ANNUAL REPORT NOVA KBM GROUP and NOVA KBM d.d.

Transcription

1 ANNUAL REPORT 2017 and NOVA KBM d.d.

2 Name of the Parent Bank Nova Kreditna banka Maribor d.d. Short name of the Bank Nova KBM d.d. Registered office Ulica Vita Kraigherja 4, 2000 Maribor, Slovenia Website Skype NovaKBM Switchboard Share capital 150,000,000 Registration number VAT ID Account No IBAN SI BIC (SWIFT) KBMASI2X LEI J0GSZ83GTKBZ89 GIIN XQ7A4V LE.705 BUSINESS REPORT AND 1

3 CONTENT BUSINESS REPORT 1. KEY PERFORMANCE INDICATORS / KEY PERFORMANCE INDICATORS OF THE / KEY PERFORMANCE INDICATORS OF / HIGHLIGHTS 8 2. STATEMENT BY THE MANAGEMENT BOARD 9 3. REPORT OF THE SUPERVISORY BOARD STRATEGIC DIRECTIONS OF NOVA KBM AND THE PROFILE OF THE AND / IMPORTANT EVENTS AND ACHIEVEMENTS DURING / SIGNIFICANT EVENTS AFTER THE END OF THE FINANCIAL YEAR / GOVERNANCE OF THE AND NOVA KBM / ORGANISATIONAL STRUCTURE OF THE / ORGANISATIONAL STRUCTURE OF NOVA KBM / CORPORATE GOVERNANCE OF NOVA KBM / PREVENTION OF MONEY LAUNDERING AND TERRORIST FINANCING SHAREHOLDERS EQUITY OF NOVA KBM DECLARATION ON THE ADEQUACY OF RISK MANAGEMENT ARRANGEMENTS RISK MANAGEMENT PERFORMANCE OF THE AND NOVA KBM / MACROECONOMIC ENVIRONMENT / ANALYSIS OF PERFORMANCE OF THE GROUP AND NOVA KBM / NOVA KBM / PROFILE OF THE COMPANIES IN THE GROUP / MARKETING STRATEGY AND MARKETING ACTIVITIES AT NOVA KBM / TOGETHER TO EXCELLENCE PROGRAMME / NEW AND UPGRADED SERVICES AND DISTRIBUTION CHANNELS AT NOVA KBM / MODERN DISTRIBUTION CHANNELS / CORPORATE BANKING OPERATIONS AT NOVA KBM / RETAIL BANKING OPERATIONS AT NOVA KBM / ACTIVE MANAGEMENT OF DISTRESSED LOANS / INTERNATIONAL OPERATIONS AT NOVA KBM / TREASURY OPERATIONS AT NOVA KBM / TRADING IN FINANCIAL INSTRUMENTS BY NOVA KBM / HUMAN RESOURCES MANAGEMENT / INTERNAL DEVELOPMENT OF NOVA KBM PLANS FOR CORPORATE GOVERNANCE STATEMENT STATEMENT OF NOVA KBM MANAGEMENT S RESPONSIBILITIES IN COMPILING 2017 ANNUAL REPORT TYPE OF SERVICES FOR WHICH NOVA KBM HAS THE AUTHORISATION OF THE BANK OF SLOVENIA NOVA KBM BRANCH OFFICE NETWORK SUSTAINABLE DEVELOPMENT AND SOCIAL RESPONSIBILITY 61 BUSINESS REPORT AND 2

4 FINANCIAL REPORT AUDITOR S REPORT ON THE FINANCIAL STATEMENTS OF THE AND 64 FINANCIAL STATEMENTS AND INCOME STATEMENT STATEMENT OF OTHER COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CASH FLOWS STATEMENT OF CHANGES IN EQUITY 75 NOTES TO THE FINANCIAL STATEMENTS AND GENERAL INFORMATION BASIS FOR THE PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES EXPOSURE TO VARIOUS TYPES OF RISK / CREDIT RISK / LIQUIDITY RISK / MARKET RISKS / GEOGRAPHICAL ANALYSIS OF ASSETS AND LIABILITIES / OPERATIONAL RISK / CAPITAL RISK FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES REPORTING BY OPERATING AND GEOGRAPHICAL SEGMENTS / ANALYSIS OF RESULTS BY OPERATING SEGMENTS / ANALYSIS OF RESULTS BY GEOGRAPHICAL SEGMENTS / RECONCILIATION OF OPERATING SEGMENTS STRUCTURAL CHANGES IN THE ACQUISITION OF SUMMIT LEASING SLOVENIJA 130 NOTES TO THE INCOME STATEMENT ITEMS 132 NOTES TO THE STATEMENT OF FINANCIAL POSITION ITEMS 142 OTHER NOTES 161 BUSINESS REPORT AND 3

5 BUSINESS REPORT BUSINESS REPORT AND 4

6 CLIENT EXCELLENCE Client excellence is a key strategic guideline for everything we do. We strive to meet the needs of our clients by continuously fine-tuning the range of our services and introducing new banking channels, to make them even more accessible. Excellence will also be a key driver in the future, with the aim to enhance satisfaction and trust of our customers and business partners. BUSINESS REPORT AND 5

7 1/ KEY PERFORMANCE INDICATORS 1.1 / KEY PERFORMANCE INDICATORS OF THE 1 ITEM DESCRIPTION Statement of financial position ( 000) Balance sheet total 4,929,829 4,823,450 4,246,167 Total deposits from the non-banking sector measured at amortised cost 3,638,391 3,626,247 3,095,356 Total loans and advances to the non-banking sector measured at amortised cost 2,366,167 1,963,849 1,808,373 Financial assets 1,729,042 1,762,581 1,820,439 a) of which available for sale 1,621,581 1,584,514 1,675,907 b) of which held to maturity 88,700 90, ,548 Total equity 697, , ,073 Total impairments and provisions 491, , ,186 Off-balance-sheet items 1,000, , ,722 Income statement ( 000) Net interest income 82,569 92,300 98,144 Net non-interest income (including profit or loss before tax from discontinued operations) 60,425 54,420 64,158 - of which net fee and commission income 45,456 42,431 54,477 Staff, general and administrative costs (108,041) (97,686) (84,752) Depreciation and amortisation (10,993) (11,863) (12,663) Net impairments and provisions 14,829 (10,501) (39,138) Profit before tax from continuing and discontinued operations 38,789 26,670 25,749 Income tax on continuing and discontinued operations 9,533 3,805 (8,789) Net profit 48,322 30,475 16,960 Statement of comprehensive income ( 000) Other comprehensive income/(loss) before tax (4,876) 5,032 (12.233) Income tax related to other comprehensive income 956 (1,153) Number of employees 1,576 1,512 1,591 Shares Number of shareholders Number of shares 10,000,000 10,000,000 10,000,000 Accountable par value of one share ( ) Book value per share ( ) In the Annual Report, the name of Nova KBM Group is also referred to as the Group. Data for 2017 include operations of Summit Leasing Slovenija d.o.o. from 1 October to 31 December Data for 2016 include results of KBS banka d.d. from 1 July to 31 December 2016, while data for 2015 refer only to the Nova KBM Group (without KBS) ITEM DESCRIPTION Ratios (%) a) Equity - total capital adequacy ratio Tier 1 capital ratio Common Equity Tier 1 capital ratio b) Asset quality - impairments of financial assets measured at amortised cost, and provisions for commitments/classified on-balance-sheet items and classified off-balance-sheet items c) Profitability - interest margin non-interest margin margin of financial intermediation ROAA before tax ROAA after tax ROAE before tax ROAE after tax d) Operating costs - operating costs/average total assets cost-to-income ratio (CIR) operating costs (excluding extraordinary items)/income (CIR 2) e) Net loans and advances to customers/customer deposits (net LTD ratio) f) Gross loans and advances to customers/customer deposits (gross LTD ratio) International ratings Fitch Ratings Moody s Investors Service ITEM DESCRIPTION JANUARY - MARCH BB/B (stable outlook) Ba2/Non-prime (stable outlook) APRIL - JUNE 2017 BB /B (stable outlook) B2/Non-prime (stable outlook) JULY - SEPTEMBER B+/B (stable outlook) B3/Non-prime (stable outlook) OCTOBER -DECEMBER LIQUIDITY (IN 000) - liquidity coverage ratio 866 % 766 % 684 % 596 % - liquidity buffer 1,693,170 1,754,031 1,790,732 1,797,549 - net liquidity outflows 205, , , ,653 BUSINESS REPORT AND 6

8 1.2 / KEY PERFORMANCE INDICATORS OF 2 ITEM DESCRIPTION Statement of financial position ( 000) Balance sheet total 4,913,905 4,831,767 3,563,355 Total deposits from the non-banking sector measured at amortised cost 3,671,799 3,650,858 2,514,527 a) of which from legal and other entities that carry out economic activity 916, , ,978 b) of which from households 2,755,651 2,721,483 1,887,549 Total loans and advances to the non-banking sector measured at amortised cost 2,322,531 1,948,737 1,538,283 a) of which to legal and other entities that carry out economic activity 1,257, , ,328 b) of which to households 1,065,165 1,043, ,955 Financial assets 1,727,944 1,759,275 1,484,391 a) of which available for sale 1,621,498 1,582,095 1,442,288 b) of which held to maturity 88,700 90,216 28,566 Total equity 683, , ,729 Total impairments and provisions 439, , ,307 Off-balance-sheet items 1,031, , ,487 Income statement ( 000) Net interest income 78,584 90,728 79,101 Net non-interest income (including profit or loss before tax from discontinued operations) 53,155 55,281 51,785 - of which net fee and commission income 40,178 37,885 40,536 Staff, general and administrative costs (100,477) (92,067) (63,157) Depreciation and amortisation (8,384) (10,409) (9,504) Net impairments and provisions 12,716 (14,465) (15,974) Profit before tax from continuing and discontinued operations 35,594 29,068 42,251 Income tax on continuing and discontinued operations 10,219 3,936 (7,816) Net profit 45,813 33,004 34,435 Statement of comprehensive income ( 000) Other comprehensive income/(loss) before tax (3,996) 1,562 (9,801) Income tax related to other comprehensive income 824 (1,135) 1, Number of employees 1,419 1,464 1,056 Shares Number of shareholders Number of shares 10,000,000 10,000,000 10,000,000 Accountable par value of one share ( ) Book value per share ( ) ITEM DESCRIPTION Ratios (%) a) Equity - total capital adequacy ratio Tier 1 capital ratio Common Equity Tier 1 capital ratio b) Asset quality - impairments of financial assets measured at amortised cost and provisions for commitment/classified on-balance-sheet items and classified off-balance-sheet items c) Profitability - interest margin non-interest margin margin of financial intermediation ROAA before tax ROAA after tax ROAE before tax ROAE after tax d) Operating costs - operating costs/average total assets cost-to-income ratio (CIR) operating costs (excluding extraordinary items)/income (CIR 2) e) Net loans and advances to customers/customer deposits (net LTD ratio) f) Gross loans and advances to customers/customer deposits (gross LTD ratio) ITEM DESCRIPTION JANUARY - MARCH APRIL - JUNE 2017 JULY - SEPTEMBER OCTOBER -DECEMBER LIQUIDITY (IN 000) - liquidity coverage ratio 758 % 680 % 611 % 531 % - liquidity buffer 1,536,694 1,688,818 1,792,803 1,799,620 - net liquidity outflows 214, , , ,173 2 In the Annual Report, the name Nova KBM d.d. is also referred to as Nova KBM or the Bank. Data for 2016 include results for Poštna banka Slovenije (hereinafter also: PBS) from 1 January to 31 December 2016 and KBS banka from 1 July to 31 December 2016, while data for 2015 refer only to Nova KBM (without PBS and KBS). BUSINESS REPORT AND 7

9 1.3 / HIGHLIGHTS High level of liquid assets and good capital position Maribor CET1 ratio % % % 2,205 2,665 2, % 699 % 462 % Liquid assets 2017 LCR ratio Leading banking franchise in a growing macro-economic environment Most extensive distribution network in Slovenia, including 60 renovated Nova KBM branches and 500 Slovenian post offices 20 % European Bank for Reconstruction and Development New shareholders committed to enhance business and operating performance; owned by funds advised by Apollo Global Management (80 %) and the European Bank for Reconstruction and Development (20 %) Second largest banking group in Slovenia by total assets, systemic bank 80 % Strategically transformed to focus on core business and return to profitability BUSINESS REPORT AND 8

10 2/ STATEMENT BY THE MANAGEMENT BOARD The Annual Report presents the key results for 2017 and the strategic outlook for the future. The Report presents the performance, attainment of business objectives, dedicated work of colleagues in the Bank and the Group, and a strengthened trust demonstrated by customers, business partners, and other stakeholders. The strategic goals achieved in the past year are a solid foundation for further realisation of the Bank s strategy and mission. In 2017, special attention was devoted also to social responsibility and sustainable development. In 2016 and 2017, the Bank set up a model of strategic management of social responsibility and sustainable development, which includes all of the key stakeholders involved in the development of long-term partnerships with the Bank. The Report on Sustainable Development and Social Responsibility, which is an independent yet integral part of the entire Annual Report, discloses activities and strategic policies in this area for the first time. Both reports together present a comprehensive strategic view and mutual relations between operations of the Bank and its social responsibility. HIGHLIGHTS IN 2017 OPERATIONS The Nova KBM Group ended 2017 with a profit totalling 48,300 thousand, while Nova KBM generated the profit of 45,800 thousand. The Bank is focused on basic banking services, revenue generation, cost-efficient operation, and optimisation at all levels of its operations. The return on equity reported for the end of 2017 stood at 6.48 % and 7.05 % for the Bank and the Group, respectively. The capital adequacy ratio has remained high, at % and % for the Bank and the Group, respectively. The results show also a strong liquidity position. The Bank continued its activities related to the non-performing loan management strategy. In 2017, the share of non-performing loans in the Bank s portfolio decreased by 4.35 percentage points, and in the Group s portfolio by 4.24 percentage points. For Nova KBM, the 2017 business year was a year of momentous strategic decisions and successful operations. As a systemically important bank in Slovenia, Nova KBM operated profitable, in line with the highest standards of corporate governance and risk management, providing its customers with a high-quality financial partnership, and consolidating relationships with its key stakeholders. In April, the Bank s Management Board, together with its colleagues, designed a new Strategic Plan for (2020 Strategy). The Strategy sets out an ambitious vision for Nova KBM to become the best bank by 2020, focusing on five strategic pillars: client excellence, growth and profitability, effective risk management and compliance, operational efficiency, and organisational culture and development of employees. The Strategy also sets out precise criteria and performance indicators, providing the Bank with a better strategic focus and enabling it to monitor the results achieved. The Strategic Development Plan is supported also by the Bank s owners (Apollo Global Management and the European Bank for Reconstruction and Development) that share the same goals with the Management Board and employees in the area of improving the operations and operational efficiency. The Bank continued its activities related to streamlining, optimisation and cost-efficient operation, and achieving a higher operational efficiency. The main project in this area is the introduction of a new core banking information system, which started in 2017, implying a significant change in the business model aimed at ensuring competitiveness of the Bank. With the aim of improving the quality of services, the planned changes in the Bank s organisational structure and the branch office network were carried out. In 2017, the Bank merged operations of some branch offices, while continued introducing special bank counters in post offices of Pošta Slovenije, and carefully examining possibilities for opening new branch offices. Nova KBM keeps its primary position in terms of its network diversification, as in cooperation with its strategic partner, Pošta Slovenije, provides its services nearly at 500 post offices throughout Slovenia, in addition to 60 own branch offices. After the merger of the three banks, i.e. Nova KBM, and former KBS d.d. and PBS d.d., which was completed in 2016 and 2017, a further step was taken in the implementation of the Nova KBM Group s strategy by the acquisition of Summit Leasing Slovenija d.o.o., one of the leading leasing companies in Slovenia, which became a new member of the Nova KBM Group in September last year. This strategic acquisition means yet another important step in expanding the range of Nova KBM s services, enabling the Bank to further improve its offer in consumer financing. BUSINESS REPORT AND 9

11 In 2017, the Bank upgraded its policies and processes in the areas of risk management, compliance, and implementing the measures in the prevention of money laundering and terrorist financing. At the same time, the Bank implemented the projects aimed at ensuring regulatory compliance. At the end of 2017 and during the first two months of 2018, the Bank completed the projects aimed at ensuring compliance with the Markets in Financial Instruments Directive (MIFID II) and the International Financial Reporting Standard (IFRS 9). In 2018, the Bank continues the implementation of the projects aimed at ensuring compliance with the regulation amending the data protection regulation (GDPR), the Directive amending the payment service rules (PSD2) and other regulatory projects. Positive changes recorded in the economic environment and the improvement in the Bank s operations were reflected also in higher ratings assigned by credit rating agencies in In 2017, both Moody s Investors Service (Moody s) and Fitch Ratings upgraded their ratings for the Bank. At the end 2017, the Bank s rating assigned to it by the Moody s credit rating agency and by the Fitch agency stood at Ba2 and BB, respectively. SUCCESSFUL OPERATIONS WITH CUSTOMERS Our respected customers, both individuals and companies, have always been, are, and will remain to be at the heart of all our plans and operations also in the future. Therefore, client excellence is the Bank s key strategic orientation. In 2017, the Bank introduced the Client Excellence programme, which is focused on improving key excellence ensuring levers and elements through the whole process of dealing with customers. In 2017, one of major strategic focuses was a re-design of the product portfolio. In order to bring the Bank s services closer to its customers and make the services even friendlier, the Bank introduced new retail retail bundles and upgraded the mobile bank service. The Bank introduced also a special Premium service segment intended for affluent customers, and a special offer for customers employed in partner companies, Banka na delu (Bank@Work). In the corporate banking, the 2017 business year was dominated by optimism, as the improved capital position and ensured liquidity of the Bank made it possible to significantly increase its lending activity. In addition to that, the privatisation of the Bank contributed to a positive perception of the Bank as an institution that has in place clear objectives to pursue its principal mission of supporting its customers. Through its proactive approach to customers, strengthening of the advisory role, and the upgraded product portfolio (new bundles, cash management), the Bank managed to increase its market share in corporate operations. By its lending activity and participation in numerous banking syndicates, the Bank has demonstrated a significant contribution to the support for and development of the Slovenian economy. FOCUSED, EXCELLENT, RESPONSIBLE ALSO IN THE FUTURE Nova KBM is committed to develop a positive organisational culture. Employees are encouraged to be open to change, and to participate in a responsible manner in the value chain brought by the Bank s services to its customers and other stakeholders. The Bank is creating a work environment that allows for committed teams and individuals to attain their goals and be promoted. More than 42 specific measures and activities designed in the middle of 2017 with the aim to improve the commitment in employees, have already shown positive results. By pursuing its strategy, the Bank seeks to strengthen its visibility and reputation of being an excellent employer. We are proud of the results and successes we achieved together with more than 1,500 employees of the Nova KBM Group in the 2017 financial year. These achievements result from the Bank s strategic focus, knowledge, motivation, and a devoted work of its employees, external staff, and a constructive cooperation with the Supervisory Board. The Bank will focus on attaining the objectives of the 2020 Strategy also in the coming financial years, thereby realising the vision for Nova KBM to become the best bank in Slovenia. An integral part of this vision is devoted to strengthening the relations with all of the Bank s key stakeholders: customers, employees, business partners, and others in a wider societal environment, which remains one of the priority areas of the Bank s operations. We would like to thank you all, internal and external stakeholders, for collaboration. We regard your praise, opinions, and suggestions for improvement as a valuable signpost and motivation for our work in the future. We will continue developing high-quality partnerships also in the future, with excellence and responsibility throughout the Nova KBM Group, thus contributing to attainment of business, personal, and wider societal goals. Management Board of Nova KBM d.d. Josef Gröblacher Jon Locke Sabina Župec Kranjc Robert Senica John Denhof Member Member Member Deputy President President In 2017, the Bank and its subsidiary KBM Infond recorded positive trends also in the area of investment banking and fund management. Digitalisation is an indispensable factor in the development of the banking industry; therefore, Nova KBM pays significant attention to this area. The advantages of digitalisation are thoughtfully introduced into business processes with the aim of simplifying procedures, and improving response times and the operational efficiency, whereby providing customers with modern, comfortable, fast and high-quality solutions. The Bank keeps its customers informed about advantages of digitalisation and modern banking channels that are more and more frequently used by customers. BUSINESS REPORT AND 10

12 3/ REPORT OF THE SUPERVISORY BOARD 3.1 / REVIEW OF THE WORK OF THE SUPERVISORY BOARD INTRODUCTION Until 1 September 2017, the Supervisory Board of Nova KBM d.d. (SB) comprised the following members: Andrej Fatur (Chair), Manfred Puffer (Deputy Chair), Michele Rabà, Gernot Lohr, Andrea Moneta, and Alexander Saveliev. The composition of the SB changed on 23 August 2017 when the Shareholders Meeting of Nova KBM d.d. appointed Andrzej Klesyk as a new member of the Supervisory Board. His term of office took effect on 1 September On 28 September 2017, Andrzej Klesyk was appointed as the new Deputy Chair, replacing the current Deputy Chair, Manfred Puffer, who remained in office as SB member. Since Andrzej Klesyk was appointed, the SB has operated in its full seven-member composition. FOTO: MEDIASPEED The SB carried out the supervision of the management of Nova KBM d.d. and the Nova KBM Group, and its duty of diligent and prudent conduct, in line with its powers defined by applicable laws, other regulations, and internal rules of Nova KBM. Based on the SB s performance review, it is estimated that the SB supervised the Management Board and operations of Nova KBM d.d. and the Nova KBM Group in an adequate manner, in line with its powers and responsibilities. SUPERVISION OF THE MANAGEMENT OF AND THE METHOD AND SCOPE The SB s work was adequately organised and carried out particularly in accordance with the Rules of Procedure of the Supervisory Board and the Rules for Managing Conflict of Interest of Supervisory Board Members. Pursuant to the Companies Act (ZGD-1) and the Banking Act (ZBan-2), the following SB committees operated under the SB in 2017: The Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee, and the Credit Committee. The Bank Management Board provided SB members with professionally drafted materials, which enabled them to be well-informed on the matters subject to their decisions. We believe that the SB received sufficient and transparent reports, together with timely and accurate information on the management function, to monitor the operations of Nova KBM d.d. in a responsible and prudent manner, in particular the work of the Bank s Internal Audit. The SB and its Committees actively participated in the creation of the Governance Policy, the Remuneration Policy, and the Policy on the assessment of the suitability of members of the management bodies and key function holders (Fit & Proper Policy). Where necessary, the SB was provided with additional clarifications and explanations, whereby, together with the Management Board, launched initiatives for further improvement of the quality and quantity of data delivered, including the optimisation of data delivery times. Members of the SB took all precautionary measures to avoid any conflicts of interest that might influence their decisions, as per the Rules for Managing Conflict of Interest of the Supervisory Board Members. Any conflicts of interest encountered by respective SB members occurred only occasionally and they neither constitute a reason to terminate the office of any SB member, nor impede the operations of the supervisory body. These conflicts of interest were duly recorded and reported to the Nova KBM d.d. Compliance Office. The Chair of the SB performed his duties in line with his powers and the Rules of Procedure of the SB, communicating and cooperating with the Management Board also in the periods between particular SB meetings. He regularly monitored the developments related to the operations of Nova KBM and responded promptly and consistently. The Chair encouraged other SB members to perform their duties in an efficient and active manner, and included SB members in the communication with the Management Board and heads of internal control functions even outside regular meetings. By chairing SB meetings, the Chair ensured that the SB adopted its decisions in a responsible, transparent and prudent manner. He committed sufficient time to his chairmanship duties, therefore, his other commitments did not impede the operations of the SB. Members of the SB have relevant and complementary knowledge, experience and skills to perform their duties, and complement one another in terms of their different professional, geographical and educational backgrounds. The current composition of the SB allows for fully compensating potential lack of specific knowledge in any of its members by professional expertise of other members. All members of the SB also have the necessary personal integrity and professional ethics to hold their offices. This ensures responsible supervision and decision-making to the best interest of Nova KBM d.d. Adequacy of SB members as individuals and the body as a whole was further enhanced by appointing Andrzej Klesyk, who is a universal international expert in the field of finance. BUSINESS REPORT AND 11

13 SB members were well prepared for SB meetings. SB meetings were regularly attended by the majority of its members. SB members were properly equipped to discuss important topics; they presented constructive proposals, and often challenged the Management Board. On the basis of expertly drawn up and comprehensive information provided by the Bank Management Board, SB members were able to take high-quality decisions. The Rules of Procedure of the Supervisory Board comply with applicable principles of best corporate governance and banking-specific international guidelines. All meetings were recorded, with written records and transcriptions that highlighted and/or summarised the most important positions and key questions raised during discussions, which has ensured a full traceability and transparency of all matters discussed or decisions adopted. The SB believes that its members carried out their work with great responsibility, professionalism and commitment. In addition to materials prepared for the SB, the Management Board also provided all necessary explanations on particular topics. In addition to detailed arguments given by the Management Board directly at the meetings, members of the Management Board were also ready to discuss in detail any questions asked by SB members. The communication and cooperation between the Management Board and the SB were adequate and fair. SUPERVISORY BOARD In 2017, the SB operated with five committees. The following is a breakdown of Committee composition and their mission, the Banking Act (ZBan-2): Audit Committee: Until 26 April 2017, the Audit Committee comprised the following members: Andrea Moneta, Chair, Gernot Lohr, Deputy Chair, and Michele Rabà, Andrej Fatur, and Manfred Puffer, members. As of 26 April 2017, Gernot Lohr resigned from the position of Deputy Chair and was succeeded by Michele Rabà. The Committee operated under the new composition until 28 September 2017, when Andrzej Klesyk replaced Michele Rabà as Deputy Chair. In 2017, the Committee considered key topics and issues, as per Article 280 of the Companies Act (ZGD-1). The following is a summary of key topics considered by the Audit Committee: - Internal Audit optimisation project and hiring new eligible experts to complete the Internal Audit staff; - The 2018 financial year budget; - Preliminary audit plan for 2018; - Report on the implementation of 2017 internal audit plan; - Control of the accuracy, compliance and integrity of financial and accounting information provided by the Bank to shareholders and other external users; - Assessing the structure of the Bank s annual report, including drawing up a proposal for the Supervisory Board of the Bank; Risk Committee: In 2017, the Risk Committee comprised the following members: Manfred Puffer, Chair, Andrea Moneta, Deputy Chair, and Michele Rabà and Alexander Saveliev, members. In 2017, the Committee considered key topics and issues, as per Article 51 of ZBan-2. The following is a summary of key topics considered by the Risk Committee: - NPL reduction strategy: Implementation of ECB recommendations on NPL management; - Reports on regulatory risks; - NPL Strategy, Action plan regarding the ECB NPL Qualitative Assessment Findings, NPE Strategy, Action plan regarding the ECB Thematic Review on Risk Governance and Appetite, Risk appetite framework (RAF) with embedded Risk appetite statement (RAS) for 2017; Follow-up of the Thematic Review on Risk Governance and Appetite; IFRS 9 Thematic Review, the Nova KBM Group Recovery Plan; Action plan regarding ECB Thematic review Risk Governance and Appetite; ICAAP/Stress Test Update; - ICAAP&ILAAP Report of Nova KBM d.d. for 2016; - Advising on the Bank s current and future risk appetite, and on the risk management strategy; - Assisting in the supervision of the Bank Management Board regarding the implementation of the Risk Management Strategy. Remuneration Committee: In 2017, the Remuneration Committee comprised the following members: Gernot Lohr, Chair, Alexander Saveliev, Deputy Chair, and Michele Rabà, member. In 2017, the Committee considered key topics and issues, as per Article 52 of ZBan-2. The following is a summary of key topics considered by the Remuneration Committee: - Approval of revised Remuneration Policy concept and Performance Management Concept; - Remuneration Committee work plan; - Taking note of Nova KBM s remuneration peer analysis; - Defining Management Board goals for 2017; - Drafting proposals underlying general principles of remuneration policies, including definition of positions on respective remuneration policy topics; - Adequacy assessment of applicable methodologies applied in the remuneration system to incentivize responsible risk management, capital management, and liquidity management; - Drafting reports for the Bank s SB concerning the implementation of remuneration policies. - Control of the risk management system, internal control system, and internal audit; - Monitoring the financial reporting procedure, monitoring the efficiency of the company's internal controls, internal audit, and risk management systems; - Cooperating with the external auditor in auditing the company's annual report, in particular by means of exchanging briefings on major audit-related issues; - Cooperating with the internal auditor, in particular by means of exchanging briefings on main issues regarding internal auditing. BUSINESS REPORT AND 12

14 Nomination Committee: Until 13 January 2017, the Nomination Committee comprised the following members: Andrea Moneta, Chair, Gernot Lohr, Deputy Chair, and Alexander Saveliev, member. As of 13 January 2017, Andrea Moneta resigned from the position of Chair and was succeeded by Andrej Fatur. On 28 September 2017, Andrzej Klesyk was appointed as Nomination Committee member. In 2017, the Committee considered key topics and issues, as per Article 50 of ZBan-2. The following is a summary of key topics considered by the Nomination Committee: - Fit & Proper policies for candidates for Management Board members; - Fit & Proper Policy and assessment of KFH in 2017; - Appointment of a new SB member; - Defining tasks and required conditions for respective appointments, including time commitments for respective functions; - Assessment of the structure, size, composition and performance of the Management Board and Supervisory Board and drawing up recommendations for potential changes; - Assessment of knowledge, skills, and experience of each Management Board and Supervisory Board member, as well as of the body as a whole, and reporting accordingly to the Supervisory Board and Management Board; - Active contribution to ensuring performance of Bank obligations in terms of adopting relevant Fit & Proper policies. Credit Committee: In 2017, the Credit Committee comprised the following members: Manfred Pufer, Chair, Andrea Moneta, Deputy Chair, and Michele Rabà and Alexander Saveliev, members. The Committee is an expert advisory body of the Supervisory Board of Nova KBM d.d. Its fundamental mission is to provide prior written consent for transactions, as determined by a resolution of the Supervisory Board. The Bank Management Board shall seek the consent (approval) of the Credit Committee for legal transactions subject to special resolution of the Supervisory Board (i.e. List of Transactions) prior to concluding the transaction. In 2017, the Credit Committee dealt with the aforementioned tasks and activities. SB committees performed their work in accordance with tasks assigned to them, in line with the decisions and duties adopted by the SB, and in accordance with duties imposed on the SB committees directly by ZBan-2 or applicable implementing regulations. SB committees supported the SB in controlling the management of Nova KBM and Nova KBM Group companies. The committees carried out their work based on the law, Nova KBM Articles of Association, and respective rules of procedure setting out the lines and method of operation of respective committees. While per ZBan-2 committees need to be composed solely of SB members, they have, in cases where this proved to be necessary due to specifics or the nature of work, engaged external advisers that have extensive knowledge of the lines for which a particular committee is responsible and of operations of Nova KBM that require specific knowledge and skills. In 2017, the SB met at 8 regular, 23 by-correspondence, and 1 extraordinary meeting, considering material topics and issues in accordance with Article 48 of ZBan-2. The following is a breakdown of material topics discussed: Rules for Managing Conflict of Interest, Rules of Procedure of the Nova KBM Management Board, Supervisory Board Self-Assessment Process, Rules of Procedure of the Nova KBM d.d. Supervisory Board, and Rules of Procedure of Committees of the SB of Nova KBM d.d; Performance assessment of the Bank Management Board in 2016; Acquisition of SLS; Taking note of the ECB's intention to adopt a draft decision establishing macroprudential requirements; Treasury Reinvestment Strategy, along with the Reinvestment plan and risk assessment regarding redeployment of its treasury portfolio; Core Banking System replacement project; Strategy-Tracking mechanism; Consent on winding-up of KBM Invest d.o.o. under simplified procedure without liquidation; Performance report for leasing companies, and proposed further steps for KBM Leasing Hrvatska; AML status update and the upgrade and modification of the Compliance Link application; Annual Briefing on the status, policies and procedures of the Nova KBM d.d. Anti-Bribery and Sanctions Compliance; Side-stream merger of the company Gorica Leasing d.o.o. in liquidation and the company KBM Leasing d.o.o. in liquidation, sale of the equity stake in the company KBM Leasing Hrvatska d.o.o. in liquidation; Proposal to start the procedures for delisting of KBM10 bonds from the Vienna Stock Exchange; Materials for the Shareholders' Meeting Annual Report 2016, Nova KBM s consolidated disclosures for the financial year 2016, Independent Auditor's Report, Report of the Supervisory Board, Review of the work of the Supervisory Board. Based on the forgoing, the SB hereby estimates and declares it had fully complied with Articles 272 and 281 of ZGD-1, having regularly and thoroughly monitored the operations of Nova KBM and the Nova KBM Group in 2017 within its competences, and, therefore adequately supervised the management and operations of Nova KBM and Nova KBM Group and the work of the Internal Audit Centre. BUSINESS REPORT AND 13

15 Review and approval of 2017 Annual Report and taking note of the Management Board proposal on allocation of distributable profits for fiscal 2017 per Article 282 of the Companies Act (ZGD-1) The Management Board submitted to the SB within the statutory deadline the audited 2017 Annual Report of Nova KBM and Nova KBM Group, including the Auditor s Report. The Management Board also submitted the 2017 Annual Internal Audit Report of Nova KBM Group. The SB considered the audited 2017 Annual Report of Nova KBM Group and Nova KBM d.d., determining that the Annual Report is a complete and comprehensive review of business operations of Nova KBM and the Group in The SB also took note of the opinion of certified auditor Deloitte revizija d.o.o. on the audit of financial statements of Nova KBM d.d. as at 31 December 2017 and on the audit of financial statements of Nova KBM d.d. and its subsidiaries as at 31 December According to the certified auditor s opinion concerning the audit of financial statements of Nova KBM d.d. as at 31 December 2017, the accompanying financial statements present fairly, in all material respects, the financial position of Nova KBM d.d. as at 31 December 2017, and its financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standards as adopted by the European Union (hereinafter: IFRSs). Based on the review of Bank operations described above, the SB deems the Bank s performance in 2017 to be successful. The SB is not aware of any breach of legislation and/or Bank internal rules. Maribor, 21 March 2018 Supervisory Board of Nova KBM d.d. Andrej Fatur, Chair According to the certified auditor s opinion concerning the audit of financial statements of Nova KBM d.d. and its subsidiaries as at 31 December 2017, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards as adopted by the European Union (hereinafter: IFRSs). The SB also took note of the Management Board proposal on the sum and allocation of distributable profits for fiscal The SB proposed to the Bank Shareholders Meeting to appropriate distributable profits of 79,497, generated in fiscal 2017 for payment of dividends in the sum of 45,813,055.74, and as retained earnings in the sum of 33,684, REVIEW OF THE REPORT ON RELATED PARTY RELATIONSHIP Pursuant to Article 546a of ZGD-1, the SB examined the Report on Related Party Relationship and took note of the opinion of certified auditor Deloitte revizija d.o.o. concerning the Report on Related Party Relationship. The auditor declared in the report that the company Deloitte revizija d.o.o., based on procedures performed and evidence obtained, confirms it did not notice anything disputing that: Information in the report on Related Party Relationships for the year ending 31 December 2017 is a fair and accurate representation in all material respects; The fulfilment of the company's obligations arising from legal transactions presented in the Report was not materially disproportionate, based on circumstances known at the time of transacting; There are no circumstances which, in relation to other actions disclosed in the Report, would indicate that estimated disadvantages incurred differ substantially from the estimates of the management; all of which was considered based on the above criteria. BUSINESS REPORT AND 14

