005 the Bank fully adopted all reporting procedures according to International Financial Reporting Standards, i.e. including standards 32 and 39, taking into account detailed instructions and accounting policies of the parent bank Société Générale. All guidelines have been agreed with auditing companies that audit the SG Group. Preparations for the euro changeover in SKB Banka In September 2004, SKB Banka activelly engaged in the preparations for the euro changeover. A coordination group was formed of representatives of all divisions to assist in the euro changeover: Commercial Banking, Banking Operations and Business Support, Information and Banking Technologies, the Legal Department, the Communication Market Survey, Human Resources and others. The solutions and recommendations prepared by the co-ordination group will be submitted for decision to the decision-making group, comprising the Management Board and Executive Directors. By the end of 2004, a draft action plan for the euro changeover was ready. It includes a timetable of activities for the introduction of the euro, e.g., IT reengineering, bank equipment modifications (ATMs, POS terminals, coin counting machines, etc.), product and service modifications (including redrafting of client contracts), a cash conversion/ exchange plan, adjustments in bookeeping and accounting policies, and the Bank's communication plan for informing the general public, clients and employees. In these preparations SKB Banka will work together with other banks through the Bank Association of Slovenia, which is a significant link in co-operating with the Bank of Slovenia and relevant ministries. General Economic and Banking Environment General economic environment After several years of relatively slow growth coinciding with unfavourable conditions in the international environment, economic activity in 2004 rapidly picked up again. This boost in economic growth was significantly influenced by both domestic and international factors. Particularly important was economic growth among main trading partners, which exceeded expectations. Other major factors included a further increase in domestic consumption, especially in gross fixed capital formation, and the one-off effect of Slovenia s accession to the European Union. The latter had a great impact on the growth rates of imports and exports, mostly due to the changes in the taxation and foreign trade regimes. Positive domestic economic growth was additionally boosted by lower interest rates in the Slovene banking sector and the expected effects of the completion of the first National Housing Savings Scheme, which fuelled already substantial domestic consumption, both private and investment. Therefore, in 2004 GDP growth is expected to equal 4% or 1.5 percentage points above the expected rate. The co-ordinated restrictive measures of the price, incomes and fiscal policies in combination with the stabilisation of the tolar exchange rate, following Slovenia s joining of ERM2, considerably contributed to a continued downward trend in inflation in Annual CPI growth was a mere 3.2% at the end of December (1.4 percentage points less than the year before), which is the lowest since Slovenia s independence.

33 Consumer price index, EUR and USD exchange growth in % Total assets, deposits, securities, and loans of Slovenian banks - in SIT billon 6,000 5,000 4,000 3,000 2,000 1,000 CPI EUR USD Total assets Deposits and securities Loans The growth in exchange rates continued to lag behind domestic inflation, whilst the base interest rate exceeded it. The euro exchange rate went up by 1.3%, whilst the US dollar depreciated by 6.2%. Faster economic upturn enabled a gradual increase in the employment rate and a decrease in the number of unemployed. The registered unemployment rate in 2004 equaled 10.6%, which is 0.6 percentage point lower compared with Average gross wage per employee in 2004 was SIT 267,571, which is 5.7% in nominal terms and 2.0% in real terms more than in the respective period in Total annual turnover on all markets of the Ljubljana Stock Exchange in 2004 amounted to SIT 397 billion, i.e. 16.6% more than the year before. The Slovene stock exchange index SBI20 in 2004 grew by 24.7%. Market capitalisation of all listed securities (exclusive of investment funds) at the end of 2004 stood at SIT 1,707 billion. Financial environment and the banking sector in 2004 After entering the EU in May 2004, Slovenia also joined the exchange rate mechanism ERM2 in June. The central parity was fixed at SIT against the EUR. The real exchange rate may differ from the central parity within the agreed standard deviation of +/-15%. Thus, Slovenia, together with Estonia, Latvia and Denmark (which had joined ERM2 earlier) became a member of the EU Member States group preparing for the adoption of the single European currency. In 2004, the Slovene banking sector witnessed certain changes in ownership structure and a widening of competition. On one hand, international competition intensified, while on the other, the existing Slovene banks concentrated their power. In June, Slovenska zadruæna kreditna banka (SZKB) and Zveza hranilno-kreditnih sluæb (Zveza HKS) finally merged and formed a new bank, Deæelna banka Slovenije, on 1 July, In July, the government gave its consent to the merger of the second largest Slovene bank Nova Kreditna banka Maribor (NKBM) with Poπtna banka Slovenije (PBS). In November an Austrian bank Bank für Kärnten und Steiermark opened its first branch in Ljubljana and thus rounded 33

34 the number of competitive banks in the Slovene banking industry to 20. After Slovenia had joined the European Union, 67 foreign banks from the member countries registered with the Bank of Slovenia and announced their intentions to provide services in the country; meanwhile 3 foreign banks had previously established subsidiaries in Slovenia. unions the Slovenian Banking Union and the NLB Union, signed a new two-year collective agreement for the banking and savings sector. Review of SKB Banka s Operations Individual Banking 34 The Bank of Slovenia also introduced some novelties. It adopted the Regulation on the Harmonisation of the Amounts of Minimum Initial Capital: the minimum capital was prescribed at SIT 1.22 billion for banks and SIT 245 million for savings banks respectively. Furthermore, the Bank of Slovenia passed the Regulation on Minimum Obligatory Reserves with the aim of partially harmonising with the system of minimum reserves of the European Central Bank (including potential issuers of electronic money; a 0-percent reserves ratio was laid down for all repo transactions concluded in compliance with the Collateralisation Act). The written instruction on keeping 50% of obligatory reserves on a daily basis was withdrawn, giving banks greater flexibility in providing daily liquidity and stabilizing interest rates on the money market. The negative trend in interest rates continued also in Interest rates on both loans and deposits decreased. In addition to interest margins, some non-interest margins decreased as well due to the ever fiercer competition. The banks compensated the loss in income through intensified lending, promoting other banking and non-banking services and cost-cutting. In view of the increasing competition in the Slovene banking industry, in 2004 SKB Banka improved the quality and diversification of its products and banking channels in order to further improve relationships with its clients. In 2004, SKB Banka was very active in lending to individuals, as it increased the volume of granted loans by more than 25% compared with the previous year. The consumer loan range included favourable automobile loans as well as loans with special terms for upgrading household gas heating infrastructure. The Bank also intensely marketed so-called seasonal consumer loans. As a result, the volume of newly granted consumer loans in 2004 rose by 72%. By offering competitive housing loans, the Bank managed to increase the volume of such newly granted loans by 10% in the reporting year. Among the new products launched by SKB Banka were foreign-currency consumer and housing loans, but loans with a foreign Loan trends in SIT billion Individuals Corporates 250 Compared to 2003, the performance of most Slovene banks improved in The deposits by commercial clients, individual clients and sole proprietors grew significantly, whilst those by the state decreased. On the other hand, commercial and household loans increased, which is also true to a smaller extent for loans to the state. Furthermore, liabilities to banks and securities investments recorded an upward trend. Banking profits before tax increased nominally by 12.8% over Compared to the end of 2003, the total assets of the banking sector rose by 12.5% in nominal terms by the end of December In May, the Bank Association of Slovenia, as the representative of the employers and two banking

35 currency clause were no longer available since the end of the first half of the year. In spite of falling deposit interest rates, the volume of deposits of individual clients in SKB Banka grew by 13% in 2004, resulting in a 0.2 percentage point rise in the market share reaching 7.5%. Similar to other modern banks of the European Union in 2004, SKB Banka undertook a renewal of its saving products and services. Between July and October, tolar and foreign-currency savings books were replaced by more user-friendly savings accounts. The Bank widened its range of savings products and services by introducing Euro-denominated savings products and by offering savings arrangements of up to 30 days in tolars and foreign currencies linked to savings accounts, loyalty savings accounts and loyalty savings accounts with bonuses. By intensifying its marketing activities, SKB Banka increased the number of personal accounts by 13,527 and thereby raised its market share by 0.5 percentage point to 6.6%. A larger number of personal accounts favourably affected the growth of sight deposits kept in these accounts. At the same time, card transactions firmed up, as the numbers of BA/Maestro, Visa and Eurocard/ Mastercard holders grew by 16%, 25% and 5% respectively. products as a supplement. Through co-operation with Zavarovalnica Generali, SKB Banka widened its range of products and services by launching the investment life insurance product Skladba 1, which not only provides life insurance but also brings savings options involving the foreign investment fund Agileo P2. Special attention was devoted to the Bank's youngest clients. In May, the traditional gettogether for children was organised under the title Papi s Afternoon in Trnovo. On the Papi portal, a feature of the SKB website, children may, among other things, play an educational game Papibirint, which encourages them to use their PAPI personal accounts for savings. SKB Banka remains open to all complaints, remarks, proposals and commendations from its clients, with whom it wishes to continue furthering relationships. Commercial Banking SKB Banka s basic guideline is to create quality long-term relationships with its clients, by reaching out to them using a personalised approach combined with products and services specifically tailored to their individual needs. 35 In November, the Bank opened a specialized outlet named Golden point in its headquarters to offer a complete range of financial services to its wealthiest customers. In June 2004, the savings arrangements within the first 5-year National Housing Savings Scheme (NHSS) were concluded. The depositors may take out loans within one year following the end of their savings arrangement under the conditions stipulated in underlying savings agreements. According to surveys carried out by SKB Banka, more than half of the clients included in the NHSS will decide to take out a loan, the majority in the second half of the year. Deposits trends in SIT billion Individuals Corporates In 2004, SKB Banka invested significant effort into adding more value to its individual banking products and their cross-promotion. On the one hand, insurance products were added to certain banking products, and on the other, banking products were marketed together with insurance

36 36 In 2004, the demand for foreign-currency commercial loans of all maturities increased. SKB Banka responded to this by offering favourable products, which pushed its market share in foreign-currency loans up by 0.4% to 9.4%. In 2003, SKB Banka became the sole owner of the company SKB Leasing. Thus, foundations were laid for creating synergies between the Bank and the leasing company. In 2004 SKB Banka and SKB Leasing signed Concluding Finance Lease Agreements, which defined the terms and conditions for the conclusion of finance lease agreements. The aim of this co-operation in the marketing of leasing was to widen the Bank s range of products and comprehensively meet its clients varied needs by offering them a full line of banking and leasing products. Thanks to this joint operation SKB Banka is able to centrally service its existing clients and at the same time gain new business, as the clients of SKB Leasing are taken on board by the Bank and vice versa. Also in 2004, SKB Banka was involved in the tenders of the Small Business Development Fund of the Republic of Slovenia and accepted the offer to participate in favourable crediting of small and medium-sized enterprises. International payments in SIT billion 950 Thanks to active marketing campaigns the total number of transaction accounts held with SKB Banka rose by 1,172 (commercial clients, sole proprietors and others), despite the fact that many inactive transaction accounts were closed towards the end of The market share consequently rose from 9.6% at the end of 2003 to 9.9% at the end of More transaction accounts resulted in a higher volume of sight deposits. In 2004, SKB Banka continued its activities in domestic payment transactions, which subsequently grew by 9.2%. The Bank also encouraged companies to use e-banking for payment transactions. The volume of international payment transactions in 2004 was boosted by almost a quarter compared to SKB Banka, as a part of the Société Générale Group, enjoyed numerous advantages in performing international operations, such as the use of the parent bank's international network of correspondence banks and its SWIFT system, together with the high financial soundness of the parent bank. One of the new products offered by SKB Net are e-salaries, which enable commercial clients to pay salaries to their employees personal accounts via the Internet by making electronic payment transactions. SKB Net also enables its users to buy or sell foreign currencies and access information on exchange rates. In addition, SKB Banka s e- banking products also enable international payment transactions. 850 Treasury In 2004, the Treasury Department of the Bank continued working well according to guidelines set in previous years and realised the Bank's set goals. Timely anticipation of unfavourable business trends (such as the lowering of interest rates, narrowing of interest margin, increasing competition) enabled the Bank to restructure its assets, and by increasing the volume of transactions, achieve the same returns as it did in the previous year In the reporting year, SKB Banka was again present on the market of T-bills issued by the Ministry of Finance. As the authorized primary dealer the Bank reached a 14.9% market share

37 and gained a 14.3% share of the secondary market as the official market maker. Due to heavy demand for T-bills (popular because of their liquid nature) and the consequent rapid fall in interest rates in 2004, they represented a less interesting investment for the Bank. Mainly in the second half of the year, SKB Banka increased its holdings of central bank bills. Given a decrease in interest rates, the activity on the domestic inter-bank money market substantially subsided in 2004 and was mostly limited to deals with maturity of up to one month. The decrease of deposit interest rates is reflected in lower surplus liquidity and consequently in a smaller volume of investments in securities. Currency swaps done with the Central Bank and commercial banks represented a relatively favourable source of funds used for relending, although the interest margin was substantially narrower compared to the previous years. Despite uncertainties caused by the entry into the exchange rate mechanism ERM2, SKB Banka considerably increased its activities on the foreign exchange market. Thanks to its good positioning on the inter-bank market, aggressive approach and trust in its clients, it managed to substantially increase the volume of transactions and returns in all segments of the foreign exchange market. Good market strategy in combination with a good credit rating enabled SKB Banka to do business with the largest world banks and multinationals which are present on the Slovene market. On the derivatives market in 2004, SKB Banka managed to increase both the number of its clients and the volume of trading. As before, forward transactions accounted for the bulk and were still on the upturn. Currency swaps and particularly interest swaps also increased. In view of globally low interest rates, clients mostly decide to swap variable interest rates (LIBOR, EURIBOR) for fixed rates. In this way they hedge their credit exposure against any interest rates increases. Capital markets In 2004, SKB Banka offered its clients brokerage services in buying and selling securities on the domestic market and abroad. It also provided custodian services to residents and non-residents. When trading for its own account the Bank was active on the primary and secondary markets of fixed interest rate T-bills. 37 International payment transactions in 2004 by curency USD SIT GBP CHF EUR Other HRK DKK Otrher currencies Other

38 In terms of the total volume of trading in 2004, SKB Banka was placed ninth among 29 members of the Ljubljana Stock Exchange, whereas considering only lots, it was the fourth largest trader. Moreover, it increased the volume of trading and the number of clients to whom it provides brokerage services on foreign markets. In co-operation with Société Générale CIB from London and Paris, its clients were offered the possibility to invest in equity and debt structured instruments. Once the first deals were concluded, SKB Banka became the number one provider of equity and debt derivative products to institutional investors in Slovenia. Distribution Channels and Murska Sobota, Novo mesto and Krπko, and Nova Gorica and Koper were merged; the Ljubljana - Individuals Branch was divided into two parts: Ljubljana Outskirts - Individuals and Ljubljana Centre - Individuals; in June a new outlet in AjdovπËina was opened; in November, a specialised outlet called "Golden Spot" started operating at the Bank's headquarters, offering comprehensive financial services to affluent clients. In 2004, SKB Banka refurbished the business premises of the Ljubljana Branch, located on the 1 st floor at AjdovπËina 4, and of the Maribor Branch I. Moreover, the BTC City outlet was enlarged. Electronic Banking 38 Branch Network SKB Banka's branch network, which at the end of 2004 counted 56 outlets, underwent a number of changes during the year: SKB Banka was the first Slovene bank to replace tolar and foreign-currency savings accounts (booklets) of individual clients with new, modern and more client-friendly accounts; due to rationalization, the branches of Maribor Number of SKB NET users 30,000 25,000 20,000 In electronic banking, SKB Banka remained one of the leading banks in the Slovene banking industry. In order to make SKB Net even more user-friendly, the Bank widened the range of its electronically available services. SKB Net now offers information on savings accounts as well as National Housing Savings Scheme accounts, and allows users to review account statements or apply for opening a savings account or adding new accounts to SKB Net. Users may execute payments abroad, transfer foreign-currency funds around Slovenia and receive notifications of incoming payments from abroad. Another feature of SKB Net is the ability to keep records of all inflows. Among the services added to SKB Net are: purchases and sales of foreign currencies, access to exchange rate information and information on credit operations of the client, and e-salary transactions (paying salaries and other personal income to commercial clients employees via a PC connected to the Internet). 15,000 10,000 5, In addition to SKB Net, which mainly caters for individuals and smaller companies, SKB Banka provides services to clients via telephone banking, ranging from Zeleni telefon and Bankotel to an automatic answering service quoting foreign exchange rates and the increasingly popular mobile banking service - WAP SKB Net. In 2004, commercial clients mostly used Poslovni SKB Net, but the use of Multi SKB Net was also on the increase. This application is designed for large commercial clients and enables automatic payment transactions by directly connecting a company's

39 IT system with several banks. SKB Net, Poslovni SKB Net and Multi SKB Net are helpful for users who wish to execute payments abroad, since these three applications are IBAN supported, which allows automatic processing of international transactions. The number of clients using e-banking services continues to grow. In 2004, SKB Net users increased by almost 25%. The number of clients using Poslovni SKB Net is on the increase as well, although growth has been slower since commercial clients prefer Multi SKB Net, which last year had almost twice as many users than the year before. WAP SKB Net is becoming ever more popular, having recorded a more than 40% increase in Correspondent banking In order to streamline its operations and reduce operating expenses, SKB Banka in 2004 proposed to over 200 foreign banks to cancel correspondence relations, since in the last few years no business was done. The majority of these Financial result banks accepted the proposal. In addition, relations with other banks were severed because they asked for it or due to closure of business, mergers or acquisitions. As a result, SKB Banka reduced the number of correspondence relations by 205, so that at the end of 2004 it maintained a total of 1,131 relations with banks all over the globe. In 2004, a new method of directing payment orders to EU payees was adopted through the STEP 2 European payment system. SKB Banka is indirectly involved in this system through the Société Générale bank in Paris. Payments exceeding EUR 12,500 destined to payees in Germany were redirected to Société Générale Frankfurt. A considerably larger percentage of payment orders to payees in the United States of America went through Société Générale New York. As a consequence, SKB Banka rationalised the number of nostro accounts in EU Member States and the USA. Upon the request of foreign banks, it closed some loro accounts due to small volumes of business. 39 in million of tolars Index Net interest income 11,513 12, Net fee and commission income 5,431 4, Dividend income and gain on sale of associates Net gains from securities Net trading income Other operating income 302 1, Operating income 18,559 18, Payroll and other staff costs (6,393) (6,576) 97 Administrative expenses (5,280) (4,919) 107 Depreciation and amortization (2,372) (2,533) 94 Bad and doubtful debts expense 1,545 (220) (702) Profit before tax 6,059 3, In 2004, the financial results of the Slovene banking sector, including SKB Banka, were marked by lower interest income, as negative trends in interest rates on both deposits and loans continued. The reported results of SKB Banka for 2004 were in line with expectations. The Bank made profit before tax of SIT 6,058.7 million, more than 50% higher compared to the year Increased commercial activity, new products and other measures introduced during the year compensated for negative market developments in interest margin. Operating income was also positively affected due to 17% higher net fee and commission income.

40 Non-interest income in 2004 Other 15% International payments 29% Guarantees 6% Counter operations 5% Domestic payments 19% Cards 19% FX trading 7% 40 The declining trend in interest rates, which was also typical of previous years, lowered the interest income of SKB Banka. Increased bank lending could not fully compensate for the loss of income, which resulted from negative effects of lower interest rates on loans. At the same time, the share of foreign-currency loans with lower interest margins in the credit portfolio rose, which had an additional negative impact on interest income. With a simultaneous decrease in the volume of deposits and a fall in interest rates on deposit, interest expenses dropped, but less than interest income. Card operation's income had a significant impact on increasing net fees and commissions. In line with the Bank s business policy, great attention was devoted to transaction accounts in all segments involving payment transactions, i. e. individual and commercial clients and sole proprietors. In this way income from payment transactions and account maintenance considerably improved. Stronger lending was reflected in more than 50% higher income from loans to individual clients. by 7%, mostly due to higher marketing expenses that resulted from increased commercial activity and higher intellectual services. Also, in the future SKB Banka will continue to carefully monitor its expenses. Due to tax inspection in the year 2003, provisions for tax losses carried forward in the amount of SIT 2,964.3 million have been made. After receipt of the tax decree, the Bank has adjusted the provisions made according to the decree of Tax Administration of the Republic of Slovenia (DURS), and provisions in the amount of SIT 1,904.4 million have been reversed. So in 2004, SKB Banka recorded net profit amounting to SIT 7,422.5 million. In 2004, SKB Banka continued pursuing its cost-cutting policy. Admittedly, total overhead expenses remained at the level of Payroll and depreciation costs were lower than the year before, while costs of material and services rose

41 Financial position of the bank in million of tolars Index ASSETS 390, , Trading securities 6,802 5, CB and due from other banks, net 48,885 51, Loans and advances to customers, net 216, , Securities available for sale 54,709 77, Securities held to maturity 35,855 43, Investments in subsidiaries 2,447 3, Other 25,045 24, LIABILITIES 390, , Due to other banks 1,925 3, Due to customers 254, , Debt securities issued 5,269 5, Other borrowed funds 74,169 62, Other 11,224 12, TOTAL SHAREHOLDER'S EQUITY 42,829 35, At the end of 2004, total assets stood at SIT billion, meaning that they remained at the 2003 level. In terms of structure, total foreign currency assets increased, whereas on the other hand total assets in tolars and denominated in foreign currencies decreased. The share of operations with foreign currency clauses has been gradually decreasing, as no products with foreign currency clauses have been available since the middle of SKB Banka's market share in terms of total assets reached 6.9% by the end of Intensified commercial services in 2004 resulted in stronger lending, and by year-end the volume of loans rose by 15%. Foreign-currency loans grew by more than 50% compared to the end of 2003, mostly those granted to commercial clients. The foreign-currency loans offered by SKB Banka as a novelty to its individual clients were well accepted. However, a greater demand for tolar loans persisted among individual clients. These rose almost by a quarter, whilst tolar loans to commercial clients declined by one fifth. In terms of maturity, both short and long-term loans to individual and commercial clients increased. Short-term loans grew by almost one fifth and long-term loans by 13%. In 2004, falling interest rates and the growing competitiveness of Slovene banks resulted in a lower volume of commercials deposits. This reduction was partly compensated by a larger amount of deposits by individuals. Nevertheless, total deposits held with SKB Banka fell by 7%. In terms of maturity structure, sight deposits by both individual and commercial clients grew by more than 20%, whereas time deposits (mostly by commercial clients) fell. Individuals made more tolar and foreign-currency deposits, while less commercial deposits were mainly due to tolar deposit decreases. In terms of currency structure, foreign-currency deposits rose in SKB Banka compensated for a lower volume of long-term deposits by favourable funding from its parent bank, Société Générale. Changes of individual items in comparison with the previous period: Assets: increase of cash and balance on accounts held with the central bank was due to the higher overnight deposits on the account held with the Bank of Slovenia; decrease in loans to banks in 2004 foreigncurrency deposits with foreign banks were reduced; increase in the crediting of non-bank clients decrease in short-term securities available for sale, in particular 270-day BoS bills matured in the third quarter of the year; decrease of securities held to maturity due to the decrease of T-bills. 41

42 Liabilities: more long-term foreign-currency loans raised from the parent bank for the purpose of providing the adequate level of prescribed foreign-exchange minimum and increasing lending activities; increase in sight deposits and decrease in time deposits. Shareholder s equity: increase in reserves. SKB Banka managed its assets and liabilities so as to ensure their currency and maturity matching as well as minimizing liquidity, currency and interest rate risks. Risk exposure Credit risks Risk approval The approval of a credit risk is based on the knowledge of the client, the bank's risk strategy, the purpose, nature and structure of the transaction and the sources of repayment; also entering into consideration are the return on the transaction compared to the probability of default and the risk of loss in case of default. The risk approval process is based on the principle that all types of loans or transactions which lead to a counterparty risk must be authorized in advance, based on adequate documentation and assessment of the nature and the size of the risk on the client and related parties. 42 The Bank has an organization and an approach to risk management which are in line with the principles implemented in Société Générale group. The Risk division assesses and controls credit risk, market risks and operational risk, monitors the credit portfolio and manages the recovery of bad debts; it acts independently from the bank's commercial activity and reports directly to the Management Board and to the risk departments in Société Générale. Risk control In addition to the day-to-day management of risks performed by the officers in charge of the relations with clients, a second level of control is performed by the risk division which periodically exercises controls at regular intervals to ensure that the consolidated exposures by counterparties are within the corresponding authorizations. Commitments with clients whose situations are deteriorating are subject to a special follow up; they Assests structure by client segments Others 10,9% Foreign entities 10,6% Corporates 39,9% Individuals and sole proprietors 14,7% Banks and financial organizations 23,9%

43 are reported on a watch list and closely monitored jointly by the commercial and risk divisions. Risk measurement The Bank adapted several risk measurements tools used in the Société Générale group. The RAROC methodology (Risk Adjusted Return on Capital) assesses expected losses on a loan according to a model using quantitative financial data and a qualitative assessment adapted to Slovenian economic conditions. To measure the replacement risk of derivatives products with customers (interest rate derivatives, FX derivatives, bond derivatives, optional products, etc.) the Bank uses a new methodology. The replacement risk is the measurement of the cost the Bank would support in case a counterparty could not fulfill its commitment on a derivative product; in such a case, the Bank would have to find a new counterparty on the market, and with the market evolving daily, the Bank could support a loss. The replacement value in Société Générale is measured daily via the mark-to-market. Till 2003, Société Générale and SKB were working with an average value of the replacement risk. In order to comply with the US Federal Reserve regulations, Société Générale since 2004 reports peak exposures against limits (and not the average exposure). This new measure, the Credit VaR International, measures the peak exposure with a confidence level of 99% in a Monte-Carlo simulation. Fully in line with Société Générale s standards, SKB is monitoring its replacement risk exposure on a daily basis via the Credit VaR 99% that was implemented in December Portfolio analysis At the end of December 2004 the gross credit portfolio amounted to SIT 498 billion, which represents an increase of less than 1% in comparison with December During this period the quality of assets improved, as performing assets represented 85.9% of the portfolio, compared with 83.7% in the year This quality improvement is also reflected in the decrease of the provision requirement: as at 31 December 2004 the share of provisions and suspended interests in relation to the gross credit portfolio was 11.8%, compared to 12.4% at the end of The structure by type of clients (without exposure to the Bank of Slovenia) shows that the main shares of the portfolio are the credits to private local corporates (55.8%) and to the public sector (14.7%), with a growing share for individuals (20.6%). Liquidity risk, interest rate risk, foreign exchange risk and ALM For the purpose of managing the liquidity risk, the Bank regularly monitors future operative cash flows (daily, weekly, monthly). Globally, liquidity is monitored through regular calculations and analyses of liquidity mismatches in the balance sheet, as well as analyses and plans of complying with regulatory constraints (liquidity ratios, compulsory reserves), which are all discussed on quarterly basis in the Assets Liabilities Committee. The liquidity is satisfactorily insured by an adequate envelope of long term lines and loans from the parent bank Société Générale Paris. The Bank has fully complied with all regulatory requirements related to liquidity in the year Liquidity and solvency According to the Bank s written policy of monitoring liquidity and solvency, in addition to operative plans, the global liquidity of the Bank is monitored and managed through annual business plans which are incorporated within the banking group and also include the level of refinancing with the parent bank Société Générale Paris. On a quarterly basis, the Bank monitors structural liquidity through the analysis of the balance sheet evolution as well as plans for compliance with regulatory constraints. For the purpose of monitoring economic liquidity, the Bank performs analyses on the stability of demand deposits and liquidity profiles of other items in the balance sheet with no contractual maturity. The Bank complied with all regulatory constraints related to liquidity in As at 31 December 2004 the liquidity ratio for Class I (remaining maturity up 43

44 to 30 days) was at 1.08, while the ratio for Class II (remaining maturity up to 180 days) was at The mandatory minimum level for both classes is 1.0. Throughout the year 2004 the Bank has been maintaining high levels of liquidity reserves invested in tolar securities issued by the domestic government and central bank. The portfolio of investment tolar securities issued by the Republic of Slovenia and the Bank of Slovenia as at 31 December 2004 represented 22% of total tolar assets. no contractual maturity. The interest rate gaps represent a mismatching of the volume of assets and liability to be reinvested or refinanced during a certain time interval. On the basis of interest rate gaps, the interest rate sensitivity is calculated as the net present value of future cash flows. In the banking group Société Générale, the level of interest rate sensitivity is limited. The aim of Assets Liability Management of the Bank is to approach zero sensitivity. 44 Interest rate risk The interest rate risk monitoring is subdivided into two delimitated and clear parts: Market Interest Rate Risk: The interest rate risk arising from trading activities is monitored daily by Market Risks via a panel of tools which include VaR 99%, stress-test and sensitivity limits. Structural Interest Rate Risk: Structural interest rate risk is the risk of interest rate mismatches in the balance sheet, which determine the level of the sensitivity of the Bank to changes in the general level of interest rates in the banking environment. Interest rate gaps are calculated by time intervals on the basis of first reprising dates for all items in the balance sheet, separately by currency. For the purpose of managing interest rate gaps, the Bank performs analyses of demand deposit profiles as well as other items with In 2004 the Bank actively managed interest rate sensitivity. In order to hold the interest rate risk of its Balance Sheet at an optimal level, the Bank adequately hedged its positions with long term sovereign bonds as well as interest rate swaps. Foreign exchange risk The Bank's foreign exchange risk that arises from its global open position is monitored daily by the Treasury Department within the market limits implemented by the market risk unit. All FX positions arising in the Bank or subsidiaries are transferred to the Treasury Department, which must comply on an intraday and on an end-of-day basis with the following limits: FX nominal limits by open position; FX VaR limit; FX stress test limits. Business of SKB Bank by teritory in 2004 European Union 10,11% Other 0,27% Republics of former Yugoslavia 0,27% Slovenia 89,36%

45 Market risks Organization The Risk Division includes a dedicated unit in charge of market risks. Fully independent from the Front Office, and acting in compliance with Société Générale s standards, it is responsible for: Daily monitoring of the exposures and risks incurred by SKB s market activities and followingup of daily exposure versus a various set of limits. Implementing the SG group methodologies for assessing and managing market risks (market risk parameter and market risk parameter definitions); Daily reporting of local market risk parameters to SG Group via centralized database systems; Defining and implementing limits within the Bank; Defining proper indicators, tools for market risk valuation, and risk factors; Daily management of various market risk software tools. Daily monitoring Within Market Risk, daily activities include: Monitoring of the FX Position; Monitoring of Interest Rates positions (transformation position) taken through various instruments such as treasury bills and treasury bonds, FX and Interest Rate derivatives, optional products and money market items; Monitoring of Risk Indicators and of profitability. Methods for measuring market risks and defining exposure limits The VaR 99% is a composite indicator for dayto-day monitoring of market risks incurred by the Bank, especially on trading activities. The VaR is defined as the worst loss that might be expected from holding a portfolio over a single day, given a 99% level of probability (known as the confidence level ). The method used in SKB, in compliance with Société Générale s standards, is the historical simulation. The 99% Value at Risk method has been approved for regulatory requirement calculation by the French Banking Commission. SKB s FX VaR 99% has been integrated within the consolidated Société Générale's FX VaR parameter since SKB s Interest Rate and Global VaR 99% (Global VaR 99% is an aggregate of Interest Rate VaR and of FX VaR, where correlations between Interest Rate and FX markets are taken into account) will be integrated within the consolidated Société Générale Interest Rate VaR parameter as per January Alongside the internal VaR model, SKB Banka monitors its exposure using the stress-test method in order to take exceptional market occurrences into account. Based upon the decennial shock indicator developed by SG, the stress-test method allows for estimating the Bank s exposure to systemic and exceptional market shocks. In addition to VaR and the stress-test, complementary limits such as nominal amounts, holding periods and sensitivity limits are in place. Developed within the Bank according to local market evolution, they provide, when combined with VaR 99%, an exhaustive market risk approach. In 2004 Market Risk implemented: sensitivity limits (shock upward 10 basis points) on all trading interest rate positions; internal FX stress-testing to meet the framework of ERM2; risk / reward analysis (i.e. profitability compared to risk). Operational risks Principles Operational risk is defined as the risk of losses resulting from unsuitable or failed procedures, persons or systems, or caused by external events. This risk class includes general operational risks linked, for example, to security and IT issues, as well as risks that are more specifically associated with banking activities and which do not fall within credit risks, market risks or structural risks. Operational risk assessment and management The management of operational risk is based on an effective control system and on the principle of assigning full responsibility to the operating divisions for their risks. SKB has implemented a system of permanent supervision; this is the first level of control in all departments and branches consisting of up-to-date security and formalized supervision. In 2004, the Bank has introduced an Operational Risk Committee, where issues related to operational risks are discussed. 45

46 Expressed in EUR 20,000 SKB s FX VaR 99% (absolute value), 1 day, EUR as pivot currency 15,000 10,000 5, The Bank has implemented an information system for operational losses in line with the principles outlined in recommendations produced by the Basel Committee. Value adjustments and provisions Provisions for credit and country risk are established in line with the Resolution of the Bank of Slovenia on the classification of asset balance sheet and off-balance sheet items of banks and saving banks, with the Resolution on the establishment of specific provisions of banks and savings banks, and with internal Criteria for the classification of the Bank s investments, by considering both the objective criteria (time delay in settling of contractual obligations) and subjective criteria (assessment of the financial position of the borrower, cash flow projections, and type of collateral). Investments are classified in categories from A to E. For investments classified in category B, provisions amounting to 10% of the balance of the principal are established. For investments classified in the category C, 25%; for investments classified in the category D, 50%; and 100% of provisions for investments classified in the category E. For investments classified in the categories C, D and E, all calculated interest, fees and other claims prior to the payment are temporarily registered as short-term deferred income (suspended income) and are maintained in line with the Resolution on the classification of asset balance sheet and off-balance sheet items of banks and saving banks in the assets of the balance sheet. Additionally, for investments classified in the category B due to mortgage collateral, the Bank suspends from income the interest, fees and other claims on a monthly basis. After the takeover of SKB Banka by Société Générale, the transformation table for the comparison of credit risk assessment was elaborated, which is based on the regulation of the Bank of Slovenia and the credit risk assessment policy in the Société Générale Group. Country risk provisions are established on the basis of the Resolution of the Bank of Slovenia. Information for Shareholders Share capital The share capital of the Bank amounts to SIT 12,649,200,000, and is divided into 12,649,200 regular shares. The nominal value of a share is SIT 1,000, and shares are indivisible. Shares are registered shares and are issued in dematerialised form. Shareholders are entitled to participate in the management of the company as well as in profit distribution, and to receive an adequate share of remaining assets in the event of a cessation of the company. Shares are recorded in the share register in line with regulations. The central records are kept with the KDD - Central