16 GROWTH AND PROFITABILITY The basis for the future development of the Bank and its Group is stable and profitable business performance. With our active approach, we have strengthened the Bank s market position, and with the acquisition of Summit Leasing Slovenija, one of the leading leasing companies in Slovenia, we have expanded the product range with the top quality finance leasing services. BUSINESS REPORT AND 15

17 4/ STRATEGIC DIRECTIONS OF NOVA KBM AND THE KEY STRATEGIC PROGRAMMES In accordance with the 2020 Strategy, some new strategic programmes were launched in Nova KBM Group in 2017, while the existing ones were upgraded. The programmes are implemented in all of the five strategic areas, i.e. under a regular work of organisational units and in interdisciplinary workstreams or project teams. The key ones are highlighted below. In April 2017, the Management Board and the Supervisory Board approved the Development Strategy of Nova KBM and the Nova KBM Group for the period of VISION AND MISSION Nova KBM s vision: To become the best bank in Slovenia by 2020 is placed in the heart of the Development Strategy. "Create great place to work" "Establish strong cost discipline" OpEx C/I VOE Operational efficiency Culture & Talents Metrics and milestone tracking are set for each strategic pillar, thus enabling the Bank to track implementation of the Strategy. Strong Risk Management and Compliance Nova KBM s vision is thoughtfully built on five key pillars or strategic areas. The Nova KBM s mission is a successful realisation of all the strategic pillars: Client excellence Growth and profitability Strong risk management and compliance Operational efficiency Organisational culture and development of employees (Culture & Talents) Growth & Profitability Controlled processes e.g. strong AML VALUES ROA PBT Client Excellence NPS "Deliver step-change in growth & profitabiliy" "Provide best products & highest quality services" "Be highly effective in managing risks & compliance" Implementation of the strategy is based on common values that employees of the Nova KBM Group shall take into account in their work, mutual relations, and cooperation with all stakeholders: trust, responsibility, excellence, honesty, loyalty, and integrity. STRATEGIC PILLAR CLIENT EXCELLENCE GROWTH AND PROFITABILITY EFFECTIVE RISK MANAGEMENT AND COMPLIANCE OPERATIONAL EFFICIENCY CULTURE & TALENTS ENTIRE PROJECT PORTFOLIO IN 2017 KEY PROGRAMME In addition to the strategic projects and policies described in this section, the Bank managed in 2017 also other regulatory and non-regulatory projects, the main objective of which is to ensure improvements across various areas of banking operations. Therefore, the Bank continued its activities for efficient project management and strengthening the project culture in the Bank. The Project Office The Client Excellence programme launched in June 2017 systematically involves all employees in the Bank, providing improvements in both retail and corporate transactions. The programme covers a comprehensive mix of activities: surveys among customers and employees, development of measures aimed at improving excellence, training of employees, and internal communication. See more about the programme in the section Together to Excellence Programme. In September 2017, Nova KBM acquired Summit Leasing Slovenija (hereinafter also SLS), one of the leading leasing companies in Slovenia. This Company became a member of the Nova KBM Group and, as a result, the Bank has upgraded its scope of operations by including top-quality finance leasing services. In 2017, the Bank carried out several activities aimed at ensuring sustainable profitability and economy of operations. In 2017, the Bank upgraded its policies and processes in the areas of risk management, compliance, and completing measures in the field of prevention of money laundering and terrorist financing. Read more about risks in the section Risk Management. The project on introducing a new core banking information system launched in 2017 is the central project aimed at achieving operational efficiency in all areas of Bank s operations. See more in the section Internal Development of Nova KBM. Following mergers of the three banks implemented in 2016 and 2017 (Nova KBM, KBS, PBS), the planned changes in the organisational structure of the Bank and the network of branch offices were carried out, with a view of achieving a higher operational efficiency and improving the quality of services. In 2017, the Bank merged the operations of some branch offices, while continued introducing special bank counters in post offices of Pošta Slovenije, and carefully examining possibilities for opening new branch offices. The Bank continued in 2017 the restructuring of its core business processes and procedures, thus pursuing the objective of providing its customers and business partners with top-quality services. Numerous activities have been strengthened in this area in 2017 with the aim of ensuring a uniform and positive organisational culture, satisfaction and loyalty of employees. To this end, the Bank launched a special programme (Voice of Employees), carried out several surveys, and prepared specific measures aiming at improvements in key areas: processes, work environment, career development, remuneration, and internal communication. was transformed into the independent Project Management Department. The Department continued pursuing the strategic objectives in this area, carried out training courses in project management, coordination of project and regular line work, and took care of the process of regular monitoring and reporting on the project portfolio. See more information on important projects in the section of Internal development. BUSINESS REPORT AND 16

18 5/ PROFILE OF THE AND 5.1 / IMPORTANT EVENTS AND ACHIEVEMENTS DURING 2017 JANUARY On 1 January, after they had received the relevant approvals from the European Central Bank, Josef Gröblacher and Jonathan Charles Locke (Jon Locke) took up the roles of Nova KBM s Management Board members, with Josef Gröblacher acting as Chief Operating Officer and Jon Locke as Chief Risk Officer. On 3 January, the District Court of Maribor issued a decision on entering into the court register the merger by acquisition of KBS d.d. (hereinafter also KBS) with Nova KBM. As at that date, the banks merged in legal terms, KBS banka ceased to exist as an independent legal entity, and all its liabilities and rights were transferred to its legal successor, Nova KBM d.d. On 9 January, based on the consent of the ATVP received on 23 December 2016, Infond 2040, a target-date sub-fund, started its operations. The sub-fund is designed for saving for any long-term financial goal and for investors that do not intend to withdraw their funds before the period around 2040 or later. On 31 January, Adria Abwicklungs GmbH in Liqu. was deleted from the court register, which brought the liquidation proceedings of the Company to an end. FEBRUARY On 17 February, the General Meeting of KBM10 bond holders was held and adopted a resolution to delist these bonds from the regulated market (Third market of the Vienna Stock Exchange). MARCH On 1 March, after he had received the relevant approval from the European Central Bank (ECB), John Michael Denhof (John Denhof) took up the role of President of the Management Board. Robert Senica, the former President, was appointed as Deputy President of the Management Board on the same day. On 10 March, based on the prior consent of its Supervisory Board, the Nova KBM s Management Board entered with the Biser Bidco S.à r.l. Company (Biser Bidco) into the contract on transferring the rights and liabilities (from Biser Bidco to Nova KBM). This transfer relates to the rights and liabilities from the purchase agreement for the business stake in SLS, which was concluded on 3 March 2017 between Biser Bidco and the companies Sumitomo Corporation and Sumitomo Corporation Europe. On 14 March, under the contest Naj skladi (Best Funds) and Naj upravljavci vzajemnih skladov (Best Mutual Fund Managers), three Infond s managers were ranked among top 10 in Slovenia. Three funds received a maximum of five stars in their respective categories, while in terms of the average rating of the assessed funds, KBM Infond was ranked second in the threeyear period, and third in the five-year period among all of the Slovenian asset management companies. MARCH On 27 March, the 32 nd Shareholders Meeting of Nova KBM took place; it was provided with information about the 2016 report on the internal audit of the Nova KBM Group, and the 2016 Annual Report of Nova KBM and the Nova KBM Group. Furthermore, the Shareholders Meeting decided on allocation of the distributable profit, granted a discharge to the Management and Supervisory Boards of Nova KBM for 2016, and took note of the remuneration paid to the members of the management and supervisory bodies in GEN-I Sonce, a 100-percent owned subsidiary of the GEN-I Group, issued together with SID banka and Nova KBM, the first green bond in the amount of 14 million and the maturity in The funds obtained from investors, SID banka and Nova KBM are intended to finance green energy or the projects, which will increase energy efficiency and independence. APRIL The Vision and Development Strategy of Nova KBM and the Nova KBM Group for the period of was adopted. The Nova KBM s vision is to become the best bank in Slovenia by In order to realise its vision, the Bank is focused on five strategic pillars: client excellence, growth and profitability, strong risk management and compliance operational efficiency, and culture & talents. Nova KBM and Pošta Slovenije opened specialised bank counters (SBO) in Slovenske Konjice, Grosuplje, and Ljubljana (Fužine), where customers can be provided with all Bank s non-cash services and comprehensive information about banking services. In accordance with the business network optimisation strategy following the merger of the three banks, Nova KBM merged its branch offices in Kranj and Novo mesto with their closest branch offices. Nova KBM received a bronze Effie award for the effectiveness in communications for its campaign Živim lajf Svet skozi Zlatkove oči (I live the life The world through Zlatko s eyes), which is part of the marketing communication support for the Sveta vladar (Ruler of the World) brand designed for young customers. MAY On 5 May, Fitch Ratings, the international credit rating agency, upgraded Nova KBM s Long-Term Issuer Default Rating (IDR) to BB from BB-. In accordance with the business network optimisation strategy following the merger of the three banks, Nova KBM merged branch offices of the former Nova KBM in Maribor, Ptuj, Murska Sobota, Nova Gorica, and Koper with their closest branch offices, where customers transactions were transferred. JUNE On 21 June, Moody s Investors Service credit rating agency upgraded Nova KBM s Long-Term Deposit Rating to Ba2 from B2, and raised the Bank s Baseline Credit Assessment (BCA) and the adjusted BCA to ba3 from b3. Nova KBM launched a new product, Paket Komplet (Complete bundle), for retail clients. Nova KBM introduced a new product, E-gotovina (E-cash), which enables corporate clients to digitalise their cash transactions. JULY Nova KBM renewed its offer for corporate clients by launching new account-linked bundles (hitri, modri, and zmagovalni paket Quick, Wise, and Winning bundles). AUGUST On 23 August, at its 33 rd meeting, the Shareholders Meeting of Nova KBM d.d. appointed Andrzej Klesyk as new member of the Supervisory Board; his term of office began on 1 September BUSINESS REPORT AND 17

19 On 31 August, a decision was taken on winding up KBM Invest d.o.o. Company under a summary procedure according to Article 421 of the Companies Act (ZGD-1). Nova KBM updated its mobile banking services mbank@net, enabling comfortable and secure operation through mobile telephones. SEPTEMBER On 1 September, Andrzej Klesyk took up the role of the Nova KBM s Supervisory Board member. Since then, Nova KBM has had a seven-member Supervisory Board. On 15 September, Moody s Investors Service credit rating agency announced that it had confirmed the Nova KBM s Long-Term Deposit Rating of June and changed the rating outlook from stable to positive. The Nova KBM s Long-Term Deposit Rating remains at Ba2, and the Baseline Credit Assessment (BCA) and the adjusted BCA at ba3. On 18 September, Nova KBM completed the acquisition of the 100-percent stake in SLS, one of the leading leasing companies in Slovenia, which has since become part of the Nova KBM Group. On 22 September, the Nova KBM s bond designated KBM10 (ISIN: SI ) was delisted from the Vienna Stock Exchange. After delisting the KBM10 bond from the Vienna Stock Exchange, Nova KBM has no financial instruments listed in organised trading or stock exchange listing. In September, Nova KBM and Pošta Slovenije opened specialised bank counters (SBO) in Radovljica and Šentjur. Nova KBM launched the product Banka na delu (Bank@Work), which is designed for employees in companies, combining preferential prices for selected products with easy and comfortable banking transactions. OCTOBER On 1 October, KBM Infond merged all of the 26 funds and sub-funds managed by the company into Krovni sklad Infond (Infond Umbrella Fund). On 13 October, the KBM Invest Company was deleted from the court register, by which the decision of 31 August on winding up the company under a summary procedure was implemented. All its liabilities and rights were transferred to Nova KBM as the sole company member. NOVEMBER On 6 November, Nova KBM opened in Maribor its first Premium banking office; after it had introduced Premium banking services for VIP customers in preceding months. On 25 November, KBM Infond completed the merger by acquisition of four funds. Infond Delniški was incorporated into Infond Dynamic, an equity subfund, while Infond EurAsia Flexible, Infond Resource Flexible, and Infond WorldMix were incorporated into Infond Global, a mixed sub-fund. 5.2 / SIGNIFICANT EVENTS AFTER THE END OF THE FINANCIAL YEAR JANUARY On 16 January 2018, the sale of the subsidiary KBM Leasing Hrvatska in liquidation was completed. On 26 January 2018, the District Court of Maribor issued a decision on merger by acquisition of Gorica Leasing d.o.o. in liquidation with KBM Leasing d.o.o. in liquidation. The assets of the acquiree were transferred to the acquiring company. On the day of the final decision, the District Court of Maribor issued a decision on striking Gorica Leasing d.o.o in liquidation off the court register. BUSINESS REPORT AND 18

20 5.3 / GOVERNANCE OF THE AND NOVA KBM / ORGANISATIONAL STRUCTURE OF THE 100 % GORICA LEASING D.O.O. IN LIQUIDATION 100 % SUMMIT LEASING SLOVENIJA D.O.O. 0,00 % MARIBOR FINANCE B.V. 50 % M-PAY D.O.O. NOVA KBM D.D. 100 % KBM LEASING D.O.O. IN LIQUIDATION 1,45 % 72,73 % KBM INFOND D.O.O. 100 % KBM ASCO D.O.O. 98,55 % KBM LEASING HRVATSKA D.O.O. IN LIQUIDATION BUSINESS REPORT AND 19

21 5.3.2 / ORGANISATIONAL STRUCTURE OF NOVA KBM REAL ESTATE MANAGEMENT INFORMATION TECHNOLOGY DATA QUALITY MANAGEMENT RETAIL BANKING BRANCH OFFICE NETWORK PROJECT MANAGEMENT OPERATING ACTIVITIES (COO) SUPPORT FOR OPERATIONS HEAD OF STAFF CUSTOMER SATISFACTION OFFICE PRIVATE RETAIL BANKING (CEO) ALTERNATIVE SALES CHANNELS BUSINESS ANALYSES, PLANNING AND PROFITABILITY PROCESS ORGANISATION AND MANAGEMENT CENTRAL PURCHASE AND COST MANAGEMENT HUMAN RESOURCES MANAGEMENT INTERNAL AUDIT ANTI-MONEY LAUNDERING OFFICE Liquidity Committee Classification Committee Bank s Credit Committees ALCO BANKING MARKETING RETAIL PRODUCT AND SEGMENT DEVELOPMENT COMPLIANCE OFFICE LEGAL OFFICE Operational Risk Committee Committee for Active Monitoring and Recovery of Loans in CC and SP Fit&Proper Committee MANAGEMENT BOARD STRATEGIC RISK MANAGEMENT RISK MANAGEMENT RISK MANAGEMENT ASSESSMENT (CRO) Audit Committee SUPERVISORY BOARD PHYSICAL AND INFORMATION SECURITY MANAGEMENT NON-PERFORMING LOAN MANAGEMENT Risk Committee Nomination Committee ACCOUNTING Remuneration Committee Credit Committee CORPORATE BANKING CORPORATE BANKING (CCBO) NON-STRATEGIC EQUITY INVESTMENTS IN SUBSIDIARIES FINANCE (CFO) CONTROLLING STRATEGIC PARTNERSHIPS PUBLIC RELATIONS AND CORPORATE COMMUNICATIONS RELATIONS TO FINANCIAL INSTITUTIONS INVESTMENT BANKING AND CUSTODY SERVICES TREASURY NOT ORGANISATIONAL UNIT BUSINESS REPORT AND 20

22 5.3.3 / CORPORATE GOVERNANCE OF NOVA KBM The governance of the Bank is based on applicable legislation, the Company s Articles of Association, and the rights and responsibilities of Company s governance and management bodies that realise the mission indicating that responsible management is a basis of all activities of Nova KBM and the Nova KBM Group. In compliance with Slovenian legislation, the Bank has a two-tier management structure, under which the relations between individual bodies are founded on mutual division of rights and responsibilities. John Denhof took up the role of President of the Management Board on 1 March Before taking up the role of the President of the Management Board, John Denhof acted as an authorised representative (procurator) of the Bank. On 31 December 2017, John Denhof served as a member of the Supervisory Board of Summit Leasing d.o.o. On 28 February 2017, the Supervisory Board took note of the resignation of the then President of the Management Board, Robert Senica. As of 1 March 2017, the Supervisory Board appointed Robert Senica as new member of the Management Board acting also as the Deputy President of the Management Board. As of 22 July 2016, the Supervisory Board of Nova KBM appointed Josef Gröblacher as a new member of the Management Board in the capacity of Chief Operating Officer. On 7 December 2016, Josef Gröblacher received the authorisation from the ECB to act as a Management Board member. The term of the newly appointed member started on 1 January 2017 as per the decision taken by the Supervisory Board on 16 December Before taking the role of a Management Board member, he held the office of an authorised representative (procurator) of Nova KBM since 15 September On 31 December 2017, Josef Gröblacher served as a member and Deputy Chair of the Supervisory Board of Bankart d.o.o. OTHER NOVA KBM COMMITTEES Bank Credit Committee The Bank Credit Committee makes decisions on granting all loans to customers within its powers, in accordance with the Bank s rules governing the powers, procedures and decision-making with respect to loan approvals. The committee comprises five members. It is chaired by the Deputy President of the Management Board responsible for corporate operations. The committee meets on a weekly basis. Distressed Loans Committee Nova KBM s bodies include: Management Board, Supervisory Board, and the Shareholders Meeting of the Bank. MANAGEMENT BOARD As at 31 December 2017, the Nova KBM Management Board comprised of the following five members: John Denhof, President of the Management Board, Robert Senica, Deputy President of the Management Board, Jon Locke, Management Board member, Sabina Župec Kranjc, Management Board member, and Josef Gröblacher, Management Board member. As of 14 November 2016, the Supervisory Board appointed John Denhof as new member of the Nova KBM d.d. Management Board. To perform his role of the Management Board member, John Denhof had to obtain relevant authorisation from the Bank of Slovenia and the European Central Bank. On 24 February 2017, John Denhof received the authorisation from the European Central Bank (Fit & Proper) to perform the role of a Management Board member. As of 28 February 2017, the Supervisory Board appointed John Denhof as new President of the Management Board of Nova KBM d.d. for a period of five years. As at 31 December 2017, Robert Senica was a member of the Supervisory Boards of the Bank Association of Slovenia and Sava, pokojninska družba, d.d., and the Chair of the Supervisory Board of KBM Infond DZU d.o.o. As of 19 August 2016, the Supervisory Board appointed Jon Locke as a new Management Board member in the capacity of Chief Risk Officer. On 7 December 2016, Jon Locke received the authorisation from the ECB to act as a Management Board member. The term of the newly appointed member started on 1 January 2017 as per the decision taken by the Supervisory Board on 16 December Before taking the role of a Management Board member, he held the office of an authorised representative (procurator) of Nova KBM since 15 October On 31 December 2017, Jon Locke served as a member of the Supervisory Board of Summit Leasing d.o.o. On 31 December 2017, Sabina Župec Kranjc held the office of Deputy Chair of the Supervisory Board in KBM Infond, and a Supervisory Board member of Summit Leasing d.o.o. In the Bank Association of Slovenia, she was a deputy member of the Supervisory Board. Since the change of Nova KBM s ownership (on 21 April 2016), the remuneration of Management Board members has been subject to restrictions arising from the received State Aid No. SA (2013/N) Slovenia, Restructuring of Nova Kreditna banka Maribor d.d. (Nova KBM) Slovenia based on the Commitments made by Nova KBM for the period of its restructuring, i.e. from 2013 to 31 December In accordance with regulations, Nova KBM has set up and is implementing an appropriate remuneration policy for employees the professional activities of which significantly influence the Bank s risk profile, including members of the Management Board. The most recent Remuneration Policy was adopted on 24 May 2017, being effective since 1 January Nova KBM discloses the remuneration of its Management Board in compliance with regulations governing that issue. The remuneration of Management Board members is disclosed in the notes to the financial statements. Further information about the work and powers of the Management Board is set out in the section on Corporate governance statement of Nova KBM. The Bank also has the Distressed Loans Committee in place. The committee comprises six members. It is chaired by the Management Board member, Chief Risk Officer. Liquidity Committee The Liquidity Committee monitors the situation and adopts measures for the provision of short-term liquidity. The committee comprises eight members. It is chaired by the Management Board member responsible for finance. The Liquidity Committee meets daily. Assets and Liabilities Committee (ALCO) The ALCO reviews and monitors the statement of financial position structure, capital adequacy, interest rate risk, structural liquidity, market risks, foreign exchange risks, profitability and performance of profit centres, financial plans, aggregate credit risk, regulatory requirements, tax aspects of operations, and other risks associated with new products and services. The committee comprises ten members. It is chaired by the Management Board member responsible for finance. The ALCO meets once in a month. BUSINESS REPORT AND 21

23 Operational Risk Committee The Operational Risk Committee is responsible for monitoring, measuring, assessing, and managing operational risks. The committee comprises six members. It is chaired by the Management Board member, Chief Risk Officer. The Operational Risk Committee meets at least on a quarterly basis. Committee for Active Monitoring and Recovery of Loans Outstanding to Corporate Customers and Sole Proprietors This committee is responsible for taking measures regarding loan recovery processes, for making decisions with respect to regulating past-due obligations of customers, and for intensive monitoring the performance of customers that are subject to special treatment. The committee comprises of five members. It is chaired by the Director of Underwriting. The committee meets at least once a month. Classification Committee The committee deals with and decides on proposals for changing/confirming percentages of individual impairments of customers with/without adjustment in credit rating, and addresses changes in impairments of non-negotiable securities and equity investments. The committee comprises four members. It is chaired by the Director of Underwriting. The Classification Committee meets on a monthly basis. Nova KBM d.d. Investment and International Lending Committee The Investment and International Lending Committee deals with and decides on debt securities portfolio investments and international lending portfolio on behalf and in the name of the Bank. The committee comprises five members. It is chaired by the Management Board member responsible for finance. The committee meets on weekly basis. High-risk Client Committee The High-risk Client Committee considers in a comprehensive manner the customers in which certain derogations have been ascertained that in terms of their substance represent an increased risk of abusing the Bank for money laundering or terrorist financing, and takes measures to ensure compliance with the legislation. The High-risk Client Committee is appointed by the Bank s Management Board. The Committee comprises four permanent members. The Anti- Money Laundering Office coordinates the work of the Committee and takes care of the implementation of decisions adopted by the Committee. The committee comprises four members. It is chaired by the Director of Anti-money Laundering Office. Committee meetings are called when necessary. Fit & Proper Committee In accordance with the provisions of the Banking Act (ZBan-1), the Companies Act (ZGD-1), and the Bank of Slovenia s regulations, the Bank s Management Board set up in 2014 the Fit & Proper Committee, aiming at assessment of the suitability of members of the management and supervisory bodies, and officers holding key positions. The committee comprises three members. It is chaired by the Director of Compliance Office. SUPERVISORY BOARD In accordance with the Articles of Association, the Supervisory Board shall consist of no fewer than 6 and no more than 11 members to be appointed by the Until 1 September 2017, the Supervisory Board comprised 6 members, i.e. Andrej Fatur, Chair, Manfred Puffer, Deputy Chair, Michele Rabà, Gernot Wilhelm Friedrich Lohr, Andrea Moneta, and Alexander Saveliev. As of 23 August 2017, the Shareholders Meeting of Nova KBM d.d. appointed Andrzej Klesyk as new member of the Supervisory Board; his term of office began on 1 September On 28 September 2017, Manfred Puffer presented his resignation notice from the Supervisory Board Deputy Chair, and the Supervisory Board appointed Andrzej Klesyk as new Deputy Chair. As at 31 December 2017, the Supervisory Board comprised the following members: dr Andrej Fatur, Chair, Andrzej Klesyk, Deputy Chair, Manfred Puffer, member, Michele Rabà, member, Gernot Wilhelm Friedrich Lohr, member, Andrea Moneta, member, and Alexander Saveliev, member. Dr Andrej Fatur holds a PhD in Law and has many years of experience working in both local and international environment. He serves as an attorney for corporate law. Currently, he is acting as the Chair of the Public Finance Law Institute. In the past, he served as a member of the Nova KBM s Supervisory Board, and a member of the Supervisory Board s Audit Committee and Risk Committee. Furthermore, he was a legal adviser to the Bank of Slovenia on banking operations and regulations. Manfred Puffer has more than 30 years of experience in banking and insurance sectors. Since 2008, he has been working as an Operating Partner at Apollo Global Management, LLC, focusing primarily on the European banking sector. He has acquired professional experience by performing a supervisory role in various companies in Europe and the United States, in particular at banking and insurance companies. Michele Rabà is a Director at Apollo Management International, LLP the area of Private Equity. In addition, he is acting as a Non-Executive Director at Biser Bidco S.à.r.l., a holding company for Apollo affiliated investment funds. He has acquired professional experience by performing a supervisory role in various companies in Europe, in particular in the area of finance. He previously worked in the Investment Banking Division Financial Institutions Group of Goldman Sachs International. Gernot Wilhelm Friedrich Lohr is member of the Risk Committee and of the Management Committee. Gernot Lohr is a Senior Partner at Apollo Private Equity having joined in Prior to that, Gernot Lohr was a founding partner at Infinity Point LLC, Apollo s joint venture partner for the financial services industry, since Before that, Gernot Lohr spent eight years in financial services investment banking at Goldman Sachs & Co. in New York. Gernot Lohr also worked at McKinsey & Company and B. Metzler Corporate Finance in Frankfurt. Gernot Lohr is also a member of the MIT Sloan Advisory Board. Gernot Lohr received his MBA from the MIT Sloan School of Management and graduated from the University of Karlsruhe with a joint Master s Degree in Economics and Engineering. Andrea Moneta is the President of the Board of Directors in Amissima, the insurance company of the Apollo Global Management fund. He has acquired relevant supervisory experience by acting in supervisory boards of various European companies, particularly at banking and insurance companies. He has gained in-depth experience through various senior management positions held at several European financial institutions. Andrea Moneta completed his post-graduate studies in risk management and financial markets. Shareholders Meeting. BUSINESS REPORT AND 22

24 Alexander Saveliev serves as the Director of the Financial Institutions Banking Group at the EBRD. Over the last 15 years, he has acquired knowledge and experience by performing various supervisory functions, and commercial and executive functions, particularly in the area of finance. As a representative of the EBRD, he has served as a member of supervisory boards of several banks (Bank Kedr in Russia, Megabank in Ukraine, and Šiaulių Bankas in Lithuania). He also gained his banking experience while acting as a member of the Management Board of ProCreditBank in Serbia. Andrzej Klesyk is a highly qualified expert in financial services. Since 2016, he has been working as a senior advisor, mainly in the field of financing listed companies, advising investors and banks, and advising international companies on their business strategy NAME AND SURNAME POSITION TERM OF OFFICE Andrej Fatur Chair Manfred Puffer Deputy Chair until 28 September 2017 Michele Rabà Member Andrea Moneta Member Gernot Wilhelm Friedrich Lohr Member in Europe. Between 2007 and 2015, he was Chief Executive Officer of PZU SA Company. Under his leadership, PZU became known as one of the largest and most successful cases of public offering of private company shares in Central and Eastern Europe. In accordance with the resolution adopted by the Shareholders Meeting, members of the Supervisory Board are entitled to receive basic remuneration for their work and reimbursement of their costs incurred in relation to their work and the work of the Supervisory Board s committees. For each subsequent financial year in which they will perform their functions, the two members of the Supervisory Board shall be provided with their remuneration in two equal amounts, i.e. 50 % of the amount in July and 50 % in December. AUDIT COMMITTEE Member (Chair until 16 December 2016) NOMINATION COMMITTEE Chair since 13 January 2017 REMUNERATION COMMITTEE RISK COMMITTEE Member Chair Member Deputy Chair from 26 April to 28 September 2017 (Chair since 16 December 2016) Deputy Chair until 26 April 2017 Chair until 13 January 2017 Deputy Chair Member Chair Member Deputy Chair Alexander Saveliev Member Member Deputy Chair Member Andrzej Klesyk Deputy Chair since 28 September Further information about the work and powers of the Supervisory Board is set out in the section on Corporate governance statement of Nova KBM. Deputy Chair since 28 September 2017 Member since 28 September 2017 SUPERVISORY BOARD COMMITTEES In the 2017 financial year, the following committees carried out their work in accordance with the Companies Act (ZGD-1) and the Banking Act (ZBan-1): the Audit Committee, the Remuneration Committee, the Nomination Committee, and the Risk Committee. In accordance with the Bank s Articles of Association, the Supervisory Board set up the Credit Committee, which is responsible for giving consent to the Management Board for concluding any legal transaction in respect of which the Supervisory Board adopted a special resolution. Further information about the work and powers of Supervisory Board committees is set out in the section on Corporate governance statement of Nova KBM. SHAREHOLDERS' MEETING OF THE BANK The Shareholders Meeting is the body of the Bank through which shareholders exercise their rights, i.e. take decisions on all statutory issues, in particular the issues in respect of staff decisions (e.g. appointment of Supervisory Board members, appointment of an auditor), distribution decisions (appropriation of distributable profit), and decisions on corporate changes (e.g. amendments to the Articles of Association, increase or decrease in share capital) and legal restructuring (e.g. mergers, acquisitions, demergers, etc.) with the aim of attaining the fundamental commercial objective to maximise the value of the Bank. Information in respect of the convocation of the Shareholders Meeting, participation at the Shareholders Meeting, and about the method of decision-making is set out in the section on Corporate governance statement of Nova KBM. Two Shareholders Meetings of Nova KBM were held in On 27 March 2017, the Shareholders Meeting took note of the 2016 report on the internal audit of the Nova KBM Group and of the opinion given by the Supervisory Board in this regard, the 2016 Annual Report of the Nova KBM Group and the 2016 Annual Report of Nova KBM d.d., and the auditor s report and the Supervisory Board s report on the examination of the 2016 Annual Report of the Nova KBM Group and the 2016 Annual Report of Nova KBM d.d. Furthermore, the Shareholders Meeting granted a discharge to the Management Board and the Supervisory Board for the year 2016, and took note of the remuneration paid to the members of the management and supervisory bodies in The Shareholders Meeting also decided on allocation of the 2016 distributable profit, and adopted a new resolution determining the amount of remunerations for Supervisory Board members. On 23 August 2017, the Shareholder s Meeting of Nova KBM d.d. appointed Andrzej Klesyk as a new member of the Supervisory Board, adopted a new resolution determining the amount of remunerations for Supervisory Board members, and determined a new method of cost reimbursement for Supervisory Board members. COMPLIANCE FUNCTION Sustainable and profitable growth of the Bank is based on the development of new products, effective solutions and excellent services on the one hand, and on exemplary and regulatory-compliant business practices on the other hand. In carrying out its operations, the Bank faces numerous threats, both in dealings with external parties and internally, including threats arising from non-compliance with the applicable regulations and from the loss of its integrity. Not only are the level and the nature of existing threats changing over time, but the development and changes taking place in the Bank constantly give rise to new threats. Considering the aforesaid, the Bank has set up a centralised, autonomous and independent compliance function represented by the Compliance Office, which is placed directly under the Bank s Management Board, having a direct access to both the Supervisory Board and the Audit Committee. BUSINESS REPORT AND 23

25 In accordance with the adopted Compliance Mission Statement, the Compliance Office works with all business departments of the Bank in supporting the attainment of its strategic, business and financial objectives, while at the same time protecting the Bank by developing and promoting an organisational culture that encourages ethical conduct and commitment to compliance with the law, and by strengthening the values of trust, responsibility, excellence, honesty, loyalty, and integrity, all of which are important components of the Code of Conduct, the applicability of which was spread to all the members of the Nova KBM Group in Furthermore, through effective training programmes, the Compliance Office advises the Bank in identifying any compliance risks, seeking regulatory solutions, and strengthening institutional compliance, thereby preserving the reputation of the Bank. It encourages all those who have grounds to suspect that any law or regulation, the Code of Conduct, or any other internal policy or procedure has been violated in the Bank, to promptly report what they know or suspect about the situation, while ensuring that the notifier does not have to fear of being subjected to retaliatory measures. In view of managing the risk of illicit conduct, the Bank adopted in 2017 the policy on unlawful practice management, and adjusted Bank s processes accordingly. The Bank also developed the strategy on unlawful practice management. The Bank is continuously improving its system of compliance risk management also in specific areas, such as ensuring compliance of the management body, operations of the financial instruments market, data protection, prevention of tax evasion, obligations arising from automatic exchange of information on financial accounts, management of the internal control system and the risks imposed by new legislation, etc. In accordance with the requirements of the regulator, the Bank renewed in 2017 the fit & proper process for members of the management bodies, and officers holding key positions. In the area of dealing in financial instruments, the Bank increased last year its control over possible market abuse, and started aligning its operations with new legislative frameworks. In the area of personal data protection, the Bank started intensely implementing new requirements of the General Data Protection Regulation (GDPR) by adjusting processes and information systems of the Bank. In 2017, the Bank kept implementing consistently FATCA requirements relating to identification of customers and annual reporting. Likewise, the Bank completed the introduction of the OECD CRS Standard requirements to its processes, and carried out the first reporting on non-residents under automatic exchange of information with the regulator in line with tax In the area of compliance, the Bank carries out regular training courses for all its employees, and suggests appropriate measures and advice as permanent support to individual organisational units of the Bank for the purpose of preventing or mitigating compliance risks in the Bank. In 2017, the Bank carried out compulsory and comprehensive training of all employees working in relevant fields. By considering the importance of the prevention of money laundering and terrorist financing, both from the point of view of increasing requirements of the national and international regulatory environment that requires the Bank to strengthen and intensify its activities in this area, the Bank has in place a special Anti-Money Laundering Office functioning as a fully autonomous and independent organisational unit that reports directly to the Management Board. Further details in this regard are set out in the section on the Prevention of Money Laundering and Terrorist Financing / PREVENTION OF MONEY LAUNDERING AND TERRORIST FINANCING Activities with respect to the prevention of money laundering and terrorist financing are carried out by the Bank in accordance with the Prevention of Money Laundering and Terrorist Financing Act. The Bank also respects the obligations arising from EU regulations relating to the implementation of restrictive measures, and obligations relating to the implementation of prohibitions and restrictions issued by the US Treasury Office (OFAC). Risks related to the possibility of abusing the Bank for the purpose of money laundering and terrorist financing and the risks in the area of restrictive measures are managed centrally, by the Anti-Money Laundering Office. Key tasks include the implementation of legal requirements, supervision of the internal control system, provision of training courses, continuous control over the performance of the system, and a continuous search for modern solutions that would contribute to a more efficient and improved system for managing the risks of money laundering, terrorist financing and restrictive measures. In 2017, Nova KBM carried out the Compliance Programme adopted, implemented the Compliance Statement, and in this context, among other things, updated the Nova KBM d.d. and the Nova KBM Group s Code of Conduct, the Compliance Policy, the Compliance Risk Methodology, and other relevant internal regulations, the Anti-Corruption Policy, and further improved the system of managing conflicts of interest, all of these with the aim of reducing the regulations. The activities aimed at the implementation of CRS requirements included the adjustment of processes related to the identification of customers, customer due diligence, identification and management of risks arising from treatment of customers and handling documents, regular staff training courses, and a comprehensive upgrade of the existing register of customers, including the installation of new controls relating to the quality of data. compliance risk, and strengthening the corporate culture and awareness in employees. In 2017, it also carried out a general annual compliance risk assessment, accompanied with specific compliance risk assessments by area. In order to increase its operational efficiency, ensure the reliability of financial reports and compliance, the Bank renewed the Internal Control System Policy and adopted the action plan in managing the internal control system, and started implementing them. BUSINESS REPORT AND 24