47 Clearing and Depository Company d.d. in Ljubljana, which carries out all procedures of share transfer in line with the law. The share capital of the Bank and the number of the shares remained unchanged in 2004, but the structure of shareholders changed. The bank Société Générale is a majority shareholder with 97.43% stake in the Bank, while Société Générale Group as at 31 December 2004 held a 99.58% ownership stake. Due to a low ownership stake of minority shareholders in share capital, the turnover of SKB Banka shares on the Ljubljana Stock Exchange was so low that at the 14 th Shareholders Meeting at 20 June 2002, the shareholders adopted a resolution on the delisting of shares from the organised market. On 27 June 2002, the Ljubljana Stock Exchange excluded SKB Banka s shares from stock exchange trading. In line with regulations, the Bank offered to purchase the shares of those shareholders that objected to the adoption of this resolution. The price of SIT 2, per share according to Slovenian accounting standards was offered, based on the last audited book value of The biggest shareholders Ten biggest shareholders as at 31 December 2004: the share as at 31 December In December 2002, SKB Banka, together with its majority shareholder, Société Générale, offered a final opportunity to minority shareholders to sell their shares. The offered price per share was equal to the price offered at the delisting of shares from the organised market. The offer was accepted by most minority shareholders, thus, after the completion of the transaction, the share of minority shareholders decreased to 0.42% of the Bank s capital. As at 31 December 2004, there were 159 shareholders registered in the share register, consisting of: 8 foreign shareholders with a 99.66% total share of the Bank s capital, 123 individual investors - domestic individuals with 0.05% total share, 28 domestic corporates with 0.06% total share, and the balance of unexchanged priority shares represents 0.23 % total share of the Bank s capital. On 31 December 2004 the Bank had no treasury stock. 47 Ser.No. Shareholder Number of shares Stake in share capital (%) 1. Société Générale S.A., Paris 12,324, Genefinance S.A., Paris 271, Erste Bank der Oesterreichiche Sparkasse A.G., Vienna 7, Basler Emanuel, Burghausen 2, EGP Elektrotehniπko podjetje, Grosuplje 2, Burja Ignac, Domæale 1, Kmetijski inπtitut Slovenije, Ljubljana Turboinπtitut d.d. Ljubljana Pozavarovalnica Sava d.d., Ljubljana Bank Austria Aktiengesellshaft, Wien Capital structure of the Bank in thousands of tolars Ordinary shares 12,649,200 12,649,200 Share premium 18,145,923 18,145,923 Reserves 10,618,850 2,916,717 Retained earnings 1,415,452 1,415,452 Total 42,829,425 35,127,292 Number of shares 12,649,200 12,649,200 Book value per share (in tolars) 3,386 2,777

48 48 SKB Banka's Internal Development Human resources As at 31 December 2004, SKB Banka employed 972 people. Compared to 2003, the number of employees dropped by 52 (in 2003 it fell by 28 and in 2002 by 60, compared to the previous year) which reflects a continuous streamlining and adaptation of the number of employees to current needs. The Bank uses organisational, technological and other measures to reduce the need for human resources despite the fact that the actual volume of operations grows. The Bank does not reduce the number of employees in its sales and branch network but merely in the backoffices at the Bank s headquarters. The share of employees in the network compared to total number of employees thus increased from 46% to 47.8%. Accordingly, the average number of employees calculated on the basis of working hours dropped: in 2004, the average number of employees was or 3% less than in The structural change in terms of gender was minimum: 72.7% of all employees were women and their share dropped by 0.3% in The average age of employees was 39.9 and the age classes between 26 and 50 years were quite homogenous. There were 18 employees older than 55 years and 21 employees younger than 26 years. There were no significant changes in the formal education structure of employees: most of them have a secondary education, i.e. level V (57%, vs. 56% in the previous year); the share of employees with lower levels of education was further reduced (from 6.3% to 6%), while 37% of employees have higher education (level VI or more). In 2004, the volume of maternity leaves fell considerably (from 3.12% to 2.58%) and so did the volume of sick leaves exceeding 30 days (from 1.49% to 1.12%). Average gross salary of employees employed under collective agreement was SIT 342,804 in 2004, which is 6.7% more than the year before. Salary growth was adapted to inflation in line with the Collective Agreement for the Activity of Banks and Savings Banks; additionally, the share of salary based on employee performance was also increased. In 2004 the Bank s employees were able to participate in the Société Générale Programme for the first time; in the scope of this programme, SKB employees are offered shares of Société Générale at a reduced price, with the Bank contributing a certain amount in such purchases. This ownership programme strengthens the managing role of employees and their long-term interest in the Bank s operating results. The human resources policy pursued two main goals last year: a further reduction of the number of employees and improvements in their quality. The Bank sought to reduce the number of employees as smoothly as possible and reach agreements with the employees. One of the instruments used was an internal offer to terminate the employment relationship whereby employees are entitled to adequate severance pay. As the education structure is appropriate, there is no need for investments in its formal improvement but rather in various types of training that improves the employees skills and abilities to perform the tasks assigned to them as well as stimulate their personal development within the scope of the Bank. In 2004, the Bank, among other measures, trained its executive and managerial staff for conducting annual interviews of their colleagues aimed at improving the quality of communication in aligning the Bank s and the individuals goals. The Bank s Career Development Committee is constantly discussing and trying to define individual careers of certain bank employees. More than 80% of employees participated in at least one training; the volume of hours of such training courses was increased by 35% so that the current average is 36 hours per employee. The Bank invested over SIT 75 million in direct training of its employees. They showed the greatest interest in training for sales of bank products and services, in which more than 800 employees participated. They were trained in the sales of credit, savings, card, insurance, leasing and other products. A total of 160 participants broadened and deepened their knowledge in the use of new banking technologies for the audit of credit risks and loan granting. In line with current global developments, the Bank continued training its employees for the prevention of money laundering and the financing of terrorism as well as training on how to behave and react in the event of robbery. Communication skills were

49 primarily acquired by the employees working in call centres. Besides the training for conducting annual interviews, the training in the field of management skills was focused on project managers. Over 150 employees also participated in various language courses; the total number of hours was 3,500. A total of 28 employees studied part-time and five concluded part-time study contracts in The Bank s employees also participated in seminars organised by Société Générale, either covering more general topics or specialised in individual areas of operations. In the field of health protection and the statement of health and safety at work, the Bank organised 120 periodic preventive physical examinations. It employed 24 disabled persons. The Bank has ten holiday facilities which are used by its employees for vacation and recreation purposes. The number of facilities was reduced with the aim of improving their occupancy. In 2004, a total of 2022 overnight stays were recorded or 22% more per individual facility compared to The Bank has a sports club that organises recreational events and participation in various competitions. The Bank also maintains good relationships with its retired employees in the pensioners society. The Information and Banking Technology (IBT) Department employs 67 people in five different areas of responsibility: Project management, alignment and analysis of user requirements, and preparation of detailed specifications for the development of computer equipment; Software development and maintenance; System and network administration; Management of work stations and Help Desks; Data centre and production. The IBT is also responsible for ensuring quality in the field of information technology, information security, database management and software administration. Electronic Banking (EB) has 15 employees in two areas: Support to electronic banking services (management of EB projects, analyses, alignment and preparation of specifications for the development, testing and drafting of instructions for the use of EB); Help Desk (in charge of telephone support and communication via electronic mail, back-office processing and management of applications for the use of services, such as logins, logouts, assignment of recognition elements, etc.). 49 In 2004, negotiations were held at the banking level between the employers and the trade union, resulting in the adoption of a new collective agreement for the banking sector. Preparations were started for the adoption of a company specific collective agreement that will regulate certain specific aspects of life and work in SKB Banka. The Bank is aware of the importance of social partnership and therefore regularly maintains positive relations with the Trade Union of SKB Banka, which represents the employees interests. Information support Organisation Information support in SKB Banka is organised within the General Means & Services Division and includes The Information and Banking Technology Department and the Business Support to Distribution Channels Department, which includes the functional areas of Electronic Banking and Card Banking. Card Banking (CB) has 9 employees. It is in charge of card and ATM operations (co-operation in projects, co-ordination between the Bank and the processing centres, co-ordination with Visa and MasterCard systems, drafting of instructions for branches, distribution of cards, alignment of ATM balances, bookkeeping support and control of ATM operations). Information system In 2004, SKB Banka focused on implementing the migration of products that are still managed in the old applications into the new SKBS information system. Most of retail and corporate credits and deposits (except for retail loans with currency clauses), savings in the scope of the National Housing Saving Schemes (NHSS) and saving deposits by retail clients were transferred to the new information system; simultaneously with the migration, the Bank eliminated the retail savings book product, which was replaced by a new product client savings accounts.

50 50 Besides the migration projects, the Bank carried out numerous other projects and activities in the area of information support in 2004, namely: upgrading of software for the support of court execution for the Bank s clients, software solutions for the new tax legislation in force as of 1 January 2005, compiling of various new reports for the needs of SKB and the Bank of Slovenia, and improvement and modernisation of products in the new information system. We resolved 331 user requirements for software development (New Requests), 586 user requirements for assistance and resolution of errors (System Incident Reports) and 309 requirements for interventions in production data (DATA Requests). In 2004, SKB introduced the services of electronic banking (SKB NET, POSLOVNI (business) SKB NET, MULTI SKB NET) for corporate clients, sole proprietors and retail clients. The payments are executed through electronic channels and processed in real time; moreover, the system enables other information and orders, including advance payment orders. New functionalities were added: payments abroad, e-salaries, new information and queries and similar. SKB Banka also started implementing electronic signature. At the end of 2004, a total of 5,811 corporate clients, 4,635 sole proprietors and 29,438 retail clients used electronic banking channels. A total of 5,317,000 transactions were performed by clients through electronic channels last year. Information infrastructure The Bank s infrastructure is a modern and comprehensive mixture of client/server technology, Oracle database, Symbols package (SKBS), work stations with Windows, electronic banking, a communication network all over Slovenia and connections with the Société Générale Group's communication network. The basis for SKBS is a client/server environment which consists of work stations with Windows (user support), Windows servers (application support) and UNIX server (Oracle database support). We have also introduced a very complex parallel/stand-by environment which enables the duplication of the SKBS database from the original server to the stand-by server. This function can also be used as a backup copy of data in cases of emergency. So far, this has not been necessary as the basic system is very reliable. There are almost 1000 work station on the users side (mostly HP and IBM) with a standard Windows environment, MS Office and Outlook. All of these are connected to the common network which is integrally managed by the IBT. Last but not least, state-of-the-art software support for the Help Desk was introduced for recording and monitoring messages, as well as the Change Management and Version Control Management system (PVCS), which enables better control and improvement in quality of information services. Organization In 2004, the Bank has reinforced its marketing organization by creating a dedicated direction within the commercial division. The Client Portfolio Management activity is being terminated. In replacement of this activity, SKB intends to promote Société Générale AM investment funds in order to take advantage of the high know-how in Asset Management activity developed in the SG Group. Within the regional branch network, the branches of Novo Mesto and Krπko on one side and the branches of Nova Gorica and Koper on the other side have been merged, with a view to leverage regional synergies. On the 21 st of June, SKB also opened an outlet in AjdovπËina. In parallel, the consolidation of similar activities at the head-office is being pushed forward, such as may be seen in the grouping together of court executions teams. Material Investments The Bank has spent 300 million tolars in 2004 for investments in its network. The funds were used for the adaptation of premises at the Ljubljana branch located at AjdovπËina 4, for acquiring and setting up a new outlet in the city of AjdovπËina, for renovation of the Maribor outlet, and for enlargement of the outlet at BTC City. The funds were also partly used to finish last year's fittings and on projects involving investments which will take place in For the purchase of furniture, technical and security equipment, the Bank spent 118 million tolars in Funds were spent mainly for new access control in the main office building at AjdovπËina 4 and for video surveillance within branch outlets.

51 Integration of SKB Banka in the Environment SKB Banka is aware of the fact that like any other company it is strongly integrated into the wider social and cultural environment, and its success is measured in terms of the success of the environment in which it operates. Our concern and responsibility for people and the environment we live in are among the fundamental values of SKB Banka, which is why the Bank cannot ignore what is happening around it. One way that SKB Banka demonstrates its philosophy of harmonisation with nature is by directly donating a portion of its income to various cultural activities. It tries to promote good interpersonal relationships within a healthy and positive environment, and to this end it does its best to support individual organisations and people who share the same values. Also, as part of the Société Générale Group, SKB Banka continues to be closely integrated with the Slovene social environment, as proven by many forms of donations to cultural, sports, and philanthropic organisations and their activities. Culture SKB Banka is certain that social progress can be measured through culture, and therefore supports cultural organisations and individual artists. The Bank has been sponsoring the Ljubljana Summer Festival for many years. Over the last five decades this international festival has hosted numerous top musicians who have impressed audiences with picturesque concert scenes in the historical centre of Ljubljana, a perfect setting for listening to music under a starry sky. SKB Banka is also the sponsor of Maribor's Lent Festival, which has for a number of years been held in June and July, attracting over 500,000 visitors hungry for culture and entertainment. Moreover, in 2004 SKB Banka sponsored the premiere of Aida, Guiseppe Verdi's glorious opera filled with unforgettable arias, telling a story from ancient Egypt. SKB Banka is also actively involved in numerous small-scale cultural events, which are, however, of great importance for local communities. Philanthropy Since the very beginning SKB Banka has financially contributed to education, health care and socially deprived individuals and groups to the best of its abilities. Through donations and sponsorships the Bank enables seminars, conferences and meetings of experts in various fields. It co-operates with faculties, universities, and secondary and primary schools in educational projects as well as social events, being fully aware of how importantly these two aspects are intertwined. The Bank believes that for every society, knowledge represents an asset and a basis for development. Special attention is paid to financial support for health care, since SKB Banka feels responsible for helping socially deprived individuals to recover from personal tragedies. The Bank donates considerable 51

52 52 funds to health care organisations for the purchase of expensive medical equipment and for the renovation of hospital premises. It co-operates with organisations active in disease prevention and promotion of healthier lifestyles. One such organisation is Europa Donna, the Slovene Association for Fighting Breast Cancer, with which SKB Banka has been co-operating for many years. In 2004 SKB Banka helped in their fundraising campaign to purchase a Mammotome device for early detection of breast cancer. In addition, SKB Banka helps families which have found themselves in financial straits due to adverse circumstances. It helps them return towards a normal and quality life. Last year, SKB Banka and Société Générale Belgrade jointly donated funds to the institution SKUPAJ for helping children from South Eastern Europe who are suffering from consequences imposed by war. The objective of their joint donation to SKUPAJ was to support the institution's activities, such as training teachers in helping such children, carrying out programs of psycho-social aid aimed at improving their mental health and quality of life, as well as giving support to institutions for the protection of the children's mental health. Sports SKB Banka is a great advocate of healthy lifestyles. It believes in the proverb a sound mind in a sound body, since a healthy society is a prerequisite for normal functioning of the wider environment, including individuals and organisations within it. Within the scope of its efforts devoted to healthy lifestyles, SKB Banka supports recreational and top sporting events, organisations and athletes. The Bank is aware that sportsmen and sportswomen contribute much to Slovenia's image and reputation. SKB Banka is proud to be the main sponsor of the Slovene Olympic teams for the 11 th year in a row. Last year the Slovene Olympic teams delighted us with four Olympic medals at the XXVIII Olympic Games in Athens. SKB Banka takes great pride in contributing to such excellent results at the most prominent competitions. The Bank also sponsors the most successful Slovene basketball team, Union Olimpija. Thanks in part to SKB's contribution, the team was again successful in the highly prestigious European Club Championship and delighted fans with its fighting spirit and numerous victories. SKB Banka is also a member of the Sponsor Club Foundation within the Olympic Committee of Slovenia. It sponsors young, promising sportsmen and sportswomen who are good students and also come from socially deprived families. Without these donations, they would not be able to continue their successful sports careers. Thus, in 2004 SKB Banka renewed sponsorship contracts with Suzana MladenoviÊ and Andrej Cimperπek, two extremely promising young athletes, with the hope that it will pave their way to success.