26 6/ SHAREHOLDERS EQUITY OF NOVA KBM The composition of Nova KBM shareholders equity at the end of 2017 and 2016 is presented in the table below. 7/ DECLARATION ON THE ADEQUACY OF RISK MANAGEMENT ARRANGEMENTS 31/12/ /12/2016 Share capital 150, ,000 Share premium 403, ,302 Accumulated other comprehensive income 30,029 33,201 Reserves from profit 20,228 20,228 Retained earnings 33,685 30,847 Net profit/loss for the financial year 45,813 33,004 Total 683, ,581 As at 31 December 2017, Nova KBM shareholders equity increased by 1.9 % or 12,476 thousand compared to 31 December Based on the relevant proposal of the Management Board and the opinion of the Supervisory Board, a resolution was passed at the 32 nd Shareholders Meeting of Nova KBM held on 27 March 2017 to earmark 30,166, In 2017, the share capital of Nova KBM did not change and amounted at the end of 2017 to 150,000 thousand. It was split into 10,000,000 ordinary no-par-value shares. of the distributable profit for the financial year 2016 as a dividend payment to the shareholder, with the remaining balance of the distributable profit, totalling 33,684, being carried forward as retained On 21 April 2016, the 100-percent owner of Nova KBM earnings. For 2017, Nova KBM reported a net profit of shares became the BISER BIDCO S.à.r.l. Company, 45,813 thousand. through which the shares were purchased by the American alternative investment funds manager, Apollo Global Management, LLC, and the European Bank for Reconstruction and Development. The Management Board and the Supervisory Board of the Parent Bank will make a proposal to the Shareholders Meeting to allocate the distributable profit of 45,813 thousand as a dividend payment. Further information Accumulated other comprehensive income decreased concerning the composition of distributable profit is in 2017 by 3,172 thousand, mainly due to the evaluation provided in financial statements. of available-for-sale financial instruments. INFORMATION ABOUT NOVA KBM SHARES NOVA KBM 31/12/ /12/ /12/ /12/ /12/ /12/2015 Share book value 3 ( ) Net earnings/(loss) per share 4 ( ) In accordance with Article 435(e) of the Regulation (EU) No. 575/2013 of the European Parliament and the European Council on prudential requirements for credit institutions and investment firms (CRR), the governance body consisting of the Management Board in the following composition: John Denhof, President of the Management Board, Robert Senica, Deputy President of the Management Board, Sabina Župec Kranjc, Management Board member, Jon Locke, Management Board member, Josef Gröblacher, Management Board member and the Supervisory Board: Andrej Fatur, Chair of the Supervisory Board, confirm, by signing this declaration that the risk management function, which is an independent area in the Bank s organisational structure, is organised properly. The risk management system is adequate with regard to the Bank s risk profile, strategy and risk appetite framework. The Bank has determined its Risk Appetite Statement setting out the list of material risks and other types of risks, as well as the key risk indicators in respect of its capital adequacy, liquidity position, asset quality, and profitability, which are monitored on a regular basis. With the purpose of defining the Bank s risk appetite framework, a forward-looking risk analysis has been conducted by the Bank to determine both the threshold values by tolerance level for each of these indicators and the relevant risk-response triggers. In order to properly deal with a situation where a defined threshold value has been reached or exceeded, the Bank has put in place an escalation process that enables the Management Board and the Supervisory Board to take appropriate action. The risk appetite statement of the Bank is below its risk appetite framework. Operational limits have been set for each type of risk, and these limits reflect and define the business strategy. The utilisation of the Bank s risk appetite statement is regularly monitored and reported to the Management and Supervisory Boards on a quarterly basis. Maribor, 14 March 2018 Management Board of Nova KBM d.d. Josef Gröblacher Jon Locke Sabina Župec Kranjc Robert Senica John Denhof Member Member Member Deputy President President 3 Book value per share on the last day of the reporting period is calculated as the ratio between the Bank s total equity or, in case of the Group, between equity attributable to owners of the Parent Bank, respectively, and the total number of shares at the end of the reporting period. 4 Net earnings or loss per share is calculated as the ratio between the Bank s net profit or loss or, in case of the Group, between net profit or loss attributable to owners of the Parent Bank, respectively, and the weighted average number of shares during the period. The total number of Nova KBM's shares outstanding at the end of the reporting period was taken into account in the calculation of the 2014 net earnings per share. Supervisory Board of Nova KBM d.d. Andrej Fatur, Chair BUSINESS REPORT AND 25

27 STRONG RISK MANAGEMENT AND COMPLIANCE Responsible management is the basis of all activities carried out in Nova KBM and the Nova KBM Group, while the security of operations, prudent risk taking, and achieving the highest degree of compliance with risk management standards, is our guide. We encourage the culture of ethical conduct and commitment to operate in line with the legislation and the Bank's values. BUSINESS REPORT AND 26

28 8/ RISK MANAGEMENT It is the mission of the Group to ensure the security of its operations, assume risks in a thoughtful and responsible manner, and comply with the highest standards of risk management. In its strategy, the Group has defined its risk appetite framework and risk appetite statement in order to manage it successfully. The Group is aware of material risks to which it is exposed in its operations, and classifies these according to the type of risk, individual organisational units, business processes, and employees. The risk management processes reflect the Group s comprehensive approach to risk and include the following: Identification of all risks that arise in the operations of the Group, Measurement or assessment of the amount of risk and evaluation of the methods of monitoring individual risk factors, Continuous monitoring of the exposure to individual risks, and systematic and comprehensive reporting, Learning from and adapting to the evolving business environment, which includes re-assessment of limits and methodologies for establishing limits in order to ensure stable and secure operations of the Nova KBM Group in the long run. It is the responsibility of each Group s employee to identify risks. The risk appetite framework and the method of measuring and monitoring each type of risks are defined by officers that specialise in dealing with each type of risk. The organisational unit responsible for defining the risk appetite framework and the method of measuring and monitoring the risks is in organisational terms separated from the risk-taking unit. Monitoring and managing of individual types of risk are described in detail in the respective risk management policies that take into account specific characteristics of individual risk types. Each risk management policy is the responsibility of a single person who takes care of compliance of the respective policy with other policies, while taking into account the applicable legislation, guidelines, recommendations, and best banking practice. The decision-maker in respect of the methodologies for measuring, monitoring and managing risks in the Nova KBM Group is Nova KBM. All companies within the Group manage risks in accordance with legal requirements and methodologies that reflect their activities and the volume of operations. Persons responsible for individual risk policy in the Bank are familiar with the method of managing respective risks across all companies of the Group, and have the opportunity and obligation to influence establishment of the adequate method of managing each risk in all companies of the Group. Risk management procedures are conducted independently at the level of each company. The Group has set up methods of reporting on individual risks, which stipulate the content, the frequency, and recipients of reports. Through an assessment of the likelihood of the realisation of threats and occurrence of loss, a critical review of the Group s risk profile and its risk appetite or individual types of risk is carried out each year, and an evaluation is made of the adequacy of controls established to limit individual types of risk at the same time. In 2017, the Bank renewed the assessment process of the Group s Risk Profile. It has established a comprehensive process to identify and assess risks, renewed the approach to identify the evaluators, risk holders, and companies involved in the assessment, and renewed the approach to calculating the overall risk assessment and the risk profile of business areas in the development of the final assessment of the Risk Profile. All of the companies within the Nova KBM Group treat risk management as a continuous process of identifying, measuring and managing the risks that arise in their operations. During the second half of 2017, the Bank set up the processes of risk management and control in SLS in the same way as applies to the other members of the Group. By these procedures, it also provided reporting on risk exposure at the Group level. In SLS, the Bank unified also relevant policies and methodologies for managing individual types of risks. CREDIT RISK In the area of credit risk management, Nova KBM made the following improvements in 2017: It upgraded its processes for assessing customer creditworthiness, Implemented the calculation of expected credit losses in accordance with IFRS 9, Upgraded the system of limits and connected it directly to the risk appetite. Credit risk is the risk of loss resulting from the failure of counterparty to repay its debts. Nova KBM is primarily exposed to credit risk through its lending portfolio, which comprises of: Risk-bearing assets (financial assets measured at amortised cost, financial assets measured at cost, and other financial assets that may be allocated to individual counterparties), Risk-bearing off-balance-sheet items (undrawn loans, undrawn overdrafts, credit lines, guarantees given, sureties, letters of credit, and similar transactions where a payment obligation of the Bank may incur). Nova KBM s credit risk management includes the following activities: Continuous monitoring and analysing customers performance and, based on this, their classification into appropriate credit risk categories, Monitoring the concentration and quality of the lending portfolio in terms of its compliance with the set limits, Monitoring exposure to credit risk by individual portfolio segment in terms of compliance with the risk appetite, Determining rules for the identification of nonperforming exposures and rules for the termination of a non-performing exposure status, Developing appropriate credit rating models, and their calibration, Monitoring the risk profile of the portfolio using appropriate risk parameters, such as the probability of default (PD) and loss given default (LGD), Separate managing of the performing portfolio and the non-performing portfolio, BUSINESS REPORT AND 27

29 Determining an adequate level of impairments to be recorded on the performing and non-performing portfolios, Monitoring the adequacy of collateral provided for securing individual financial assets and commitments, Rules of best banking practice. Prior to approving any loan, the Bank carries out a thorough review of the customer s operations and classifies each customer into credit risk categories from 0 to 12 based on its Customer Classification Methodology. The Risk Management Division is involved LIQUIDITY RISK The Bank regularly follows the following principal objectives with respect to liquidity risk management: Continuous provision of liquidity, Daily settlement of all on- and off-balance sheet liabilities in various currencies, Limiting exposure to each customer and groups of related customers, Systematic early detection of any increase in credit risk using the warning signals (EWS), Developing stress scenarios for the purpose of calculating the Bank s internal capital, Developing stress scenarios for the purpose of the Financial Restructuring Plan, and reporting on the values of certain indicators as action plan triggers, Participating in decision-making on loan approvals, Ensuring proper functioning of the lending process by providing an adequate assessment of risks for each loan. All of the companies within the Nova KBM Group comply with the upper lending limit of a customer or a group of related customers, as set out in the Nova KBM Group Methodology for Determining Upper Lending Limits. The principal goal of credit risk management is to ensure the stable and profitable performance of the Group while assuming the necessary level of credit risk that arises from the nature of Bank s operations. The Nova KBM Group reduces the impact of assumed risks by complying with the following: Regulations of the European Central Bank, instructions of the European banking body and the Bank of Slovenia, which are based on EC directives and regulations, Its own risk management strategy, which is set out in decision-making on loan approvals. During the credit relationship with a customer, the Bank carries out the following procedures: At least once a year, it verifies the adequacy of credit rating assigned to the customer, taking into consideration financial statement data and soft operation factors, It assesses, on a daily basis, the compliance of credit rating after delays in settlement of obligations, frozen current accounts, and initiated insolvency proceedings, It verifies, on a daily basis, adverse events in accordance with the early warning system (EWS), Depending on the risk classification of the customer or investment, the Bank promptly records adequate level of impairments for each contract. The Bank classifies customers into appropriate credit rating categories using its own credit rating model. Special attention is devoted to assignation and cancelling of the statuses of a defaulting customer and non-performing exposure. When the debtor s performance improves, the Bank classifies it in the status of cured exposures in accordance with the rules. To calculate impairments and provisions, Nova KBM uses its own Methodology for Assessing Credit Risk Losses, which is compliant with the Bank of Slovenia s Regulation on the Assessment of Credit Risk Losses of Banks and Savings Banks, International Accounting Standards, and EC regulations. In the area of liquidity risk, the Bank started automation and improvement of the ILAAP process, which will receive more attention in Liquidity risk management is an integral part of a prudential and secure operation of the Bank. Liquidity risk is the risk of loss when the Bank is not able to meet all of its due liabilities, or is forced to provide necessary funding at significantly higher than usual costs. It arises from maturity mismatches between assets and liabilities. It may result in a failure to meet obligations to customers in paying off deposits and withdrawing approved credit lines. The Bank has its own methodologies for identifying, measuring, managing, and monitoring liquidity, which are applied at the Group level and enable matching of actual and potential liquidity sources with the actual and potential use of liquid assets within the same periods of time. Compliance with all regulatory requirements, Monitoring compliance with the set liquidity ratio thresholds, indicators, and of other elements of liquidity risk, Managing an adequate pool of financial assets used as collateral for central bank s claims, Efficient management of daily liquidity surpluses and setting up an adequate liquidity reserve, Monitoring the liquidity gap, Regular conducting of liquidity stress tests and reporting on the results thereof. In accordance with the Capital Requirements Directive IV and the European Banking Authority (EBA) guidelines referring to SREP, the Bank carries out the Internal Liquidity Adequacy Assessing Process (ILAAP). The ILAAP process has an important role in the SREP Methodology concerning the process of determining liquidity requirements under the second pillar. The liquidity risk management policy of the Nova KBM Group represents a framework of the ILAAP process in the Nova KBM Group. ILAAP is an internal process, which means that it has to comply with the Bank s business model, size, complexity, risk, market expectations, etc. It includes all qualitative and quantitative information on which the risk appetite is based, including a description of the systems, processes and methodology used to measure and manage liquidity and financing risks. in detail in the Nova KBM Group s risk management policies and methodologies, BUSINESS REPORT AND 28

30 In 2017, Nova KBM managed liquidity risk in accordance with the adopted policy and methodologies. It fully complied with the regulations on minimum requirements concerning liquidity position, which prescribe as obligatory the Category I Liquidity Ratio (up to 30 days), while the Category II Liquidity Ratio (up to 180 days) is calculated for informative purposes only. The Bank complies with the minimum regulative ratios, i.e. the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). All the three ratios are identified as key risk indicators and defined in the Risk Appetite Statement. The Nova KBM Group has a system of limits in place as insurance against liquidity risk and for its mitigation, which includes quantifiable risks and important factors of liquidity risk. The purpose of the system of limits is to manage liquidity risk and determine effective measures and activities to be used to prevent and manage various liquidity crisis situations, including appropriate measures to overcome and limit any consequences of liquidity crises, and to restore the Bank s normal liquidity position. Negative liquidity position may arise very quickly and unexpectedly; this is why the Bank has drawn up three types of stress scenarios at two difficulty levels guiding the Bank to adopt adequate measures to reduce liquidity risk. Stress scenarios are carried out on a monthly basis with the main aim to ensure sufficient amount of liquidity reserves for the period precisely fixed in advance. The results of stress tests are discussed by the ALCO on a regular basis. The Bank regularly reports to the ALCO on the diversification of funding sources, liquidity ratio values, and on the results of the dynamic liquidity gap analysis that takes into consideration the time component of cash flows, which is used by the Bank for early detection of negative moments in the anticipated liquidity position. The main cash flows are assessed on the basis of a statistical analysis of historical timeseries data on liquidity items. MARKET RISKS In the area of market risks, the Bank upgraded its monitoring system under the ICAAP process, and updated the system of limits in Market risk is a risk of loss arising due to adverse changes in financial markets (changes in the prices of securities, exchange rates or interest rates). Nova KBM monitors market risks of trading book items and market risks of banking book items separately. The method of monitoring and reporting as well as of limiting the exposure to market risks is set out in the Market Risk Management Policy. The Bank values its trading portfolios daily mark-tomarket. In order to determine the risk of a particular financial instrument held for trading, the Bank calculates value at risk (VaR) on a daily basis. The methodology used by the Bank to calculate (VaR) complies with the Basel standards: 99 % one-sided confidence interval, the calculation of volatility is based on 250-day data history, 10-day securities retention period or one-day retention period for currencies. The limits are revised at least once a year and approved by the Bank s Management Board. The Strategic Risk Management Department monitors compliance with limits on a daily basis, publishes them on the Bank s Intranet site, and reports any violation of limits to responsible persons in accordance with adopted documents. Position risk is a risk of loss resulting from a change in the price of a financial instrument held by the Bank in its portfolio for the purpose of trading for its proprietary account. The Bank holds three trading portfolios: the portfolio of debt securities, the portfolio of equity instruments, and the currency portfolio. Position risk is controlled by trading limits determined by the Bank. Limits are additionally determined by traders as decided by the head of the Trading Department. Trading in securities is limited by the highest allowable risk value of the portfolio and the stop-loss limit. In addition, stop-loss limit is defined for each transaction. Limits for foreign exchange trading for the Bank s proprietary account are defined as the maximum allowable open position of the Trading Department. Foreign exchange risk represents a potential loss arising from an open foreign exchange position and the volatility of foreign exchange rates. Foreign exchange risk is restricted by the maximum allowable 10-day VaR, which is established at the individual currency level, and the maxim allowable 10-day VaR is established also for the entire currency portfolio. The Bank monitors the efficiency of maintaining a balanced position by individual foreign currencies daily, whereas any violation of limits is reported to responsible persons in accordance with instructions. Credit risk spread is a risk arising from any changes in the market value of debt instruments held in the portfolio of available-for-sale financial instruments and results from changes in the credit quality of the debt instrument issuers. Given the volume of its portfolio of available-for-sale debt instruments, the Bank has established, through the ICAAP, that it is exposed to the credit risk spread. Assessment of the amount of internal capital required to cover changes in the credit risk spread is based on the BCBS Standard methodology: Minimum capital requirements for market risk (January 2016). Based on the results of this assessment, a calculation has to be made of the impact of the shock on the fair value of debt instruments held in the portfolio of available-for-sale financial instruments. INTEREST RATE RISK IN THE BANKING BOOK (IRRBB) In the area of interest rate risk in the banking book, the Bank fully upgraded the risk management process in The Bank has upgraded in particular its management scenarios for the needs of the ICAAP process and the system of limits. Further activities are planned in Interest rate risk is a risk of loss arising due to unexpected changes in market interest rates, and results from maturity mismatches of interestsensitive assets and liabilities. The Bank identifies, measures, manages, controls, and monitors the interest rate risk in accordance with the Interest Rate Risk Management Policy and the Methodology for Interest Rate Risk Measuring. BUSINESS REPORT AND 29

31 With a purpose of managing the interest rate risk, the Bank measures on a monthly basis the impact of various shifts in the yield curve on the economic value of equity (EVE) and net interest income (NII). For its internal needs and to calculate capital requirements for the interest rate risk, the Bank implements 9 interest rate scenarios aimed at day-to-day management of the interest rate risk. The capital requirement for the interest rate risk is determined by the scenario producing the greatest negative impact on the economic value of equity (EVE) and on net interest income (NII). In all of the scenarios, the Bank takes into account also the distribution of demand deposits in accordance with the internal models. The Bank regularly performs also stress testing scenarios, using them to measure its vulnerability in stressful market conditions. In addition to the standardised stress test in the form of a parallel shift in the yield curve by +/-200 basis points using the zerointerest-rate floor, the Bank carries out also 6 other shifts in the yield curve of various proportions that were summarised in line with the Basel standards on the interest rate risk in the banking book management. The result with the largest negative change in the economic value of equity shall not exceed 15 % of the Bank s Tier 1 capital. The Bank controls its exposure to the interest rate risk of portfolios by the system of limits, which is approved by the Bank s Management Board and updated at least once a year. The Bank has limited its exposure to interest rate by time buckets for the three most important currencies: EUR, US$ and CHF. OPERATIONAL RISK In 2017, the Bank set up the framework for a comprehensive management of operational risk The official definition of the operational risk determined by Basel II is as follows: a risk of loss arising from inappropriate or failed internal processes, people and systems or external events. This definition includes legal risk (in accordance with CRR regulation), while excluding the strategic risk and the risk of losing business reputation. It is known, however, that some ORs (operational risks) can lead to subsequent issues related to loss of reputation. Although OR may have a number of sub-categories, such as legal risk, risk of conduct, and information and communication technology (ICT) risk, Nova KBM treats all these risks as a general OR. The Bank established in 2017 the Operational Risk Management Department, which coordinates a systematic recording of OR events. The reporting system on OR incidents covers the whole Nova KBM Group, being implemented on a monthly and quarterly basis. The report for the whole Group is discussed by the Operational Risk Committee, which meets at least quarterly. The committee aims at ensuring a proper flow of information through the participation of all organisational levels and, consequently, integrity of the OR treatment. This is the way to ensure also a possibility of action, as the reports are discussed by members of the Management Board and directors of divisions and departments having an important role in managing operational risks. The Operational Risk Committee reviews, on a quarterly basis or more frequently, the report on incidents recorded by all important business segments, adopts necessary measures in this regard, and monitors their implementation. The Operational Risk Committee is responsible for dealing in the following matters: Operational risk loss events of the Nova KBM Group, Review of operational risk self-analyses, Control over external contractors, Physical and information security. The Bank calculates capital requirements for operational risk for the Nova KBM Group according to the Pillar I by using the Basic Indicator Approach (BIA). In 2017, the Bank introduced under the ICAAP Project an internal capital adequacy calculation for ORs according to Pillar II based on its own models resulting from OR financial loss events, OR non-financial and potential events, and self-analyses of operational risk carried out. The Bank identifies and distinguishes operational risk events to the following: Financial loss events, Loss events arising from operational risk and resulting either in financial loss (impact on the profit and loss A non-financial event arising from operational risk is the event producing an effect of regulatory nature, or an effect relating to customers, market/competitors, and/or reputation. A potential event arising from operational risk is the event with no financial/non-financial effects, while having the potential to cause such effects. Since not all operational risk losses can be measured, the Bank assesses them additionally, yet separately, under its annual risk profile. The determination of the risk profile with respect to operational risk is of particular importance, given that this risk makes up the largest proportion of loss events, which cannot be reliably measured; therefore, they have to be assessed. The Bank classifies operational risk loss events by operating segments and types of loss events, in accordance with the guidelines of the Basel capital standards. In 2017, within the OpRisk Framework, the Bank developed a comprehensive OR training plan, established appropriate IT support for measuring, assessing, managing and monitoring ORs, and set up effective controls of reporting on OR events. account [IPI]) or misstatement of items in IPI. Non-financial and potential events. BUSINESS REPORT AND 30

32 In the field of managing risks arising from fraud, the Bank wants, through adopting appropriate guidelines and establishing the system of responsibility for the development of internal controls and carrying out investigations, to establish an organisational culture complying with the internal documents and objectives of the Bank. To this end, the Bank established a separate organisational unit, the Fraud Prevention Department. The Fraud Management Policy has been set up, which requires the Bank, in relation to owners and other stakeholders, to take necessary measures to prevent fraud, which could arise from prohibited conduct by employees, business partners or suppliers or the conduct of other legal entities or natural persons. The Bank manages fraud and the risks arising from fraud or suspected fraud through the process of fraud prevention, detection and response, which involves establishing a solid ethical culture, identifying and assessing the risk of fraud, education and awareness raising in the area of risks arising from fraud, the development of mechanisms for reporting, disclosing and dealing with fraud, and the development of new products. Management of operational risk in the area of physical and information security within the Bank includes the following areas: (1) protection of people and assets, (2) information security management, (3) business continuity management. Ad 1: Services related to the protection of people and assets are carried out in accordance with the applicable regulations and standards. In the area of protecting people and assets, internal training courses and measures based on risk assessments are carried out. The area is defined by the Policy and associated documents. In ensuring technical, mechanical and physical protection, as well as protection of cash transports, the Bank cooperates with several contractors that provide a high level of private protection services. Ad 2: The Bank has introduced an information security management system with the aim of protecting sensitive business information from unauthorised access and interception (confidentiality), protecting accuracy and completeness of business information and business computer hardware and software (integrity), and ensuring availability of business information and information technology services to users, whenever and wherever they may use them to manage their day-to-day operations (availability). In 2017, the Bank, working with external providers, renewed the information security management system, which allows for improvement of the control environment and compliance of policies with the legislation. Furthermore, the Bank successfully introduced a centralised and documented security incident management system in 2017, and instructed all key users accordingly. The Bank carried out e-training for all the employees of the Bank, and introduced regular information about news and threats in the area of information technology through the Intranet. Ad 3: The Bank has in place a business continuity management system aimed at managing extraordinary events in line with the adopted Business Continuity Strategy, i.e. for breakdown of key buildings, information and communication resources of the Bank, staff, or in case of failure in key suppliers. The system is designed to enable effective action with the aim to fully protect key services and processes and the related Bank s resources. The system is based on the regulatory framework, and on the Business Continuity Management Strategy and Policy and the related documents developed by the Bank. The Bank carries out, on an annual basis, a business impact analysis (BIA), risk assessment, maintenance and testing of business continuity plans, and notifying the Operational Risk Committee of any extraordinary events and identified risks. The Bank provides assistance to other companies in the Group. In 2017, the Bank, working with an external contractor, carried out a renewal of its business continuity management system. OTHER TYPES OF RISK REPUTATIONAL RISK Reputational risk is a risk of loss resulting from damage to the Bank s reputation. The loss may incur as a consequence of various factors, such as improper management of all types of risk in the Bank, erroneous or negative actions of Bank s employees, bad experience gained by stakeholders in relation to the Bank, and negative opinions and judgements expressed by stakeholders with respect to the Bank. The Bank has developed the Reputational Risk Management Policy, defining the method of monitoring the key risk factors or loss of its reputation, the procedures for managing reputational risk, responsibilities and the persons in charge of the activities aimed at effective management of reputational risk. When drafting its business plan, the Bank estimates the capital requirement for reputational risk. The capital requirement for reputational risk takes into consideration the possibility of a decline in the Bank s reputation and its effect on the ability to attract necessary funds. The capital requirement for reputational risk at the level of the Group equals that for reputational risk at the Bank s level. STRATEGIC RISK Strategic risk is a risk of loss arising from wrong business decisions, improper implementation of adopted decisions, or poor responsiveness to external changes in the business environment. Consequently, the Bank regularly monitors the key elements of strategic risk associated with its business strategy, mission and vision, its strategic objectives, and its corporate culture pursued in the implementation of its business strategy, while taking into account also external impacts of the business environment. Under the ICAAP process, and in line with the internal methodology, the Bank assesses material exposure to risks at the Bank and Group s level, respectively, and determines the capital requirement accordingly. INFORMATION SYSTEM RISKS The Bank devotes particular attention to the management of risks associated with the functioning of its information system. Information technology risk management is an on-going process in the Bank, since the Bank can only ensure high availability and proper functioning of its core information systems through continuous monitoring of risks related to the information infrastructure and improvement of controls. In 2017, the Bank introduced key risk indicators for the information technology area, and they are reported to the Management Board on a quarterly basis. The Bank has also undertaken a renewal of the information system risk management process. Loss events arising from (failures in) the functioning of information systems fall within one of the regulatory-defined categories of loss events. The Bank has in place business continuity plans for its information technology systems that comply with the applicable regulations. These plans relate to disaster recovery procedures. Backup facilities storing copies of systems and data have been set up at a secondary location to ensure the continuous functioning of IT systems. As part of the annual evaluation of the Bank s risk profile, the risks related to information systems are treated as operational risks and thus included in the overall assessment of the risk profile of the Bank. BUSINESS REPORT AND 31

33 REAL ESTATE PORTFOLIO RISK The Group has defined the real estate portfolio risk as the risk to which it is exposed due to fluctuations in the market value of its own real estate portfolio, comprising of the following assets: Property, plant and equipment (treated in accordance with IAS 16), Investment property (treated in accordance with IAS 40), and Non-current assets held for sale and discontinued operations (treated in accordance with IFRS 5). The Group regards its exposure to real estate risk as moderate. PROFITABILITY RISK Profitability risk is a risk that the Bank or the Group will incur losses in its operations that may have a significant impact on the business performance and, consequently, cause a reduction in the level of the Bank or the Group s equity. Under the ICAAP process, and in line with the internal methodology, the Bank assesses material exposure to risks, and determines the capital requirement at the level of the Bank or the Group accordingly. In order to assess its exposure to profitability risk, the Bank has to determine the key factors that have influenced its operations in the past and will influence the implementation of its business plan. Following that, the Bank manages profitability risk at the level of the Bank or the Group, respectively, on the basis of a carefully designed business plan. BUSINESS REPORT AND 32

34 OPERATIONAL EFFICIENCY Following the merger of the three banks in 2016 and 2017 (Nova KBM, KBS banka, PBS), the Bank s organisational structure and branch network were changed to improve operational efficiency and further enhance the quality of services. At the same time, we opened several special bank counters in the Pošta Slovenije units and focused on improving our work processes, as well as the efficiency of the Bank's information system. BUSINESS REPORT AND 33

35 9/ PERFORMANCE OF THE AND NOVA KBM In 2017, a high growth of the Slovenian economy was mostly driven by the expansion in the euro zone. Contribution of exports to the GDP growth has increased to the highest level since 2010; however, the starting point was significantly higher than after the crisis in Real GDP for 2017 exceeded the expected figure and, according to the SORS s first estimate, accounts for 5.0 %. In autumn of 2017, the growth of export reached pre-crisis levels. Surplus in international trade of goods and services has further increased. Slovenian exporters remain competitive in terms of prices in the euro area markets. 9.1 / MACROECONOMIC ENVIRONMENT 2017 was a good year for the global economy. Signs of synchronisation are being shown all over the world, area has been growing steadily and remains well above the long-term average. since the proportion of countries in which the growth of economic activity exceeds the average of recent years has been increasing since the second half of Among developed economies, in the United States, the growth of economic activity has rapidly strengthened in the third quarter of 2017, despite the effects of recent hurricanes. Real GDP growth remained strong also in Japan, while activity in the United Kingdom In 2017, the US Federal Reserve (FED) gradually increased the key interest rate to the level between 1.25 and 1.50 percent. The gap between the key interest rates in the US and the euro area is increasing, as the latter amounts only to 0.25 percent. A rise in key interest rates is expected in 2018 both in the US and Europe. was relatively moderate, resulting partly from the Risks at the global level are still present; they are negative effect of the pound depreciation on real primarily of political or geopolitical nature or result household income and consumption, which has more from rapid growth of oil prices and the re-appreciation than outweighed the increased competitiveness and of the euro. At the level of global funding conditions, positive incentives due to ever-increasing growth in the risk is primarily due to faster normalisation of FED the euro area. Trust in the economy in the European monetary policy and increase in interest rates, and hence adjustment of capital prices. 5 GDP by main trading partners, changes in percentages compared to the previous period, data are seasonally adjusted III 2017 IV 2017 I 2017 II USA United Kingdom Japan China Euro area Source: European Central Bank, Economic Bulletin, No. 8/2017 Selected macroeconomic indicators for Slovenia INDICATOR * 2018* Real GDP (in %) Inflation (annual average in %) 0.2 (0.5) (0.1) Registered unemployment (in %) Real export of goods and services (in %) Real import of goods and services (in %) Note:* Forecast; Autumn Forecast, IMAD Source: IMAD, Statistical appendix, Autumn Forecast of Economic Trends 2017 Growth in employment remained high also in November Year-on-year, the number of employees in the private sector increased by 4 %, and the number of unemployed has been decreasing steadily. Labour market conditions characterised by rapid growth in employment allow for a faster growth of private consumption than realised in the third quarter. In 2017, after two years of negative rates, inflation increased by December to 1.9 %, thus exceeding the average in the euro area. In 2017, the average annual inflation rate was 1.6 %. All major turns in total inflation were driven mainly by fluctuation of global oil prices. Slowdown in the growth of investment activity in the third quarter of 2017 was transient, conditions for investment are especially favourable. In particular, a record business surplus of companies stands out, which still enables companies to finance investments with own funds and reduces the need for bank financing. Consequently, the increase in new bank loans to nonfinancial companies remained relatively low in 2017, while financing from debt securities declined. Positive trends in labour market have strengthened the yearon-year growth in bank lending to households. The lending portfolio in banks has been improving, and the portion of non-performing exposure decreased in The portion of deposits of the non-banking sector has been growing steadily, and sight deposits account for as much as 68 % of all bank liabilities. Excess liquidity has remained high, which is reflected in lower demand for interbank financing, both domestic and foreign. 6 The growth of net interest in the banking system in Slovenia remains negative, as net interest was lower in 2017 by 2.9 % year-on-year. Nevertheless, banks generated higher profits during the said period, mainly due to reversal of impairments and provisions in Bank of Slovenia, Summary of Macroeconomic Developments, February Bank of Slovenia, Monthly Information on Bank Performance, February Bank of Slovenia, Economic and Financial Developments, January 2018 BUSINESS REPORT AND 34