53 Subsidiary Companies and their Operations in 2004 As at 31 st of December, the SKB Group consists of SKB Banka as the parent company, and its subsidiaries SKB Leasing and Plasis, which are fully consolidated. SKB Leasing 1. Company Profile Address: Slovenska cesta 54, 1000 Ljubljana Management Board: Borut VujËiË Director Bruno Plazanet Deputy Director President of the Supervisory Board: Bernard Koenig Activity: Financial and operational leasing Interest of SKB Banka: 100% Face value of SKB Banka s interest: SIT 353,955,886 Lines of Business: The two most important lines of SKB Leasing are financial and operational leasing. This includes the leasing of cars and other vehicles and equipment, agricultural machinery and equipment, construction machinery, computer and other equipment, and real estate leasing. 2. Operations of SKB Leasing in 2004 Market Activities The sales of SKB Leasing in 2004 reached SIT 17.2 billion, which represents a 50% rate of growth compared to Its market share grew from 4.8% to 6.6%, placing SKB Leasing among the first five leasing companies in Slovenia. Internal Development In 2004, the company was organisationally restructured. New heads were appointed in the Back Office Department, the Financial and Accounting Department, and the Novo mesto and Koper branches. 3. Business strategy in 2005 Market strategy The company plans to earn SIT 19.2 billion in sales in 2005, of which SIT 4.8 billion are expected from synergetic cooperation with SKB Banka. In 2005, SKB Leasing intends to increase its market share by 1.4 percentage points to 8% and thus become the market leader in the leasing of equipment and vehicles. In the same year, marketing activities will be aimed at expanding co-operation with Peugeot Slovenia and attracting new strategic partners. Internal Organisation Changes The planned organisational changes for 2005 are aimed at optimising commercial and backoffice procedures. The goal of this reorganisation is to enhance the quality of services, improve management of business risks and rectify weaknesses in the operation of the company. For 2005, SKB Leasing plans no new staff recruitment. Other Important Information In view of the amended tax legislation, particularly regarding corporate income tax, attention should be paid to the problem of thin capitalisation, which all leasing companies have to face. In the case that tax legislation is not appropriately amended during 2005, this will harm the markets of leasing and similar financial services. 53 Market share Number of employees Number of outlets % % 31 4

54 PLASIS, druæba za plaëilne sisteme d.o.o. 1. Company Profile 2. Operations of PLASIS in Address: Slovenska 56, 1000 Ljubljana Management Board: Patrick Debaene President of the Management Board Samo avs Member of the Management Board President of the Supervisory Board: Damien Jamet Activity: Card processing operations Interest of SKB Banka: 100% Face value of SKB Banka s interest: SIT 80,000,000 Lines of Business: The company Plasis (hereafter: the Company) is an international processing centre, which carries out card processing operations not only for SKB Banka, but also for the Société Générale Yugoslav Bank (SGYB) in Belgrade (Serbia and Montenegro) and the Société Générale Expressbank (SGEB) in Varna (Bulgaria). The Company processes Visa and Mastercard card transactions for SKB Banka (exclusive of ATM operations). In Bulgaria and the Republic of Serbia and Montenegro the Company processes Visa cards, and in the latter country also manages and supervises the ATM network of SGYB. In Slovenia, the Company also enables the exchange of data on card transactions for other card products like Karanta, Maestro, Ba, and Aktiva on the network of POS terminals as well as prepares data for exchange between domestic and foreign banks. In the name and on behalf of SKB Banka, the Company also keeps accounting records on the above-mentioned card products. Besides day-to-day processing, in 2004 the Company also successfully concluded a number of projects in line with the requirements made by the abovementioned banks. Regarding development, it focused on the introduction of chip cards to Slovenia, which is expected to be completed in February In the middle of last year and on the request of SGYB, the Company enabled the use of MasterCard and Maestro cards on the existing POS terminals in addition to Visa card products, which improved the competitive edge of SGYB as far as the acceptance of payment cards is concerned. The Company also successfully completed the project of providing support in the replacement of outdated POS technology without PIN support at more than 1,000 locations. This considerably added to the safety of card use. In 2004, the Company started transferring personalisation activities to the company Oberthur in Hungary, which the three banks selected as their new partner in this business. 3. Business strategy in 2005 offer all types of card transaction services to all member banks of the Société Générale Group, rigorously implement all requirements and recommendations given by the international card systems MasterCard and Visa International, transfer certain services the Company provides only to SKB Banka to SKB Banka itself, and actively participate in the global business of Société Générale card transactions. Market share Number of employees Number of outlets 2004 no data no data 54 -

55 SKB Banka Organisation Chart Management Board Human Resources Audit & Internal Control Communication & Market Survey Finance Risk Commercial Management Banking Operations & Business Support General Means & Services Controlling Asset & Liabilities Management Corporate & Individual Loans Bad Debts Collection & Prevention International Banking Domestic Payments Legal Service Information & Banking Technology Accounting Securities Back Office & Custody Individual & Corporate Support General Services Distribution Channells Support 55 Back Office Capital Markets Organization Coroporate Finance Distribution Strategy & Marketing Key Account Coverage Financial Markets & Liquidity Distribution & Animation Corporate Strategy & Marketing Individuals Big Corporates Treasury Distribution & Animation Individuals Strategy & Marketing Corporates International Desk Securities Brokerage Branch Maribor & Murska Sobota Strategy & Marketing Sole Proprietors Institutional Investors Branch Celje Marketing Communications Branch Ljubljana - Corporate Branch Ljubljana - Center Individuals Branch Ljubljana - Outskirts Individuals Branch Krπko & Novo Mesto Branch Gorenjska Branch Primorska & Notranjska

56 SKB Banka's Subsidiary Companies Post Balance Sheet Event 56 SKB Group SKB s Subsidiary Companies SKB Leasing, d.o.o. Direct stake of the bank: 100% Stake of voting rights: 100% Nominal value of capital stake at 31 Dec. 2004: SIT 775,796,033 Plasis, d.o.o. Direct stake of the bank: 100% Stake of voting rights: 100% Nominal value of capital stake at 31 Dec. 2004: SIT 536,335,704 The international agency Moody's Investors Service has upgraded the long-term foreign currency deposit rating assigned to SKB Banka (SKB) from A1 to Aa3, with a stable outlook, following a similar rating action for Société Générale of France (SocGen), which owns 99.6% of SKB Banka. Société Générale s long-term deposit rating was recently upgraded to Aa2 from Aa3. SKB s D+ Financial Strength Rating (FSR) and Prime-1 short-term foreign currency deposit ratings remain unchanged. All outlooks are stable. This rating action is based on the high degree of support that Société Générale is likely to extend to its subsidiary SKB if the latter were to face financial difficulties. Moody s notes that the sovereign ceiling for foreign currency deposits in Slovenia is Aa3, and as such SKB is the only Slovenian bank rated at the same level as the country. SKB's international ratings: Moody s: Long-term deposits: Aa3 Short-term deposits: Prime-1 Bank financial strength: D+

57 Bank balance sheet at 31 December 2004 (all amounts expresed in thousands of tolars) Unaudited 2004 Unaudited 2003 ASSETS Cash and balances with central bank 14,964,534 13,189,263 Trading securities 6,802,108 5,756,733 Due from other banks, net 33,921,040 38,418,388 Loans and advances to customers, net 216,580, ,811,761 Securities available for sale 54,708,777 77,081,496 Securities held to maturity 35,854,566 43,038,517 Investments in subsidiaries 2,447,005 3,656,302 Goodwill 827,437 1,278,767 Property and equipment and intangible assets, net 16,126,236 16,448,757 Other assets, including derivatives and tax assets, net 8,091,227 6,627,473 Total assets 390,323, ,307,457 LIABILITIES Due to other banks 1,925,174 3,687,063 Due to customers 254,907, ,011,415 Debt securities issued 5,269,196 5,488,285 Other borrowed funds 74,168,822 62,508,543 Other liabilities, including derivatives and tax liabilities 4,866,341 5,191,205 Provisions 3,280,168 4,255,820 Subordinated debt 3,077,094 3,037,834 Total liabilities 347,494, ,180,165 SHAREHOLDERS EQUITY Ordinary shares 12,649,200 12,649,200 Share premium 18,145,923 18,145,923 Reserves and retained earnings 12,034,302 4,332,169 Total shareholders equity 42,829,425 35,127, Total equity and liabilities 390,323, ,307,457 Bank income statement for the year ended 31 December 2004 (all amounts expresed in thousands of tolars) Unaudited 2004 Unaudited 2003 Interest income 20,500,018 25,305,793 Interest expense (8,987,292) (13,294,507) Net interest income 11,512,726 12,011,286 Fee and commission income 7,713,510 6,649,666 Fee and commission expense (2,282,785) (2,022,017) Net fee and commission income 5,430,725 4,627,649 Dividend income and gain on sale of associates 448, ,959 Net gains from securities 236, ,254 Net trading income 627, ,791 Other operating income 301,927 1,015,008 Operating income 18,558,227 18,155,947 Payroll and other staff costs (6,393,335) (6,575,633) Administrative expenses (5,279,593) (4,919,278) Depreciation and amortization (2,372,148) (2,532,656) Bad and doubtful debts expense 1,545,499 (220,270) Profit before tax 6,058,650 3,908,110 Deferred income tax expense 1,007,220 (3,948,674) Income tax expense 356,597 (598,192) Net profit/(loss) for the period 7,422,467 (638,756) Earnings/(loss) per share (expressed in SIT per share) 587 (50)

58 Bank statement of changes in equity for the year ended 31 December 2004 Share capital Share premium (all amounts expressed in thousands of tolars) Reserves Retained earnings Unaudited Total equity Balance at 1 January 2003 as previously stated 12,649,200 18,335,061 3,745,535 1,365,514 36,095,310 Effect of IAS 16 adoption (significant parts approach impementation) - - (487,669) - (487,669) Balance at 1 January 2003 restated 12,649,200 18,335,061 3,257,866 1,365,514 35,607,641 Mark to market of securities available for sale , ,114 Mark to market of trading securities from year (39) - (39) Deferred taxes for mark to market valuation of securities available for sale - - (98,571) - (98,571) Other equity movement - (189,138) 38,103 49,938 (101,097) 58 Loss for year (638,756) (638,756) Transfer from retained earnings (638,756) 638,756 - Balance at 31 December ,649,200 18,145,923 3,555, ,696 35,127,292 Mark to market of securities available for sale - - (70,774) - (70,774) Mark to market of IRS - cash flow hedge , ,495 Deferred taxes for mark to market valuation of securities available for sale - - (36,180) - (36,180) Fixed assets, significant parts approach implementation Other equity movement - - (90,580) - (90,580) Revaluation of capital investments , ,705 Profit for year ,422,467 7,422,467 Transfer from retained earnings - - 7,422,467 (7,422,467) - Balance at 31 December ,649,200 18,145,923 11,257, ,696 42,829,425

59 Bank cash flow statement for the year ended 31 December 2004 (all amounts expressed in thousands of tolars) Unaudited 2004 Unaudited 2003 Cash flows from operating activities Interest receipts 19,388,231 24,151,128 Interest payments (9,935,360) (12,724,464) Dividend receipts 497, ,225 Fee and commission receipts, net 5,478,498 4,679,653 Other income received 1,100,904 1,288,172 Recoveries on loans previously written off 62,254 30,727 Cash payments to employees and suppliers (11,005,980) (10,889,511) Income taxes paid (157,766) (50,475) Cash flows from operating activities before changes in operating assets and liabilities 5,427,958 6,803,455 Changes in operating assets and liabilities Net (increase)/decrease in loans and advances to banks (3,931,616) 6,070,108 Net (increase)/decrease in trading securities (69,341) 2,680 Net (increase)/decrease in loans and advances to customers (23,192,260) (13,109,868) Net (increase)/decrease in other assets (388,333) 1,546,956 Net increase/(decrease) in deposits from other banks (3,532,454) (6,293,432) Net increase/(decrease) in amounts due to customers (25,277,050) 3,683,924 Net increase/(decrease) in other liabilities 1,327,519 (654,162) 59 Net cash flows provided by/(used in) operating activities (49,635,577) (1,950,339) Cash flows from investing activities Acquisition of capital investments - (1,696,632) Disposal of capital investments 1,365,335 1,264,823 Purchase of property and equipment and intangible assets (3,239,227) (1,987,234) Proceeds from sales of property and equipment 4,002,850 2,794,532 Purchases of securities available for sale and securities held to maturity (212,987,927) (331,173,876) Proceeds from sales of securities available for sale and securities held to maturity 264,989, ,042,833 Net cash flows provided by/(used in) investing activities 54,130,810 (26,755,554) Cash flows from financing activities Proceeds from borrowed funds and debt securities 26,597,177 35,467,799 Repayments of borrowed funds and debt securities (15,155,838) (9,719,408) Net cash flows provided by/(used in) financing activities 11,441,339 25,748,391 Effect of exchange rate changes on cash and cash equivalents 453, ,727 Net increase/decrease in cash and cash equivalents 16,389,902 (2,295,775) Cash and cash equivalents at beginning of the year 104,075, ,371,484 Cash and cash equivalents at end of the year 120,465, ,075,709

60 Capital adequacy The Group monitors the adequacy of its capital using ratios established by the Bank for International Settlements (BIS). These ratios measure capital adequacy by comparing the Group s capital with its balance sheet assets, off-balance-sheet commitments, and market and other risk positions at a weighted amount to reflect their relative risk. Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example, cash and money market instruments have a zero risk weighting, which means that no capital is required to support the holding of these assets. Property and equipment carries a 100% risk weighting, meaning that it must be supported by capital equal to 8% of the carrying amount. Other asset categories have intermediate weightings. Off-balance-sheet credit-related commitments and forward-based derivative instruments are taken into account by applying different categories of credit conversion factors, designed to convert these items into balance sheet equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for balance sheet assets. 60 Tier 1 capital consists of shareholders equity. Tier 2 capital includes the Group s revaluation reserve, profit brought forward and subordinated loan deducted for capital investments in non-consolidated financial organisations. The minimum amount of Tier 1 plus eligible Tier 2 capital required to be maintained under BIS guidelines is 8% of weighted risk assets. Balance sheet / Nominal amount (all amounts expressed in thousands of tolars) Risk weighted amount Balance sheet assets (net of provisions) Cash and balances with central bank 14,964,550 13,189, Due from other banks 33,921,040 38,418,388 6,786,139 7,684,752 Loans and advances to customers 237,371, ,303, ,423, ,111,153 Securities 97,366, ,877,459 49,362,389 51,245,153 Investments in associates Goodwill 1,136,517 1,665,117 1,136,517 1,665,117 Property and equipment 17,794,583 18,603,724 17,794,583 18,603,724 Other assets 8,929,702 7,867,895 8,929,702 7,867,895 Off-balance sheet positions Credit related commitments 92,605,586 72,598,984 56,426,135 47,147,254 Letters of credit 1,213,400 1,277, , ,498 Total risk-weighted assets 350,101, ,580,546 BIS Capital Ratios Tier 1 capital 33,144,912 26,150, Tier 2 capital 11,480,865 10,626, Tier 1 + Tier 2 capital 44,625,777 36,776, BIS minimum 8.0

61 Annual report on internal audit for the year 2004 SKB Banka s Internal Audit Department performs internal audits of SKB Banka and its subsidiaries. The organisation of this department, its certified internal auditors and the scope of its activities comply with the provisions of the Slovene Banking Act. The Internal Audit Department (IAD) is in charge of all types of audits (operational, functional, financial, risk audits, etc.) covering the entire Bank s units and functions as well as all subsidiaries and contractual exchange offices. The IAD verifies the procedures and sees that these are legal, regular and up-to-date. Above all, its task is to verify the existence and functioning of controls embedded in work processes, which is the responsibility of the management at all organisational levels of the Bank and the Group. The IAD performs internal audits in compliance with professional principles, internal audit standards, codes of professional ethics adopted by the Slovenian Institute of Auditors, and the IAD's internal rules of procedure passed by the Management Board and approved by the Supervisory Board. For better efficiency the IAD drew up its own manual on internal auditing operations. The scope and the schedule of audits performed by the IAD are defined in the Internal Audit Annual Plan, which is approved each year by the Bank's Management Board in agreement with the Supervisory Board. The IAD also carries out extraordinary audits upon the request of the Management Board, such as when frauds are suspected, major irregularities are discovered or when higher risks in the Bank or the Group arise. Other tasks of the IAD are: organisation and coordination of annual external audits, the supervision performed by the Bank of Slovenia, SG Inspection or SG auditors, as well as the supervision of annual inventory taking of all the Bank s bookkeeping accounts of assets and liabilities. The IAD is also responsible for monitoring operational risks in SKB Banka. An advisory function is becoming an important task of the IAD, especially as regards the implementation of internal controls into procedures. Furthermore, some auditors at times participate in certain project teams. 61 For its performance the IAD is responsible to the Management Board and reports to the Supervisory Board on a quarterly basis. The Bank of Slovenia supervises its operations and during the year-end audit, its performance is also reviewed by an external auditor. Upon joining the Société Générale Group, the IAD started reporting to the Audit Department PAEN/AUD in Paris. To perform its tasks the IAD employed 12 auditors on average in 2004, of whom three were on average absent due to maternity leave or extended illness. Three auditors resigned (1 retirement and 2 consensual resignations) in Resignations and absences due to extended illness were substituted by employing of a new auditor. In September, the former assistant director was appointed as the new director of the IAD, while the previous director was appointed to another field of activity inside the bank.

62 The educational structure of the department is well suited, since two auditors have been granted degrees of specialised internal auditor or IT auditor, whilst of the remaining staff, 8 hold an university degree. The ratio between the number of auditors and the SKB Group staff in % as at 31 December, 2004 is 9 : 1,005 or 0.90%. 62 In 2004, the Internal Audit Department executed the following tasks: 51 regular audits of retail operations in SKB Banka's outlets; 2 extraordinary audits of outlet operations; 3 audits in SKB Banka's branches (audits of corporate operations including retail operations on client and staff accounts); 5 regular audits of organisational units at the head office of SKB Banka; 2 extraordinary audits in organisational units at the head office of the bank; 3 functional audits; 2 regular information technology audits and 1 extraordinary IT audit; 1 regular security audit; 7 quarterly audits of sensitive accounts and 3 quarterly audits of credit portfolio; 1 regular audit and 1 extraordinary audit of a subsidiary; follow-up of the implementation of the recommendations given by the Internal Audit Department in previous audits and follow-up of the Management Board's requirements related to the improvement of procedures as well as follow-up of the implementation of the recommendations from the PAEN audit and the requirements by the Bank of Slovenia's inspection; 64 audits of contractual exchange offices (complying with the requirement of the central bank that all exchange offices have to be audited twice a year). Following the recommendations of the SG Inspection, the IAD introduced the practice of intensive off-site reviews. For efficient auditing the IAD, together with the IT Department, developed special IT support for audit sampling. The Internal Audit Department is also developing its own work methods. In 2004, the renewal of audit programmes continued according to risk observations. Moreover, the IAD launched the development of IT support for following-up on recommendations, given either by the IAD inside the SKB group or by external inspectors or auditors. Apart from the audit function, the Internal Audit Department planned and supervised the annual inventory-taking process, which was carried out in 2004 in line with the most important rules of Permanent Supervision. The internal audits focused particularly on verifying the existence and functioning of basic internal inprocess controls, the existence and adequacy of instructions, compliance with the instructions and authorisations, cost control, segregation of duties, and management of all types of risks. Upon each audit the IAD reviewed the implementation of the previously given recommendations. Upon IT auditing special attention was paid to compliance with the IT security standard (PSIST 7799) and to a review of functionality and security issues of the Symbols modules. The IAD regularly reported on performed audits to the Management Board in a written form. The Management Board discussed these reports and approved measures in order to oblige audited organisational units to follow the recommendations of the IAD and eliminate all non-compliances by the set deadlines. Also, the Supervisory Board received a quarterly summary of findings and recommendations following individual audits.

63 Permanent Supervision is not yet fully implemented in SKB Banka. Nevertheless, the inventory taking that took place in November and December 2004 was performed in line with the guidelines and based on the principles of Permanent Supervision. Additionally, the following steps of Permanent Supervision implementation have already been executed: all sensitive bookkeeping accounts have been listed, while the level of implementation of Permanent Supervision for the accounts is different among the divisions; in some divisions it is fully implemented, whilst in others it is still in the launching phase; Permanent Supervision for sensitive procedures is implemented in all divisions in larger extent; some procedures have already been fully supervised. Execution of Permanent Supervision is continuing, and will take place on a wider scale in the first half of Mateja Papeæ Director of Internal Audit Department 63

64

65 Consolidated Financial Statements 2004 () 65

66 66

67 Consolidated Financial Statements Consolidated balance sheet at 31 December 2004 (all amounts expressed in thousands of tolars) Notes ASSETS Cash and balances with central bank ,964,550 13,189,453 Trading securities ,802,108 5,756,733 Due from other banks, net ,921,040 38,418,388 Loans and advances to customers, net ,371, ,303,545 Securities available for sale ,709,498 77,082,209 Securities held to maturity ,854,566 43,038,517 Goodwill ,136,517 1,665,117 Property and equipment and intangible assets, net ,794,583 18,603,724 Other assets, including derivatives and tax assets, net ,887,585 7,867,895 Total assets 411,441, ,925,581 LIABILITIES Due to other banks ,925,920 3,724,270 Due to customers ,114, ,668,336 Debt securities issued ,269,196 5,488,285 Other borrowed funds ,149,148 79,779,103 Other liabilities, including derivatives and tax liabilities ,691,152 5,752,647 Provisions ,506,766 4,392, Subordinated debt ,077,094 3,037,834 Total liabilities 368,733, ,842,567 SHAREHOLDERS EQUITY Ordinary shares ,649,200 12,649,200 Share premium 18,145,923 18,145,923 Reserves and retained earnings ,912,701 4,287,891 Total shareholders equity 42,707,824 35,083,014 Total equity and liabilities 411,441, ,925,581 The accompanying notes form an integral part of these financial statements. Bernard Koenig Vice-president of the Management Board Cvetka Selšek President of the Management Board

68 Consolidated income statement for the year ended 31 December 2004 (all amounts expressed in thousands of tolars) Notes Interest income 21,630,353 26,496,051 Interest expense (9,418,662) (13,710,549) Net interest income ,211,691 12,785,502 Fee and commission income 7,662,545 6,613,709 Fee and commission expense (1,695,850) (1,353,054) Net fee and commission income ,966,695 5,260,655 Dividend income and gain on sale of associates , ,994 Net gains from securities , ,254 Net trading income ,888 65, Other operating income ,487,724 2,718,337 Operating income 20,957,447 21,213,620 Payroll and other staff costs (7,069,551) (7,229,445) Administrative expenses (5,994,985) (6,583,426) Depreciation and amortization (3,111,133) (3,308,139) Bad and doubtful debts expense ,469,187 (179,497) Profit before tax 6,250,965 3,913,113 Deferred income tax ,007,290 (3,943,772) Income tax ,593 (628,950) Net profit / (loss) for the period 7,606,848 (659,609) Earnings / (loss) per share (expressed in SIT per share) (52) The accompanying notes form an integral part of these financial statements. Bernard Koenig Vice-president of the Management Board Cvetka Selšek President of the Management Board

69 Consolidated statement of changes in equity for the year ended 31 December 2004 Share capital Share premium (all amounts expressed in thousands of tolars) Reserves Retained earnings Total equity Balance at 1 January 2003 as previously stated 12,649,200 18,335,061 3,745,536 1,365,514 36,095,311 Effect of IAS 16 adoption (significant parts approach impementation) - - (511,093) - (511,093) Balance at 1 January 2003 restated 12,649,200 18,335,061 3,234,443 1,365,514 35,584,218 Mark to market of securities available for sale , ,114 Deferred taxes for mark to market valuation of securities available for sale - - (98,571) - (98,571) Other equity movement - (189,138) 38,062 49,938 (101,138) Loss for year (659,609) (659,609) Transfer from retained earnings - - (659,609) 659,609 - Balance at 31 December ,649,200 18,145,923 2,872,439 1,415,452 35,083,014 Mark to market of securities available for sale - - (70,774) - (70,774) Mark to market of IRS - cash flow hedge , ,495 Deferred taxes for mark to market valuation of securities available for sale - - (36,180) - (36,180) Other equity movement - - (90,579) - (90,579) Profit for year ,606,848 7,606,848 Transfer from retained earnings - - 7,606,848 (7,606,848) - 69 Balance at 31 December ,649,200 18,145,923 10,497,249 1,415,452 42,707,824 The accompanying notes form an integral part of these financial statements. Bernard Koenig Vice-president of the Management Board Cvetka Selšek President of the Management Board

70 Consolidated cash flow statement for the year ended 31 December 2004 (all amounts expressed in thousands of tolars) Notes Cash flows from operating activities Interest receipts 20,574,631 25,288,610 Interest payments (10,409,649) (13,097,499) Dividend receipts 758, ,225 Fee and commission receipts, net 6,014,467 5,312,659 Other income received 2,034,600 2,677,177 Recoveries on loans previously written off 62,254 30,727 Cash payments to employees and suppliers (12,249,630) (12,326,280) Income taxes paid (182,817) (50,475) Cash flows from operating activities before changes in operating assets and liabilities 6,602,732 8,153, Changes in operating assets and liabilities Net (increase)/decrease in loans and advances to banks (3,931,616) 6,070,107 Net (increase)/decrease in trading securities (69,341) 2,680 Net (increase)/decrease in loans and advances to customers (42,490,978) (11,053,952) Net (increase)/decrease in other assets 14,310, ,202 Net increase/(decrease) in deposits from other banks 1,143,021 (7,199,565) Net increase/(decrease) in amounts due to customers (25,727,264) 2,447,269 Net increase/(decrease) in other liabilities 1,511,924 (751,809) Net cash flows provided by/(used in) operating activities (48,650,781) (1,422,924) Cash flows from investing activities Acquisition of capital investments (669,198) (2,488,607) Disposal of capital investments 563,529 1,264,823 Purchase of property and equipment and intangible assets (3,239,227) (1,987,234) Proceeds from sales of property and equipment 4,488,885 3,059,097 Purchases of securities available for sale and securities held to maturity (212,987,927) (331,173,876) Proceeds from sales of securities available for sale and securities held to maturity 264,989, ,042,833 Net cash flows provided by/(used in) investing activities 53,145,841 (27,282,964) Cash flows from financing activities Proceeds from borrowed funds and debt securities 26,597,177 35,467,799 Repayments of borrowed funds and debt securities (15,155,838) (9,719,408) Net cash flows provided by/(used in) financing activities 11,441,339 25,748,391 Effect of exchange rate changes on cash and cash equivalents 453, ,727 Net (decrease) / increase in cash and cash equivalents 16,389,729 (2,295,770) Cash and cash equivalents at beginning of the year 104,075, ,371,669 Cash and cash equivalents at end of the year ,465, ,075,899 The accompanying notes form an integral part of these financial statements. Bernard Koenig Vice-president of the Management Board Cvetka Selšek President of the Management Board

71 Notes to the Consolidated Financial Statements 1. General Information the group ( SKB or the Bank ) is a commercial bank incorporated in the Republic of Slovenia, servicing enterprises and individual customers. The consolidated financial statements comprise the financial statements of the Bank and all significant entities it controlled as at 31 December The Bank and the entities which it controls are referred to collectively as the Group. The following subsidiaries are included in the process of consolidation of the accompanying financial statements: PLASIS d.o.o., Slovenia, which is 100% owned by SKB Banka. The principal activity of Plasis is credit card processing. As at 31 December 2004 the company has total assets of SIT 680,864 thousand, equity of SIT 595,273 thousand and achieved profit for the year of SIT 39,559 thousand. SKB LEASING d.o.o., Slovenia, which is 100% owned by SKB Banka since 1 January 2003 when the Bank acquired the additional 50%. During 2003 the company merged with other two smaller leasing companies, Invest Rent d.o.o. and SKB N&L d.o.o, which were both the Bank's subsidiaries. The principal activity of SKB Leasing is the leasing of vehicles, industrial equipment, land and buildings. As at 31 December 2004 the company has total assets of SIT 24,476,640 thousand, equity of SIT 324,262 thousand and realized a profit for the year of SIT 222,148 thousand. 2. Basis of Preparation The consolidated financial statements of the Group at December 31, 2004, and for the year then ended were authorized for issue by the board of directors of SKB Banka on March 15 th, The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ( IFRS ), which comprise standards and interpretations approved by the International Accounting Standards Board ( IASB ), and International Accounting Standards ( IAS ) and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ( IASC ) that remain in effect. The financial statements are prepared under the historical cost convention except for the measurement at fair value of derivatives and trading and available-for-sale investment securities. The Group maintains its accounting records and prepares its statutory accounts in accordance with accounting, commercial, banking and fiscal regulations prevailing in Slovenia. The Group's functional currency is the Slovenian Tolar ("SIT"). The consolidated financial statements are prepared in SIT and all values are rounded to the nearest thousand () except when otherwise indicated. 71 The Société Générale Group holds percent of shares in The remaining shares are owned by other enterprises and individuals. The ultimate parent is Société Générale S.A., 29 Boulevard Haussmann, Paris. At the end of 2004 a total of 1,056 staff were employed by the Bank (2003: 1,024) at the head office in Ljubljana, AjdovπËina 4, and in the 56 branch offices (2003: 55) spread all over Slovenia, and 84 staff were employed by subsidiaries (2003: 85). Certain accounting principles prescribed for statutory purposes are different from those generally recognized in international financial markets. In order to present the financial position and results of operations of the Group in accordance with International Financial Reporting Standards, certain adjustments have been made to the Bank s Slovenian statutory accounts. The principal adjustments are related to revenue and expense recognition, valuation of securities, deferred taxes, the allowance for

72 72 losses, recognition of provisions and significant parts approach implementation related to fixed assets. A reconciliation between the two bases of accounting is provided in Note Summary of Significant Accounting Policies The significant accounting policies adopted in the preparation of the financial statements are set out below: 3.1 Consolidation Subsidiary undertakings, which are those companies in which the Bank holds, directly or indirectly, more than 50% of the registered capital or where the Bank can exercise more than 50% of the voting rights or where the Bank can appoint or dismiss a majority of the members of the Board of Directors or Supervisory Board, have been fully consolidated. The effects of all material inter-company balances and transactions are eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Bank. An investment in an associate is one in which the Bank holds, directly or indirectly, 20% to 50% of the voting rights and over which the Group exercises significant influence but which it does not control. Associates are accounted for under the equity method of accounting, and the prorata share of their income (loss) is included in the income statement. The Group's interest in an associate is carried in the balance sheet at an amount that reflects its share of the net assets of the associate. 3.2 Related parties For the purposes of the financial statements, related parties include all the enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with the reporting enterprise (this includes parents, subsidiaries and fellow subsidiaries), associated companies, managers and directors of the Bank and enterprises in which managers and directors of the Bank are able to exercise significant influence (participation in the financial and operating policy decisions of an enterprise). 3.3 Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated at the Bank of Slovenia s ( BoS ) official exchange rates for SIT as of December 31, 2004 and December 31, 2003, respectively. The Bank of Slovenia s official exchange rates as of December 31 are as follows: in SIT Currency US$ 176, , EUR 239, ,6903 Transactions denominated in foreign currencies are recorded at the Bank of Slovenia s official exchange rate on the date of the transaction. Gains and losses from foreign currency (FX) translations are included in the income statement of the respective year in trading income or expense. Margin from FX dealings with non-banking clients is included in the profit and loss account in fee and commission income or expense. The SIT is a convertible currency outside of Slovenia and official exchange rates are determined daily by the BoS. Market rates may differ from official exchange rates, but differences are maintained by commercial banks within a narrow spread to attract clients on a competitive basis. Market rates are used for measuring and accounting for foreign settlement transactions. 3.4 Cash and balances with central bank Cash and balances with central bank include cash in hand and balances with central banks. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition, including: cash and balances with central banks, treasury bills and other eligible bills, amounts due from other banks and trading securities. 3.5 Derivatives The Group enters into derivative instruments in the foreign exchange and interest rate markets. Derivatives are stated at fair value. The fair value of a derivative is the equivalent of the unrealized gain

73 or loss from marking to market the derivative using prevailing market rates or internal pricing models. Derivatives with positive market values (unrealized gains) are included in other assets and derivatives with negative market values (unrealized losses) are included in other liabilities in the balance sheet. For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability, or as cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. In relation to cash flow hedges, which meet the conditions for special hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognized in net profit or loss. The gains or losses that are recognised in equity are transferred to the income statement in the same period in which the hedged item affects the net profit and loss. Hedge accounting is discontinued when the hedging instrument or hedge item expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to net profit or loss for the year. 3.6 Trading assets Trading securities are securities the Group holds with the intention of recognizing short-term profits. They are carried at fair market value based on quoted bid prices. All gains and losses realized and unrealized from trading are reported in net trading income in the period in which they arise. Interest earned is reported as interest income. Dividends are taken to other operating income when received. 3.7 Originated loans and provisions for loan impairment Loans originated by the Group by providing money directly to the borrower are categorised as loans originated by the Group and are carried at amortised cost, which is determined as the principal amount outstanding, increased by the amount of interest and other claims due from customers, less any amounts written off and less any provisions for loan impairment. Loans originated by the Group are recognised when cash is advanced to borrowers. The value of the loan portfolio, net of provisions for loan impairment, approximates the fair value of the portfolio. Management estimates the carrying value of impaired loans as the net present value of payments expected to be received discounted at the loans effective interest rates or, for loans which are solely dependent on collateral for repayment, the estimated discounted fair value of the collateral. The provision for credit losses is an amount estimated for credit losses from loans and advances to corporate and individual customers and due from other banks' portfolios to reduce all impaired loans, advances and balances due from other banks to their expected realizable value. The provision for loan losses is established as soon as the recovery of an exposure is identified as doubtful and is allocated to individual loans. Actual credit losses, net of recoveries, are deducted from the provision. 3.8 Non-trading investments These are classified as follows: Held to maturity Available for sale All investments are initially recognized at cost, being the fair value of the consideration given including acquisition charges associated with the investment. Held to maturity Investments which have fixed or determinable payments are intended to be held to maturity, provided that the Group has an ability to hold them to maturity, and are subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and amortised on a systematic basis to maturity using the effective interest method and taken to interest income. 73

74 74 A reduction in market value is not taken into account unless it is considered to be permanent. Interest earned on held-to-maturity securities is reported as interest income. Available for sale After initial recognition investments which are classified as available for sale are re-measured at fair value based on a model of valuation utilizing the market prices of securities which have the same characteristics. Unless unrealized gains and losses on remeasurement to fair value are part of an effective hedging relationship, they are reported as a separate component of equity until the investment is sold, collected or otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement for the period. Interest earned whilst holding these securities is reported as interest income. Dividends are taken to other operating income when received. 3.9 Goodwill If the costs of acquisition exceeded the fair value of net identifiable assets of the business acquired, goodwill is accounted for. The goodwill is amortized over a period of five to six years using the straightline method. Management regularly reviews the carrying value of goodwill and immediately writes off any amounts considered unrecoverable. Costs that are directly associated with identifiable software products controlled by the Bank and are expected to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Expenditure which increases the value of software programmes beyond their original specifications is added to the original costs of the software. Software recognised as assets is amortised using the straight-line method over its estimated useful life. Land is not depreciated. Assets in the course of construction are not depreciated until they are brought into use. The Group elected to early adopt IAS 16 Property, plant and equipment as revised in March As a result the Group reviewed its fixed assets and identified significant parts of buildings whose useful life differs from that of the whole building and whose costs are significant, and recalculated their carrying values retrospectively. The Group decided for early adoption of IAS 16 to provide more relevant and reliable information about the carrying amount of the assets. The impact of the implementation of this significant parts approach for the period ended 31 December 2003 is 552,613 thousand SIT (2002: 511,093 thousand SIT) and the depreciation charge for the year ended 31 December 2004 is higher by 41,037 thousand SIT (2003: 41,520 thousand SIT) in comparison with the accounting treatment adopted before Property and equipment and intangible assets All property and equipment is stated at cost, less accumulated depreciation. Depreciation is based on the straight-line depreciation method to write-off the cost of each asset to its residual value over the estimated useful life as follows: % % Buildings and their significant parts Furniture and fittings Computers Motor vehicles Equipment and other Intangible assets The effect of the revised policy due to the early adoption of IAS 16 on earnings per share is for the year 2004 a decrease in net assets per share by 47 SIT (2003: 80 SIT) to 3,376 SIT (2003: 2,774 SIT) and earnings per share by 4 SIT (2003: 3 SIT) to 601 SIT (2003: -52 SIT). Maintenance and repairs are charged to the income statement when incurred. Expenditures that enhance and extend the benefits of property or equipment beyond the original specifications and lives are recognized as capital improvements and added to the original cost. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit.