36 9.2 / ANALYSIS OF PERFORMANCE OF THE GROUP AND NOVA KBM / NOVA KBM INCOME STATEMENT The Bank s net profit for the financial year 2017 is 45,813 thousand. As at the date of merger of KBS banka to Nova KBM in 2016, KBS banka ceased its operations as an independent legal entity. All its obligations and rights were taken by its successor, Nova KBM. The effects of KBS banka s operations from the previous year are shown in the Bank s income statement from 1 July 2016 onwards. NET INTEREST INCOME Net interest income earned by the Bank in 2017 totalled 78,584 thousand ( 90,728 thousand reported for 2016). Interest income amounted in 2017 to 88,747 thousand ( 104,212 thousand in 2016). Lower interest income in 2017 compared to 2016 resulted mainly from lower interest on available-for-sale financial assets. Interest expenses amounted in 2017 to 10,163 thousand ( 13,484 thousand in 2016). At the end of 2017, interest margin was 1.62 %. NET FEE AND COMMISSION INCOME Net fee and commission income generated by the Bank in 2017 amounted to 40,178 thousand ( 37,885 thousand in 2016). Fees earned on local payment transactions were the largest proportion of fees earned and paid. OPERATING COSTS The operating costs (administration costs, including depreciation and amortisation) incurred by the Bank in 2017 totalled 108,861 thousand ( 102,476 thousand in 2016). In 2017, staff costs amounted to 57,788 thousand, general and administrative costs to 42,689 thousand, and depreciation and amortisation costs to 8,384 thousand. At the end of 2017, the Bank had 1,419 employees, and 1,464 were employed at the end of NET IMPAIRMENTS AND PROVISIONS In 2017, the Bank generated income of 12,716 thousand from reversal of provisions and reversal of impairments (in 2016, the Bank recorded net impairments and provisions in the amount of 14,465 thousand). Net income from reversal of impairments was 12,146 thousand, and reversal of provisions was 570 thousand. STATEMENT OF NOVA KBM FINANCIAL POSITION BALANCE SHEET TOTAL As at 31 December 2017, Nova KBM s balance sheet total amounted to 4,913,905 thousand ( 4,831,767 thousand at the end of 2016). According to most recent available data, the market share of the Nova KBM s balance sheet total remained at 13.0 % at the end of LOANS At the end of 2017, Nova KBM s loans outstanding amounted to 2,419,507 thousand, and increased by 310,998 thousand compared to the end of A majority of loans relates to customers, in which outstanding loans increased by 19.2 % in 2017, mainly on account of long-term loans. Most of this increase is attributed to the acquisition of Summit Leasing Slovenija, which in turn resulted in a decrease in liquid assets (which decreased by 30.6 % in 2017). FINANCIAL ASSETS At the end of 2017, financial assets portfolio of Nova KBM amounted to 1,727,944 thousand. The largest portion of financial assets portfolio is taken by available-for-sale and held-to-maturity financial assets. At the end of 2017, the total value of debt securities amounted to 1,681,006 thousand. The proportion of total securities in the balance sheet total was 35.2 % at the end of 2017, and 36.4 % at the end of During 2017, the Bank was decreasing primarily the portion of securities of the Republic of Slovenia, replacing them with foreign government and corporate securities, on the other hand. LONG-TERM INVESTMENTS IN THE EQUITY OF SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES The Bank recorded in 2017 a net increase in long-term investments in the equity of subsidiaries, associates and joint ventures, i.e. by 30,286 thousand. Movements in the Nova KBM assets in 2017 ( 000) 4,831,767 (238,408) 310,998 The increase of 44,417 thousand in equity investments resulted from the acquisition of SLS. Following the dissolution of KBM Invest, Nova KBM decreased its equity investment by 4,290 thousand. In May, based on the agreement on asset placement concluded between Nova KBM and KBM ASCO, the subsidiary KBM ASCO returned to Nova KBM 4,000 thousand, the result of which is a decrease of the same amount in the equity investment in KBM ASCO. In November, Nova KBM recognised impairment of the equity investment in KBM ASCO in the amount of 4,990 thousand. Further details with respect to long-term investments in the equity of subsidiaries, associates and joint ventures are available in the financial statements. 146,947 (137,399) 4,913,905 Total assets Cash in hand Loans and Financial assets Other assets Total assets advances DEPOSITS AND LOANS FROM CUSTOMERS In 2017, deposits from customers increased by 20,941 thousand or 1.7 %. The increase included deposits from households, non-financial corporations, and nonprofit providers, while all other deposits decreased. The balance of retail sight deposits increased in 2017 by 262,311 thousand, while the balance of current and non-current loans decreased by 87,334 thousand and 135,559 thousand, respectively. DEPOSITS AND LOANS FROM BANKS Deposits and loans from banks and ECB amounted to 430,774 thousand at the end of 2017 and increased by 15.1 % compared to the end of BUSINESS REPORT AND 35

37 EQUITY net profit reported for the business year, from a rise in share premium, and the change in the market prices of At the end of 2017, the Bank s equity amounted to securities, which are valued through equity. 683,057 thousand, which was an increase of 1.9 % compared to 31 December This increase in the balance of equity results primarily from the Bank s Further information about the Bank s equity is available in the section on shareholders equity. Movements in the Nova KBM liabilities and equity in 2017 ( 000) 56,579 (8,189) ,476 4,913,905 4,831,767 20,941 NON-INTEREST INCOME Net fees and commissions of the Group, which represent the most important part of net non-interest income, were by 7.1 % higher in 2017 compared to The Group recorded in 2017 an increase in fee and commission income of 5 % or 3,696 thousand. In 2017, fee and commission expenses increased by 671 thousand or 2.1 %. Other non-interest income 8 of the Group amounted to 14,969 thousand in 2017 and increased by 1.2 % compared to OPERATING COSTS STATEMENT OF FINANCIAL POSITION OF THE NOVA KBM GROUP BALANCE SHEET TOTAL As at 31 December 2017, the Nova KBM Group s balance sheet total amounted to 4,929,829 thousand. Loans and advances made up one-half of total assets; the remaining assets include mostly financial assets. The portion of deposits from customers accounted for 73.8 % of total liabilities (including equity). Total liabilities and equity Deposits and loans from customers Deposits and loans from banks incl. central banks Profit or loss of SLS is included in the consolidated income statement of the Nova KBM Group from the date of acquisition to the reporting date (i.e. from 1 October 2017 to 31 December 2017). INCOME STATEMENT The Nova KBM Group, including SLS, generated in 2017 net profit of 48,322 thousand, which exceeds the amount for 2016 by 17,847 thousand. The Group generated net operating income of 142,994 thousand, of which net interest accounted for 58 %, and net fees and commissions 32 %. Operating expenses, including amortisation and depreciation, amounted in 2017 to 119,034 thousand and, without expenses relating to the reorganisation of the Bank and the Group, to 105,335 thousand. In 2017, the Group reversed net provisions and impairments of Provisions Other liabilities Equity Total liabilities and equity ,829 thousand, mainly due to improved quality of its lending portfolio, favourable economic conditions, and a positive trend in decreasing the amount of nonperforming exposures, while increasing repayments. NET INTEREST INCOME At the level of the Nova KBM Group, net interest kept declining in In December 2017, net interest margin stood at 1.70 %, which is by 0.3 percentage points less than in In 2017, the Group generated net interest of 9,731 thousand or a decline of 10.5 % compared to the same period in the past year. Lower net interest income resulted mainly from lower interest on available-for-sale financial assets in the Parent Company. In 2017, interest expense totalled 10,735 thousand ( 13,487 thousand in 2016). The structure of interest income and interest expenses of the Group and of Nova KBM by market segment and type of assets and liabilities is presented in the notes to the financial statements. At the end of 2017, operating expenses of the Group, which include administrative costs with amortisation and depreciation, amounted to 119,034 thousand. The cost to income ratio was %. If extraordinary expenses in the amount of 13,699 thousand relating primarily to restructuring of the Group were not taken into account, the cost to income ratio at the Group level would be %. Staff costs had the largest portion in the Group s operating costs (51.5 %), followed by general and administrative costs (39.3 %) and depreciation and amortisation (9.2 %). The structure of administrative costs is presented in the notes to the financial statements. NET PROVISIONS AND IMPAIRMENTS In 2017, the Group reversed net provisions and impairments of 14,829 thousand. The Group recorded the largest reversal of net impairments in loans to customers. The structure of provisions and impairments of the Group and Nova KBM by type of assets is presented in the notes to the financial statements. 8 Other non-interest income includes: dividend income; realised gains or losses on financial assets and liabilities not measured at fair value through profit or loss; net gains or losses on financial assets and liabilities held for trading; gains or losses on financial assets (and liabilities) designated at fair value through profit or loss; net gains or losses from foreign exchange rate differences; net gains or losses on derecognition of assets other than non-current assets held for sale; other net operating income or loss; share of profits or losses of associates and joint ventures accounted for using the equity method; net gains or losses from non-current assets held for sale and the liabilities associated therewith. LOANS At the end of 2017, the Nova KBM Group s total lending portfolio amounted to 2,464,449 thousand, of which 96 % were customer loans. In 2017, loans outstanding to customers increased by 20 % or 402,318 thousand, mostly due to an increase in net long-term loans in Nova KBM. FINANCIAL ASSETS Financial assets portfolio of the Nova KBM Group amounted at the end of 2017 to 1,729,042 thousand. Available-for-sale financial assets, which represented the largest portion in the total portfolio of financial assets, increased by 37,067 thousand in 2017, mainly as a result from an increase in debt securities issued by other issuers. BUSINESS REPORT AND 36

38 Movements in the Nova KBM Group's assets in 2017 ( 000) 9.3 / PROFILE OF THE COMPANIES IN THE GROUP 9,10 4,823,450 (237,394) Total assets Cash in hand 339,391 33,539 37,921 4,929,829 Loans and advances DEPOSITS AND LOANS FROM CUSTOMERS In 2017, the structure of deposits from customers changed in favour of an increase in the proportion of sight deposits and a decrease in the proportion of long-term deposits. The volume of customer deposits rose slightly in 2017, amounting at the end of 2017 to 3,638,391 thousand. DEPOSITS AND LOANS FROM BANKS In 2017, the Group increased liabilities from deposits and loans from banks by 73,821 thousand, i.e. to 448,016 thousand, mostly on the account of longterm loans from banks in Nova KBM. Financial assets Other assets Total assets EQUITY Movements in the Nova KBM Group's liabilities and equity in 2017 ( 000) As at 31 December 2017, the Nova KBM Group s total equity was 697,414 thousand, which was an increase of 14,053 thousand compared to At the end of 2017, total equity represented 14.1 % of the total balance sheet liabilities. Movement in equity is shown in Statement of Changes in Equity in the financial report. KBM INFOND, DRUŽBA ZA UPRAVLJANJE, D.O.O. Year of establishment: 1993 Website: info@infond.si Nova KBM s stake as at 31 December 2017 (in %): Management Board members as at 31 December 2017: President of the Management Board: Matjaž Lorenčič, Management Board member: Samo Stonič Supervisory Board members as at 31 December 2017: Chair: Robert Senica, Deputy Chair: Sabina Župec Kranjc, members: Mitja Leskovar, dr Vito Bobek, Borut Celcer ACTIVITY As at 31 December 2017, the Company managed the assets of Krovni sklad Infond with 22 sub-funds totalling 320,834 thousand. According to available data, the total market capitalisation of all the investment funds managed by companies registered in Slovenia amounted on 31 December 2017 to 2,643,692 thousand. Therefore, the market share of KBM Infond, družba za upravljanje, d.o.o. was % on 31 December BUSINESS PERFORMANCE IN 2017 For 2017, the company reported a net profit of 1,768 thousand. Net profit increased compared to 2016 by 59 %. During this period, the Company generated a positive result, mainly from the generated fee and commission income amounting to 6,655 thousand, and sales of long-term financial investments, generating 807 thousand of capital gains. As at 31 December 2017, the Company s total equity amounted to 10,630 thousand, which falls below the previous year by 3 %. As at 31 December 2017, the balance sheet total amounted to 11,545 thousand, falling below the 2016 balance sheet total by 2 %. 4,823,450 12,144 73,821 (9,775) 16,136 14,053 4,929,829 BUSINESS STRATEGY The Company plans the following activities: to increase the value of its assets under management, to promote the sale of existing products and to develop new combined products within the Nova KBM Group, to strengthen cooperation with institutional investors, to explore options of working together with others in the area of new distribution channels. Total liabilities and equity Deposits and loans from customers Deposits and loans from banks incl. central banks Provisions Other liabilities Equity Total liabilities and equity The data presented in this section relate to standalone financial statements of the Group companies. 10 In 2017, KBM Invest d.o.o ceased its operations, following a summary procedure without liquidation. Therefore, this company s operations are not specifically presented in this chapter. BUSINESS REPORT AND 37

39 SUMMIT LEASING SLOVENIJA D.O.O. KBM LEASING D.O.O. - IN LIQUIDATION Year of establishment: 1999 Website: info@summit-leasing.si Nova KBM s stake as at 31 December 2017 (in %): 100 Management Board members as at 31 December 2017: Director: Mitja Otorepec, Deputy Directors: Maja Kebe, Tina Filipan Supervisory Board members as at 31 December 2017: Chair: John Denhof, Deputy Chair: Jon Locke, members: Michele Rabà, Philip Greuter, Sabina Župec Kranjc ACTIVITY The Company s main activity is financing the purchase of private cars and light commercial vehicles for end customers, and financing the stock, test and replacement vehicles to car dealers. The product range includes: finance leasing, operating leasing, and loan. In addition, the Company also offers consumer loans and insurance policies for compulsory and comprehensive car insurance. BUSINESS PERFORMANCE IN 2017 In 2017, the Company underwent a change in the company ownership, as the Japanese Sumitomo Corporation sold its 100-percent stake in the Company. Consequently, on 18 September 2017, Summit Leasing Slovenija became a new member of the Nova KBM Group. The Company contributed to the consolidated financial statements for the period from 1 October 2017 to 31 December 2017 by profit after tax of 570 thousand, while its capital amounted to 37,000 thousand. As at 31 December 2017, the Company s balance sheet total amounted to 341,000 thousand, thus increasing compared to 31 December 2016 by 92,000 thousand or 37 % respectively. The Company had 117 employees at the end of 2017, their number increased in 2017 by 17. The Company has its registered office in Ljubljana, two business units, i.e. in Maribor and Koper, and a field representative in Celje. BUSINESS STRATEGY The main objectives of the Company for 2018 are as follows: Maintaining the existing business model with a slight increase in investments in new private cars and light commercial vehicles, and a slight increase also in consumer loans and insurance taking. In addition to financing private cars and light commercial vehicles, the company plans to diversify its operations into other segments. Year of establishment: 1989 Website: leasing@nkbm.si Nova KBM s stake as at 31 December 2017 (in %): 100 Management Board members as at 31 December 2017: Liquidator: Stjepan Marinović ACTIVITY The Company was involved in the provision of services with respect to finance leasing and operating leasing of movable property and real estate. Since 2012, the Company has stopped concluding new deals in its activity. BUSINESS PERFORMANCE IN 2017 On 31 December 2014, Nova KBM as the sole shareholder of KBM Leasing, took a decision on initiating regular liquidation proceedings against the Company for the reasons arising from the Nova KBM Group s Restructuring Programme and the commitments regarding the Nova KBM Group made by the Republic of Slovenia and Nova KBM and approved by the European Commission. KBM Leasing ended 2017 with a net profit of 748 thousand, and a positive equity of 15,471 thousand. The company generated a major part of profit from the reversal of provisions and reversal of impairments, due to the payment of claims and the sale of inventories above the expected estimate. The Company s balance sheet total amounted to 17,724 thousand, and decreased by 289 thousand compared to In the liquidation process, the Company was selling its assets and claims. Compared to the end of 2016, the balance of cash held by the Company at the end of 2017 increased by 2,756 thousand and reached 14,575 thousand or 82 % of the Company s balance sheet total. Inventories were valued at 395 thousand. In 2017, the company sold 905 thousand net worth of items seized under lease agreements. The balance of claims under lease and loan agreements outstanding at the end of 2017 totalled 1,978 thousand. The Company has already recorded impairments on these claims in the amount of 357 thousand. Other assets of the Company were mostly made up of fixed assets, claims arising from actions, and other claims. BUSINESS STRATEGY In January 2018, the District Court of Maribor issued a decision on merger by acquisition of Gorica Leasing d.o.o. in liquidation with Nova KBM Leasing d.o.o. in liquidation. The Company planned to have its claims from active leasing and loan agreements fully paid and its entire inventories and business premises in Šempeter pri Gorici sold. The remaining assets will include immovable and movable property, claims to the shareholder and the reserve fund, and off-balance sheet items. BUSINESS REPORT AND 38

40 GORICA LEASING D.O.O. - IN LIQUIDATION KBM LEASING HRVATSKA D.O.O. IN LIQUIDATION Year of establishment: 1998 Website: info@gorica-leasing.si Nova KBM s stake as at 31 December 2017 (in %): 100 Management Board members as at 31 December 2017: Liquidator: Stjepan Marinović ACTIVITY The Company was involved in the provision of services with respect to finance leasing and operating leasing of movable property and real estate. BUSINESS PERFORMANCE IN 2017 On 31 December 2014, Nova KBM as the sole shareholder of the Company, took a decision on initiating regular liquidation proceedings against the Company for the reasons arising from the Nova KBM Group s Restructuring Programme and the commitments regarding the Nova KBM Group made by the Republic of Slovenia and Nova KBM and approved by the European Commission. The Company ended 2017 with a net profit of 998 thousand, and a positive equity of 19,850 thousand. The company generated a major part of profit from the reversal of provisions and reversal of impairments, due to the payment of claims and the sale of inventories above the expected estimate. The Company s balance sheet total amounted to 19,935 thousand, and increased by 305 thousand or 1.6 % compared to In the process of its liquidation, the Company was making efforts to sell its assets and claims in the promptest and most effective manner. Compared to the end of 2016, the balance of cash held by the Company at the end of 2017 increased by 4,528 thousand and reached 13,778 thousand, a figure that equalled 69 % of the Company s balance sheet total. Inventories were valued at 1,990 thousand. In 2017, the company sold 1,552 thousand net worth of items seized under lease agreements, fixed assets and investment property. Claims under lease and loan agreements outstanding at the end of 2017 totalled 359 thousand, of which 4 thousand or 1.24 % were in past-due unpaid claims. The Company has already recorded impairments on these claims in the amount of 4 thousand. Claims outstanding under terminated lease and loan agreements totalled 10,188 thousand at the end of 2017, with impairments recorded on these claims amounting to 6,543. Other assets of the Company were made up of fixed assets, inventories, and other claims. Year of establishment: 2006 Website: info@kbm-leasing.hr Nova KBM s stake as at 31 December 2017 (in %): Management Board members as at 31 December 2017: Liquidator: Branimir Cvitanović Supervisory Board members as at 31 December 2017: Chair: Mitja Leskovar, members: Damijan Podlesek, Nada Topolovec. ACTIVITY The Company offers finance and operating leasing in the territory of the Republic of Croatia, and is constantly monitored by the Croatian Financial Services Supervisory Agency (HANFA). As a result of being put into liquidation, the company stopped concluding new deals, while focusing its operations on the recovery of its outstanding claims. BUSINESS PERFORMANCE IN 2017 On 30 April 2015, the Company s Shareholders Meeting took the decision to initiate the liquidation proceedings against the Company. The Company started selling its assets, the number of its employees was reduced to a minimum (2), the number of outstanding lease agreements decreased from 264 to 163, its credit exposure from 15,985 thousand to 8,302 thousand, and its loan obligations from 13,942 thousand to 12,942 thousand. The Company ended the 2017 financial year by a net loss of 763 thousand. BUSINESS STRATEGY KBM Leasing Hrvatska d.o.o. in liquidation was sold in January BUSINESS STRATEGY In January 2018, the District Court of Maribor issued a decision on merger by acquisition of Gorica Leasing d.o.o. in liquidation with Nova KBM Leasing d.o.o. in liquidation. BUSINESS REPORT AND 39

41 M-PAY D.O.O. KBM-ASCO d.o.o. Year of establishment: 2004 Nova KBM s stake as at 31 December 2017 (in %): 50 Management Board members as at 31 December 2017: Director: Janez Stajnko Supervisory Board members as at 31 December 2017: Members: Tomaž Pernovšek, Samo Jošt, Severin Vičič, Miha Šlamberger, Aleksander Batič ACTIVITY M-PAY was set up as a joint venture of Nova KBM and Mobitel d.d. with the aim of processing payments sent through the mobile payment system, which the partners have been developing since the beginning of their cooperation. Based upon an agreement between its owners, and in accordance with their strategies, M-PAY d.o.o. has not yet taken over the processing of mobile payments, which is why it has no permanent employees and is operating on a small scale. BUSINESS PERFORMANCE IN 2017 In accordance with the strategy of its owners, the M-PAY Company acts as a coordinator of the Moneta system development. It provides advisory services to both strategic partners pursuant to the agreement, from which it generates all its operating income. As at 31 December 2017, the net profit amounted to 10,000 and the balance sheet total to 254 thousand. The Company performs content-related and technical coordination of the Moneta system, and provides advice on the involvement of other participants and on further development of mobile payment services. The mission of the Company is to further develop the Moneta system and, by doing so, to provide its institutional participants in Slovenia with an open business and technical platform that allows all types of payments using mobile phones as contemporary and widely spread financial services. Year of establishment: 2016 Nova KBM s stake as at 31 December 2017 (in %): 100 Management Board members as at 31 December 2017: Legal representative: Marko Hinić (Director), other representatives: Črt Slokan, Mitja Leskovar ACTIVITY The Company was established in February 2016 under the process of selling KBM Banka A.D. Kragujevac. The Company carries out the management of real estate and other assets that were transferred to the company at the time of its establishment. The company has no employees, assets are managed by individual specialised external contractors. BUSINESS PERFORMANCE IN 2017 As at 31 December 2017, the balance sheet total amounted to 8,850 thousand, of which real estate owned were 2,191 thousand, claims amounted to 3,054 thousand, and other items to 3,605 thousand. Total revenues generated by the Company amounted to 2,328 thousand. Total costs incurred by the Company amounted to 8,303 thousand. In 2017, net loss was 6,082 thousand. BUSINESS STRATEGY In 2018, the Bank intends to sell a majority of the Company s assets and gradually liquidate the Company. BUSINESS STRATEGY With a vision of becoming the leading Slovenian organisation in the area of developing mobile payment services, system and processing, the Company aims to support the Moneta system in all its key elements in order to fully cover the market of mobile operators, banks and payment service providers. BUSINESS REPORT AND 40

42 9.4 / MARKETING STRATEGY AND MARKETING ACTIVITIES AT NOVA KBM The Bank was focusing its marketing efforts in 2017 even more actively on meeting the needs of its customers. Therefore, it has strengthened its investment in research, and designed and implemented all marketing activities following the principle of Listen to your customers. When doing so, the Bank followed its strategic orientations and objectives. It has enhanced its offer with new bundle services, improved credit conditions, and extended offer of investment funds. Through active pricing policy and monitoring the market, the Bank kept adjusting the prices of banking services to the market and customer habits. By merging the three banks, the Bank optimised the network of branch offices for its customers, and supplemented it by a broad support from counters in post offices. In selected post offices, the Bank expanded its services by the presence of bank advisers. The Bank also upgraded the mobile bank service, enabling customers to have even easier and faster access to banking services. In planning and performing marketing activities, the Bank followed its key objective, i.e. to consolidate and cultivate its relationships with existing customers, while also targeting new, potential customers in selected markets. The Bank paid special attention to the target group of active population and to modern users that require quick and effective solutions. In 2017, the Bank established the segment of so-called Premium banking, which will provide customers with improved services in the field of investment opportunities and asset management, based on personal approach and high-quality advice of personal bankers. Nova KBM has strengthened its presence in media in 2017, and intensified its marketing activities to support sales. The Bank has used various innovative marketing tools to raise awareness of its products and services. It was recognised as the third largest advertiser among banks in the Slovenian territory. In terms of regional approach, the Bank carried out its marketing activities through the presence in local media, with the aim of strengthening its visibility and informing customers about new items in its offer and changes in the Bank. When communicating with customers, the Bank was choosing, in addition to mass media, also niche media and other, new forms of communication providing the Bank with a possibility of spreading information by word-of-mouth. In this area, particular emphasis is put on social networks, digital media, and links with various commercial partners in key industries at national level. The Bank organised several business events with the aim to further intensify relationships with its key customers and business partners. Through introducing new business models, the Bank tried to get even closer to its customers and to increase its active role in the market. The Bank introduced a new concept of sales in companies, i.e. the Bank at Work, which will be used to provide special offer and personal advice to employees in selected companies. For its existing customers, the Bank introduced the Bring a friend programme, through which satisfied customers can recommend the Bank to their friends and relatives, while choosing different gifts and benefits for themselves. The Bank continued active sales in the field and increased its presence in major shopping centres in regions where its presence is poorer, using these activities to present its offer and bring it closer to existing and potential new customers. In corporate operations, the Bank continued in 2017 its well-thought development and marketing communication strategy with a view to increase its visibility, strengthen relationships with and satisfaction among key customers, and to achieve business and sales goals. To this end, the Bank organised several business events, either independently under activities of the Business Centre, or in cooperation with regional chambers and other partners. The Bank communicated with its customers through various communication channels, with the most frequently used personal communication, direct marketing, and communication through social media, and specialised media for the corporate sector. The Bank presented its offer also at several sponsorship events, focusing mostly on the target group of entrepreneurs and small or medium-sized enterprises. The main purpose of participation at such events was to obtain new contacts (networking) among potential customers. Nova KBM continued its activities aimed at consolidating its position as a stable and secure bank with over 150-year tradition. As a socially responsible institution, the Bank is aware of the importance of integration into a wider social and local environment. In this spirit, it was actively involved in important events taking place at regional and local levels, in addition to boosting its visibility throughout Slovenia by participating in various national events. Special attention was paid to the internal public, i.e. employees of the Bank, by training and instructing all employees to take care of and provide good treatment to customers, both implemented under the so-called Client Excellence programme. 9.5 / TOGETHER TO EXCELLENCE PROGRAMME Client Excellence is a key part of the Bank s ambition to realise its vision and become the best bank by With the Client Excellence programme, the Bank is even more focused on its customers and on improving their satisfaction and commitment. Additional information about this programme is found in the Sustainable Development and Corporate Social Responsibility Report. 9.6 / NEW AND UPGRADED SERVICES AND DISTRIBUTION CHANNELS AT NOVA KBM Nova KBM provides its customers with a wide variety of services including all key groups of financial products, from basic banking services for day-to-day business, through insurance products, to a broad range of investment products. While the Bank devotes a great deal of attention to providing contemporary banking services, it maintains its competitive position by actively adjusting its pricing policy and launching various attractive special offerings. In 2017, its focus was on simplifying the product portfolio for customers enabling them to better understand the banking offer. The Bank introduced some improvements in the area of simpler and affordable dealing with accounts, lending operations focused especially on more favourable terms of approving and optimising the processes in lending to customers. It has upgraded the mobile bank service, which provides for simpler user experience, new functionalities, and a broader range of services. Through merging the banks, Nova KBM expanded the offer of mutual funds and introduced improvements in the range of insurance services. BUSINESS REPORT AND 41

43 SEGMENT NEW PRODUCTS AND SERVICES, AND UPGRADES OF EXISTING ONES Customers can deal with the Bank through the following distribution channels: ONLINE BANKING SERVICE FOR CORPORATE CUSTOMERS: POSLOVNI ACCOUNTS MOBILE BANKING SERVICE: LOANS MUTUAL FUNDS CORPORATE OPERATIONS 9.7 / MODERN DISTRIBUTION CHANNELS Komplet bundle Premium bundle New, renewed mobile banking service Contracting loans Concluding other simple services (cards, insurance) P2P payments Login by fingerprint In order to keep pace with increasing changes in customer habits, the Bank is expanding the range of its services through various market channels. In 2017, it upgraded the mobile banking service and expanded the range of services at post office counters. In selected post offices, the Bank launched special bank counters with the presence of bank advisers, allowing customers to carry out more complex bank transactions and obtain a better banking advice. In its mobile and electronic banking services, the Bank increased the variety of services and, consequently, expanded lending, payment card and simple insurance products, and other services via electronic channels. Furthermore, it improved online invoice opening processes and, consequently, detected an increase in Optimised range of lending products, Changed pricing policy, more understandable for customers New RCM mutual funds Cash management product a centralised asset management in all accounts of companies in the Group, whether operating through accounts with different banks in the parent company s country of establishment or abroad. E-cash service digitalisation of cash transactions Account-related bundle for corporate clients Hitri, Modri, and Zmagovalni paket (Quick, Wise, and Winning bundles). the number of new customers that have chosen the Bank just via the Internet. Through the redistribution of the ATM network, the Bank tried to enable a wider circle of Bank customers to carry out payment and other services, in addition to cash withdrawals. In 2017, the Bank intensified the role of its call centre in order to provide a better service in receiving and resolving customer complaints, as well as to serve as a new sales channel. This is the way used by the Bank to strengthen its relationship and ensure regular communication with its customers, while providing them with a target offer and appropriate services. By expanding alternative banking channels, the Bank follows the method of operations desired by its customers, while seeking to transfer simple transactions to alternative channels, and allowing its branch offices to focus on the sale of more sophisticated products and provision of personal advice to customers. At counters of Nova KBM and Pošta Slovenije (regular and contractual post offices) Online banking service Bank@Net and Poslovni Bank@Net Mobile banking service mbank@net ATMs of Nova KBM. BRANCH OFFICES OF NOVA KBM AND POŠTA SLOVENIJE At the end of 2017, Nova KBM had three branches, under which a total of 60 branch offices were operating. Banking services to be performed in person can be carried out also at nearly 500 post offices of Pošta Slovenije and at 6 specialised bank counters in Pošta Slovenije post offices. ATMS The total number of ATMs held by Nova KBM as at 31 December 2017 was 285, giving a market share of 17.1 %. ONLINE BANKING SERVICE FOR RETAIL CUSTOMERS: Bank@Net AND mbank@net The number of retail customers using online banking service, Bank@Net, has been growing steadily, which reflects changed habits in customers and also the results of active marketing and improvements in online and mobile banking services. At the end of 2017, the number of online banking service users increased by 32 % compared to the previous year. The number of loans sold in 2017 via online bank increased by more than three times. Various surveys show that the users of electronic and mobile banking services report an above-average satisfaction with the service. The number of users of the Poslovni Bank@Net system that is designed for corporate customers amounted at the end of 2017 to 10,794, which exceeded the figure at the end of 2016 by 15 %. The number of transactions made via this channel also increased, i.e. by 25 % compared to the previous year. PAYMENT CARDS AND POS TERMINALS The number of payment cards issued to the Bank s customers at the end of 2017 was 4.9 % above that of a year ago, while the number of payment card transactions registered a year-on-year increased by 27.4 %. The Bank has 4,826 POS terminals, which represents a market share of 13.9 %. In 2017, the Bank increased its market share by more than 2 %. 9.8 / CORPORATE BANKING OPERATIONS AT NOVA KBM LENDING OPERATIONS The Corporate Banking Division started 2017 with increased optimism, as the improved capital and liquidity position of the Bank made it possible to significantly increase its lending activity. In addition to that, the privatisation of the Bank contributed to positive perception of the Bank as an institution that has in place clear objectives to pursue its principal mission of supporting its customers. The Bank has been adapting its operations to market conditions and sought investment opportunities in the process of economic recovery with existing customers, as well as through the acquisition of new ones. BUSINESS REPORT AND 42

44 Companies have mainly demanded working capital financing, while the demand for investment loans, which could have created conditions for a more conspicuous growth of the lending portfolio, continued to be weak. Nevertheless, the trend started shifting late in the year when public calls for investments were closed and some investments already started. The Bank demonstrated its support for the economy also as a member of banking syndicates supporting larger projects. The Bank focused on its corporate advisory role and intensified it further. In partnership with some other institutions (the Slovene Enterprise Fund, Tovarna podjemov, and IRP Institute for Entrepreneurship Research), the Bank ensured easier access to information and advice and, consequently, to grants from EU funds and banking funds to finance their projects. The Bank recorded an increase in the volume of business carried out with companies that achieved an appropriate level of competitiveness, sell their products or services in foreign markets, and are not heavily indebted. Nova KBM continued its cooperation with SID banka d.d., from which it obtained long-term funds to finance corporate customers. Most of these funds were dedicated to the development of environment-friendly companies, funding of their competitiveness, and financing fixed assets and long-term working capital. Most funds were granted to small and medium-sized enterprises. bank. One of the key advantages of the merged bank is its expanded business network, where in particular micro and small enterprises may now perform basic banking transactions at Pošta Slovenije counters. The Bank has strengthened also its range of products. Accordingly, it has upgraded its offer with cash management products, while micro and small enterprises have been offered service bundle enabling them to simplify their operations. DEPOSIT OPERATIONS During 2017, the Bank regulated its liquidity policy in such a way as to ensure it had a sufficient level of primary liquidity. The main instrument for adjusting the volume of deposits was the interest rate, which depended on the maturity of deposits. Under its deposit management policy, the Bank often decided on acquiring special-purpose funding to support individual projects. It is the policy of the Bank to attract deposits with longer maturities in order ensure suitable structure that would be able to match the demand for long-term loans. OTHER BANKING PRODUCTS In 2017, the Bank promoted the use of its online banking service, which is used daily as a communication channel by more than 70 % of its customers. 9.9 / RETAIL BANKING OPERATIONS AT NOVA KBM In 2017, Nova KBM kept the focus on improving its sales activities, product offerings and, consequently, customer satisfaction. The Bank started to concentrate on simplifying its service offering and streamlining its procedures, and so substantially improving the customer experience. In 2017, the Bank started with the development of the new lending process, with simpler pricing policy, that will provide its customers with a loan in few minutes. The Bank also offers a streamlined range of products that is more oriented to the customer needs and based on the proper segmentation. Based on the customers needs, the Bank started offering bundles, such as Paket Komplet and Premium. These offers were welcomed by customers since they incorporate a single fee for a group of benefits, favourable interest rates, and access to Bank@net. The Bank upgraded the offer of personal banking for VIP customers and introduced the Premium banking. It is a service designed especially for affluent customers who want and require more. With the slogan In tune with excellence, the Bank offers professional approach and an excellent banking service. The most important advantage of this service are professionally trained In 2017, in line with its business network optimisation strategy following the merger of the three banks, the Bank opened in its business network five specialised bank counters (SBO) in Pošta Slovenije units (Slovenske Konjice, Grosuplje, Fužine, Radovljica, Šentjur) and a new Premium branch office for VIP customers in Maribor. In 2017, nine offices ceased their operations (in the towns of Deskle, Dornberk, Kranj, Novo mesto, Ptuj, Murska Sobota, Nova Gorica, Maribor, Koper). These branch offices were merged with their nearby branch offices, to which customers transactions were transferred free of charge. Taking into account its own branch office network, in addition to the network of Pošta Slovenije post offices, Nova KBM has the widest network of bank offices in the country. At post office counters, Nova KBM s customers may carry out basic banking services, such as withdrawal or deposit of funds, and account balance checking. Since September 2016, however, Bank s customers have also been able to use post office counters to take out a loan, open a deposit account, and carry out a number of other services. This was the way used by the Bank to strengthen its presence in locations where it does not have its own branch offices, and to approach new customers, thus ensuring a range of banking services almost anywhere. Through its proactive approach to customers, which involved more than 8,000 on-site customer visits, the Bank managed to increase its market share in corporate operations, and organised business events aimed at training and strengthening its business relations. The Bank ensured strengthening of its market share also through merger of KBS, the customers of which were provided with the whole range of Nova KBM s services. The transfer of customers to a new banking environment was carried out to the highest standard, which is demonstrated by responses of customers, since they have remained to be partners of the merged The Bank offered to micro and small enterprises and sole traders service bundles and prepaid VISA cards, which are primarily intended for company employees engaged in fieldwork. The Bank provided local and cross-border payment services, successfully developed and launched new services in the Single European Payment Area (SEPA), and improved the quality of services, in particular in documentary operations. personal bankers who help customers to achieve their financial goals and requirements and take care for their daily banking needs. To enjoy all benefits of Premium service, the customers need to conclude the Premium bundle, which is based on a dedicated relationship manager and contains all important products that customers need for their daily banking. Apart from devoting attention to the existing portfolio of loyal customers, which has further expanded following the acquisition of KBS, the Bank has been intensively acquiring new customers, especially in regions in which it is less present. The number of loans sold in 2017 through Bank@Net exceeded the figure for the previous year by 97 %. BUSINESS REPORT AND 43