75 The carrying amounts are periodically reviewed on the basis of independent valuation to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount and an impairment loss is recognized in the Group s income statement. The valuation of property and equipment was last performed in June Financial leases When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable and included in Loans and advances to customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return and is included in interest income Assets held for resale Assets held for resale (inventories of land and buildings) were acquired by foreclosing loans due from customers and are carried at their estimated net realisable value Provisions for off-balance sheet commitments and contingencies In the normal course of business, the Group enters into financial instrument contracts with off-balance sheet risk. Such contracts include the issuance of guarantees and letters of credit, granted but not yet drawn loans, and credit lines. These financial instruments involve, to varying degrees, elements of credit, interest rate and currency risk. Provisions are built for estimated losses on such items based on similar assessments as set out for loans and advances Revenue and expense recognition Interest income and interest expense are recognized on an accrual basis using the effective yield method. The same applies in relation to fees and commissions income and expenses, as well as income and expenses from financial activities. Interest is added to the principal where this is foreseen by the agreement Social costs The Group does not contribute to any private pension funds. Contributions to the state pension fund, social insurance, medical insurance, and unemployment funds for the Group s employees are considered as operating expenses as incurred. The Group accounts for employee holiday benefits on an accrual basis and for the present value of a defined employee retirement plan and seniority awards based on an actuarial calculation Taxation Taxes are calculated in accordance with the provisions of the relevant legislation of the Republic of Slovenia. In accordance with tax legislation, banks are liable for tax calculated on either of two separate bases, where the higher calculated tax expense applies. The two bases are: 25% of taxable profits or 3% on the balance sheet determined in accordance with the tax rules. However, the total amount of tax to be paid may not exceed 50 percent of the Bank s total profit calculated under SAS. When calculating tax on the balance sheet volume the following items are deductible: Liabilities to credit institutions in foreign currencies; Liabilities to clients in foreign currencies; SIT loans to customers; Short-term SIT loans to banks; Some marketable securities; Deferred income; Tax prepayments and tax liabilities; 7% of all deposits with the Bank. Deferred taxation is provided using the liability method on all temporary differences at the reporting date. It is calculated at the tax rates that are expected to apply to the period when it is anticipated the liabilities will be settled, and it is based on tax rates (and laws) that have been enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised Borrowings Borrowings are recognised initially at cost, being their issue proceeds net of transaction costs incurred. Subsequently, borrowings are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective yield method. 75

76 If the Group purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of a liability and the consideration paid is included in net trading income Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and accordingly are not included in these financial statements Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously Trade and settlement date accounting All regular way purchases and sales of financial assets are recognised on the settlement date, i.e. the date the asset is delivered to the counterparty. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place Segmental reporting Condensed financial statements of the subsidiary Plasis, representing segments of a business, other than banking and financial services provided in Slovenia are not presented due to their immateriality. 4. Notes to the consolidated financial statements Cash and balances with central banks Cash in hand 4,134,487 5,553,245 Balances with central banks 10,830,063 7,636,208 14,964,550 13,189, Trading securities Debt securities 6,731,181 5,756,645 Listed 6,731,181 5,756,645 Equity securities - 65 Unlisted - 65 Interest 70, ,802,108 5,756,733 Trading securities by sector of issuer: Debt securities 6,731,181 5,756,645 - Government 6,731,181 5,755,747 - Banks 898 Equity securities Corporate - 65 Interest 70, ,802,108 5,756,733

77 Interest rates and maturity of trading securities % maturity % maturity Listed / / / / Due from other banks Loans and advances to other banks 34,359,260 38,740,294 Interests 25, ,989 Gross exposure 34,385,202 38,880,283 Less specific provision for impairment (464,162) (461,895) 33,921,040 38,418,388 Loans and advances to credit institutions are stated at revalued amounts based on FX rates for FX loans and FX clauses for SIT loans. The amounts are reported on a gross basis, including accrued interest, prior to deduction of provisions. Accrued interest includes TOM (basic interest rate) applied to long-term SIT loans. TOM is calculated as the arithmetic average of the last twelve rates of growth of consumer prices and is calculated and published by the Statistical Office of the Republic of Slovenia. Analysis by territory: Deposits with banks in Slovenia 3,482,816 4,794,583 Deposits with OECD based banks abroad 30,435,810 33,492,536 Deposits with non - OECD based banks abroad 2, ,269 33,921,040 38,418, Lonas and advances to costumers Short term banking loans to costumers 135,909, ,568,965 Long term banking loans to costumers 106,968, ,160,723 Long term financial 20,095,240 15,446,095 Gross exposure 263,708, ,228,245 Less specific provisions for impairment for loans (26,337,898) (30,924,700) Net interests 736,189 1,052, ,371, ,303,545 As at December 31, 2004 the Bank accepted real estate at an estimated fair value of SIT 129,041,575 thousand (2003: SIT 157,997,850 thousand), state securities and guarantees at a fair value of SIT 11,050,868 thousand (2003: SIT 8,454,089 thousand) and cash deposits on the Bank s accounts at fair value of SIT 4,621,174 thousand (2003: SIT 3,901,792 thousand) as collateral for loans and advances to customers, which the Bank is permitted to sell or repledge in the absence of default. As of December 31, 2004 the Group had large loans of SIT 57,227,191 thousand or 24.1% of the gross loan portfolio (2003: SIT 56,418,884 thousand or 27.6 % of gross loan portfolio). A provision of SIT 8,164,869 thousand (2003: SIT 8,310,173 thousand) was made against these loans.

78 Economic sector risk concentrations within the customer loan portfolio were as follows: 2004 % 2003 % Manufactoring and mining 52,178, ,158, Agriculture and forestry 568, ,990 0 Construction 11,716, ,731,045 5 Commerce 42,940, ,279, Other financial organizations 35,144, ,412,873 2 Government 21,417, ,262, Individuals 18,698, ,670, Other 54,705, ,377, ,371, ,303, Economic sector risk concentrations within the customer loan portfolio and geographic sector risk concentration are presented in amounts, net of provisions. Geographic sector risk concentrations within the customer loan portfolio were as follows: 2004 % 2003 % Slovenia 235,921, ,971, European Union 3, Former Yugoslavia 927, , Other countries 519, , ,371, ,303, Securities available for sale Debt securities 53,951,735 75,101,227 Listed 12,853,749 41,031 Unlisted 41,097,986 75,060,196 Equity Securities 308, ,250 Unlisted 308, ,250 Interest 449,474 1,155,732 54,709,498 77,082,209 Unlisted debt securities consist of treasury bills of the Bank of Slovenia with maturities up to 360 days from the date of issue. Listed debt securities consist of government bonds. Securities available for sale by sector of issuer: Debt securities 53,951,736 75,101,227 - Central bank 40,885,609 74,897,793 - Government 7,327, ,434 - Foreign government 5,738,937 Equity Securities 308, ,250 - Banks 19,645 - Corporate 88, ,401 - Other financial institutions 219, ,204 Interest 449,474 1,155,732 54,709,498 77,082,209

79 Interest rates and maturity of securities available for sale % maturity % maturity TBZ 60D / / / /2004 TBZ 270D / / / /2005 UBK1E /04/2004 RS /02/ Securities held to maturity Treasury bills - EUR denominated 35,740,597 42,966,951 Interest 113,969 71,566 35,854,566 43,038,517 Treasury bills consist of treasury bills of the Bank of Slovenia with maturities up to 360 days from the date of issue. Interest rates and maturity of securities held to maturity % maturity % maturity Treasury bills - EUR denominated /05-04/ /04-04/ Goodwill Positive goodwill arises from the merger with Banka Société Générale Ljubljana ( BSGL ) on 1 October 2001 and from the acquisition of the additional 50% of SKB LEASING d.o.o. on 1 January 2003 when the Bank became its sole owner. Goodwill as at 31 December ,665,117 Amortization (528,600) Goodwill as at 31 December ,136, Property and equipment and intangible assets Cost or valuation Land Buildings Computer Equipment Furniture & fittings Other equipment Assets in course of transfer Assets in operating lease Intangible fixed assets Total assets At 1 January 830,241 13,493,975 6,884,998 3,878, , ,714 2,190,946 6,059,949 34,085,015 Additions - 688, , ,852 15,602 14,091, ,024 1,064,283 17,507,641 Disposal - (406,416) (961,638) (167,017) (93,168) (13,689,373) (1,272,336) (87,585) (16,677,533) At 31 December 830,241 13,776,517 6,654,324 3,895, , ,299 1,650,634 7,036,647 34,915,123 Depreciation At 1 January - 2,554,912 5,951,064 2,792, , ,551 3,065,209 15,481,291 Charge for year - 871, , ,768 18, ,335 1,403,482 3,611,067 Eliminations and disposals - (99,155) (960,872) (164,687) (55,973) (647,594) (43,537) (1,971,818) At 31 December - 3,327,280 5,637,372 2,856, , ,292 4,425,154 17,120,540 Net Book Value 830,241 10,449,237 1,016,952 1,039,607 10, , ,342 2,611,493 17,794, December ,241 10,449,237 1,016,952 1,039,607 10, , ,342 2,611,493 17,794, December ,241 10,939, ,934 1,086,853 50, ,714 1,232,395 2,994,740 18,603,724 The Bank holds buildings, which are shown as a part of land and buildings, with a net book value of SIT 432,852 thousand (2003: SIT 633,060 thousand), which are leased as operating leases. Income from operating leases was recognised in the income statement in the amount of SIT 50,618 thousand (2003: SIT 56,101 thousand).

80 4.9 Other assets, including derivatives and tax assets Accounts receivable and prepayments 1,895,137 2,386,819 Prepaid taxes 50,665 51,007 Accrued income 118, ,010 Inventories of land and buildings held for resale 1,059,261 1,160,106 Inventories of materials Receivables for fees and commissions 268, ,493 Receivables from individuals and sole enterpreneurs (giro and transaction accounts, saving deposits) 1,365,772 1,383,118 Items in course of collection (credit cards, payments in progress) 1,802,498 1,761,955 Advances and prepayments 415, ,282 Deferred income tax assets 3,626,615 4,262,517 Other 926,803 1,519,246 Derivative financial instruments 592, ,351 Specific provisions for deferred tax assets (1,059,876) (2,964,250) Other specific provisions (2,174,232) (2,745,038) 8,887,585 7,867,895 Other specific provisions consists of provisions for doubtful fees and commissions in the amount of SIT 160,360 thousand (2003: SIT 230,102 thousand), provisions for doubtful claims on customers in the amount of SIT 159,199 thousand (2003: SIT 183,179 thousand) and provisions for other claims from business operations in the amount of SIT 1,854,673 thousand (2003: SIT 2,331,757 thousand) Movement in provisions for impairment of loans, investments and other assets Bank loans Customer loans Interests Other assets Total Balance at 1 January ,895 30,924,700 28,426,020 5,709,288 65,521,903 Current year allowances for losses 6,098 5,708,559 6,887, ,457 13,532,873 Recoveries (3,831) (10,295,361) (4,732,543) (3,405,637) (18,437,372) Balance at 31 December ,162 26,337,898 30,581,236 3,234,108 60,617, Due to other banks Current accounts 1,837, ,477 Time deposits and loans 87,912 3,261,468 Interest 969 8,325 1,925,920 3,724,270 Due to other banks balances represent money market deposits and include accrued interest.

81 4.12 Due to customers Demand deposits 97,887,445 80,555,161 Citizens 66,709,437 55,002,651 Enterprises 30,313,867 25,404,932 Local authorities and other organisations 110,787 4,867 Restricted deposits 753, ,711 Savings and time deposits 153,788, ,881,930 Citizens 108,756, ,271,561 Enterprises 28,459,489 60,775,269 Local authorities and other organisations 8,549,848 11,954,667 Restricted deposits 4,621,174 7,023,846 Certificates of deposits 3,401,136 7,856,587 Interest 1,438,820 3,231, ,114, ,668,336 Deposits due to customers include deposits in the amount of SIT 62,641 thousand (2003: SIT 90,488 thousand) held as collateral for irrevocable commitments under import letters of credit Debt securities issued Average interest rate % Maturity Bonds SKB 4 A (SIT) TOM ,818,200 3,818,200 Bonds SKB 4 B (EUR) ,416,641 1,398,603 Bonds UBK ordinary (EUR) ,499 Bonds UBK convertible (EUR)* , Interest 34,355 41,098 5,269,196 5,488, Other borrowed funds Domestic borrowings 207, ,705 Foreign borrowings 95,632,437 78,657,242 Interest 309, ,156 96,149,148 79,779,103 Other borrowed funds represents loans from other financial institutions.

82 4.15 Other liabilities, including derivatives and tax liabilities Taxes payable 610, ,066 Items in course of payment 93,201 91,156 Liabilities for unpaid dividends - 1,903 Liabilities for fees and commission 6,374 8,089 Amounts owed to employees 303, ,752 Amounts owed to suppliers 2,463,664 1,945,453 Prepayments 110, ,109 Additional taxes and related penalty interests - 943,000 Accruals and deferred income 975, ,232 Deferred tax liabilities 663, ,421 Other 144, ,463 Derivative financial instruments 320, ,003 5,691,152 5,752,647 Accruals and deferred income relate to liabilities for settlements in the course of payment, accrued expenses for 2004 for which the Group did not obtain an invoice and deferred income which will be accounted for when paid in the following year Provisions Provisions for off - balance commitments and contingencies 853,366 1,682,425 Other provisions 2,653,400 2,709,667 3,506,766 4,392,092 The majority of other provisions represents provisions for the deposit guarantee scheme in the amount of SIT 200,000 thousand (2003: 200,000 thousand), employee holiday bonuses in the amount of SIT 205,000 thousand (2003: 205,000 thousand), and provisions for potential losses from litigation in the amount of SIT 968,499 thousand (2003: SIT 983,757 thousand). In the year 2004 the Group established provisions for an employee retirement plan in the amount of SIT 476,949 thousand (2003: SIT 461,211 thousand) and for seniority awards in the amount of SIT 52,227 thousand (2003: SIT 53,582 thousand). Movement in provisions Guarantees & commitments Other At 1 January ,682,425 2,709,667 Provisions made 2,614, ,489 Recoveries and write offs (3,443,496) (655,756) At 31 December ,366 2,653, Subordinated debt Subordinated debt 3,071,613 3,032,501 Interest 5,481 5,333 3,077,094 3,037,834 Subordinated loans due to the parent bank Société Générale amount to EUR 12.8 million.