45 In addition to sales activities and providing advice to customers at branch offices, the Bank paid significant attention to the development of alternative channels and using them for sales (online banking, the call centre, and ATMs). The volume of sales through these channels has been increasing year by year. The number of deposits sold in 2017 through exceeded the figure for the previous year by 29 %. Through intensive cross-selling of different products, in 2017, the Bank managed to increase the average number of products per customer by 3.2 % compared to the end of LENDING OPERATIONS As was the case a year earlier, the demand for loans registered an increase in 2017, reflecting moderate economic growth and a recovery of the real estate market. The Bank focused more on consumer loans in order to increase profitability. The total volume of consumer loans granted in 2017 was 30.7 % above that of a year ago. The total number of housing loans approved in 2017 was by 21 % below that of a year ago, with their total value falling 23 % below the respective figure for the same period in The volume of new retail loans increased by 5.6 % compared to the previous year. DEPOSIT OPERATIONS Total customer deposits placed with the Bank registered a stable growth in The highest increase was recorded in demand deposits, while the volume of fixed-term deposits slightly decreased. The Bank offers different types of savings products: short- and long-term deposits with different maturities, deposits at call, deposits with different notice periods, annuity savings, savings for young people of all age ranges, the ZA-TO! gradual savings plan, housing savings accounts, and a combined product called Naložbeni duet (Investment duo), which is a combination of a long-term deposit and an investment into Infond mutual funds and RCM funds. SALES OF OTHER GROUP S SERVICES AND INSURANCE PRODUCTS The Bank provides its customers with a complete range of financial products and solutions for various life-related situations, including the services of other companies within the Nova KBM Group and of some of its other partners on the market. In 2017, the Bank earned additional non-interest income through a continuous updating of these products, by taking a proactive marketing approach, and adjusting its pricing policy. With a year-on-year increase of 1.7 %, the Bank was very successful in 2017 in selling insurance products of Zavarovalnica Sava. At branch offices of the Bank, customers may take out life insurance policies when taking a loan, arrange travel or accident insurance for themselves and their families, take out attractive health insurance and payment card or valuables insurance. The amount of insurance brokerage fees earned by the Bank in 2017 exceeded the figure for the previous year by 39 %. When investing in mutual funds, customers showed optimism in 2017, which resulted from the market situation. Compared to the year before, the volume of invested funds increased considerably (by %), which resulted in a higher volume of non-interest income earned by the Bank / ACTIVE MANAGEMENT OF DISTRESSED LOANS Management of non-performing loans in Nova KBM was subject to comprehensive renovations and upgrades in The Bank introduced a centralised management of all non-performing loans at a single unit, which, in addition to managing non-performing loans of legal entities and natural persons, includes also the management of seized assets and some of nonstrategic investments. Furthermore, the Strategy on Managing Non-performing Exposures was renewed in 2017, an operational plan was developed and numerous improvements introduced, including the setting up of a call centre for early recovery, standardisation of processes and procedures that make an important part of non-performing investment management. The entire portfolio is managed by the non-performing loan management (Workout Department, SUPN ) that, in organisational terms, is placed directly under the Bank s Management Board, and its Director reports to the Chief Risk Officer. The SUPN takes over the management of customers with distressed loans once certain criteria are met, including early warning signs. After transferring the customer to SUPN, an analysis is carried out taking into account all available data and circumstances, which is followed by the strategy on handling the particular case approved by the competent body. Particular attention is devoted by the Bank to the management of credit risk, effective recovery of distressed loans, and constructive participation in the restructuring efforts. The results of this work are reflected, inter alia, in an improved loan recovery rate and an increased number of restructured loans, and in individual cases, the Bank decides on selling specific Nova KBM s officers work actively in various initiatives and institutions in developing systemic solutions to deal with the issue of distressed asset management, both nationally and abroad. The said process improvements, reorganisation, and a more active approach contributed in 2017 to further positive trend in reducing the volume of nonperforming exposures, while the volume of recovered loans increased. The latter provided also a significant contribution to the positive Bank s performance. The Bank expects to continue the initiated activities related to the management of distressed loans in the following year, where the portfolio of such loans is expected to further decrease with the aim of reaching the target share of non-performing loans in the Bank s portfolio, while maximising the effects on the Bank s performance / INTERNATIONAL OPERATIONS AT NOVA KBM OPERATIONS WITH BANKS Due to its solid liquidity position, the Bank was not active on the international financial markets in terms of borrowing or issuing debt instruments in Nevertheless, the Bank was actively involved in managing and optimising its long-term liabilities to banks, mainly through repaying more expensive existing debt, improving the conditions of existing funds, and by contracting more favourable long-term funds. In 2017, Nova KBM borrowed funds in total amount of 58,000 thousand aimed at financing the economy, medium-sized and small enterprises, and internationalisation. The Bank carried out activities related to meeting the Minimum Requirement for Own Funds & Eligible Liabilities (the MREL requirement). receivables when such an approach is considered the most appropriate, taking into account all the circumstances of the specific case. BUSINESS REPORT AND 44

46 Nova KBM provided long-term liquidity to Group companies. In December 2017, the KBM10 bond became due. The Bank paid significant attention to strengthening its international visibility. During 2017, following the merger with KBS at the beginning of the year, the Bank optimised the network of business relations with foreign banks. RATINGS ASSIGNED TO NOVA KBM BY INTERNATIONAL RATING AGENCIES In 2017, both international rating agencies, i.e. Fitch Ratings, and Moody s Investors Service, upgraded the rating of Nova KBM. In May, Fitch Ratings upgraded Nova KBM s Long-Term Issuer Default Rating to BB from BB- and assigned the stable outlook. The agency raised the Bank s Viability Rating, i.e. to bb from bb-. Then, in June, an upgrade in Long-Term Deposit Rating and Baseline Credit Assessment was assigned also by Moody s Investor Service, i.e. to Ba2 from B2, and to ba3 from b3, respectively. As at 31 December 2017, the ratings of Nova KBM were as follows: Fitch Ratings: BB/B (stable outlook) Moody s Investors Service: Ba2/Non-Prime (positive outlook) / TREASURY OPERATIONS AT NOVA KBM The Bank s Treasury Department performs the activity of managing the Bank s balance sheet, trading in its own name and own account, and marketing of treasury products designed for customers of the Bank to hedge against currency risk and interest rate risk. In 2017, the Treasury Department continued its successful work, and operated in line with the plan agreed. The bulk of its operations was based on managing assets and resources of the Bank. As at 31 December 2017, the Treasury Department s investment balance accounted for 46 % of the balance sheet total, with the later amounting to 4,913,905 thousand at the end of the year. The Treasury Department s investments include 1,681,006 thousand of debt securities, in addition to cash and current receivables from banks totalling 583,867 thousand. The Bank managed its liquidity in 2017 in such a way as to ensure the settlement of all obligations that became due. In addition to adequate primary liquidity, the Bank maintained an adequate secondary liquidity reserve, comprising of eligible securities and eligible bank loans (ECB-eligible). The Bank may use these items for securing receivables in borrowings through the instruments of the European Central Bank, while the ECB-eligible securities may also be used for entering into repos in the interbank market. In its operations, the Bank fully followed the Central Bank s regulations on compliance with the regulations on ensuring minimum liquidity position, which require banks to maintain the Category I Liquidity Ratio (up to 30 days) as compulsory. The average Category I Liquidity Ratio value reported by the Bank between 31 December 2016 and 31 December 2017 was The Bank also complied with the Bank of Slovenia s regulations on minimum reserve requirements. As at 31 December 2017, the key interest rates applicable to the ECB s operations were as follows: for the main refinancing operations 0.0 %, for the marginal lending facility 0.25 %, and for the marginal deposit facility %. Since June 2014, the interest rate for the marginal deposit facility has also applied to banks average reserve holdings in excess of their minimum reserve requirements. Under non-standard Eurosystem measures in 2017, the Bank successfully participated in targeted long-term refinancing operations. PORTFOLIO OF DEBT SECURITIES HELD IN THE BANKING BOOK The securities held in the banking book are mainly used for the provision of an adequate liquidity reserve and for managing interest rate risk. The Bank has created the portfolio of debt securities in accordance with its Policy of Managing the Banking Book Debt Securities Portfolio. As at 31 December 2017, the total value of debt securities held in the banking book was 1,681,006 thousand, which exceeds the figure for the end of the previous year by 1.65 %. Government securities and securities with state guarantee accounted for 63.0 % of the total banking book portfolio, followed by securities issued by prime banks with a 29.0 % share, and securities issued by other issuers, which accounted for 8 % of the portfolio. The composition of the portfolio of debt securities held by Nova KBM in its banking book as included in financial statements is presented in the table below. ITEM (IN 000) 31/12/ /12/ Financial assets at fair value through profit/loss account 3,264 67,592 Available-for-sale financial assets 1,589,042 1,551,388 Held-to-maturity financial assets 88,700 90,216 TOTAL 1,681,006 1,709,196 In 2017, the Bank started investing in international lending transactions, i.e. in syndicated loans and direct lending. The Bank created its international lending portfolio in line with the Investment Strategy of the Nova KBM Group, and the Corporate Lending Policy. The bulk of trading in foreign exchange markets was carried out in the most important currencies, such as the euro, the US dollar and the Swiss franc. A total of 2,524 currency trading transactions were concluded by Nova KBM d.d. in The number of foreign currency cash transactions concluded by Nova KBM d.d. in 2017 reached 4,310. In the said period, Nova KBM entered into a total of 484 derivative transactions, while it has concluded no repo or reverse repo transactions. In 2017, the Bank also issued long-term deposit certificates. In December 2017, the KBM10 bond became due. The interest rate policy of the Bank was carried out in accordance with the adopted guidelines and on the basis of its business policy and financial plan for The data include also the KBD d.d. banking book. The policy was adjusted by the Bank to reflect current market conditions, circumstances in international financial markets, and developments in the economic environment / TRADING IN FINANCIAL INSTRUMENTS BY NOVA KBM In 2017, a total of 8,610 transactions were concluded by the Bank in domestic and foreign markets. The value of these transactions decreased by 21 %, mainly as a result of the reduced volume of transactions. In 2017, Nova KBM concluded transactions worth 16,875 thousand at the Ljubljana Stock Exchange, transactions worth 49,268 thousand in international stock markets, 3,727 thousand by trading in mutual funds, and 1,219 thousand worth transactions through unregulated capital markets. Following the merger with KBS banka, Nova KBM introduced also the financial instruments custody segment and generated the revenues of 157,241 thousand in this segment in BUSINESS REPORT AND 45

47 In 2017, Nova KBM actively promoted its asset management products. A total of 1,311 thousand was obtained for management in 2017, with the total value of customer assets managed at the end of 2017 amounting to 8,868 thousand. Following the merger with KBS banka, Nova KBM expanded in 2017 its range of mutual funds by adding mutual funds of Raiffeisen Capital Management to its existing mutual funds of KBM Infond. AS AT 31 DECEMBER 9.14 / HUMAN RESOURCES MANAGEMENT EMPLOYEES At the end of 2017, the Bank had 1,419 employees, which is 173 more than at the end of On the last day in the year, 1,387 employees (98 %) had permanent employment contracts, and 32 employees (2 %) fixedterm contracts. In 2017, employment contracts ended with 185 employees, while 358 employees were recruited anew Total number of employees 1,419 1,246 Number of permanent employees 1,387 1,235 Number of fixed-term employees Number of disabled employees DURING THE YEAR Average number of employees 1,459 1,161 Number of new employees Number of employees who left The Bank s employees represent a key factor in its performance. The Bank believes that its success and growth are founded on satisfied and committed employees who are properly trained for their job. To this end, the Bank offers well organised, safe and healthy working environment, organises skills upgrading courses, thus offering its employees an opportunity of personal development and career advancement, as well as possibility to participate in future development of the Bank. The Bank values highly the opinion and well-being of its employees and for this reason, in 2017, it carried out two employee satisfaction and engagement surveys (VOE Voice of Employees). The results show slight improvement and a good foundation for future work. Detailed information on employees is available in the section on the report on sustainable development and corporate responsibility / INTERNAL DEVELOPMENT OF NOVA KBM The projects undertaken in 2017 helped Nova KBM make a significant step towards accomplishing its strategic objectives and business growth, as well as provision of regulatory compliance. By its projects, the Bank pursued its strategic directions in It realised the strategic objective relating to the merger of Nova KBM and KBS banka. By acquisition of SLS, the Bank upgraded the scope of operations by including finance leasing services. The Bank selected a new core banking information system and started implementing it, and introduced the support for the implementation of a fast lending process. Furthermore, the Bank was implementing necessary adjustments in order to ensure regulatory compliance in a number of areas (accounting reporting, dealing in financial instruments, payment services, etc.). Through successful implementation of individual projects, the Bank further develops and improves its project culture. INTEGRATION OF KBS BANKA The Bank continued integration activities in 2017, and early in the year, the merger of Nova KBM and KBS banka was carried out in legal terms. It was followed by the transfer of corporate accounts of former KBS banka s customers, and in April, by retail accounts of the former KBS banka. Over 60,000 transactions were transferred, and customers of the former KBS banka were enabled to carry out banking transactions at any Nova KBM branch office or at Pošta Slovenije counters. SUMMIT LEASING SLOVENIJA The Bank continued the expansion of its operations, and in September completed the acquisition of SLS, one of the leading leasing companies in Slovenia. The acquisition was an important step in attaining the strategic objective of the Bank, i.e. to become the leading universal bank in Slovenia. The Bank has upgraded its scope of operations by including topquality financial leasing services. Acquisition related activities were followed by the implementation of a new governance model. TOWARDS A NEW CORE IT SYSTEM In order to realise its ambitious business strategy and vision, i.e. to become the leading bank in Slovenia by 2020, the Bank needs a modern, powerful and efficient information platform, which will enable the Bank to improve its business model, while focusing on ensuring customer excellence. The Bank completed the activities aimed at selecting a new provider of the core banking information system, which were started already in It was followed by an intense reconciliation of the contract. In parallel, the Bank completed an optimisation of the product catalogue, aiming at providing both more transparent customer services and maximising the optimisation of work processes. The latter was one of the inputs to a large phase of the GAP analysis aimed at identifying the gap between regulatory and banking requirements and the new system, which started in September. BUSINESS REPORT AND 46

48 In addition to considering the guideline of adapting maximally to the new system, a multi-level coordination and prioritisation of requirements were carried out. The final approval of the scope of necessary adjustments is foreseen in February 2018, after a detailed estimate of the time required for the implementation is obtained. This will be a basis for the development of a detailed action plan for the introduction of the new system, the implementation of which will be one of the key priorities of the Bank in SUPPORT FOR THE IMPLEMENTATION OF A FAST LENDING PROCESS Key priorities of the Bank s retail banking strategy include the growth of retail loans and customer experience. To this end, the Bank is introducing a new support for the implementation of a fast lending process. This support will enable the growth of loans, while ensuring a topmost customer experience with a quick and simple decision-making process. In August 2017, the Bank chose a new tool provider and started the implementation of the new process and tool. Their use in the Bank s business network and at the website is scheduled for March 2018; it will be followed by the phase of introducing them to post office counters of Pošta Slovenije. REGULATORY COMPLIANCE NEW INTERNATIONAL FINANCIAL REPORTING STANDARD IFRS 9 By introducing IFRS 9, the Bank ensures compliance with the International Financial Reporting Standard 9. The standard affects almost all banking activities, e.g. product development, loan approval, securities purchase, accounting, risk management, reporting, disclosures... It is effective for annual periods beginning on or after 1 January Since it was necessary to provide comparable data already for 2017, the Bank has already performed most of the necessary adjustments in information systems and processes. Determining of impairments will be carried out in a completely different way, in a new integral application, based on numerous data, new models and methodologies. Introduction of the standard will be reflected in revised financial statements. CHANGES IN REGULATING OPERATIONS OF MARKETS IN FINANCIAL INSTRUMENTS MIFID II DIRECTIVE MiFID Directive is a principal regulation governing operations of markets in financial instruments in the European Union. The Directive sets out, inter alia, commissions for investment services and financial instruments charged by banks and investment firms for their respective work. One of its main objectives is to ensure a high degree of harmonised protection for investors in financial instruments. The Bank implemented the MIFID II European directive in the field of financial instruments in accordance with the statutory deadline of 3 January This was ensured by the introduction of the new information support and changes in the process of providing advice on these products and selling them to customers. AMENDMENTS TO PAYMENT SERVICE RULES PSD2 DIRECTIVE PSD2 Directive updates and complements the existing payment service rules. The Directive extends the scope of payment services and payment service providers, and introduces higher security standards for online payments. PSD2 main objective is to improve the integration and efficiencies of the European payment market, security of payments, consumer protection, and uniform conditions for the operation of payment service providers, while promoting affordability of payments. In 2017, the Bank prepared necessary adjustments in its general operating conditions for customers and information systems, which are imposed by the amendments to the Payment Services and Systems Act at the beginning of 2018 (not yet finally validated at the time of preparing this document). The Bank will continue these activities in 2018, with the implementation of technical standards, which are also under the validation stage. Changes in regulating data protection GDPR (General Data Protection Regulation) GDPR Regulation becomes effective as of 25 May It will be transposed into national laws by the Personal Data Protection Act (ZVOP-2). The new legislation sets out additional obligations for the Bank and additional rights of individuals with regard to processing personal data of natural persons. In 2017, the Bank started analysing the personal data processing system in the Bank and necessary adjustments with a view to ensure regulatory compliance by the statutory deadline. The implementation will continue in DEVELOPMENT OF INFORMATION TECHNOLOGY INFRASTRUCTURE In 2017, the Bank followed its strategic goals related to the renewal of the information infrastructure for its operations, and successfully completed the selection of the future core banking system provider and the provider of the information infrastructure for lending process. Replacement of the core banking system is also an opportunity to design a modern information architecture that will effectively support operations of the Bank and enable the realisation of its strategic goals for the period till The target information architecture was defined, together with the plan of gradual transition from the current architecture to the target one, which will be completed in three stages by the end of In 2017, preparations were completed for the implementation of GDPR the European General Data Protection Regulation, and the second version of PSD2 the Payment Services Directive, which radically changes the banking sector by encouraging innovative banking services and facilitating involvement of companies in designing the financial ecosystem of the future. The Bank responded to the Directive by ensuring all mandatory elements of the Directive, which will further contribute to the security of payments and consumer protection, and be put in place early in Furthermore, steps were taken in 2017 to analyse the opportunities arising from the PSD2 Directive, which the Bank will implement in cooperation with strategic partners and innovative high-tech companies. In the light of adopting a new business strategy and considering rapid technological changes, the Bank initiated in 2017 a renewal of its IT strategy that follows new strategic objectives and prepares the foundations for new innovative solutions in the next period. In 2017, Nova KBM started the overhaul of its central banking system and the construction of a modern information infrastructure, which will support its business needs and make the Bank ready for the introduction of innovative solutions and taking part in modern financial ecosystems. BUSINESS REPORT AND 47

49 With regard to the development of application solutions, the Bank in 2017 completely renewed its support for mobile operations of natural persons. The Bank completed effectively and timely several upgrades of information solutions, which were initiated by amendments to the legislation (the Consumer Credit Act, ZPotK-2), the credit register (SISBON, payment services). In 2017, the Bank renewed the process of managing changes in its technology-information support and the security incident management process. Employees were provided by the solution aimed at increasing the efficiency of support for corporate users. With regard to IT infrastructure, the Bank redefined the architectural design of the central disk system, allowing now a higher throughput and responsiveness of the server infrastructure. The Bank also carried out a renovation of the data warehouse server infrastructure, which enables a smooth implementation of the activities planned in the field of data management and business intelligence. In 2017, the Bank successfully consolidated and optimised the system of printing, which is now more cost-effective and flexible in terms of changes expected to arise from introducing paperless operations and implementing the business strategy. With regard to information security systems, an upgrade of network protocols, systems for detecting and preventing intrusions into computer networks, and the system for the central control of information security events was completed in Furthermore, the Bank completed the first stage of replacing its fixed telephony by a more advanced IP telephony, and the integration with the call centre support applications. By starting the project on the renovation of the core banking system, the first stage of upgrading the server infrastructure was carried out in 2017 for the needs of introducing the new core banking system, which included an analysis of the current situation, determining the concept of reconstruction and defining the target architecture of the system infrastructure. With regard to data management and business intelligence development, the Bank carried out in 2017 the planned steps in the optimisation of the central part of data warehouse architecture, especially in terms of consolidating data modules of the merged banks and setting up the central part of data warehouse as the central data source for the preparation of both internal and external bank reporting modules. The Bank continued internal development of business intelligence tools, a wider productive use of which is foreseen in the first half of In 2017, the Bank completed the activities related to reviewing and upgrading the process of managing the licensed software, provided information support for licence management, and implemented an active licensing policy aimed at achieving optimal software licensing costs. After the merger of KBS, the Bank started consolidating the systems, migrated successfully information solutions into Nova KBM s systems, and carried out a physical relocation of the equipment. Furthermore, the Bank carried out the preparations and started implementing a comprehensive archiving of the systems of merged banks, which will be finalised in The Bank carried out the annual process of systematic collection, evaluation and prioritisation of corporate users requirements for information support, which ensured for efficient and transparent planning of business needs, planning the use of human and financial resources, and monitoring the indicators of their utilisation. INVESTMENTS IN PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS INVESTMENTS IN INFORMATION TECHNOLOGY In accordance with the plan, the Bank upgraded in 2017 its workstations and the related peripheral hardware equipment installed at workplaces of employees. The Bank also carried out the process of renovating and increasing disk capacities in the Intel server infrastructure and communication equipment. The Bank is aware that up-to-date software is an essential and necessary part of any information system, as such software reduces information security risks, while enabling employees to be more productive, at the same time. To this end, the Bank completed in 2017 the procedures for renewal and consolidation of solutions in the field of fixed telephony and the renovation of multifunctional devices. INVESTMENTS IN BUILDINGS In 2017, Nova KBM completed the renovation of the existing branch office in Maribor (Maistrov dvor) and opened the first Premium banking office; and in addition, Premium banking offices were refurbished and opened in business units in all major cities. Under regular and extraordinary maintenance works, the Bank took care of its commercial property and a smooth operation of its business network. INVESTMENTS IN MECHANOGRAPHIC AND OTHER EQUIPMENT Purchases of mechanographic equipment were made in line with the plan, taking into account the actual need and the wear and tear on equipment. In 2017, the Bank partially modernised its vehicle fleet. BUSINESS REPORT AND 48

50 CULTURE AND TALENTS In Nova KBM, we are committed to creating a positive organisational culture; we promote openness to change and constructive cooperation among employees. We create a work environment that enables us to achieve our goals and encourages development of the committed teams and individuals, while at the same time we build the Bank s employer brand. BUSINESS REPORT AND 49

51 10/ PLANS FOR 2018 In 2018, Nova KBM will continue pursuing its vision of becoming the best bank in Slovenia. Therefore, it will focus on pursuing its mission and key strategic objectives of the 2020 Strategy. In addition, as a socially responsible institution and by taking into account its business objectives, Nova KBM will be involved in important national, regional and local events, projects and initiatives also in 2018, thus contributing to the development of the societal and economic environment in which it operates. The Bank will keep managing its portfolio of key projects with the aim of complying with regulatory requirements, pursuing strategic goals, and strengthening its competitiveness. CLIENT EXCELLENCE Customers of Nova KBM will remain to be central to the Bank s operations and efforts in The Bank will continue the implementation of the Client Excellence programme, through which the Bank will upgrade the quality of its products, processes and services, and thus strengthen the satisfaction and confidence of its customers and business partners. In the area of retail banking, the Bank will focus on providing excellent, affordable, and efficient financial products and services and make them available to customers through different means. In doing so, the Bank will follow challenges and opportunities of digitalisation that provides faster and more comfortable operations to customers. The Bank will introduce these changes in its operations thoughtfully while announcing them to its customers and general public. The Bank will further develop its premium offer for demanding customers, and the programme called Bank@Work. CULTURE AND TALENTS The Bank and the entire Nova KBM Group will continue their measures, activities and projects aimed at further development of positive culture, working environment, and talents in the Bank. Under these activities, special attention will be paid to strengthening the values of trust, responsibility, excellence, fairness, loyalty and integrity, commitment to operate in accordance with legislation and ethical standards. GROWTH AND PROFITABILITY Working in the strategic partnership with Pošta Slovenije and by opening special bank counters at post offices, the Bank will further strengthen its position with the most diversified and accessible sales network in Slovenia. At the same time, the Important objectives of the Bank also include further reduction of non-performing loans at both levels, the Group s and Nova KBM s. In this area, the Bank will keep its focus on ensuring the protection of its interest, attaining a target share of non-performing loans in the Bank s portfolio, while simultaneously maximising the effects on its performance. The Bank will keep managing its liquidity in a responsible manner also in Furthermore, the Bank will ensure its presence and visibility in international markets and use this opportunity to contribute to adequate access to more favourable funding sources and capital markets. ENSURING EFFECTIVE RISK MANAGEMENT AND COMPLIANCE In accordance with the adopted risk management strategy and taking into account its risk appetite in each type of risk, the Bank will strive to ensure the security of its operations, and assume risk in a thoughtful and responsible manner. In this area, the Bank will operate in compliance with the highest risk management standards. The Bank will continuously improve its system of compliance risk management and ensure regulatory compliance in all business areas. After introducing MIFID and IFRS9 in 2017, the Bank will continue with ensuring compliance with GDPR, PSD in OPERATIONAL EFFICIENCY The Bank plans sustainable profitability by introducing appropriate measures both in terms of revenue and costs. Therefore, in 2018, the Bank will ensure efficient procurement procedures, cost-efficiency and cost control at all levels of its operations. The project of implementation of the core banking system and the construction of a modern information infrastructure will be one of the top priorities in The expected result will be a modern, powerful and efficient information platform, which will enable the Bank to improve its business model, while focusing on ensuring customer excellence. STRATEGIC FOCUSES WITHIN In 2018, respective strategic goals will be pursued also by the Nova KBM Group companies. Summit Leasing Slovenija, one of the leading leasing companies in Slovenia, which became a member of the Nova KBM Group last year, plans to expand its operations in 2018 to other segments, in addition to financing private cars and light commercial vehicles. In accordance with the Nova KBM Group s Restructuring Strategy, the sale of KBM Leasing Hrvatska in liquidation and merger by acquisition of Gorica Leasing in liquidation with KBM Leasing in liquidation were completed in January In order to achieve synergies in the area of customer operations, the Bank will provide for continuous improvements of its internal business processes, while developing strategic partnerships with external stakeholders in accordance with its strategy. Bank will further optimise its branch office network through well-thought mergers of branch offices, while opening new ones in market-attractive locations. In its operations with corporate customers, the Bank The Bank will ensure that its operations comply with the highest standards applicable to the prevention of money laundering and terrorist financing, as well as in the identification of any fraud, and proper treatment of any illicit conduct. The KBM Infond Company will focus in 2018 on realisation of its ambitious business strategy and strengthening its cooperation with institutional investors. will pursue its revised strategy covering this area. It will focus on providing high-quality services and thoughtfully introducing some new products, while upgrading existing ones. The Bank will strengthen its custody programme, business relationships, and its advisory role in BUSINESS REPORT AND 50

52 11/ CORPORATE GOVERNANCE STATEMENT In accordance with the fifth paragraph of Article 70 of the Companies Act, Nova KBM d.d. issues the following Corporate Governance Statement, which is part of the business report included in the Annual Report. 1. INFORMATION ON THE EXTENT OF DEROGATIONS FROM CORPORATE GOVERNANCE CODES IN ACCORDANCE WITH THE FIRST AND SECOND INDENTS OF ITEM 1 OF PARAGRAPH 5 OF ARTICLE 70 OF THE ZGD Reference to codes, recommendations and other internal corporate governance rules As at 31 December 2017, Nova KBM d.d. is a company with an equity investment made by foreign investors. The process of selling 10,000,000 shares issued by Nova KBM d.d. was completed on 21 April The agreement concerning the sale of those shares was signed by the Slovenian Sovereign Holding d.d. on behalf and for the account of the Republic of Slovenia as the seller. The purchase of shares was performed through the joint venture BISER BIDCO S.à.r.l. by the American alternative investment manager Apollo Global Management, LLC (Apollo), and the European Bank for Reconstruction and Development (EBRD), where Apollo provided 80 % of the funds for the acquisition, with the remaining 20 % being provided by the EBRD. Furthermore, as at 31 December 2017, Nova KBM d.d. is not a public company in the sense of the provisions of the Financial Instruments Market Act, as the Nova KBM s bond designated KBM10 (ISIN: SI ) was delisted from the Vienna Stock Exchange on 22 September After delisting the KBM10 bond from the Vienna Stock Exchange, Nova KBM has no financial instruments listed in organised trading or stock exchange listing. In accordance with the above, and on the basis of the exception referred to in item 2 of the fifth paragraph of Article 70 of the Companies Act, Nova KBM d.d. implements its internal governance arrangements, including corporate governance, in accordance with the legislation applicable in the Republic of Slovenia, while respecting its internal rules. With a view to strengthening internal governance arrangements in its operations, the Bank takes into account particularly the following: 1. Provisions of the applicable Banking Act, setting out internal governance arrangements, in particular the provisions of Chapter 3.4 (Banking management system), and Chapter 6 (Internal governance arrangements and corresponding internal capital), in the part of the requirements applicable to the Bank or members of its governing body, whereby taking into account also the acts referred to in the second paragraph of Article 9 of the Banking Act. 2. Regulation on internal governance arrangements, the governing body and the internal capital adequacy assessment process for banks and savings banks, and 3. EBA guidelines governing internal governance, assessment of the suitability of members of the management body and officers holding key functions, and remuneration policies and practices, based on relevant regulations of the Bank of Slovenia on the application of these guidelines. Nova KBM d.d. strives to take into account, as far as possible, also non-binding recommendations contained in the letter of the Bank of Slovenia (code /15-TR of 23 October 2015). Nova KBM d.d. also strives to continue its proactive work to strengthen and promote appropriate internal governance arrangements and corporate integrity in a wider professional, financial, economic and other public. In implementing its corporate governance framework in 2017, the Bank also took into consideration the Nova KBM and the Nova KBM Group companies Governance Policy, which was adopted in February 2016 and revised in December Furthermore, in 2017, the Bank complied with the Catalogue of Commitments made by the Republic of Slovenia to the European Commission with respect to the provision of state aid to Nova KBM, i.e. in the part relating to corporate governance (public version of the Catalogue of Commitments is available on the European Commission s website). 2. DESCRIPTION OF MAIN FEATURES OF INTERNAL CONTROL AND RISK MANAGEMENT IN RELATION TO FINANCIAL REPORTING PROCEDURES The aim of internal controls is to ensure that the risks are properly managed, that proper accounting principles, as well as internal and external financial reporting and communicating are applied, and that operations of the Bank are carried out in compliance with the law and business ethics. Internal controls are established within all processes and organisational units, at all levels of the Bank and the Group. Risk management is an important part of the management and governance system relating to the systematic identification, measurement, and assessment of risks arising from operations of the Group and its environment. Procedures of measuring the risks and risk management by individual types of risk are set out in the respective risk management policies. Each company within the Group is responsible for identifying, measuring, and managing all the risks influencing its operations. Assessing and managing risks has an important impact on drafting up the business and strategic plan of the Bank and the Group, and on the decision-making process in commercial transactions, individual agreements, investments, and other activities. The system of control over risk management is based on monthly reports which are reviewed by the specialised bodies of the Bank that are responsible for monitoring the exposure to individual types of risk. For the purpose of a comprehensive overview of the risks to which the Group is exposed, the Bank prepares the Risk Profile once a year, and this document contains an assessment of the key types of risk and of the related controls. The document is discussed and approved by the Bank s Management Board. BUSINESS REPORT AND 51

53 The Bank and the Group endeavour to have in place appropriate systems of internal controls, which includes precisely specified accounting procedures (including details regarding powers and responsibilities for individual tasks, automatic and manual controls in all phases of the accounting process, reporting). The Internal Audit Centre assesses the adequacy and efficiency of applicable internal controls, including the risk management systems and processes, and the system of the Bank s internal controls. The Internal Audit Centre provides support and assistance to the Management Board in protecting long-term interests of the Bank and its reputation. The Centre reports on the results of its work to the Management Board, the Audit Committee, and the Supervisory Board on a regular basis. When conducting the annual audit of financial statements, the appointed external auditor carries out at its discretion, a review of internal controls with respect to the preparation and fair presentation of financial statements. In its letter to the Management Board, the external auditor summarises the findings regarding the deficiencies, as well as areas of possible improvements identified during the audit of the financial statements, and reports thereon to the Management Board and the Audit Committee. 3. INFORMATION AND EXPLANATIONS PROVIDED BY COMPANIES THAT ARE SUBJECT TO THE APPLICATION OF THE ACT REGULATING ACQUISITIONS (INFORMATION FROM ITEMS 3, 4, 6, 8, AND 9) OF THE SIXTH PARAGRAPH OF ARTICLE 70 OF THE ZGD-1) Significant direct and indirect holding of the company s securities in the sense of achieving a qualified stake as determined by the act regulating acquisitions (item 3 of the sixth paragraph of Article 70 of the ZGD-1) On 21 April 2016, a 100-percent owner of Nova KBM d.d. shares became the BISER BIDCO S.à.r.l. Company, through which the purchase of shares was performed by the American alternative investment manager Apollo Global Management, LLC, and the European Bank for Reconstruction and Development. The BISER BIDCO S.à.r.l. Company owns 10,000,000 ordinary, registered no-par-value shares, which represent 100 % of the Bank s share capital. Nova KBM has issued only one class of shares, which are all freely transferable and bear the same rights in every respect. Each ordinary share entitles its holder to one vote at the Shareholders Meeting. The rights of the holders of ordinary shares are set out in the relevant legislation. Holders of securities that carry special control rights (item 4 of the sixth paragraph of Article 70 of the ZGD-1) Shareholders have no special controlling rights arising from the ownership of Nova KBM shares. Restrictions related to voting rights, in particular: ( ) restrictions of voting rights to a certain stake or a certain number of votes, ( ) deadlines for executing voting rights, and ( ) agreements in which, on the basis of the company s cooperation, the financial rights arising from securities are separated from the rights of ownership of such securities (item 6 of the sixth paragraph of Article 70 of the ZGD-1) In accordance with the Bank s Articles of Association, no restrictions apply to the voting rights. The Bank s rules on appointment or replacement of members of the management or supervisory bodies and amendments to the Articles of Association (item 8 of the sixth paragraph of Article 70 of the ZGD-1) MANAGEMENT BOARD In accordance with the provisions of the Articles of Association, the Supervisory Board appoints and recalls the President and other Management Board members, whereby the President of the Management Board may appoint one of the Management Board members as Deputy President. Management Board members are appointed for a period of five years and may be reappointed. The Supervisory Board may recall Management Board members for the reasons stipulated in the applicable regulations and internal documents and rules of the Bank. Management Board members may also resign voluntarily. SUPERVISORY BOARD In accordance with the Articles of Association, Supervisory Board members are elected by the Shareholders Meeting for a period of five years. The appointment of a Supervisory Board member shall be terminated after the expiry of the period or based on a resolution on removal adopted by the Shareholders Meeting. Supervisory Board members may resign at any time. In accordance with the provisions of the ZGD-1 and Article 14 of the Bank s Articles of Association, the Shareholders Meeting is authorised to make decisions with respect to amendments to the Bank s Articles of Association. In accordance with the provisions of the ZGD-1 and the Bank s Articles of Association, at least three-quarters of the share capital represented in the voting is required to pass a resolution of the Shareholders Meeting. Authorisation of members of the management for issuing or purchasing treasury shares (item 9 of the sixth paragraph of Article 70 of the ZGD-1) In accordance with the Bank s Articles of Association and its other documents, the powers of the Management Board members for issuing or purchasing treasury shares are not restricted. Management Board members may issue and purchase treasury shares under the terms and conditions stipulated by law. 4. INFORMATION ABOUT THE FUNCTIONING OF THE SHAREHOLDERS MEETING AND OF ITS KEY POWERS, AND DESCRIPTION OF SHAREHOLDERS RIGHTS AND THE METHOD OF THEIR EXERCISING The Shareholders Meeting has the powers as laid down in the applicable regulations. The Shareholders Meeting shall be convened by the Management Board or the Supervisory Board. The Shareholders Meeting shall be convened in the cases provided for in the applicable regulations, or when this is to the benefit of the Bank. The Shareholders Meeting may also be convened by the Supervisory Board, particularly in cases where the Management Board does not convene the Shareholders Meeting in due time, or if the convocation of the Shareholders Meeting is required for the smooth running of the Bank s operations. BUSINESS REPORT AND 52