83 4.18 Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest and currency rates. These financial instruments include credit lines, financial guarantees, commercial letters of credit and forward foreign exchange contracts. These instruments involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized in the balance sheet. Credit risk associated with off-balance sheet financial instruments is defined as the possibility of sustaining a loss due to any other party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in making commitments and conditional obligations as for the balance sheet financial instruments, i.e. through established credit approvals, risk control limits and monitoring procedures. Market risk represents the possibility that the value of financial instruments will change, either positively or negatively, with changes in market prices, such as interest or foreign currency rates. The Bank requires collateral to support off-balance sheet financial instruments when it is deemed necessary. Collateral held varies, but may include deposits held in financial institutions, government securities, other marketable securities, and mortgages. Credit lines are commitments to extend credit, which generally have fixed expiration dates or other termination requirements. Substantially all of the Bank s commitments to extend credit are revocable as they are contingent upon the customers maintaining specific credit standards at the time of loan funding. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing guarantees is essentially the same as that involved in extending facilities to other customers. The Bank applies similar principles as those applied in assessing the required allowance for losses under other credit facilities when assessing the likelihood of loss under the guarantee. A commercial letter of credit represents an extension of credit by a bank to its customer, where the customer is usually the buyer/ importer of goods and the beneficiary is usually the seller/exporter. As letters of credit are collateralized by the underlying shipments of goods to which they relate, they carry significantly lower risk. The Bank s exposure regarding commitments to extend credit, guarantees, and commercial letters of credit is as follows: Guarantees 20,246,684 21,695,523 in SIT 17,744,162 17,375,374 in F/C 2,502,522 4,320,149 Undrawn facilities 72,358,904 50,903,461 in SIT 47,154,432 42,528,446 in F/C 25,204,472 8,375,015 Letters of credit 1,213,400 1,277,489 in SIT - 274,186 in F/C 1,213,400 1,003,303 Forward and swap contracts issued 146,110,017 67,417,606 in SIT 16,811,795 13,427,442 in F/C 129,298,222 53,990, ,929, ,294,079 In the normal course of business the Group entered into interest rate swaps and foreign exchange forward, swap and option transactions for its assets and liabilities management purposes and to fulfill customers demands. The notional amounts of these financial instruments provide a basis for comparison with instruments recognised on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Group s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand determines the extent to which instruments are favorable or unfavorable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The fair values of derivative instruments held as at December 31 are set out in the following table.

84 Net amount of derivative financial instruments arises from: Nominal value Fair value assets Fair value liabilities Nominal value Fair value assets Fair value liabilities Currency forwards 82,666, , ,515 33,037, , ,003 Interest rate swaps 51,136, , ,486 34,380,360 6,421 - Currency options 1,917, ,721, , ,001 67,417, , ,003 Net profit/(loss) from revaluation to fair value 56,690 27,768 Interest rate swaps - cash flow hedging 10,388, , Ordinary shares The total authorised number of ordinary shares at 31 December 2004 was 12,649,200 shares (2003: 12,649,200 shares) with a par value of 1,000 tolars per share (2003: 1,000 tolars per share). All issued shares are fully paid. Net assets per share at 31 December 2004 is SIT 3,376 (2003: SIT 2,819) Reserves and retained earnings 84 Obligatory reserves Revaluation reserves Other reserves Retained earnings Total Balance at 1 January ,051,301 6,791,352 (4,970,214) 1,415,452 4,287,891 Mark to market of securities available for sale - - (70,774) - (70,774) Mark to market of IRS - cash flow hedge , ,495 Deferred taxes for mark to market valuation of securities available for sale - - (36,180) - (36,180) Other equity movement - - (90,579) - (90,579) Profit for year - 261,707 7,345,141 7,606,848 Transfer from retained earnings - - 7,345,141 (7,345,141) - Balance at 31 December ,051,301 7,053,059 2,392,889 1,415,452 11,912,701 In accordance with Slovenian legislation, the distribution of the Group s retained earnings and reserves is not allowed unless the statutory losses carried forward are covered. There is no distributable amount of retained earnings available as at 31 December Dividends per share No dividend is proposed for 2004.

85 4.22 Net interest income Interest income 21,630,353 26,496,051 Cash and balances with central bank 72,755 79,457 Due from other banks 863,185 1,400,149 Banking loans and advances to customers 13,617,853 16,722,934 Securities 4,305,852 6,198,793 Financial leasing 981,105 1,149,895 Other 1,789, ,823 Interest expense 9,418,662 13,710,549 Banks and customers 6,678,411 10,336,740 Debt securities in issue 1,041,963 1,559,070 Other borrowed funds 1,681,607 1,282,280 Other 16, ,459 Net interest income 12,211,691 12,785, Net fee and commission income Income 7,662,545 6,613,709 Enterprises 2,161,351 2,212,153 Other banks 119,090 72,776 Citizens 5,354,295 4,323,068 Other 27,809 5,712 Expenses 1,695,850 1,353, Enterprises 378, ,608 Other banks 53,308 62,161 Citizens 1,226, ,909 Other 37,568 38,376 Net fee and commission income 5,966,695 5,260, Dividend income and gain on sale of associates Trading securities 107,310 78,160 Other income from capital investments 341, , , , Net gains from securities Gains from trading securities 181,552 98,958 Gains from investment securities - available for sale 154,063 51,905 Losses from trading securities (23,296) (28,609) Losses from investment securities - available for sale (75,462) - 236, ,254

86 4.26 Net trading income Foreign exchange (34,458) (57,071) Net gains from derivatives 267,063 (252,736) Net gains from dealing in foreign currencies 373, , ,888 65, Other operating income Rents receivable 50,618 85,202 Non banking services 9,727 9,618 Sale of services 897,341 1,166,895 Other 530,038 1,456,622 1,487,724 2,718, Payroll and other staff costs Salaries 4,744,320 4,611,130 Social security costs 1,144,035 1,086,290 Bonus paid to management 84,000 59,250 Provisions for retirement indemnity and seniority costs 14, ,793 Other employee costs 1,082, ,982 7,069,551 7,229, Administrative expenses Professional services 732, ,724 Advertising and marketing 506, ,630 Software development costs 662, ,683 Operating lease rentals 317, ,316 Entertainment 39,901 31,937 Insurance 114,644 96,559 Education, training and scholarships 77,137 67,722 Stamp and court duties 789, ,414 Memberships 40,721 42,537 Business trips 63,165 56,889 Taxes and other duties 70,998 65,299 Maintanance of premises and equipment 1,451,872 1,504,089 Material costs 356, ,652 Authors' fees and students' contracts 98,435 94,461 Extraordinary expenses 64,594 11,226 Other 608,317 1,489,288 5,994,985 6,583,426

87 4.30 Depreciation and amortization Depreciation of tangible fixed assets 1,654,971 1,913,657 Depreciation of intangible fixed assets 874, ,651 Amortization of goodwill 528, ,329 Impairment for tangible and intangible fixed assets 52,679 91,502 3,111,133 3,308, Bad and doubtful debt expense Amounts due to other banks (4,359) (12,435) Loans and advances to customers 2,323, ,965 Interest (111,813) 157,414 Other assets 602,735 (132,219) Commitments and contingencies 829, ,567 Other provisions (118,770) 315,796 Bad debts written off directly (2,113,502) (1,799,312) Recoveries on loans previously written off 62,254 30,727 1,469,187 (179,497) 4.32 Tax Corporate tax payable in the year (164,407) (115,950) Net deferred tax (charge) / credit 1,049,407 (3,943,772) Additional tax charges / credit 513,000 (513,000) Tax expense 1,398,000 (4,572,722) Profit / (loss) after tax as disclosed 7,606,848 (618,089) Adjustments between Statutory (SAS) and IFRS accounts (7,101,601) 1,005,565 Profit before tax under SAS 505, ,476 Corporate income tax rate 25% 25% Tax calculated at income tax rate 126,312 96,869 Adjusted for Non deductible expenses 5,612,590 5,448,312 Non taxable income (1,677,232) (1,903,943) (Utilization) of tax losses (3,782,976) (3,468,045) Tax base 657, ,800 Income tax 164, ,950 Corporate tax payable in the year 164, ,950 Effective tax rate 33% 30% Tax losses brought forward Opening balance 16,535,229 20,003,274 Current year movement (3,782,976) (3,468,045) Closing balance 12,752,253 16,535,229 Tax losses brought forward at 25 % rate 3,188,063 4,133,807

88 Capitalized tax losses Capitalized tax losses that expire in ,043 Capitalized tax losses that expire in ,188,063 3,912,765 Capitalized tax losses 3,188,063 4,133,807 Non deductible expenses include expenses which are not recognised for tax purposes (depreciation of fixed assets above the tax deductible depreciation rates, provisions above the level prescribed by the Bank of Slovenia, general provisions, interest on loans where the interest rate is higher than the average weighted inter-bank interest rate, etc.). 88 Net income/loss from deferred tax Deferred tax liabilities Mark to market valuation of trading securities (246) (639) Mark to market valuation of derivatives (76,764) (5,627) Mark to market valuation of securities available for sale (80,879) (98,572) Profits and losses of associates (53,874) - Provisions for loans to customers (452,020) (261,583) (663,783) (366,421) Deferred tax assets Mark to market valuation of derivatives - losses 80,000 - Provisions for retirement indemnities and seniority awards 132, ,698 Amortized costs of HTM securities Accruals of commissions - effective interest rate method 77,808 - Fixed assets - significant parts approach 148,413 - Tax loss carry forwards 3,188,063 4,133,808 Provisions for tax losses carried forward (1,059,876) (2,964,250) 2,566,739 1,298,267 The deferred tax charge in the income statement comprises the following temporary differences: Mark to market valuation of trading securities 393 (4,543) Mark to market valuation of derivatives 8,862 - Fixed assets - significant parts approach 148,413 - Accruals of commissions - effective interest rate method 77,808 - Provisions for loans to customers (190,438) (236,677) Amortized costs of securities held to maturity Provisions for retirement indemnities and seniority awards 3, ,698 Tax loss carry forwards utilised in the year (945,744) (867,011) Provisions for tax losses carried forward 1,904,374 (2,964,250) Net income/loss from deferred tax 1,007,290 (3,943,772) The Bank has capitalized tax losses that occurred in 1999 (SIT 4,352,215 thousand) which expired on the 31 st of December 2004 and tax losses that occurred in 2001 (SIT 15,651,059 thousand) that expire on the 31 st of December 2006 and are not expected to reoccur. Management believes that these losses will be used to offset corporate tax charges in future years. Realization of these losses is dependent on achieving sufficient taxable profit in the years concerned. Management regularly reviews the recoverability of these capitalized tax losses and immediately writes off any amounts not considered recoverable. A provision for deferred tax assets for tax losses carried forward in the amount of SIT 2,964,250 thousand was made in 2003 for temporary impairment. In 2004 after receiving the final tax decree, the provision was released in the amount of SIT 1,904,374.

89 4.33 Earnings/(loss) per share Basic earnings/(loss) per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding the average number of ordinary shares purchased by the company and held as treasury shares Net profit/(loss) attributable to shareholders (thousands) 7,606,848 (659,609) Weighted average number of ordinary shares in issue 12,649,200 12,649,200 Basic earnings/(loss) per share (in tolars per share) 601 (52) Cash and cash equivalents In the cash flow statement, cash and cash equivalents are comprised of the following balances with maturity less than 90 days: Cash and balances with central banks 7,208,380 9,636,453 Treasury bills and bonds 73,973,522 51,908,235 Due from other banks 32,553,530 36,777,058 Trading securities 6,730,195 5,754, ,465, ,075, Risk evaluation Management of risk is fundamental to the banking business and forms an essential element of the Bank s operations. The major risks faced by the Bank are those related to credit exposures, liquidity, capital adequacy, movements in interest rates and foreign exchange rates. These risks are managed in the following manner. 89 Credit Risk Credit risk is the risk of financial loss occurring as a result of default by the borrower or counterparty in their obligation to the Bank. The Bank has defined strict procedures for the processing of all loan applications, and maintains a Credit Committee to implement the Bank s credit policy and monitor credit risk limits. Lending limits for a given client are determined by the Bank s credit risk assessment method. Exposure to the client is classified according to its creditworthiness. The Bank also limits its exposure to credit risk by obtaining security from clients. Liquidity Risk Liquidity risk arises from mismatches in the cash flows from financial transactions. The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. Further, the Bank has contingency plans to ensure that, in the event of a liquidity crisis, the Bank continues to honor all of its cash outflow obligations. The Bank s liquidity management procedures are monitored by the committee for liquidity management. The maturity analysis of the Bank s monetary assets and liabilities is included in Note 5.4. Interest Rate Risk Interest rate risk is measured by the extent to which changes in market interest rates impact on margins and net interest income. To the extent that the term structure of interest bearing assets differs from that of liabilities, net interest income will increase or decrease as a result of movements in interest rates. Interest rate risk is managed by increasing or decreasing positions within the limits specified by the Bank s management and by adapting interest rates in order to maintain the desired structure of interest bearing assets and liabilities. These measures restrict the potential effect of movements in interest rates on current earnings and on the value of interest sensitive assets and liabilities. To monitor interest rate risks, the Bank also uses interest rate gap analysis, produced on a regular basis. The Bank s interest rate risk management procedures are monitored by the ALCO committee.

90 Foreign Currency Risk The Bank s assets and liabilities are denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or lesser than liabilities in that currency. The primary purpose of the Bank s foreign currency risk minimization activities is to protect against the volatility of foreign currency exchange rates. The Bank maintains balanced currency positions to minimize foreign currency losses. Under this approach, the Bank increases or decreases its foreign currency denominated financial assets and firm commitments to match increases or decreases of its foreign currency denominated financial liabilities. The Bank s foreign currency risk management procedures are monitored by the ALCO committee. The currency analysis of the Bank s monetary assets and liabilities is presented in Note 5.2. Operational Risk Operational risk refers generally to the risk of loss resulting from the Bank s operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in the Bank s operating systems, and inadequacies or breaches in the Bank s control processes. To mitigate and control operational risk, the Bank has developed and continues to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels. The task of managing operational risks falls to the management and staff at all levels. The Bank has established a control department in order to further develop procedures of monitoring operational risk. Internal audit, as an independent department responsible directly to the Management Board, is already in place to supervise the Bank s operations in order to detect possible areas of increased inherent risk and to monitor implementation as well as strengthen or even introduce new control procedures Geographical concentrations of assets and liabilities As at 31 December 2004 Slovenia European Union Former Yugoslavia Other Total Assets Cash and balances with central banks 14,964, ,964,550 Trading securities 6,802, ,802,108 Due from other banks 3,913,830 29,589,782 1, ,579 33,921,040 Loans and advances to customers 235,921,158 3, , , ,371,101 Securities available for sale 49,085,059 5,624, ,709,498 Securities held to maturity 35,854, ,854,566 Other assets, including tax assets 8,720, ,677 29,665 8,491 8,887,585 Total assets 355,262,023 35,346, , , ,510,448 Liabilities Due to other banks 1,105, , , ,925,920 Due to customers 247,249,760 2,200,874 2,202,266 1,461, ,114,448 Debt securities issued 5,269, ,269,196 Other borrowed funds 207,500 95,941, ,149,148 Other liabilities, including tax liabilities 4,770, ,649 8,824 4,623 5,691,152 Subordinated debts - 3,077, ,077,094 Total liabilities 258,601, ,717,137 2,441,631 1,466, ,226,958 Net balance sheet position 96,660,065 (67,371,105) (1,482,314) (523,156) 27,283,490

91 As at 31 December 2003 Slovenia European Union Former Yugoslavia Other Total Assets Cash and balances with central banks 13,189, ,189,453 Trading securities 5,756, ,756,733 Due from other banks 4,933,416 30,919,567 1,341 2,564,064 38,418,388 Loans and advances to customers 202,971, , , ,303,545 Securities available for sale 77,082, ,082,209 Securities held to maturity 43,038, ,038,517 Other assets, including tax assets 7,788,491 45,776 28,967 4,661 7,867,895 Total assets 354,760,045 30,965, ,811 3,171, ,656,740 Liabilities Due to other banks 3,214,896 61, , ,430 3,724,270 Due to customers 267,020,970 1,774,707 1,589,991 2,282, ,668,336 Debt securities in issue 5,488, ,488,285 Other borrowed funds 830,705 78,948, ,779,103 Other liabilities, including tax liabilities 5,465, ,302 8, ,448 5,752,647 Subordinated debts - 3,037, ,037,834 Total liabilities 282,020,750 83,996,882 1,941,297 2,491, ,450,475 Net balance sheet position 72,739,295 (53,031,300) (1,181,486) 679,756 19,206, Currency risk As at 31 December 2004 SIT USD CHF EUR Other foreign currencies Total 91 Assets Cash and balances with central banks 14,091,558 92,984 51, ,829 52,070 14,964,550 Trading securities 6,802, ,802,108 Due from other banks 3,025,000 7,752,792 27,730 21,521,283 1,594,235 33,921,040 Loans and advances to customers 141,132,746 2,363,266 3,219,951 90,655, ,371,101 Securities available for sale 49,085, ,624,440-54,709,498 Securities held to maturity ,854,566-38,854,566 Other assets, including tax assets 8,254,766 20, ,572 10,731 8,887,585 Total assets 222,391,236 10,229,187 3,299, ,933,828 1,657, ,510,448 Liabilities Due to other banks 709, ,940 4, ,232 13,962 1,925,920 Due to customers 150,777,455 9,886,414 2,249,355 88,714,355 1,486, ,114,448 Debt securities in issue 5,269, ,269,196 Other borrowed funds 207, ,941,648-96,149,148 Other liabilities, including tax liabilities 4,514,427 19,458 1,654 1,149,730 5,883 5,691,152 Subordinated debt ,077,094-3,077,094 Total liabilities 161,478,535 10,818,812 2,255, ,167,059 1,506, ,226,958 Net balance sheet position 60,912,701 (589,625) 1,043,323 (31,233,231) 150,322 30,283,490 Off balance sheet items 81,710,385 25,460,478 3,603, ,916,814 2,237, ,929,005 Total net position 142,623,086 24,870,853 4,647,223 95,683,583 2,387, ,212,495