54 The session of the Shareholders Meeting is usually held either at the headquarters of the Bank or at another location specified in the notice on convening the Shareholders Meeting. The Shareholders Meeting shall adopt resolutions by a simple majority of the votes cast, unless the law or the Articles of Association provide for a different type of majority. The voting rights of shareholders shall be exercised in proportion to their stake in the share capital. Each no-parvalue share with a voting right entitles its holder to one vote. 5. INFORMATION ABOUT THE COMPOSITION AND WORK OF THE MANAGEMENT AND SUPERVISORY BODIES OF AND THEIR COMMITTEES MANAGEMENT BOARD As at 31 December 2017, the Nova KBM Management Board comprised of the following five members: John Denhof, President of the Management Board, Robert Senica, Deputy President of the Management Board, Jon Locke, Management Board member, Sabina Župec Kranjc, Management Board member, and Josef Gröblacher, Management Board member. FUNCTIONING OF THE MANAGEMENT BOARD Pursuant to the law and the Bank s Articles of Association, the Management Board runs operations autonomously and on its own responsibility. The Management Board shall be composed of at least two members. Management Board members shall be appointed by the Supervisory Board. One of the Management Board members shall be appointed as President of the Management Board. The President of the Management Board shall appoint one Management Board member as Deputy President. The number of Management Board members shall be determined by the Supervisory Board in a resolution. Management Board members shall be appointed for a period of five years and may be reappointed. The Supervisory Board may recall Management Board members for reasons stipulated in the applicable regulations as well as in internal documents and rules of the Bank. Management Board members may also resign voluntarily. The Management Board shall decide on all matters concerning the Company, except those decided on by the Shareholders Meeting or the Supervisory Board in accordance with the applicable regulations and/or the Articles of Association. The Management Board must obtain a prior consent of the Supervisory Board to conclude any legal transaction for which consent of the Supervisory Board is required by law. To conclude any legal transaction, in respect of which a special resolution is passed by the Supervisory Board, the Management Board must obtain a prior consent of the Supervisory Board or its relevant committees or any other body set up for this purpose by the Supervisory Board. The method and the process of giving consent shall be determined by the Supervisory Board by a special resolution. The Management Board shall perform its work in accordance with its Rules of Procedure. The Rules of Procedure shall be approved by the Supervisory Board. The Management Board shall decide by a majority of the votes cast. Where a vote is a tie, the vote of the President of the Management Board shall be the casting vote. The Management Board shall adopt decisions at regular and extraordinary meetings or meetings by correspondence (through electronic means). The minutes shall be taken of meetings of the Management Board. The Management Board shall inform the Supervisory Board about all the matters, for which the obligation to inform is prescribed by the applicable regulations. In addition, the Management Board shall inform the Supervisory Board about any other matters determined by a respective resolution of the Supervisory Board. Further details regarding the composition and powers of the management bodies committees are set out in the section on Corporate governance. SUPERVISORY BOARD Performance of Nova KBM s operations is overseen by the Supervisory Board that, in accordance with Bank s Articles of Association, shall consist of no fewer than 6 and no more than 11 members. As at 31 December 2017, the Supervisory Board comprised of the following members: dr Andrej Fatur, Chair, Andrzej Klesyk, Deputy Chair, Manfred Puffer, member, Michele Rabà, member, Gernot Wilhelm Friedrich Lohr, member, Andrea Moneta, member, and Alexander Saveliev, member. FUNCTIONING OF THE SUPERVISORY BOARD Supervisory Board members shall be appointed by the Shareholders Meeting. Supervisory Board members shall elect among themselves the Chair and at least one Deputy Chair of the Supervisory Board. Supervisory Board members are appointed for a period of five years and may be reappointed. The appointment of Supervisory Board members shall be terminated after the expiry of the period or based on a resolution on removal adopted by the Bank s Shareholders Meeting. Supervisory Board members may resign at any time. The Supervisory Board may regulate its work by the Rules of Procedure. Supervisory Board members shall be entitled to remuneration, which shall be determined by a respective resolution of the Shareholders Meeting. The Supervisory Board s decisions shall be valid if the majority of its members are present at its meeting. Decisions of the Supervisory Board shall be adopted by a majority of the votes cast. Where a vote is a tie, the vote of the Chair of the Supervisory Board shall be the casting vote. BUSINESS REPORT AND 53

55 The Supervisory Board shall adopt decisions at regular and extraordinary meetings or meetings by correspondence (through electronic means). The minutes shall be taken of meetings of the Supervisory Board. Meetings of the Supervisory Board shall be convened at least four times a year. Meetings of the Supervisory Board shall be convened by its Chair or Deputy Chair. The Supervisory Board may appoint other committees, the appointment of which is not foreseen or mandatory in accordance with the applicable regulations. The powers of such other committees shall be determined in a respective resolution adopted by the Supervisory Board. Detailed information about the composition of the Supervisory Board as at 31 December 2017 is presented in the section on Corporate governance. Information about the functioning of the Supervisory Board is set out also the section Report of the Supervisory Board. SUPERVISORY BOARD COMMITTEES In the 2017 financial year, the following committees carried out their work in accordance with the Companies Act (ZGD- 1) and the Banking Act (ZBan-1): the Audit Committee, the Remuneration Committee, the Nomination Committee, and the Risk Committee. In accordance with the Bank s Articles of Association, the Supervisory Board set up the Credit Committee, which is responsible for giving consent to the Management Board for concluding any legal transaction in respect of which the Supervisory Board has adopted a special resolution. AUDIT COMMITTEE OF THE SUPERVISORY BOARD Until 26 April 2017, the Audit Committee had the following members: Andrea Moneta, Chair, Gernot Wilhelm Friedrich Lohr, Deputy Chair, Michele Rabà, member, dr Andrej Fatur, member, and Manfred Puffer, member. On 26 April 2017, Gernot Wilhelm Friedrich Lohr presented his resignation notice from the Audit Committee s member and Deputy Chair. The Supervisory Board appointed Michele Rabà as new Deputy Chair. As at 28 September 2017, the Supervisory Board discharged the then Deputy Chair Michele Rabà an appointed Andrzej Klesyk as new member and Deputy Chair of the Audit Committee. As at 31 December 2017, the Audit Committee had the following members: Andrea Moneta, Chair, Andrzej Klesyk, Deputy Chair, Michele Rabà, member, dr Andrej Fatur, member, and Manfred Puffer, member. Pursuant to the ZGD-1, the responsibilities of the Audit Committee are as follows: To monitor the financial reporting procedures and make recommendations and proposals to ensure their integrity; To monitor the efficiency and effectiveness of the Company s internal controls, the internal audit, if any, and risk management systems; To monitor the statutory audits of annual and consolidated financial statements, in particular the effectiveness of the statutory audit, taking into account all the findings and conclusions of the competent authority; To examine and monitor the independence of the auditor appointed for the review of the Annual Report, especially regarding the provision of additional non-audit services; To be responsible for the auditor selection process and propose to the Supervisory Board the appointment of the auditor for the review of the Company s Annual Report; To control the integrity of financial information provided by the Company; To assess the composition of the Annual Report, including drafting the proposal for the Supervisory Board; To participate in determining the major areas subject to audit; To participate in the preparation of the agreement between the auditor and the Company, which must not include any provisions that would restrict the Shareholders Meeting choice regarding the appointment of the auditor; any such provisions would be null and void; To report to the Supervisory Board on the results of the statutory audit, including notes on how the statutory audit contributed to the integrity of financial reporting and what the role of the Audit Committee was in the process; To carry out other tasks as stipulated by the Articles of Association or a resolution of the Supervisory Board; To cooperate with the auditor in auditing the Company s annual reports, in particular by exchanging information about the major audit-related issues, and To cooperate with the internal auditor, in particular by exchanging information about the major internal auditrelated issues. The Audit Committee carries out its activities in accordance with the applicable legislation, the Bank s Articles of Association, and the instrument of incorporation, which regulates the purpose and the composition of the Audit Committee, conditions and methods of its work, as well as powers and responsibilities of its members. The area and the method of work of the Audit Committee, its decision-making process, and all other issues deemed important for its work are regulated by the Rules of Procedure of the Audit Committee. BUSINESS REPORT AND 54

56 NOMINATION COMMITTEE Until 13 January 2017, the committee had the following members: Andrea Moneta, Chair, Gernot Wilhelm Friedrich Lohr, Deputy Chair, Alexander Saveliev, member, and dr Andrej Fatur, member. On 13 January 2017, Andrea Moneta presented his resignation notice from the Nomination Committee s Chair, and the Supervisory Board appointed dr Andrej Fatur as new Chair. On 28 September 2017, the Supervisory Board appointed Andrzej Klesyk as new member of the Nomination Committee. As at 31 December 2017, the Nomination Committee had the following members: dr Andrej Fatur, Chair, Gernot Wilhelm Friedrich Lohr, Deputy Chair, Alexander Saveliev, member, and Andrzej Klesyk, member. Pursuant to the ZBan-2, the responsibilities of the Nomination Committee are as follows: To select and recommend to the Supervisory Board candidates for members of the Management Board, and to select and recommend to the Shareholders Meeting candidates for members of the Supervisory Board, taking into account policies on the selection of suitable candidates, as set out in the ZBan-2; To define the tasks and required conditions for a specific appointment, including an assessment of the time envisaged for the performance of the function in question; To define the target number of the under-represented gender on the Management Board and the Supervisory Board, and to draw up an associated policy on how to increase the number of members of the under-represented gender in the Management and Supervisory Board in order to achieve that target; To assess, at least once a year, the structure, size, and performance of the Management and Supervisory Boards, and to draw up recommendations detailing potential changes; To assess, at least once a year, the knowledge, skills and experience of individual members of the Management and Supervisory Boards, and of the body as a whole, and to report to the Supervisory and Management Boards accordingly; To regularly review the Management Board s policy on the selection and appointment of suitable candidates for the Bank s senior management positions, and to draw up recommendations detailing potential changes; To actively contribute to the fulfilment of the Bank s obligation to adopt appropriate policies on the assessment of the suitability of the governing body s members. The area and the method of work of the Nomination Committee, its decision-making process, and all other issues important for its work are regulated by the Rules of Procedure of the Nomination Committee. REMUNERATION COMMITTEE As at 31 December 2017, the Remuneration Committee had the following members: Gernot Wilhelm Friedrich Lohr, Chair, Alexander Saveliev, Deputy Chair, and Michele Rabà, member. Pursuant to the ZBan-2, the responsibilities of the Remuneration Committee are as follows: To carry out technical and independent assessments of remuneration policies and practices, and to formulate initiatives for measures on the basis thereof with the aim of improving management of the risks to which the Bank is exposed, as well as its capital and liquidity; To draw up proposals for decisions by the governing body regarding remuneration, including the remuneration that impacts the risks to which the Bank is exposed, and the management thereof; To control the remuneration of the senior management that performs risk management functions and ensure the compliance of operations. The area and the method of work of the Remuneration Committee, its decision-making process, and all other issues important for its work are regulated by the Rules of Procedure of the Remuneration Committee. RISK COMMITTEE As at 31 December 2017, the Risk Committee had the following members: Manfred Puffer, Chair, Andrea Moneta, Deputy Chair, Alexander Saveliev, member, and Michele Rabà, member. Pursuant to the ZBan-2, the responsibilities of the Risk Committee are as follows: To provide advice regarding the Bank s current and future risk appetite and regarding its risk management strategy; To provide assistance in the supervision of senior management with respect to the implementation of the risk management strategy; To verify, without encroaching on the tasks of the Remuneration Committee, whether the forms of stimulation provided for by the remuneration system take into account the risks, capital, liquidity and the likelihood and timerelated allocation of the Bank s revenue, with the aim of formulating prudent remuneration policies and practices; To verify whether the prices of the Bank s products are fully compatible with the adopted business model and risk management strategy, and to propose measures for the elimination of identified discrepancies, and to submit those proposals to the Management and Supervisory Boards. The area and the method of work of the Risk Committee, its decision-making process, and all other issues important for its work are regulated by the Rules of Procedure of the Risk Committee. BUSINESS REPORT AND 55

57 6. DESCRIPTION OF DIVERSITY POLICY BEING IMPLEMENTED IN RELATION TO THE REPRESENTATION IN MANAGEMENT OR SUPERVISORY BODIES IN TERMS OF E.G. GENDER, AGE OR EDUCATION) Although the Bank has adopted no formal diversity policy for the selection of members of its management bodies, this area is fully covered in substance by the Policy on the Selection of Suitable Candidates for a Management Body, which was drafted and adopted by the Bank in 2016; this policy takes account of the second paragraph of Article 34 of the Banking Act (ZBan-2), according to which a bank must set up and implement an appropriate policy on the selection of suitable candidates, ensuring: That a management body as a whole takes into account a wide range of knowledge, skills and experience of its members; Initiatives are implemented to achieve diversity within a management body, including the appropriate representation of both genders, and policies to achieve these objectives by increasing the number of members of an underrepresented gender in the management body; Conditions are defined for the performance of a specific function, including the required profile of members of the management body before they are appointed. Therefore, the criteria of experience are defined for members of the management body (in this area, the following criteria are assessed in each member or candidate: education, work experience, and expertise in pivotal areas), the criterion of personal reliability and reputation, and the criterion of management capability. Further details about this policy are set out in the Biser Topco Group Disclosures (under Pillar 3) document, which is published at The Corporate Governance Statement forms an integral part of the 2017 Annual Report of the Bank, which will be published on the Bank s website. 12/ STATEMENT OF NOVA KBM MANAGEMENT S RESPONSIBILITIES IN COMPILING 2017 ANNUAL REPORT By signing this statement, the Management Board, comprising of John Denhof, President of the Management Board, Robert Senica, Deputy President of the Management Board, Sabina Župec Kranjc, Management Board member, Jon Locke, Management Board member, and Josef Gröblacher, Management Board member, confirms to the best of its knowledge that: The financial statements have been drawn up in accordance with the appropriate accounting framework of reporting and that they provide a true and fair view of the assets, liabilities, the financial position and the profit and loss of the Bank and other companies included in the consolidation as a whole, and The business report gives a fair view of the development and results of the Bank s operations and its financial position, including the description of principal risks the Bank and other companies included in the consolidation are exposed to as a whole. The Management Board of Nova KBM d.d. hereby declares that in the 2107 financial year, pursuant to Article 545 of the Companies Act (ZGD-1), the Bank has neither engaged in or concluded any legal transactions with the controlling company and its affiliated companies upon an initiative or in interests of those companies, nor it has performed or omitted any other acts upon an initiative or in interests of those companies that would result in detriment or deprivation of the Bank. Maribor, 14 March 2018 Management Board of Nova KBM d.d. Josef Gröblacher Jon Locke Sabina Župec Kranjc Robert Senica John Denhof Member Member Member Deputy President President Maribor, 14 March 2018 Management Board of Nova KBM d.d. Josef Gröblacher Jon Locke Sabina Župec Kranjc Robert Senica John Denhof Member Member Member Deputy President President Supervisory Board of Nova KBM d.d. dr Andrej Fatur, Chair Supervisory Board of Nova KBM d.d. dr Andrej Fatur, Chair BUSINESS REPORT AND 56

58 13/ TYPE OF SERVICES FOR WHICH NOVA KBM HAS THE AUTHORISATION OF THE BANK OF SLOVENIA Nova kreditna banka Maribor d.d. has the authorisation to perform banking services pursuant to Article 5 of the Banking Act (Official Gazette of RS, No. 25/15, hereinafter: ZBan-2). Banking services include the acceptance of deposits and other repayable funds from the public and granting loans for its own account. The Bank also has the authorisation to perform mutually recognised and additional financial services. Pursuant to Article 5 of the ZBan-2, the Bank may perform the following mutually recognised financial services: 1. Acceptance of deposits and other repayable funds. 2. Granting loans, including: Consumer loans, Mortgage loans, Factoring (with our without recourse), Financing commercial transactions, including export financing based on forfeiting; 3. Lease of assets, where all material risks and benefits that arise from ownership rights to assets are transferred to the lessees, whereby transfer of the ownership rights to lessees is possible but not inevitable; 7. Trading for own account and for accounts of customers in: Money market instruments, Foreign exchange, including currency exchange transactions, Standardised financial futures and options, Foreign exchange and interest-rate instruments, Transferable securities; 8. Participation in the issuance of securities and services related to such issues; 9. Advice and services related to mergers and the purchase of undertakings; 11. Portfolio management and advice; 12. Safekeeping of securities and other services related to safekeeping; 14. Renting out of safe deposit boxes; 15. Investment services and operations and ancillary investment services in accordance with the ZTFI. The Bank may perform the following additional financial services in accordance with Article 6 of the ZBan-2: 1. Insurance brokerage in accordance with the law governing the insurance business; 2. Administration of payment systems; 6. Marketing of investment funds and the sale of investment coupons or shares in investment funds. Furthermore, within additional financial services provided in accordance with item 6 of the first paragraph of Article 6 of the ZBan-2, the Bank may be engaged in the brokerage of voluntary supplementary pension insurance. 4. Payment services; 5. Issuance and management of other payment instruments (e.g. travellers cheques and bankers drafts) in the part in which this service is not included in the service referred to in the previous item; 6. Issuance of guarantees and other commitments; BUSINESS REPORT AND 57

59 14/ NOVA KBM BRANCH OFFICE NETWORK Lenart Branch Office Partizanska cesta Lenart v Slovenskih goricah Telephone: 02/ Titova Branch Office Ljubljanska cesta Slovenska Bistrica Telephone: 02/ Zgornja Bistrica Branch Office Novi trg Branch Office Partizanska ulica 61 Nova KBM d.d. Branch Office Network Department Ulica Vita Kraigherja Maribor Telephone: 02/ Slovenia-East Branch Ulica Vita Kraigherja Maribor Telephone: 02/ Centrala Branch Office Ulica Vita Kraigherja Maribor Telephone: 02/ Cesta zmage Branch Office Cesta zmage Maribor Telephone: 02/ Koroška vrata Branch Office Turnerjeva ulica 17a 2000 Maribor Telephone: 02/ Pobrežje Branch Office Cesta XIV. divizije Maribor Telephone: 02/ Novi trg Ptuj Telephone: 02/ Breg Branch Office Zagrebška cesta 4a 2250 Ptuj Telephone: 02/ Kidričevo Branch Office Mladinska ulica Kidričevo Telephone: 02/ Gorišnica Branch Office Gorišnica Slovenska Bistrica Telephone: 02/ Poljčane Branch Office Bistriška cesta Poljčane Telephone: 02/ Pragersko Branch Office Kolodvorska ulica Pragersko Telephone: 02/ Oplotnica Branch Office Ulica Pohorskega bataljona Oplotnica Melje Branch Office Partizanska cesta Maribor Telephone: 02/ Tezno Branch Office Ptujska cesta Maribor Telephone: 02/ Gorišnica Telephone: 02/ Rogoznica Branch Office Špindlerjeva ulica 3 Telephone: 02/ Murska Sobota Branch Office Kocljeva ulica Murska Sobota Ljubljanska Branch Office Ljubljanska ulica Maribor Telephone: 02/ Ruše Branch Office Jamnikova ulica Ruše Telephone: 02/ Ptuj Telephone: 02/ Rabelčja vas Branch Office Ulica 25. maja 13 Telephone: 02/ Ljutomer Branch Office Glavni trg Ljutomer Europark Branch Office Pobreška cesta Maribor Telephone: 02/ Hoče Branch Office Miklavška cesta Hoče Telephone: 02/ Ptuj Telephone: 02/ Ormož Branch Office Ptujska cesta 2 Telephone: 02/ Gornja Radgona Branch Office Partizanska cesta Gornja Radgona 2270 Ormož Telephone: 02/ Telephone: 02/ BUSINESS REPORT AND 58

60 Lendava Branch Office Kranj 1 Branch Office Lovrenc na Pohorju Branch Office Kanal Branch Office Trg ljudske pravice 11 Nazorjeva 3 Gornji trg 20 Trg svobode Lendava 4000 Kranj 2344 Lovrenc na Pohorju 5213 Kanal Telephone: 02/ Telephone: 04/ Telephone: 02/ Telephone: 05/ Tezno 1 Branch Office Žiri Branch Office Ljubljana Branch Office Branik Branch Office Zagrebška cesta 76 Loška cesta 15 Tivolska cesta 48 Branik Maribor 4226 Žiri 1000 Ljubljana 5295 Branik Telephone: 02/ Telephone: 04/ Telephone: 01/ Telephone: 05/ Premium Branch Office Novo mesto 1 Branch Office Ljubljana Center Branch Office Miren Branch Office Razlagova ulica 4 Rozmanova 16 Stritarjeva ulica 2 Miren 125 a 2000 Maribor 8000 Novo mesto 1000 Ljubljana 5291 Miren Telephone: 02/ Telephone: 07/ Telephone: 01/ Telephone: 05/ Slovenia-Centre Brežice Branch Office Slovenia-West Renče Branch Office Branch Cesta prvih borcev 6 Branch Trg 40 Tivolska cesta Brežice Kidričeva ulica Renče 1000 Ljubljana Telephone: 07/ Nova Gorica Telephone: 05/ Telephone: 01/ Telephone: 05/ Krško Branch Office Ajdovščina Branch Office Ljubljana 1 Branch Office Cesta krških žrtev 137 Centrala Branch Office Goriška cesta 25 Pogačarjev trg Krško Kidričeva ulica Ajdovščina 1000 Ljubljana Telephone: 07/ Nova Gorica Telephone: 05/ Telephone: 01/ Telephone: 05/ Celje Branch Office Vipava Branch Office Ljubljana 2 Branch Office Cankarjeva ulica 1 Šempeter Branch Office Cesta 18. aprila 4 Linhartova cesta Celje Cesta Prekomorskih brigad Vipava 1000 Ljubljana Telephone: 03/ Šempeter pri Gorici Telephone: 05/ Telephone: 01/ Telephone: 05/ Dravograd Branch Office Idrija Branch Office Celje 1 Branch Office Meža 10 Solkan Branch Office Lapajnetova ulica 41 Prešernova ulica Dravograd Trg J. Srebrniča Idrija 3000 Celje Telephone: 02/ Solkan Telephone: 05/ Telephone: 03/ Telephone: 05/ Ravne Branch Office Cerkno Branch Office Šoštanj Branch Office Prežihova ulica 5 Brda Branch Office Glavni trg 5 Ulica Lole Ribarja Ravne na Koroškem Trg 25. maja Cerkno 3325 Šoštanj Telephone: 02/ Dobrovo v Brdih Telephone: 05/ Telephone: 03/ Telephone: 05/ BUSINESS REPORT AND 59

61 Tolmin Branch Office Trg maršala Tita Tolmin Telephone: 05/ SBO Grosuplje Taborska cesta Grosuplje Telephone: Bovec Branch Office Trg golobarskih žrtev Bovec Telephone: 05/ SBO Šentjur Mestni trg 5a 3230 Šentjur Telephone: Kobarid Branch Office Trg svobode Kobarid Telephone: 05/ SBO Slovenske Konjice Mestni trg 3a 3210 Slovenske Konjice Telephone: Koper Branch Office Ferrarska ulica Koper Telephone: 05/ Post Office Banking Services SBO Radovljica Kranjska cesta Radovljica Telephone: SBO Čopova Slovenska cesta Ljubljana Telephone: 01/ SBO Fužine Fužine Ljubljana Telephone: 01/ BUSINESS REPORT AND 60

62 15/ SUSTAINABLE DEVELOPMENT AND SOCIAL RESPONSIBILITY The Nova KBM Group pursues its mission, vision and strategic goals in accordance with its values, legislation, ethical standards, and national and international norms, while seeking at the same time to strengthen a broader societal well-being and preserve the natural environment in the long run. In its continuous search for a balance between economic, social and environmental components of the development, the Bank is guided by its Policy of Sustainable Development and Social Responsibility of Nova KBM, and the Strategy. In 2016 and 2017, during the period of change in the ownership and extensive structural changes, the Bank set up a model of strategic management of social responsibility and sustainable development, which includes all the key stakeholders involved in the development of long-term partnerships with the Bank. This model includes the process of continuous improvement based on the GRI reporting model, measurement and evaluation of GRI indicators. This is the way the Bank pursues its strategic goals, such as: Sustainable care for the development of employees; Assuming responsibility and managing risks; Fair and consistent relationships with stakeholders in a long-run; Quick and innovative exploitation of the opportunities in sustainable development; Reducing operating costs and increasing efficient use of resources, which minimises the environmental footprint; Continued, transparent and credible communication on corporate social responsibility and sustainable development; Building trust in the Bank. Due to the importance of the Corporate Social Responsibility and Sustainable Development management for the Group, activities in this area are disclosed separately, in the comprehensive Report on Sustainable Development and Social Responsibility. It identifies the challenges for the future brought by digitalisation, strategic directions in corporate social responsibility, and the activities most relevant to the Bank s operations in a wider environment. SUSTAINABLE GOVERNANCE In terms of sustainable governance, the Bank follows the Code of Conduct of Nova KBM and the Nova KBM Group, which was revised in 2017 and its applicability extended to all employees of the Nova KBM Group. The Bank discloses its anti-corruption activities, contingency plans, and risk management. SUSTAINABLE RELATIONS WITH EMPLOYEES In sustainable relationships with the social environment, the Bank focuses on its employees that are a key factor in its performance. At the end of 2017, the Bank had 1,419 employees, which rank Nova KBM among bigger employers in the immediate region. The Bank believes that its success and growth are founded on satisfied and committed employees who are properly trained for their job. Therefore, training and development of employees are strategically planned, implemented, and evaluated by the Bank. The ambition of human resources development is demonstrated by the fact that the volume of training courses increased by more than 50 % in 2017 compared to previous years. SUSTAINABLE CUSTOMER RELATIONS In the Bank s business strategy, client excellence is given a central role. The Bank is aware that only excellent services tailored to individual customers provide the basis for a long-term relationship. In 2017, the Bank made several strategic steps in this field. SUSTAINABLE RELATIONS WITH SUPPLIERS Suppliers are part of strategic stakeholders of the Nova KBM Group. Due to its size, the Bank can achieve synergy effects through sustainable and socially responsible management of these relationships. In this regard, there are not only economic interests of the Bank that count, but also socially responsible and sustainable impacts, which the Bank s suppliers can contribute to a wider societal well-being. RELATIONS WITH LOCAL COMMUNITIES Local communities are facing ever-increasing challenges. Global and European trends impose increasing responsibilities on local communities, which is why they need development partnerships. In this context, the Bank is aware of its importance and responsibility as a business institution to the wider society and the local environment. Despite of the change in ownership, the Bank remains an active supporter of the environment where it operates. SUSTAINABLE RELATIONS TO THE NATURE The Nova KBM Group recognised among its strategic stakeholders also the natural environment. Since the Bank, as a service provider, wants to act in a sustainable and socially responsible manner also in this area, it has identified its impacts on the natural environment. The biggest impacts that can be managed by the Bank include energy, the use of resources, and banking products that can stimulate responsible management of the natural environment. The content of the Report on Sustainable Development and Social Responsibility is available on the website BUSINESS REPORT AND 61

63 LIST OF ACRONYMS AND TERMS USED IN THE ANNUAL REPORT ALCO AML Apollo BCBS CRS CRD IV EBRD ECB EU FATCA GDPR ICAAP ILAAP MiFID IFRSs NPS OECD POS PBT VaR ZBan-1 Nova KBM s Assets and Liabilities Committee Prevention of money laundering and terrorist financing Apollo Global Management, LLC, a global investment manager, funds managed by its affiliates Basel Committee on Banking Supervision Common Reporting Standard Capital Requirements Directive European Bank for Reconstruction and Development European Central Bank European Union Foreign Account Tax Compliance Act General data protection regulation Internal Capital Adequacy Assessment Process Internal Liquidity Adequacy Assessment Process Markets in Financial Instruments Directive International Financial Reporting Standards Net promoter score Organization for Economic Cooperation and Development Point Of Sale Profit before tax Value-at-risk Banking Act ZBan-2 The amended Banking Act (effective from May 2015) VOE ZTFI Voice of Employees Financial Instruments Market Act BUSINESS REPORT AND 62

64 FINANCIAL REPORT FINANCIAL REPORT AND 63

65 AUDITOR S REPORT ON THE FINANCIAL STATEMENTS OF THE AND FINANCIAL REPORT AND 64

66 FINANCIAL REPORT AND 65

67 FINANCIAL REPORT AND 66

68 FINANCIAL REPORT AND 67

69 FINANCIAL REPORT AND 68

70 FINANCIAL STATEMENTS AND FINANCIAL REPORT AND 69

71 1/ INCOME STATEMENT 000 ITEM DESCRIPTION NOTES YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 Interest income 9 92, ,787 88, ,212 Interest expenses 9 (10,375) (13,487) (10,163) (13,484) Net interest income 9 82,569 92,300 78,584 90,728 Dividend income 10 1, , Fee and commission income 11 77,663 73,967 69,738 68,370 Fee and commission expenses 11 (32,207) (31,536) (29,560) (30,485) Net fee and commission income 11 45,456 42,431 40,178 37,885 Net realised gains on financial assets and liabilities not measured at fair value through profit or loss 12 7,963 8,593 7,227 10,120 Net gains on financial assets and liabilities held for trading 13 4, , Net gains on financial assets and liabilities designated at fair value through profit or loss , ,491 Net gains/losses from foreign exchange rate differences 15 (1,541) 311 (2,231) 264 Net losses on derecognition of assets 16 (1,252) (2,991) (749) (3,040) Other net operating income 17 2,954 3,731 1,686 4,118 Administration costs 18 (108,041) (97,686) (100,477) (92,067) Depreciation and amortisation 19 (10,993) (11,863) (8,384) (10,409) Provisions 20 2,541 4, ,022 Impairments 21 12,288 (15,245) 12,146 (16,487) Share of profits of subsidiaries, associates and joint ventures Net profit/(loss) from non-current assets and disposal groups classified as held for sale - 72 (870) 72 (870) PROFIT FROM CONTINUING OPERATIONS - 38,789 29,866 35,594 29,068 Income tax on continuing operations 23 9,533 3,805 10,219 3,936 NET PROFIT FROM CONTINUING OPERATIONS - 48,322 33,671 45,813 33,004 Net loss after tax from discontinued operations - 0 (3,196) 0 0 NET PROFIT FOR THE FINANCIAL YEAR - 48,322 30,475 45,813 33,004 a) Attributable to owners of the parent - 47,835 30,167 45,813 33,004 continuing operations - 47,835 33,363 45,813 33,004 discontinued operations - 0 (3,196) 0 0 b) Attributable to non-controlling interests continuing operations discontinued operations Basic earnings per share ( ) Diluted earnings per share ( ) The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 70

72 2/ STATEMENT OF OTHER COMPREHENSIVE INCOME 000 ITEM DESCRIPTION YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 NET PROFIT FOR THE FINANCIAL YEAR AFTER TAX 48,322 30,475 45,813 33,004 OTHER COMPREHENSIVE INCOME/(LOSS) AFTER TAX (3,920) 3,879 (3,172) 427 ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS 469 (434) 592 (429) Actuarial gains/(losses) on defined benefit pension plans 526 (475) 652 (470) Income tax relating to items that will not be reclassified to profit or loss (57) 41 (60) 41 ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS (4,389) 4,313 (3,764) 856 Loss from foreign currency translation (75) (89) 0 0 revaluation losses taken to equity (75) (89) 0 0 Gains/(losses) in respect of available-for-sale financial assets (5,327) 2,400 (4,648) 2,032 revaluation gains/losses taken to equity (3,554) 4,579 (3,682) 4,338 transfer of gains to profit or loss (1,773) (2,179) (966) (2,306) Gains recognised in other comprehensive income in respect of discontinued operations 0 3, Income tax relating to items that may be reclassified subsequently to profit or loss 1,013 (1,194) 884 (1,176) TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR AFTER TAX 44,402 34,354 42,641 33,431 a) Attributable to owners of the parent 44,068 34,044 42,641 33,431 b) Attributable to non-controlling interests The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 71

73 3/ STATEMENT OF FINANCIAL POSITION 000 ITEM DESCRIPTION NOTES 31/12/ /12/ /12/ /12/2016 Cash, cash balances at central banks and demand deposits at banks , , , ,469 Financial assets held for trading 26 1,524 1, Financial assets designated at fair value through profit or loss 27 17,237 86,732 17,237 86,732 Available-for-sale financial assets 28 1,621,581 1,584,514 1,621,498 1,582,095 Loans and advances 2,464,449 2,125,058 2,419,507 2,108,509 loans and advances to banks 29 42, ,916 42, ,787 deposits and loans to customers 30 2,366,167 1,963,849 2,322,531 1,948,737 other financial assets 31 55,440 42,293 54,170 40,985 Held-to-maturity financial assets 32 88,700 90,216 88,700 90,216 Non-current assets held for sale and discontinued operations 39 8,104 1,646 8,035 1,646 Property, plant and equipment 33 70,288 57,314 51,725 56,746 Investment property 34 28,576 37,807 28,161 30,459 Intangible assets 35 27,197 18,463 15,364 13,113 Investments in the equity of subsidiaries, associates and joint ventures ,762 55,476 Tax assets 37 20,706 9,438 19,389 9,396 current tax assets , ,067 deferred tax assets 37 20,592 8,329 19,371 8,329 Other assets 38 34,946 27,228 16,957 17,678 TOTAL ASSETS 4,929,829 4,823,450 4,913,905 4,831,767 Financial liabilities held for trading 40 1,024 1,575 1,023 1,575 Financial liabilities measured at amortised cost 41 4,167,845 4,075,892 4,178,883 4,100,131 deposits from banks and central banks 41 51,863 41,107 51,862 41,107 deposits from customers 41 3,638,391 3,626,247 3,671,799 3,650,858 loans from banks and central banks , , , ,088 debt securities 41 1,502 14,376 1,502 14,376 other financial liabilities 41 79,936 61,074 74,808 60,702 Provisions 42 49,445 59,220 48,596 56,785 Tax liabilities current tax liabilities deferred tax liabilities Other liabilities 43 13,708 3,169 2,338 2,687 TOTAL LIABILITIES 4,232,415 4,140,089 4,230,848 4,161,186 Share capital , , , ,000 Share premium , , , ,302 Accumulated other comprehensive income 46 29,893 33,571 30,029 33,201 Translation reserves - (184) (95) 0 0 Reserves from profit 47 20,543 20,545 20,228 20,228 Retained earnings (including net profit for the financial year) 48 90,835 73,164 79,498 63,850 EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT - 694, , , ,581 Equity attributable to non-controlling interests - 3,025 2, TOTAL EQUITY - 697, , , ,581 TOTAL LIABILITIES AND EQUITY - 4,929,829 4,823,450 4,913,905 4,831,767 The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 72

74 4/ STATEMENT OF CASH FLOWS 000 DESIGNATION ITEM DESCRIPTION YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 A. CASH FLOWS FROM OPERATING ACTIVITIES a) Total profit before tax 38,789 26,670 35,594 29,068 Depreciation and amortisation 10,993 11,863 8,384 10,409 Impairments of available-for-sale financial assets 0 3, ,395 Impairments/(reversal of impairments) of loans and advances (24,612) 6,829 (18,883) 8,813 (Reversal of impairments) of held-to-maturity financial assets (1,657) Impairments of tangible assets, investment property, intangible assets and other assets 12,324 5,021 1,747 6,372 Impairments/(reversal of impairments) of investments in the equity of subsidiaries, associates and joint ventures 0 0 4,990 (436) Share of (profits) of subsidiaries, associates and joint ventures 0 0 (225) (457) Net (gains)/losses from foreign exchange rate differences 1,541 (311) 2,231 (264) Net (gains)/losses from the sale of tangible assets and investment property 656 (55) (70) 469 Net losses from the sale of intangible assets 1,005 3,047 1,005 2,572 Other (gains) from investing activities (2,146) (2,213) (2,146) (2,243) Net unrealised (gains)/losses from non-current assets held for sale and discontinued operations and the liabilities associated therewith (72) 870 (72) 870 Other adjustments to total profit or loss before tax (2,535) (1,540) (570) (2,022) Cash flow from operating activities before changes in operating assets and liabilities 35,943 53,576 31,985 54,889 b) (Increase)/decrease in operating assets (excluding cash equivalents) (42,957) 155,079 (312,228) 123,968 Net (increase)/decrease in financial assets held for trading (405) 3,093 (277) 2,533 Net decrease in financial assets designated at fair value through profit or loss 69,495 10,874 69,495 10,874 Net (increase)/decrease in available-for-sale financial assets (44,825) 97,542 (46,482) 96,484 Net (increase)/decrease in loans and advances (62,965) 11,961 (335,391) 12,665 Net decrease in non-current assets held for sale 0 26, Net (increase)/decrease in other assets (4,258) 4, ,412 c) Increase/(decrease) in operating liabilities (191,085) 21,581 79,620 89,101 Net increase/(decrease) in financial liabilities held for trading (551) 1,305 (552) 1,305 Net increase/(decrease) in deposits and loans taken, measured at amortised cost (170,459) 80, ,313 91,489 Net increase/(decrease) in debt securities in issue, measured at amortised cost (12,874) 2,008 (12,874) 1,770 Net (decrease) in liabilities associated with non-current assets held for sale 0 (56,941) 0 0 Net (decrease) in other liabilities (7,201) (5,686) (7,267) (5,463) d) Cash flow from operating activities (a + b + c) (198,100) 230,236 (200,623) 267,958 e) Income taxes (paid) refunded f) Net cash flow from operating activities (d + e) (197,353) 231,004 (199,649) 268,802 FINANCIAL REPORT AND 73

75 000 DESIGNATION ITEM DESCRIPTION YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 B. CASH FLOWS FROM INVESTING ACTIVITIES a) Receipts from investing activities 14, ,378 9, ,000 Receipts from the sale of tangible assets and investment property 6,204 2, Receipts from non-current assets or liabilities held for sale 715 4, ,752 Receipts from the sale of held-to-maturity financial assets 3,661 43,233 3,661 43,233 Cash acquired through a business combination 3, , ,821 Other receipts from investing activities 0 0 5,365 5,289 b) Cash payments on investing activities (57,876) (10,752) (52,118) (22,408) (Cash payments to acquire tangible assets and investment property) (6,520) (7,357) (908) (1,499) (Cash payments to acquire intangible assets) (6,939) (3,115) (6,793) (3,029) (Cash payments for the investments in the equity of subsidiaries, associates and joint ventures) (44,417) (280) (44,417) (17,880) c) Net cash flow from investing activities (a + b) (43,452) 226,626 (42,209) 280,592 C. CASH FLOWS FROM FINANCING ACTIVITIES a) Receipts from financing activities Other cash proceeds related to financing activities b) Cash payments on financing activities (30,320) (16,682) (30,167) (16,567) (Dividends and shares in profits paid) (30,320) (16,682) (30,167) (16,567) c) Net cash flow from financing activities (a + b) (30,320) (15,996) (30,167) (15,881) D. Effects of change in foreign exchange rates on cash and cash equivalents (3,663) (1,635) (3,842) (1,635) E. Net increase/(decrease) in cash and cash equivalents (Af + Bc + Cc) (271,125) 441,634 (272,025) 533,513 F. Opening balance of cash and cash equivalents 838, , , ,382 G. Closing balance of cash and cash equivalents (D + E + F) 564, , , ,260 Reconciliation of cash and cash equivalents with the statement of financial position items is presented in Note CASH FLOWS FROM INTEREST, DIVIDENDS AND SHARES IN PROFITS 000 ITEM DESCRIPTION YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 YEAR ENDING 31/12/2017 YEAR ENDING 31/12/2016 Interest paid (13,110) (19,579) (12,868) (18,980) Interest received 140, , , ,915 Dividends and shares in profits paid (30,320) (16,682) (30,167) (16,567) Dividends and shares in profits received 1, ,441 1,190 The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 74

76 5/ STATEMENT OF CHANGES IN EQUITY STATEMENT OF CHANGES IN THE EQUITY OF THE FOR THE YEAR ENDING 31 DECEMBER ITEM DESCRIPTION SHARE CAPITAL SHARE PREMIUM ACCUMULATED OTHER COMPREHENSIVE INCOME TRANSLATION RESERVES RESERVES FROM PROFIT RETAINED EARNINGS (INCLUDING NET PROFIT FOR THE FINANCIAL YEAR) EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS TOTAL EQUITY OPENING BALANCE FOR THE FINANCIAL YEAR 150, ,302 33,571 (95) 20,545 73, ,487 2, ,361 Total comprehensive income for the financial year after tax 0 0 (3,678) (89) 0 47,835 44, ,402 Appropriation of (accounting for) dividends/profits (30,167) (30,167) (153) (30,320) Transfers between equity components (2) Other (30) (29) CLOSING BALANCE FOR THE FINANCIAL YEAR 150, ,302 29,893 (184) 20,543 90, ,389 3, ,414 The accompanying notes form an integral part of these financial statements. STATEMENT OF CHANGES IN THE EQUITY OF THE FOR THE YEAR ENDING 31 DECEMBER ITEM DESCRIPTION SHARE CAPITAL SHARE PREMIUM ACCUMULATED OTHER COMPREHENSIVE INCOME TRANSLATION RESERVES RESERVES FROM PROFIT RETAINED EARNINGS (INCLUDING NET PROFIT FOR THE FINANCIAL YEAR) EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT EQUITY ATTRIBUTABLE TO NON-CONTROLLING INTERESTS TOTAL EQUITY OPENING BALANCE FOR THE FINANCIAL YEAR 150, ,572 32,815 (3,230) 54,069 25, ,957 3, ,073 Total comprehensive income for the financial year after tax , ,167 34, ,354 New share capital subscribed (paid) Increased interest in subsidiaries due to recapitalisation 0 42, , ,253 Appropriation of (accounting for) dividends/profits (16,567) (16,567) (115) (16,682) Transfer of net profit to reserves from profit (33,524) 33, Other (437) (322) CLOSING BALANCE FOR THE FINANCIAL YEAR 150, ,302 33,571 (95) 20,545 73, ,487 2, ,361 The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 75

77 STATEMENT OF CHANGES IN THE EQUITY OF FOR THE YEAR ENDING 31 DECEMBER ITEM DESCRIPTION SHARE CAPITAL SHARE PREMIUM ACCUMULATED OTHER COMPREHENSIVE INCOME RESERVES FROM PROFIT RETAINED EARNINGS (INCLUDING NET PROFIT FOR THE FINANCIAL YEAR) TOTAL EQUITY OPENING BALANCE FOR THE FINANCIAL YEAR 150, ,302 33,201 20,228 63, ,581 Total comprehensive income for the financial year after tax 0 0 (3,172) 0 45,813 42,641 Appropriation of (accounting for) dividends/profits (30,167) (30,167) Other CLOSING BALANCE FOR THE FINANCIAL YEAR 150, ,302 30,029 20,228 79, ,057 The accompanying notes form an integral part of these financial statements. STATEMENT OF CHANGES IN THE EQUITY OF FOR THE YEAR ENDING 31 DECEMBER ITEM DESCRIPTION SHARE CAPITAL SHARE PREMIUM ACCUMULATED OTHER COMPREHENSIVE INCOME RESERVES FROM PROFIT RETAINED EARNINGS (INCLUDING NET PROFIT FOR THE FINANCIAL YEAR) TOTAL EQUITY OPENING BALANCE FOR THE FINANCIAL YEAR 150, ,572 25,799 53,648 16, ,729 Total comprehensive income for the financial year after tax ,004 33,431 New share capital subscribed (paid) Acquisition of PBS d.d ,975 0 (2,924) 4,051 Appropriation of (accounting for) dividends/awards in form of shares 0 42, ,253 Appropriation of (accounting for) dividends/profits (16,567) (16,567) Transfer of net profit to reserves from profit (33,420) 33,420 0 Other (1) (1) CLOSING BALANCE FOR THE FINANCIAL YEAR 150, ,302 33,201 20,228 63, ,581 The accompanying notes form an integral part of these financial statements. FINANCIAL REPORT AND 76

78 NOTES TO THE FINANCIAL STATEMENTS AND 77

79 1/ GENERAL INFORMATION Nova KBM d.d. 1 is the parent company of the Nova KBM Group 2, which, as at 31 December 2017, comprised the parent company and eight subsidiary companies. Nova KBM is a commercial bank with tradition, focusing on providing its retail and corporate customers with standard banking products. Its registered office is at Ulica Vita Kraigherja 4, 2000 Maribor, Republic of Slovenia. As at 31 December 2017, the Parent Bank s share capital totalled 150,000,000 and was split into 10,000,000 ordinary no-par-value shares. 1.1 / DEFINITION OF THE GROUP The Bank is owned by Apollo Global Management, LLC (Apollo), and the European Bank for Reconstruction and Development (EBRD) that financed the acquisition through the joint venture, Biser Topco S.à r.l., a special project company. In order to purchase a 100-percent stake of Nova KBM d.d. (and all of the subsidiaries in the Nova KBM Group), the EBRD and Biser Topco established the Biser Bidco S.à r.l. company, the only owner of which is Biser Topco S.à r.l. The Parent Bank is obliged to prepare consolidated financial statements. The financial statements of the Nova KBM Group are included in the consolidated financial statements of the company Biser Topco S.à r.l. The Group comprises of the Parent Bank and its subsidiary companies. COMPANY POSITION IN THE GROUP S VOTING RIGHTS IN THE SUBSIDIARY (%) PLACE OF BUSINESS (OR COUNTRY OF INCORPORATION) Nova KBM d.d. parent bank Maribor, Slovenia Infond d.o.o. subsidiary company Maribor, Slovenia KBM Leasing d.o.o. in liquidation subsidiary company Maribor, Slovenia Summit Leasing Slovenija d.o.o. subsidiary company Ljubljana, Slovenia Gorica Leasing d.o.o. in liquidation subsidiary company Nova Gorica, Slovenia M-PAY d.o.o. subsidiary company Maribor, Slovenia KBM Leasing Hrvatska d.o.o. in liquidation subsidiary company Zagreb, Croatia KBM Asco d.o.o. subsidiary company Belgrade, Serbia MB Finance B.V. subsidiary company The Netherlands 1 In the Financial Report, Nova KBM d.d. is also referred to as the Parent Bank, the Bank, or Nova KBM. 2 In the Financial Report, the Nova KBM Group is also referred to as the Group. 3 The Group s stake in the share capital of KBM Infond d.o.o. accounts for %. Because KBM Infond holds a certain percent of its own stake, the Group s stake in the capital of and voting rights in KBM Infond d.o.o. equals %. 4 In accordance with IFRS 10, MB Finance B.V. company is regarded as a special purpose vehicle controlled by Nova KBM d.d. The Bank has neither voting rights nor equity stake in this entity, and the investment in this entity is considered to be immaterial to the Group. On 3 January 2017, based on a decision taken by the District Court of Maribor, the merger by acquisition of KBS banka to Nova KBM was entered into the court register. As of the date of the final decision, KBS banka ceased its operations as an independent legal entity, with all its assets, including all liabilities and rights, transferred to Nova KBM, its legal successor, which recognised in its books the assets and liabilities acquired from KBS banka as per 1 July The merged bank operates under the name Nova KBM, with its registered office remained in Maribor. In accordance with the commitments made to the European Commission regarding the restructuring of the Nova KBM Group, the controlled liquidation of KBM Leasing d.o.o. and Gorica Leasing d.o.o. started at the end of 2014, while that of KBM Leasing Hrvatska d.o.o. started in April 2015, based on appropriate decision made by shareholders. In May 2017, based on a decision taken by its management, the Parent Bank started actions to sell KBM Leasing Hrvatska d.o.o. in liquidation, which is 100-% owned by the Group (of which % are directly owned by the Parent Bank). The subject of the sale agreement (SPA) is the ownership interest in KBM Leasing Hrvatska d.o.o. in liquidation, including the claims of the Parent Bank. The company was sold on 16 January 2018, and the entire company s exposure (as going concern) has been assumed by the buyer. Completion of the liquidation of KBM Leasing d.o.o. in liquidation and Gorica Leasing d.o.o. in liquidation is foreseen within two years, which depends mostly on the litigations still pending and strategic decisions of the Parent Bank. In December 2017, with an aim to optimise the liquidation process, the Parent Bank took a decision to merge by acquisition Gorica Leasing d.o.o. in liquidation to KBM Leasing d.o.o. in liquidation. Based on the final decision on the merger by acquisition of Gorica Leasing d.o.o. in liquidation to the acquiring company, KBM Leasing d.o.o. in liquidation, Gorica Leasing d.o.o. in liquidation has been deleted from the court register since 26 January The merger cut-off date is 1 January, The companies in liquidation are still controlled by the Parent Bank and are therefore fully consolidated in the Group s accounts. Financial statements of subsidiaries have been prepared under a non-going concern basis, and this assumption has been taken into consideration also in the valuation of the investments in and exposure to subsidiaries. On 22 May 2017, Nova KBM as the sole shareholder of KBM Invest, made a decision on launching the activity of summary winding up of KBM Invest d.o.o. without liquidation. In accordance with the instructions set out in the decision, activities were carried out to regulate the relations with the company s creditors and employees. On 31 August 2017, the Management Board of the Bank made a decision on winding up of the company and signed a notarial statement on the summary winding up of KBM Invest d.o.o. without liquidation. The company was deleted from the court register on 13 October On 10 March 2017, Nova KBM and the sellers, Sumitomo Corporation and Sumitomo Corporation Europe Limited, entered into the Contract on purchasing a 100- % equity stake in Summit Leasing Slovenija (hereinafter SLS). After all necessary regulatory approvals had been obtained and all the conditions from the sales contract met, Nova KBM completed the acquisition on 18 September Istra Plan d.o.o., the project finance company which was 100 % owned by the subsidiary, KBM Invest d.o.o, was sold in August FINANCIAL REPORT AND 78

80 2/ BASIS FOR THE PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The financial statements of the Nova KBM Group and Nova KBM d.d. for the year ending 31 December 2017 were authorised for issue on 7 March 2018 by the Parent Bank s Management Board. The financial statements have been prepared in accordance with regulatory requirements and on the assumption that both the Bank and the Group will continue as going concerns in the foreseeable future and that they will be able to meet their liabilities when due. 2.1 / STATEMENT OF COMPLIANCE AND THE PURPOSE OF FINANCIAL STATEMENTS relating to the Group. Accordingly, users of these audited financial statements should not rely exclusively on these financial statements and should undertake other relevant procedures before making decisions. 2.2 / BASIS OF VALUATION The financial statements have been prepared under the historical cost convention, except for the following items for which the fair value has been elected: Financial assets designated at fair value through profit or loss, Available-for-sale financial assets, Derivatives, 2.3 / USE OF ESTIMATES AND JUDGEMENTS The preparation of financial statements in accordance with the IFRSs requires the use of certain accounting estimates and judgements, which affect the value of reported assets and liabilities and of potential assets and liabilities as of the reporting date, and income and expenses for the period then ended. The most important judgements relate to the classification of financial instruments, in particular to the distribution between the held-to-maturity portfolio and the portfolio held for trading. The classification of financial instruments is carried out in line with the Group s policy prior to the initial recognition of a financial instrument. Estimates are used for: impairments of loans to customers, impairments of available-for-sale financial assets, fair value of financial assets and liabilities, provisions for off-balance-sheet risks, depreciation period of property, plant and equipment and amortisation of intangible assets, potential tax items, provisions for liabilities to employees and provisions for pending legal issues. 2.4 / PRESENTATION AND FUNCTIONAL CURRENCY Items included in the financial statements are presented in euro, which is the functional and presentation currency of both the Bank and the Group. All amounts in the financial statements and in the notes to the financial statements are expressed in thousands of euros, unless stated otherwise. Slight discrepancies in the totals may occur due to rounding adjustments. The separate and consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (hereinafter: IFRS) as adopted by the European Union. Financial statements included in this Report are prepared in accordance with legal requirements. The Group is legally required to obtain an independent audit of these financial statements. The scope of that audit is limited to an audit of general purpose statutory financial statements to fulfil the legal requirement for audit of statutory financial statements. The audit scope comprehends the statutory financial statements taken as a whole and does not provide assurance on any individual line item, account or transaction. The audited financial statements are not intended for use by any party for purposes of decision making concerning any ownership, financing or any other specific transactions Investment property. The fair value assessment methods are set out below. Changes in estimates of impairments have an especially important impact on the financial position and results of operations. These estimates are subject to adjustment in the future as a result of changes in economic conditions, customers repayment capabilities, and the change in collateral values for defaulted loans at their realisation. FINANCIAL REPORT AND 79

81 3/ SIGNIFICANT ACCOUNTING POLICIES The adopted accounting policies have been consistently Recognises the fair value of the consideration applied in both reporting periods presented in these received, financial statements. Recognises the fair value of any investment retained, 3.1 / CONSOLIDATION BASIS OF CONSOLIDATION The consolidated financial statements comprise the financial statements of the Parent Bank and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Nova KBM Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the Group s companies are prepared for the same reporting period as the parent company s, using consistent accounting policies. When preparing the consolidated financial statements, all intra-group transactions, balances, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Losses within a subsidiary are attributed to noncontrolling interests even if that results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary, Derecognises the book value of any non-controlling interest, Derecognises the cumulative translation differences, recorded in equity, Recognises any surplus or deficit in profit or loss, Reclassifies the parent s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate. EXCEPTIONS TO CONSOLIDATION When judging the inclusion of subsidiaries in the consolidation, the Group takes into account the principle of irrelevance (immateriality), which defines as irrelevant the information that, if omitted (non-disclosed), does not affect the decision-making of financial statement users. The Group does not include a subsidiary in the consolidated financial statements when none of the following criteria are exceeded: The subsidiary s balance sheet total is less than 3 % of the Group s balance sheet total, Subsidiary s net profit or loss is less than 3 % of the Group s net profit or loss, Subsidiary s net income is less than 3 % of the Group s net income. However, collectively, the subsidiaries that would have been excluded from consolidation for non-achieving the above-mentioned criteria, may not represent more than 5 % of the balance sheet total or 5 % of net profit/loss or 5 % of net income of the Group. BUSINESS COMBINATIONS AND GOODWILL/ NEGATIVE GOODWILL Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures non-controlling interests in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in Administration costs. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If a business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the fair value recognised for non-controlling interests over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised in profit or loss (negative goodwill). After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the book value of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained by the Group. FINANCIAL REPORT AND 80

82 BUSINESS COMBINATIONS OF ENTITIES UNDER SUBSIDIARIES INVESTMENTS IN THE EQUITY OF SUBSIDIARIES Financial statements of the Group companies that have COMMON CONTROL Business combinations of entities under common control that form an economic whole are accounted for using the predecessor values method, according to which the book values of the acquiree s assets and liabilities, as presented in the consolidated financial statements of its immediate parent company that is obliged to prepare consolidated financial statements, are recognised in the separate financial statements of the acquirer on the day a business combination takes place (accounting date). A business combination of entities under common control is treated as a reorganisation (of an economic whole) if the acquiree was already accounted for using the acquisition method, as provided for under IFRS 3, at the time it was included in the consolidated financial statements of its parent company for the first time (at the time when control of the acquiree was obtained). The effects of a business combination (as recognised on the accounting date), calculated as the difference between: The book value of the acquirer s equity investment in the acquiree, and The amount of transferred assets, liabilities and accumulated other comprehensive income of the acquiree, as presented in the consolidated financial statements of its immediate parent company that is obliged to prepare consolidated financial statements, are recognised in the acquirer s equity (as retained earnings or losses), without having an impact on its profit or loss. Subsidiary entities are entities controlled by the Group. Control exists when the Group is exposed, or has rights, to variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity. Financial statements of subsidiary entities are included in the consolidated financial statements from the date on which effective control is transferred to the Group and are no longer consolidated from the date of disposal. Business combinations achieved in stages are accounted for as separate steps. Any additional acquired share of interest does not affect previously recognised goodwill. When necessary, accounting policies of subsidiary entities have been changed to ensure consistency with the policies adopted by the Group. The reporting dates are unified across the entire Group. All subsidiary entities are fully consolidated. In the statement of financial position, non-controlling interests are reported as a separate item within equity. Shares of non-controlling interests are eliminated from all equity items in proportion to the share of noncontrolling interests in the share capital. TRANSACTIONS ELIMINATED ON CONSOLIDATION Intra-group balances and transactions, and income and expenses and dividends are eliminated in full. Unrealised gains and losses arising from intra-group transactions and recognised in assets are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. PRESENTED IN THE SEPARATE FINANCIAL STATEMENTS OF THE PARENT BANK In making decisions on whether it has control over an entity, the Management Board takes into consideration the pre-determined criteria regarding the definition of subsidiaries. In the separate financial statements of Nova KBM d.d., the investments in the equity of subsidiaries are presented at cost, less any adjustment for impairment. 3.2 / FOREIGN CURRENCY TRANSLATION Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the transaction dates. Foreign exchange rate differences are recognised in profit or loss. Asset and liability items denominated in foreign currency are translated and disclosed in the consolidated financial statements by applying the ECB s reference exchange rates in effect on the reporting date. The effects of translating foreign currency into the euro are recognised in profit or loss as net translation gains or losses. Translation differences on non-monetary items, such as equity instruments designated at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on equity instruments classified as available-for-sale financial assets are included in other comprehensive income, together with the fair value measurement effect. functional currency different from the presentation currency are translated into the presentation currency as follows: Assets and liabilities are translated at the rate of exchange prevailing at the reporting date, Profit or loss is translated at the average exchange rate for the period. While translation differences are presented as separate equity category, they are recognised in profit or loss in the period in which the asset is disposed of. 3.3 / CASH EQUIVALENTS Cash equivalents are current, highly liquid investments that can be quickly converted into a known amount of cash and for which the risk of changes in value is negligible. The Group regards the following items as cash equivalents: Cash in hand and balances in settlement and current accounts, Loans to banks with an original maturity of up to three months, Investments in available-for-sale debt securities with an original maturity of up to three months. Obligatory deposit funds are available to finance dayto-day operations and are therefore considered as cash equivalent. In the case of business combinations of entities under common control, the comparable financial data are not restated in the financial statements of the acquirer. FINANCIAL REPORT AND 81

83 3.4 / FINANCIAL ASSETS / CLASSIFICATION OF FINANCIAL ASSETS Upon initial recognition, the Group classifies financial assets with regard to the purpose of the acquisition, the period held, and the type of the financial asset into one of the following categories: Financial assets designated at fair value through profit or loss are classified into financial instruments held for trading and other financial instruments designated at fair value through profit or loss. Financial assets held for trading are those instruments in which the Nova KBM Group intends to actively trade and earn profit from short-term price differences. Equity instruments, debt securities and derivatives, except those held for hedging purposes, are classified into this category. Financial assets are upon initial recognition designated at fair value through profit or loss when doing so provides more relevant information of measurement or recognition, Held-to-maturity financial assets are assets with fixed or determinable payments and a fixed maturity, for which the Group attests the purpose and capacity to hold them until maturity, Available-for-sale financial assets are assets, which the Group did not acquire for the purpose of trading but intends to hold them for an undetermined period of time. Such asset can be sold for the reason of liquidity requirements or of changes in market conditions (changes in interest rates, exchange rates or the prices of financial instruments), Loans and advances are financial assets with fixed or determinable payments, which are not traded on an active market. instruments. In its accounting, the Group does not apply the rules of hedge accounting because gains and losses resulting from the hedged item and the hedging instrument are recognised simultaneously in profit or loss. The Group does not hold instruments for which hedge accounting would be required / RECOGNITION AND DERECOGNITION OF FINANCIAL ASSETS Purchases and sales of financial assets other than loans and advances are recognised on the trading date (the day when the contract is made). Loans and advances are recognised when funds are advanced to borrowers. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or the financial asset is transferred and the transfer qualifies for derecognition (the Group has transferred all rights and risks under the financial asset). Should the Group transfer the financial asset, but retain practically all risks and rights, derecognition of the asset is not carried out. If a financial asset is derecognised in full, the difference between the book value of the asset and the sum of any consideration received (including any new assets obtained less any new liabilities assumed), together with any cumulative gain or loss that had been recognised directly in other comprehensive income, is recognised in profit or loss / MEASUREMENT OF FINANCIAL ASSETS Financial assets, other than those carried at fair value Financial assets carried at fair value through profit or loss are initially measured at fair value, and the transaction costs are expensed in profit or loss on the purchase date. After they are initially recognised, financial assets held for trading and available-for-sale financial assets are measured at fair value. Fair value of financial assets is based on current bid prices as valid on the reporting date or, if such are not available, closing prices. If a quoted market price is not available, the fair value of the financial instrument is estimated using comparative pricing models or discounted cash flow techniques. Derivatives, including foreign currency forward transactions, interest rate swaps, currency options and forward transactions in securities, are used by the Group for trading purposes, and are measured at their fair value. The fair value of derivatives equals unrealised gains or losses on the valuation of derivatives at market prices or at contractual forward prices. Available-for-sale equity instruments for which the fair value cannot be reliably estimated are measured at cost (acquisition cost plus transaction costs and reduced by appropriate impairments). Loans and advances are measured at amortised cost using the effective interest rate method. Loans and advances are reported at their outstanding principal balances plus any accrued interest and fees and reduced by appropriate impairments. Held-to-maturity financial assets are measured at amortised cost. Amortised cost is calculated as the amount at which the financial asset is measured at initial recognition less principal repayments and any reduction for impairments, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount / GAINS AND LOSSES Gains and losses arising from the change in fair value of financial assets measured at fair value through profit or loss are recognised in profit or loss in the period in which they are incurred. Gains and losses arising from the change in fair value of available-for-sale financial assets are recognised directly in other comprehensive income, except for losses due to impairment and foreign exchange gains and losses, until the financial asset is derecognised, at which time the effect previously included in other comprehensive income is recognised in profit or loss. Interest on available-forsale debt securities, calculated using the effective interest rate method, is recognised directly in profit or loss. DAY-ONE PROFIT Where the transaction price of an instrument in a nonactive market is different to the fair value from other observable market transactions in the same instrument or is based on a valuation technique whose variables include only data from observable markets, the Group immediately recognises the difference between the transaction price and fair value in profit or loss, in item Net gains or losses on financial assets and liabilities held for trading as the day one profit or loss. In cases where the data used for valuations are not fully marketable, the difference between the transaction price and the price based on the valuation technique is recognised in profit or loss only after the market becomes relevant, or if the instrument is disposed of / RECLASSIFICATION OF FINANCIAL ASSETS During 2017 and 2016, the Group did not reclassify any of its financial assets into another category. The Group uses financial instruments to economically through profit or loss, are initially measured at fair value hedge against risks arising from other financial plus any transaction costs. FINANCIAL REPORT AND 82

84 3.4.6 / IMPAIRMENTS OF FINANCIAL ASSETS AVAILABLE-FOR-SALE FINANCIAL ASSETS At each reporting period, the Group assesses whether there is objective evidence that available-for-sale financial assets are impaired. A significant or prolonged decline in the fair value of an available-for-sale equity instrument below its acquisition cost may represent objective evidence of impairment. When assessing whether an available-for-sale debt instrument is impaired, the Group examines the following information: Information about any significant financial difficulties of the issuer, Information about any failure of the issuer to meet the agreed contractual provisions, Information about any late payments of principal and/or interest by the issuer, Information about the commencement of the bankruptcy or financial reorganisation of the issuer, Information about any deterioration in the issuer s market position, Information indicating that there is a measurable decrease in the estimated future cash flows from the instrument. In case of impairments of available-for-sale equity instruments, the loss due to impairment is recognised in profit or loss. Reversal of impairments of equity instruments is not made through profit or loss, and any subsequent increase in the fair value of such instruments is directly recognised in other comprehensive income. HELD-TO-MATURITY FINANCIAL ASSETS At each reporting period the Group assesses whether there is objective evidence that held-to-maturity financial assets are impaired. When assessing whether a held-to-maturity financial asset is impaired, the Group examines the following information: Information about any significant financial difficulties of the issuer, Information about any failure of the issuer to meet the agreed contractual provisions, Information about any late payments of principal and/or interest by the issuer, Information about the commencement of the bankruptcy or financial reorganisation of the issuer, Information about any deterioration in the issuer s market position, Information indicating that there is a measurable decrease in the estimated future cash flows from the instrument. The classification of customers depends on the following criteria: Their financial standing and performance, Their ability to provide cash flow needed for the repayment of debts, The regularity of their debt service payments, The industry sector risk, Subjective criteria. The Group continuously assesses whether impartial evidence exists, or events have occurred since recognition of an asset, and whether these events have an impact on the future cash flows from a financial asset or a group of financial assets, which can be reliably assessed. Taking into consideration the risks associated with a customer or a financial asset, an appropriate impairment of the financial asset is made in accordance with the IFRSs and an internal methodology. Significant financial assets are assessed individually for impairment. If impairment is established in an individual assessment of an asset, such asset shall be impaired individually, otherwise it shall be classified into the appropriate customer or financial asset risk category and impaired collectively. Individually insignificant financial assets are also assessed collectively for impairment. For individually assessed financial assets, the amount The probability of a customer becoming a defaulting customer within the respective group of financial assets, The amount of loss incurred by the respective group of defaulting customers. The probability of a customer becoming a defaulting customer and the amount of loss are calculated on the basis of historical data. Collective impairment rates are determined separately for the following portfolios: The portfolio of household loans, The portfolio of large corporate loans, The portfolio of SME loans, The portfolio of loans outstanding to low-risk customers (e.g. public institutions, regional government institutions). The Group calculates impairments separately for prime loans and loans secured by prime collateral, loans secured by eligible collateral, and unsecured loans outstanding to E-rated customers. The adequacy of collective impairment rates is verified on an annual basis, at which time a back-testing is also carried out of impairments recorded in the previous year. The book value of an impaired asset is reduced through the allowance account. The amount of impairment is recognised in profit or loss. If an available-for-sale debt instrument is impaired, the cumulative loss recognised within other comprehensive income is transferred to profit or loss. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurred after the impairment had been recognised, the impairment is reversed through profit or loss. The amount of impairment is measured as the difference between the asset s book value and the present value of future cash flows discounted by the original effective interest rate. The amount of loss is recognised in profit or loss. LOANS AND RECEIVABLES The Group classifies each customer into the appropriate of loss due to impairment is calculated as the difference between the asset s book value and the present value of future cash flows discounted at the contractual interest rate. Cash flows from operations and/or the realisation of collateral can be taken into account in the calculation. The collective impairment rates are determined based on a model that uses as inputs the following data: If the level of impairment decreases in a subsequent period, the previously recognised amount of impairment shall be reversed. The amount of reversed impairment is recognised in profit or loss. If a customer is located in a higher-risk country, the sovereign risk also has to be taken into consideration when assessing losses due to impairment. credit rating category using an internal methodology. FINANCIAL REPORT AND 83