92 As at 31 December 2003 SIT USD CHF EUR Other foreign currencies Total Assets Cash and balances with central banks 11,714, ,276 80,156 1,176,233 91,129 13,189,453 Trading securities 5,756, ,756,733 Due from other banks 2,990,925 6,847,550 4,386 27,455,746 1,119,781 38,418,388 Loans and advances to customers 143,984,028 1,937,510 1,491,607 56,890, ,303,545 Securities available for sale 76,942, ,361-5,980-77,082,209 Securities held to maturity ,038,517-43,038,517 Other assets, including tax assets 7,604,013 12, ,131 11,038 7,867,895 Total assets 248,993,226 9,058,193 1,576, ,807,007 1,221, ,656,740 Liabilities Due to other banks 2,925, ,813 40, ,389 10,073 3,724,270 Due to customers 177,036,150 9,653,596 2,464,956 82,461,922 1,051, ,668,336 Debt securities in issue 5,488, ,488,285 Other borrowed funds 830, ,948,398-79,779,103 Other liabilities, including tax liabilities 5,139,149 86,881 1, ,157 5,199 5,752, Subordinated debts ,037,834-3,037,834 Total liabilities 191,419,812 9,845,290 2,506, ,611,700 1,066, ,450,475 Net balance sheet position 57,573,414 (787,097) (930,323) (36,804,693) 154,964 19,206,265 Off balance sheet items 73,605,449 13,687, ,226 53,433, , ,294,082 Total net position 131,178,863 12,899,948 (575,097) 16,628, , ,500, Interest rate risk The table below presents the Bank s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates. Up to 1 month to 3 months to Over Non-interest Total As at 31 December 2004 Assets Cash and balances with central banks 10,830, ,134,409 14,964,550 Trading securities 641, ,150 3,467,424 1,639,417 71,912 6,802,108 Due from other banks 31,502, , ,006 1,160, ,079 33,921,040 Loans and advances to customers 66,484,497 55,209,563 70,525,307 44,254, , ,371,101 Securities available for sale 16,396,352 27,993,425 1,854,368 7,384,075 1,081,278 54,709,498 Securities held to maturity 10,927,414 18,656,330 1,235,851 4,921, ,824 35,854,566 Other assets, including tax assets ,887,585 8,887,585 Total assets 136,782, ,341,468 77,263,956 59,359,489 15,763, ,510,448 Liabilities Due to other banks ,446 44,077 20,268 1,838,008 1,925,920 Due to customers 186,126,842 39,935,581 21,078,577 2,449,340 3,524, ,114,448 Debt securities issued 3,775,064-1,416,641 43,136 34,355 5,269,196 Other borrowed funds 339,069 25,504,953 47,948,301 22,047, ,211 96,149,148 Other liabilities, including tax liabilities ,691,152 5,691,152 Subordinated debts - 3,071, ,481 3,077,094 Total liabilities 190,241,096 68,535,593 70,487,596 24,560,358 11,402, ,226,958 Net balance sheet position (53,459,095) 34,805,875 6,776,360 34,799,131 4,361,219 27,283,490

93 Up to 1 month 1 month to 3 months 3 months to 1 year Over 1 year Non-interest bearing Total As at 31 December 2003 Assets Cash and balances with central banks 7,583, ,606,443 13,189,453 Trading securities 969,641 1,317,575 3,448,801-20,716 5,756,733 Due from other banks 36,101, ,000 1,500, ,679 38,418,388 Loans and advances to customers 82,107,017 36,533,416 62,273,890 22,336,760 1,052, ,303,545 Securities available for sale 15,993,946 17,148,557 41,696,908-2,242,798 77,082,209 Securities held to maturity 9,154,161 9,815,004 23,865, ,060 43,038,517 Other assets, including tax assets ,867,895 7,867,895 Total assets 151,909,484 65,164, ,784,891 22,336,760 17,461, ,656,740 Liabilities Due to other banks 192,532 3,450,212 32,963 24,443 24,120 3,724,270 Due to customers 191,994,060 41,841,682 30,518,512 3,408,634 4,905, ,668,336 Debt securities in issue 3,889, , ,653 41,098 5,488,285 Other borrowed funds 3,808,854 59,497,011 5,976,120 9,937, ,759 79,779,103 Other liabilities, including tax liabilities ,752,647 5,752,647 Subordinated debts - 3,032, ,333 3,037,834 Total liabilities 199,884, ,821,406 37,512,881 13,943,089 11,288, ,450,475 Net balance sheet position (47,975,210) (42,656,854) 95,272,010 8,393,671 6,172,648 19,206,265 The table below summarises the effective collective interest rate (in %) by currency: As at 31 December 2004 SIT SIT- FX revaluation clause Foreign currency 93 Assets Cash and balances with central banks Trading securities Due from other banks Loans and advances to customers Securities available for sale and securities held to maturity Liabilities Due to other banks Due to customers Debt securities in issue Other borrowed funds

94 As at 31 December 2003 SIT SIT-FX revaluation clause Foreign currency Assets Cash and balances with central banks Trading securities Due from other banks Loans and advances to customers Securities available for sale and securities held to maturity Treasury bills and bonds Liabilities Due to other banks Due to customers Debt securities in issue Other borrowed funds Liquidity risk 94 As at 31 December 2004 Up to 1 month 1 month to 3 months 3 months to 1 year Over 1 year Total Assets Cash and balances with central banks 14,964, ,964,550 Trading securities 641, ,150 5,178,753-6,802,108 Due from other banks 32,079, , ,006 1,160,563 33,921,040 Loans and advances to customers 26,892,215 16,852,807 65,433, ,192, ,371,101 Securities available for sale 14,651,507 25,787,447 1,657,032 12,613,512 54,709,498 Securities held to maturity 12,672,259 21,749,120 1,433,187-35,854,566 Other assets, including tax assets 7,221, , , ,195 8,887,585 Total assets 109,122,885 66,470,022 74,061, ,856, ,510,448 Liabilities Due to other banks 38,267 45, ,848 1,715,376 1,925,920 Due to customers 168,283,152 40,727,518 26,603,150 17,500, ,114,448 Debt securities issued - - 5,269,196-5,269,196 Other borrowed funds 2,108,638 2,256,929 6,301,845 85,481,736 96,149,148 Other liabilities, including tax liabilities 4,054, , , ,183 5,691,152 Subordinated debts - 220, ,541 2,402,911 3,077,094 Total liabilities 174,484,731 43,620,592 39,309, ,811, ,226,958 Net liquidity gap (65,361,846) 22,849,430 34,751,317 35,044,589 27,283,490

95 Up to 1 month 1 month to 3 months 3 months to 1 year Over 1 year Total As at 31 December 2003 Assets Cash and balances with central banks 13,189, ,189,453 Trading securities 990,357 1,317,575 3,448,801-5,756,733 Due from other banks 36,567, ,000 1,500,000 1,341 38,418,388 Loans and advances to customers 20,678,585 11,017,306 57,198, ,408, ,303,545 Securities available for sale 17,019,893 17,148,122 42,474, ,531 77,082,209 Securities held to maturity 9,151,400 9,814,755 23,997,196 75,166 43,038,517 Other assets, including tax assets 4,049, ,160 1,193,527 2,028,998 7,867,895 Total assets 101,645,945 40,243, ,812, ,953, ,656,740 Liabilities Due to other banks 215,143 15,667 27,740 3,465,720 3,724,270 Due to customers 163,210,896 43,654,357 42,966,994 22,836, ,668,336 Debt securities issued 41,098-1,918,825 3,528,362 5,488,285 Other borrowed funds 4,254,777 2,236,265 5,924,112 67,363,949 79,779,103 Other liabilities, including tax liabilities 962, ,186 1,406,915 2,755,177 5,752,647 Subordinated debts 5, ,032,501 3,037,834 Total liabilities 168,689,616 46,534,475 52,244, ,981, ,450,475 Net liquidity gap (67,043,671) (6,290,557) 77,568,403 14,972,090 19,206, Related party transactions 95 The group enters into transactions with related parties in the normal course of business, including loans, deposits, and foreign currency transactions, which are carried out at normal commercial terms and conditions and at market rates. Exposures to other related parties Enterprises which are shareholders with 1% or more stake 23,331,005 9,234,898 Members of the Management and Supervisory Boards 33,343 2,960 Total exposure to non-group companies where ownership exceeds 20% (excluding investment): Gross Exposure - 3,473,847 Less provisions - (3,473,847) Net Exposure - - Directors remuneration In 2004 the remuneration of the members of the Management Board of the Bank amounted to 125,726 thousand tolars (2003: 120,871 thousand).

96 Related party transactions with Société Générale Group at end of the year Time deposits and loans to other banks 22,137,123 8,265,111 Subordinated loans 3,071,612 3,032,501 Other borrowed funds 94,454,292 76,442,427 Forward foreign exchange - bought (nominal value) 30,005,488 16,889,636 Forward foreign exchange - sold (nominal value) 30,316,268 16,961,104 Interest rate swap (nominal value) 36,148,955 17,426,871 Options 898,838 - Guarantee commitments 60,000 - Credit lines received 26,371,730 14,201,418 Contra guarantees received 10,908,306 2,366,903 Transactions with Société Générale Group in the year: Interest income from time deposits and loans 360, ,693 Interest expense from subordinated debt 86,556 93,736 Interest expense from other borrowed funds 1,477,890 1,504,233 Commonly used interest rates with Société Générale Group: 96 Subordinated loans 3 monthly EURIBOR % Borrowing 6 monthly EURIBOR % Lending 1 monthly EURIBOR % 7. Fair values of financial instruments Substantially all the Group s monetary assets and liabilities are carried at their fair values as of December 31, The Group has not changed the carrying value of certain monetary assets and liabilities as their estimated fair value is subject to interest rate fluctuations, a risk managed by the Group in the normal course of its operations. Underlying the definition of fair value is the presumption that the Group is a going concern without any intention or requirement to curtail materially the scale of its operation or to undertake a transaction on adverse terms. Balances due to and from other banks The carrying amount of these balances approximate their fair value, as they are short term placements at market interest rates. Due from customers Loans to customers are carried net of specific and loan losses. The estimated fair value of these loans equates to the amount of estimated future cash flows expected to be received, discounted at market rates. It is not practicable within the constraints of timeliness and cost to determine precisely the fair value, but as the majority of loans are repriced quarterly, the carrying value is estimated to approximate the fair value. Investments Trading securities and available for sale investments are carried at their market value. Bonds and other investments held to maturity are carried at amortised cost, and as these instruments are of a short term nature and are at market rates, their fair value equates to their carrying values.

97 Due to customers The estimated fair value of deposits on demand is their carrying value. Due to the short-term maturity of fixed interest bearing deposits, the carrying value approximates the fair value. Other financial assets and liabilities The carrying amounts of other financial assets and liabilities (such as interest receivable and interest payable) approximate their fair values. Derivative financial instruments All derivatives are carried at their fair value. Fair values of trading derivative financial instruments, such as forward foreign exchange are derived from international money and capital market price quotations. 8. Difference between SAS and IFRS Total assets per SAS 408,460, ,311,616 Deferred taxes 2,566,739 1,298,267 Valuation of securities held to maturity at amortized cost (146) (44) Mark to market valuation of trading securities 985 2,557 Mark to market valuation of securities, available for sale 323, ,289 Mark to market valuation of derivatives 522, ,509 Valuation of loans 353,710 - Accrual of commissions (192,453) - Fixed assets, significant parts approach implementation (593,651) (552,613) Total assets per IFRS 411,441, ,925, Profit/loss per SAS 340,840 78,943 Deferred taxes 1,007,290 (3,943,772) Valuation of securities held to maturity at amortized cost (102) (44) Mark to market valuation of trading securities (1,572) 2,556 Mark to market valuation of derivatives (35,451) 9,638 Provisions for retirement benefits (15,738) (461,211) Provisions for seniority awards plan 1,355 (53,582) Income tax and penalty interests for year ,000 (943,000) General banking provisions 4,650,000 4,400,000 Movement in statutory provisions for customer loans not recognised for IFRS purposes (A provisions) 408, ,383 Movement in statutory provisions for country risk (3,487) - Movement of provisions for impaired loans 353,710 - Fixed assets, significant parts approach implementation (41,037) (41,520) Profit/(loss) per IFRS 7,606,848 (659,609)

98 Addresses and contacts PRIMORSKA AND NOTRANJSKA BRANCH Head office AjdovπËina 4, SI-1513 Ljubljana, Slovenia Tel.: 01/ Information: Fax: 01/ WAP portal: SWIFT: SKBASI2X Reuters: SGLJ Telex: skb dp si Branch network Branches Dorjana BabiË Primorska and Notranjska Branch Manager Koper Ferrarska ulica 6, SI-6000 Koper Tel.: 05/ , Fax: 05/ Nova Gorica Tolminskih puntarjev 4, SI-5000 Nova Gorica Tel.: 05/ , Fax: 05/ KR KO AND NOVO MESTO BRANCH 98 CELJE BRANCH Almira Mlakar BoæoviË Novo mesto and Krπko Branch Manager Polona entjurc Celje Branch Manager VrunËeva 2a, SI-3000 Celje Tel.: 03/ , Fax: 03/ GORENJSKA BRANCH Novo mesto Novi trg 3, SI-8000 Novo mesto Tel.: 07/ , Fax: 07/ Krπko Cesta 4. julija 42, SI-8270 Krπko Tel.: 07/ , Fax: 07/ MARIBOR AND MURSKA SOBOTA BRANCH Don Schoeffmann Gorenjska Branch Manager Koroπka cesta 5, SI-4000 Kranj Tel.: 04/ , , Fax: 04/ Anamarija prah Maribor and Murska Sobota Branch Manager

99 Maribor Heroja BraËiËa 1, SI-2000 Maribor Tel.: 02/ , ; Fax: 02/ Murska Sobota Kocljeva 6, SI-9000 Murska Sobota Tel.: 02/ , Fax: 02/ LJUBLJANA CORPORATE CLIENTS BRANCH Anita StojËevska Ljubljana - Corporate Branch Manage AjdovπËina 4, I. floor, SI-1513 Ljubljana Tel.: 01/ , Fax: 01/ LJUBLJANA INDIVIDUAL CLIENTS BRANCH, CITY CENTER Maja Kepic Osojnik Ljubljana Center - Individual Clients Branch Manager AjdovπËina 4, I. floor, SI-1513 Ljubljana Tel.: 01/ , Fax: 01/ LJUBLJANA INDIVIDUAL CLIENTS BRANCH, CITY SURRONDINGS Luka OmrËen Ljubljana Outskirts - Individua Clients Branch Manager AjdovπËina 4, I. floor, SI-1513 Ljubljana Tel.: 01/ , Fax: 01/ OUTLETS Addresses and telephone numbers of SKB Banka's outlets are available on the website Celje Branch Celje - VrunËeva 2a Tel.: 03/ , Fax: 03/ Æalec - Savinjska 12 Tel.: 03/ , Fax: 03/ Mozirje - Na trgu 19 Tel.: 03/ , Fax: 03/ Slovenj Gradec - Francetova 7 Tel.: 02/ , Fax: 02/ Velenje - Preπernova cesta 22 Tel.: 03/ , Fax: 03/ Rogaπka Slatina - KidriËeva 11 Tel.: 03/ , Fax: 03/ Gorenjska Branch Kranj I - Koroπka 5 Tel.: 04/ , Fax: 04/ Kranj II - C. Staneta Æagarja 37 tel04/ , Fax: 04/ Radovljica - Kranjska ulica 4 Tel.: 04/ , Fax: 04/ Bled - Ljubljanska 4 Tel.: 04/ , Fax: 04/ Kranjska Gora - Borovπka 99a Tel.: 04/ , Fax: 04/ kofja Loka - Kapucinski trg 4 Tel.: 04/ , Fax: 04/ Primorska and Notranjska Branch Koper - Ferrarska ulica 6 Tel.: 05/ , Fax: 05/ Seæana - Partizanska 64 Tel.: 05/ , Fax: 05/ Cerknica - Partizanska 1 Tel.: 01/ , Fax: 01/ Postojna - Ljubljanska 5a Tel.: 05/ , Fax: 05/ Ilirska Bistrica - GregorËiËeva 2 Tel.: 05/ , Fax: 05/ AjdovπËina - LavriËev trg 8 Tel.: 05/ , Fax: 05/ Nova Gorica - Tolminskih punt. 4 Tel.: 05/ ; Fax: 05/ Idrija - Ulica svete Barbare 3 Tel.: 05/ , Fax: 05/