85 The Bank seeks to implement such scenarios for customers facing financial difficulties that are most favourable for it in terms of economy. The decision about whether to restructure a loan outstanding to a customer in financial difficulties, or to start the procedure to liquidate collateral the customer has provided is largely dependent on the customer s business model. As an alternative to loan restructuring, the Group may also consider converting into equity the loans outstanding to corporate customers. In such a case, the book value of the loan before its conversion (which has already been appropriately impaired, in accordance with valuation provided for in IAS 39) becomes the acquisition (fair) value of the long-term investment in equity, unless a lower value is determined by an appraisal. However, upon the initial recognition of investments acquired through the conversion of loans, the Group does not recognise any gain resulting from the reversal of impairments of converted loans. 3.5 / WRITE-OFFS A financial asset measured at amortised cost is written off (in part or in whole) if, during the recovery proceedings, the Group establishes that it cannot realistically expect to recover the outstanding amount by liquidating collateral. The amount to be written off (a part) of receivable is determined as the difference between the net present value of the expected cash flows generated (including liquidation of collateral) and the book value of the respective asset. A write-off is regarded as the financial asset being derecognised. 3.6 / FORBEARANCE A forborne financial asset is a financial asset that is created as a result of the debtor s inability to repay a debt under the originally agreed terms, either by modifying the terms of the original agreement or by signing a new agreement. Accounting treatment of forborne financial assets depends on the type of restructuring. If the restructuring is carried out by way of changing the contractual terms applicable to a financial asset, such an asset is not derecognised, but its book value is adjusted on the basis of the discounted value of future cash flows that the financial asset is expected to generate after its restructuring. The difference in the book value of the financial asset before and after its restructuring is recognised in profit or loss (as impairment). Where a restructuring is made by way of signing a new agreement, the respective financial asset is derecognised and a new financial asset is recognised. If the restructuring of a financial asset is carried out by taking over other assets and/or by debt-to-equity swap, the Group derecognises the portion of the financial asset that is subject to restructuring, while the assets taken over are recognised in its statement of financial position at their fair value. The difference between the book value of the derecognised financial asset and the fair value of the acquired assets is recorded in profit or loss. 3.7 / OFFSETTING Financial assets and liabilities are offset in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. 3.8 / SALE AND REPURCHASE AGREEMENTS Securities purchased under agreements to resell (repurchase agreements repos) are recognised as loans to customers. Under such agreements, the Group does not assume risks and benefits arising from security ownership. The contractual relationship has the characteristics of loans collateralised with securities that are subject of the reverse repo agreements. The difference between the purchase and selling price is recognised as interest income and is accrued over the contract period using the effective interest method. 3.9 / LEASES Assets leased to customers under lease agreements, which transfer substantially all the risks and rewards of ownership of an item of property, plant and equipment, are classified as finance leases. Legal title may be or may be not transferred to the leasee. Depending on the lease agreement, the asset leased may be bought or returned to the lessor. As a rule, such a lease agreement cannot be unilaterally terminated. For depreciating leased assets, the same accounting policy is applied as for the Nova KBM Group s own assets subject to depreciation. A lease, which is not a finance lease is an operating lease. THE GROUP AS A LESSEE Payments made under operating leases are included in profit or loss on a straight-line basis over the period of the lease. An asset obtained on the basis of a finance lease is included within property, plant and equipment. Its acquisition cost equals the fair value of the leased asset or the present value of the minimum lease payments, whichever is lower. Lease payments are recognised as interest expense. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. THE GROUP AS A LESSOR Assets leased under operating lease agreements are included within investment property or property, plant and equipment. Lease income is recognised in profit or loss on a straight-line basis over the period of the lease. When assets are held subject to a finance lease, the present value of future lease payments is recognised as a receivable under the finance lease. Income from finance lease is recognised over the entire period of the lease and reflects a constant periodic rate of return of the lessor. It is disclosed as interest income / PROPERTY, PLANT AND EQUIPMENT Items of property, plant and equipment are assets which the Group uses for conducting its business. They are recorded at historical cost less accumulated depreciation and any impairment. Transaction costs directly attributable to the acquisition of an asset are included in the initial cost recognition. Subsequent costs are included in the asset s book value only when it is probable that future economic benefits associated with the item will flow to the Nova KBM Group and the cost of the item can be measured reliably. All other investments, repairs and maintenance are charged to profit or loss in the financial period in which they are incurred. The Group starts to depreciate items of property, plant and equipment when these assets are available for use. Depreciation of assets is provided individually on a straight-line basis over their estimated useful lives. FINANCIAL REPORT AND 84

86 The following depreciation rates were applied by the Group in both 2017 and 2016: The following amortisation rates were applied by the Group in both 2017 and 2016: Buildings 1.1 to 5 % Investments in third-party buildings 3 to 10 % Computer equipment 20 to 50 % Motor vehicles 12.5 to 20 % Other equipment 5 to % Land is recognised separately from buildings and, as it generally has an unlimited beneficial life, is not depreciated. For co-divided ownership of commercial space, the value of the associated land is included in the Group s acquisition cost of the respective part of the building. Items of property, plant and equipment are assessed due to possible impairment each time when there are indicators that the book value of an asset may not be fully recovered. If the estimated recoverable value of an asset is lower than its book value, the latter should be written down to the recoverable amount, and the loss due to impairment has to be recognised in profit or loss. The recoverable amount is the higher of the asset s fair value less costs to sell and the value in use. An asset is derecognised upon disposal or if the future economic benefits are no longer expected from its use. Gains and losses on disposal of an item of property, plant and equipment are determined as the difference between proceeds from disposal and the book value of an item of property, plant and equipment, and are recognised net in profit or loss. BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur / INVESTMENT PROPERTY Items of investment property are tangible assets that the Group does not use directly in its operations; they are held with the intention of renting them out commercially. Upon recognition, they are measured at acquisition cost, and later the Group measures items of investment property using the fair value model. Gains or losses arising from changes in fair value are included in profit or loss in the period to which they relate / INTANGIBLE ASSETS The Nova KBM Group possesses only intangible assets with a determinable period of useful life. Initial recognition of an acquisition cost includes costs which are directly linked to the acquisition of an asset and are necessary for the asset to be put into use. The Group depreciates intangible assets on a straight-line basis over their estimated useful lives. Licences 10 to % Other investments 5 to % Other long-term property rights 10 % The Group stops amortising intangible assets when they are defined as non-current assets held for sale, or when they are derecognised as the Group no longer expects any further economic benefits. Intangible assets are tested for impairment when there are indicators that the book value may not be recovered. If the estimated recoverable value of an asset is lower than its book value, the book value should be reduced to the recoverable amount, and the loss resulting from impairment has to be recognised in profit or loss. The recoverable amount is the higher of the asset s fair value less costs to sell and the value in use / INVENTORY Items of inventory are measured at the lower of cost and net realisable value. Net realisable value is the estimated sales price achieved in the ordinary course of business net of estimated costs of completion and costs of sale. An increase in the value of inventory does not result in its revaluation. Finished goods and work in progress (real estate for sale) are initially measured at direct production costs plus indirect production costs. Upon initial recognition, the Nova KBM Group measures items of real estate received in settlement of receivables on the basis of an appraiser s report. The Group holds the items of real estate so acquired with the intention of selling them. The acquisition cost of inventory items seized under lease agreements consists of the debt of the lessee (past due and unpaid as well as outstanding principal, past due and unpaid interest and other costs attributable to the lessee) / NON-CURRENT ASSETS HELD FOR SALE Non-current assets are classified as held for sale if their book value will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable (i.e. non-binding offers exist) and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets held for sale are measured at the lower of book and fair value, reduced by the costs of sale. These assets are not depreciated. FINANCIAL REPORT AND 85

87 3.15 / FINANCIAL LIABILITIES Financial liabilities include financial liabilities held for trading and financial liabilities measured at amortised cost. Financial liabilities held for trading include liabilities arising from the valuation of forward sale of securities, and are measured at fair value. Financial liabilities measured at amortised cost are deposits and loans from banks (including the central bank) and customers, liabilities arising from debt instruments issued, and other financial liabilities. Financial liabilities measured at amortised cost are recognised in the amount of proceeds received net of any direct transaction costs. After they are initially recognised, the liabilities are measured at amortised cost, and any difference between net proceeds and the redemption value is recognised in profit or loss using the effective interest rate method. A financial liability is derecognised only when it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. The difference between the book value of a financial liability that is cancelled, or transferred to another party, and the compensation paid is recognised in profit or loss / PROVISIONS The Group recognises non-current provisions for liabilities and expenses due to present obligations (legal or constructive) arising from past events for which it is possible that an outflow of resources will be required to settle the obligation and a reasonable estimate of the obligation can be made. The Group creates provisions for pensions and similar liabilities, for off-balancesheet liabilities, for pending legal issues, for the costs of restructuring, and other provisions. The Group recognises provisions for pensions and similar liabilities that reflect the present value of liabilities for severance benefits and loyalty bonuses. When calculating the present value, a discount interest rate is used that is equal to the market rate of return on 10-year or 15-year euro area corporate bonds with a high credit rating; the discount rate used for 2017 was 1.36 % and 1.92 %, respectively (in 2016, market rate of return on 10-year bond was 1.3 %). The Group recognises provisions for each employee by taking into account severance benefits at retirement provided for by the employment contract, as well as the costs of expected loyalty bonuses for the total years of service at the company until retirement. In making the calculation, the Group takes into consideration, among other factors, the employee fluctuation rate in the range of 0.0 % to 6 % (in 2016: 0.0 % to 6 %) and the projected increase in salaries by 1.5 % (in 2016: in the range of 1.4 % to 1.5 %). The calculation of these liabilities for the Group is carried out by a certified actuary. Establishment and reversal of provisions for employee benefits are recognised in profit or loss, except for actuarial gains or losses related to severance benefits that are recognised in comprehensive income. The level of provisions for pending legal issues is determined on the basis of a reliable assessment of liabilities arising from these issues at the reporting date. These provisions are estimated based on known facts of the legal proceeding, previous experience with similar proceedings, and opinions provided by legal experts. Provisions for the costs of the Group s restructuring have been recognised based on the adopted Restructuring Programme. These provisions cover only expenses that are directly attributable to the restructuring of the Nova KBM Group / EQUITY Share capital of Nova KBM is split into ordinary no-parvalue shares. Treasury shares are deducted from equity. The shares are freely transferable and have been issued in book-entry form. All shares issued by Nova KBM are of the same class. Holders of Nova KBM shares have the following rights: participation in the voting at the Shareholders Meetings in proportion to their stake in the share capital, participation in profits appropriated for dividends, and pro-rata distribution of residual assets in case of bankruptcy or liquidation of the Bank, as stipulated by the applicable legislation. All Nova KBM shares have been fully paid for. In accordance with Nova KBM s Articles of Association, regulatory reserves are established until the aggregate amount of regulatory reserves and share premium equals 10 % of the Bank s share capital. Accumulated other comprehensive income is reflecting accumulated gains and losses from changes of fair value of equity and debt instruments, which are measured at fair value through other comprehensive income as well actuarial gains and losses, decreased for potential deferred taxes. Dividends on shares are recognised as a financial liability in the period in which the Shareholders Meeting approves the dividend payment / COMMITMENTS AND CONTINGENCIES The Group undertakes transactions in financial instruments that carry off-balance-sheet risk, such as financial and service guarantees, letters of credit and credit lines. FINANCIAL GUARANTEES Off-balance-sheet commitments under guarantees represent irrevocable obligations that the Group will make payments in the event a customer cannot fulfil its obligations vis-à-vis third parties. Fees received are amortised to profit or loss using the straight-line method. Risks associated with off-balance-sheet financial commitments and contingent liabilities are assessed similarly as for loans. Any increase in liability as a result of estimated expenses required for the settlement of contractual obligations is taken account of in the creation of provisions. The Group recognises provisions for off-balancesheet liabilities on the basis of risk classification of the customer and transaction concerned, taking into Share premium cannot be paid out to shareholders, but can only be used for the purposes and under the conditions as laid down in the Companies Act (ZGD-1). consideration similar criteria as for the impairment of loans. The Bank does not create statutory reserves. FINANCIAL REPORT AND 86

88 3.19 / INTEREST INCOME AND INTEREST EXPENSES Income is recognised when a probability of future economic benefits exists, and such benefits can be reliably measured. Interest income and interest expenses are recognised in accrued amounts at a level, with maturities, and in the manner set out in the Nova KBM Group s decision on interest rates, or as stipulated in the agreement between the Group and the respective customer. All new loan and deposit agreements made by the Group from 2015 onwards include a provision regarding the minimum reference interest rate (the interest rate floor). Given that the provision of paragraph 11 of IAS 39, which requires that an embedded financial instrument be separated from a host contract, was not implemented according to the requirements of the said standard, an assessment was made of the impact of the embedded interest rate floor on the financial statements of the Group (and the Parent Bank). For the purpose of calculating the effects of embedded options, the exercise price on the reference interest rate was set at 0 % for all loans and deposits. An assessment was also made of the impact of options on the aggregate interest rate, for which case the exercise price was set at 0.01 % (which equals the interest rate on demand deposits). The results of these assessments have shown that the effects of the interest rate floor are not material to the 2017 financial statements. Following the introduction of IFRS 9, financial instruments with an embedded interest rate floor/cap will be valued separately in case the instrument as a whole does not comply with the SPPI test. All interest income and expenses from operations in financial assets are recognised in profit or loss using the effective interest rate method. The following items are included in interest income: regular, default and accrued interest, as well as prepaid fees for costs of repaying non-current loans given to households. These fees are transferred to profit or loss in line with the loan repayment period. Income from finance lease is recognised over the entire period of the lease and reflects a constant periodic rate of return of the lessor. It is disclosed as interest income. Interest expenses include all interest paid on deposits, securities issued and loans received, as well as other expenses on financial liabilities / DIVIDEND INCOME Dividend income comprises dividends and shares in profits received by the Group from its investments in the equity of companies. Dividend income is recognised in profit or loss when the right to receive payment is established / FEE AND COMMISSION INCOME AND FEE AND COMMISSION EXPENSES Fee and commission income includes fees and commissions received for services rendered by the Group. Fee and commission expenses include amounts paid by the Group for services provided by others. Fee and commission income and expenses are recognised in profit or loss when the service is rendered / REALISED GAINS AND LOSSES ON FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS Realised gains and losses on available-for-sale financial assets, loans and advances and held-to-maturity financial assets are recognised in profit or loss upon selling the asset, at maturity, or upon other derecognition of the financial asset / NET GAINS AND LOSSES ON FINANCIAL ASSETS HELD FOR TRADING Net gains and losses from trading include realised and unrealised gains and losses on financial assets held for trading, including derivatives, and net gains from buying and selling foreign currency / OTHER NET OPERATING INCOME OR LOSS Other net operating income or loss includes realised gains and losses from non-banking activities (income from leases and from selling inventory, expenses for memberships and contributions, and other expenses) / IMPAIRMENTS Impairments comprise impairments of financial assets not measured at fair value through profit or loss, impairments of property, plant and equipment, impairments of intangible assets, and impairments of investment property / TAXES Income tax is recognised at the amount as reported by the Group companies on the basis of the applicable local legislation. Deferred taxes are calculated for all temporary differences between the value of assets and liabilities for tax purposes and their book value. The deferred taxes are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. The most significant temporary differences arise from the valuation of financial instruments and provisions. Deferred taxes are recognised for all deductible temporary differences to the extent that it is probable that future taxable income will be available against which temporary differences can be utilised. Deferred taxes associated with measurement of availablefor-sale financial assets at fair value are recognised directly in comprehensive income / SEGMENT REPORTING A segment is recognisable as an integral part of the Group engaged in marketing of products or services (operating segment) and is subject to risks and returns different from those in other segments. Reporting by segments for management purposes is the same as presented in the financial statements. FINANCIAL REPORT AND 87

89 With the aim of effectively managing its operations, the Group has divided its business into five operating segments based on products and services provided: Banking Fund management Leasing Real estate activity Other services Banking and financial services provided in accordance with the Banking Act: Acceptance of deposits, granting of loans, factoring and financing commercial transactions, payment transaction services, issuance and management of payment instruments, issuance of guarantees and other commitments Management of financial funds Finance and operating leasing of movable property, equipment and real estate Real estate operations, investment engineering and project financing Coordination of the Moneta payment system development The management monitors the results of operating segments to make proper investment decisions and to assess the performance of segments. Segment performance is assessed based on operating profit or loss which, in certain respects, is different to operating results disclosed in the consolidated financial statements. For the purpose of reporting, the operations of the Group are divided into the following three geographical segments: Slovenia, Western Europe and Eastern Europe / STANDARDS AND INTERPRETATIONS a. Standards and interpretations issued by the International Accounting Standards Board (IASB) and adopted by the EU The accounting policies used to prepare the financial statements are consistent with those of the previous financial year, except for new and amended standards and interpretations issued by the IASB or the IFRS Interpretations Committee and adopted by the EU, as presented below. In the current period, the following amendments to the existing standards apply: Amendments to IAS 7 Statement of Cash Flows Disclosure Initiative adopted by the EU on 6 November 2017 (effective for annual periods beginning on or after 1 January 2017), Amendments to IAS 12 Income Taxes Recognition of Deferred Tax Assets for Unrealised Losses adopted by the EU on 6 November 2017 (effective for annual periods beginning on or after 1 January 2017), Amendments to various standards Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording adopted by the EU on 8 February 2018 (amendments to IFRS 12 are to be applied for annual periods beginning on or after 1 January 2017). The amendments to the existing standards have not led to any material changes in the Group s accounting policies. b. Standards and interpretations issued by the IASB and adopted by the EU but not yet effective At the date of authorisation of the financial statements included in this report, the following standards, amendments and interpretations adopted by the EU were in issue but not yet effective: IFRS 9 Financial Instruments adopted by the EU on 22 November 2016 (effective for annual periods beginning on or after 1 January 2018), IFRS 15 Revenue from Contracts with Customers adopted by the EU on 22 November 2016 (effective for annual periods beginning on or after 1 January 2018), Amendments to IFRS 15 Revenue from Contracts with Customers Clarifications to IFRS 15 Revenue from Contracts with Customers adopted by the EU on 31 October 2017 (effective for annual periods beginning on or after 1 January 2018), IFRS 16 Leases adopted by the EU on 31 October 2017 (effective for annual periods beginning on or after 1 January 2019), Amendments to IFRS 4 Insurance Contracts Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts adopted by the EU on 3 November 2017 (effective for annual periods beginning on or after 1 January 2018 or when IFRS 9 Financial Instruments is applied first time) Amendments to various standards Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording adopted by the EU on 8 February 2018 (amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after 1 January 2018). will have no material impact on its financial statements in the period of initial application, except the financial instruments standard (IFRS 9) the expected effects of which are presented in the section c. Standards and interpretations issued by the IASB but not yet adopted by the EU At present, the IFRSs as adopted by the EU do not significantly differ from regulations adopted by the International Accounting Standards Board (IASB), except for the following standards, amendments to the existing standards and new interpretations, which were not endorsed for use in the EU at the date of authorisation of the financial statements included in this report: IFRS 14 Regulatory Deferral Accounts (effective for annual periods beginning on or after 1 January 2016) the European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard, IFRS 17 Insurance Contracts (effective for annual periods beginning on or after 1 January 2021), Amendments to IFRS 2 Share-based Payment Classification and Measurement of Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2018), Amendments to IFRS 9 Financial Instruments Prepayment Features with Negative Compensation (effective for annual periods beginning on or after 1 January 2019), Amendments to IFRS 10 Consolidated Financial Statement and IAS 28 Investments in Associates and Joint Ventures Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred Amendments to the existing standards that are not yet effective have not been early adopted by the Group. The indefinitely until the research project on the equity method has been concluded) Group estimates that the adoption of these amendments FINANCIAL REPORT AND 88

90 Amendments to IAS 19 Employee Benefits Plan Amendment, Curtailment or Settlement (effective for annual periods beginning on or after 1 January 2019), Amendments to IAS 28 Investments in Associates and Joint Ventures Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after 1 January 2019), Amendments to IAS 40 Investment Property Transfer of Investment Property (effective for annual periods beginning on or after 1 January 2018), Amendments to various standards due to Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 3, IFRS 11, IAS 12 and IAS 23) primarily with a view to removing inconsistencies and clarifying wording (effective for annual periods beginning on or after 1 January 2019), IFRIC 22 Foreign Currency Transactions and Advance Consideration (effective for annual periods beginning on or after 1 January 2018), IFRIC 23 Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after 1 January 2019). Hedge accounting regarding the portfolio of financial assets and liabilities, whose principles have not been adopted by the EU, remains unregulated. The Group estimates that the application of hedge accounting for the portfolio of financial assets or liabilities pursuant to IAS 39 Financial Instruments Recognition and Measurement would not significantly impact the Group s financial statements, if applied as at the statement of financial position date. The Group has not early adopted any standard or interpretation that has been issued but is not yet effective, and it anticipates that the adoption of these standards, revisions and interpretations will have no material impact on its financial statements in the period of initial 3.29 / INTRODUCTION OF IFRS 9 The Group anticipates that by adopting IFRS 9, it will show impacts on its financial statements on Classification and Measurement, and Impairments in the period of initial application. IFRS 9 shall apply backwards, in accordance with IAS 8. EXPECTED IMPACT OF IFRS 9 STANDARD INTRODUCTION ON CLASSIFICATION AND MEASUREMENT Classification and Measurement according to IFRS 9 introduces a new approach to the classification of financial assets, which is driven by characteristics of the business model in which an asset is held and cash flow. This single, principle-based approach replaces existing rule-based requirements under IAS 39. BUSINESS MODELS In line with the Group s strategy, the following business models are defined. The business model Hold to collect covers loans and advances to customers and banks, and debt securities (presumably part of sovereign bonds). To this end, the Group has prepared different strategies by segments. The Retail segment will focus on the products, such as consumer loans, overdrafts on accounts, and housing loans. The Corporate segment will focus on streamlining the product range, adjusting to customers, cash management, factoring, guarantees, participating in international payment networks, project financing, and syndicated loans. The Treasury segment will focus, among other services, on reallocation of assets and active portfolio management (fixed income and syndicated loans), sale of corporate bonds and government bonds. Consequently, the Treasury segment includes in its Hold to collect and sell business model debt securities (issued by other banks, governments, and other financial institutions). The main aim is to have such instruments available for daily liquidity purposes and to maintain interest rate curves. The Other business model includes financial assets not allocated within the models Hold to collect and Hold to collect and sell, respectively. The Group has allocated derivatives in the Hold to sell business model. In the past, the Group had no sales transactions where a portion of the portfolio would have been sold. There were only individual sales transactions performed in order to minimize credit risk. With regard to the Group s strategy, sales are not expected from the Hold to colletct business model; however, a single loan may happen to be sold to reduce further credit risk. The Group has determined the limit, according to which any sale exceeding 10 % of the portfolio (book value) over a three-year period can be considered more than rare unless the sale is immaterial as a whole. Nevertheless, there is a possibility for other sales with restrictions, i.e. with regard to frequency, volume of sales, profit from sales, purpose of the business model, and the reason for the sale. The Group has set up a policy on new products, which requires the products based on characteristics of contractual cash flows not to be measured at fair value but at amortised cost. The estimated amounts of the transition to IFRS 9 listed below should be considered as preliminary, as the transition to IFRS 9 has not yet been fully completed. Final effect of the transition to IFRS 9 is still subjected to possible changes as there can be still further improvements of the impairment model and potential revision of the assumptions and estimates used in calculation of the transition effects. The Group estimates that any changes will not be significantly different. The Group is expected to recognise the positive effect on equity amounted to 28,673 thousand before tax ( 24,645 thousand after tax) due to IFRS 9 implementation. The Group is expected to recognise a positive impact of 2,471 thousand on equity before tax arising from Classification and Measurement. EXPECTED IMPACTS OF IFRS 9 STANDARD INTRODUCTION ON IMPAIRMENTS Impairments according to IFRS 9 have introduced a new, expected-loss impairment model that will require earlier recognition of expected credit losses. Specifically, the new standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses earlier. KEY IMPACT FACTORS TO CHANGES IN IMPAIRMENTS The main factors of the impact resulting from collectively impaired part of the portfolio are: The change in the approach used for the impairment estimation, whereby prior to the transition to IFRS 9, the Bank used group impairment percentages, which reflected average default rates and the average loss given default for an individual homogeneous segment, while the impairment estimation under IFRS 9 is based on an individual contract level, taking into account the probability of default of the particular customer and the loss given default of the particular contract; In addition, inclusion of macroeconomic information has resulted in a decrease in average values of risk parameters. Current macroeconomic forecasts reflect the strong recent performance of the Slovene economy; consequently, the impact of including macroeconomic variables in risk parameters is reflected in a decrease of impairments, while in the period of deteriorated economic conditions, the impact will result in an increased amount of impairments. Impact on an individually impaired part of the portfolio results from expected changes in real estate sales prices associated with GDP growth. application. FINANCIAL REPORT AND 89

91 SIGNIFICANT INCREASE IN CREDIT RISK (SICR) When determining whether the credit risk has significantly increased in a particular asset after its initial recognition, in addition to observing regulatory criteria, such as a 30-day default, the Bank acts in accordance with the Nova KBM Group s Customer Classification Methodology or takes into account a relative change in the customer s credit rating since its initial recognition. In classifying its customers, the Bank uses all available quantitative data from the analysis of financial statements and projections by using a model and an expert assessment based on clearly defined criteria, as well as qualitative or soft data relating to a particular customer, together with industry-specific factors and factors relating to the general macroeconomic environment. In monitoring credit risks, the Bank uses also the Early Warning System (EWS). INCLUSION OF FORWARD-LOOKING INFORMATION INTO THE EXPECTED CREDIT LOSS MODEL In accordance with IFRS 9 and the guidelines for managing credit risk and accounting for expected credit losses, the Bank takes into account forward-looking information (FLI), which has been identified as important in assessing expected credit losses on the basis of reasonable judgement, generally adopted methods for economic analysis and forecasting, and supported by a sufficient set of data. Macroeconomic information is included in probability of default (PD) and loss given default (LGD) risk parameters. When calculating expected credit losses, the Bank uses three macroeconomic scenarios (optimistic, most probable, and conservative), which are defined on the basis of official forecasts provided by the Bank of Slovenia, the Institute of Macroeconomic Analysis and Development, and the International Monetary Fund for foreign areas. In the scope of customer classification and the process of individual assessment of expected credit losses, the Bank systematically considers soft forward-looking information in terms of a particular customer, which might affect a credit rating and any loss in cash flows For the sole purpose of transition to IFRS 9, the Bank applied a simplification by including forward-looking macroeconomic information in the assessment of the expected credit losses by means of portfolio in the case of customers individually impaired as at 31 December 2017 the exposure of which exceeded 300 thousand. Therefore, on the basis of a statistically proven correlation between macroeconomic variables and the movement of real estate prices, the Bank took into account positive macroeconomic forecasts in the assessment of expected credit losses. Positive effect on equity before tax based on this approach is estimated at 3,100 thousand. The Bank is expected to recognise a positive impact of 26,202 thousand on equity before tax arising from Impairments, including the result from individual impairments referred above. It is estimated that effect on the Group level would not be substantially different due to the non-significant loan portfolio on subsidiaries, which are in liquidation. The estimation of IFRS 9 impact for Summit Leasing Slovenija d.o.o. has not been finalised yet as the company was acquired in the last quarter of Nonetheless, given the nature and structure of its portfolio, it is not expected that it will have a significant impact on the above mentioned estimate. EXPECTED IMPACT OF IFRS 9 STANDARD INTRODUCTION ON CAPITAL ADEQUACY RATIO When introducing the IFRS 9 Standard, the Group expects no negative effects on the capital adequacy ratio. The capital adequacy ratio is expected to increase due to a favourable impact resulting from the introduction of the IFRS 9 Standard on the amount of retained earnings and the accumulated other comprehensive income. Expected impacts of introducing the IFRS 9 Standard on the capital adequacy ratio of the Nova KBM Group are shown in Table 1: TABLE 1: EXPECTED IMPACTS OF IFRS 9 STANDARD INTRODUCTION ON CAPITAL ADEQUACY RATIO IN 000 THE NOVA KBM GROUP FULLY ADJUSTED VALUE THE TRANSITIONAL VALUE FULLY ADJUSTED VALUE TRANSITIONAL VALUE Regulatory capital 1 Common equity Tier-1 593, , , ,010 capital (IAS 39) 2a Retained earnings impact 22,455 22,455 22,455 22,455 of IFRS 9 2b Accumulated comprehensive 2,183 2,183 2,183 2,183 income impact of IFRS 9 3 Common equity Tier-1 capital (IFRS 9) 618, , , ,647 Risk weighted assets 4 Risk weighted assets (IAS 39) 2,842,990 2,848,043 2,910,238 2,915,047 5 Risk weighted assets (IFRS 9) 2,853,585 2,858,637 2,920,832 2,925,641 Capital adequacy ratios 6 Capital adequacy on % % % % common equity Tier-1 capital 7 Capital adequacy ratio % % % % 8 Impact of IFRS 9 standard introduction in p.p % 0.79 % 0.77 % 0.77 % EXPECTED IMPACT OF IFRS 9 STANDARD INTRODUCTION ON LEVERAGE RATIO When introducing the IFRS 9 standard, the Group expects no negative effects on the leverage ratio. The leverage ratio is expected to increase due to a favourable impact resulting from the introduction of the IFRS 9 standard on the amount of retained earnings and the accumulated other comprehensive income. Expected impacts of introducing IFRS 9 Standard on leverage ratio of the Nova KBM Group and Nova KBM d.d. are shown in Table 2: TABLE 2: EXPECTED IMPACTS OF IFRS 9 STANDARD INTRODUCTION ON LEVERAGE RATIO 000 THE NOVA KBM GROUP FULLY- ADJUSTED VALUE THE TRANSITIONAL VALUE FULLY-ADJUSTED VALUE NOVA KBM TRANSITIONAL VALUE 9 Leverage ratio (IAS 39) % % % % 10 Leverage ratio (IFRS 9) % % % % 11 Impact of IFRS 9 standard introduction 0.43 % 0.43 % 0.42 % 0.43 % FINANCIAL REPORT AND 90

92 4/ EXPOSURE TO VARIOUS TYPES OF RISK The Group revises the strategic document Risk Appetite Framework of the Nova KBM Group (RAF) on an annual basis. The document includes the Risk Appetite Statement (RAS) and the Operative Limits Handbook. The framework is the key document in the preparation of annual business plans. The Group uses a systematic approach in measuring risks. First, the risks are identified, assessed, materiality thresholds and the capital allocation are determined. Based on the risk assessment, measures are taken to reduce risks. The Bank is focused on active risk management based on forward-looking analyses. 4.1 / CREDIT RISK Credit risk is the risk of loss arising from the failure of counterparty to meet its financial obligations to a company in the Group. Credit risk is a basic risk to which the Group is exposed in performing its activity. In the scope of the Nova KBM Group s Risk Appetite Strategy, which is an umbrella document, the Group has quantified its strategic objectives for assuming credit risk. The management of credit risk is carried out at the customer level, by each Group company, as well as at the level of the entire Group / NON-PERFORMING EXPOSURES The Group defines as non-performing exposures (NPEs) such exposures for which it reasonably believes that the debtor will not discharge all of its liabilities within the contractual period. The Group considers as NPEs those exposures that satisfy any of the following criteria: Exposures classified as defaulted or impaired according to the Group s Methodology for Assessing Credit Risk Losses; The RAF is based on six pillars: Risk identification and estimation, Risk strategy, Risk Appetite Statement (RAS), The risk management process reflects the Group s comprehensive approach in terms: Defining, measuring and assessing all types of risks to which it is exposed, Determining the materiality of particular type of risk, The Group monitors, limits and manages credit risk by: Identifying the risk related to customers and recognising impairments of financial assets and provisions for off-balance-sheet liabilities in accordance with the International Accounting Standards (IAS); Material exposures which are more than 90 days past due Exposures, which have been subject to restructuring that caused the Group to incur significant economic losses, or which are unlikely to be repaid restructured exposures with a low repayment Risk capacity, risk limits, capital allocation and utilisation, Risk governance, Roles and responsibilities. The Group has established a Risk Appetite Strategy, which includes definitions, objectives and procedures for assuming an acceptable level of risk. The objectives of risk management defined in the Framework include: Moderate, but stable and sustainable profitability, The main source of generating profits is taking moderate credit risk, Taking a material, but diversified sovereign default risk to maintain high liquidity, Risk factors monitoring methods, Continuous monitoring of individual types of risks and compliance with the limits set, Adapting policies, methodologies, rules, and risk-reduction processes in a changing business environment. For each type of risk, the Group has adopted the following: Risk type management policy, Risk management methodology where an acceptable level of risk appetite is determined, Risk Appetite Statement defining the appetite for particular type of risk, Providing capital to ensure sufficient capital coverage of credit risks; Setting exposure limits under the limit system, which is directly integrated into the Risk Appetite Strategy and the ICAAP process; Properly securing its financial assets. To ensure that credit risk is properly limited, officers working in the risk management division are involved in loan approval processes (decisions are made based on the four-eye principle). The Group s exposure to credit risk arising from loans and advances given to banks and customers is described below. probability; NPEs that do not meet the applicable exit criteria. An exposure is reclassified as non-performing after being restructured, if the following criterion is met: During the two-year probation period, the exposure is more than 30 days past due or has been restructured once again. The portfolio of customers classified into the credit rating categories D and E is managed by the Nonperforming Loans Management Department and the Legal Office. Keeping funding and liquidity risk low, The Bank has established a comprehensive limit Keeping all other type of risks at moderate or low level. system, including operating limits and the early warning system. FINANCIAL REPORT AND 91

93 4.1.2 / INTEREST RATES AND LOAN APPROVAL FEES Interest rates are determined in accordance with the adopted lending policies of the Group companies. Interest rates depend on the basic interest rate, the purpose of a loan, the customer s track record of cooperation with the Group companies, the customer s credit rating, the maturity of a loan, and the type of collateral provided for a loan. Loan approval fees are determined in accordance with the applicable decisions adopted by the management boards of individual Group companies, taking into consideration their respective lending policies / EXPOSURE LIMITS With respect to limiting large exposures, the Group complies with all regulatory requirements setting out that the exposure to a single customer or to a group of related customers shall not exceed 25 % of the Group s equity. In order to reduce its credit risk, the Group, using its Methodology for Determining Upper Lending Limits by Products, defines an acceptable level of exposure for the customer or a group of related customers / LOAN COLLATERAL POLICY As a rule, loans contracted by the Group companies are secured by at least one type of collateral. Unsecured loans are an exception and are approved only to risk-free customers. The type of collateral required depends on: Type of a customer (including its legal status), Customer s credit rating, Type and maturity of a loan, Customer s repayment capability, Customer s relationship with the Group and with other customers, Customer s track record of cooperation with the Group. In its loan collateral policy, the Group has determined eligibility criteria for collateral to be provided in order to reduce credit risks. With respect to the adequacy of collateral, the following classification has been adopted: Prime collateral, Eligible collateral, Pledge of movable or immovable property, Other types of collateral. Leasing companies within the Group are legal owners of assets leased out under lease agreements / CREDIT RISK BY TAKING ACCOUNT OF COLLATERAL As of 31 December 2017, the proportion of A- and B-rated loans accounted for % of the total lending portfolio, compared to % as at 31 December CREDIT RATING CATEGORY NOVA KBM D.D 31/12/ /12/ /12/ /12/2016 A B C D E Total ANALYSIS OF EXPOSURE TO CREDIT RISK LOANS TO CUSTOMERS LOANS AND ADVANCES TO BANKS Individual impairments 31/12/ /12/ /12/ /12/2016 Gross amount 477, ,553 1,380 1,105 Impairment (310,761) (409,853) (1,342) (1,105) Net amount 166, , Collective impairments The table below shows the structure of gross loans of the Group by credit rating categories as at 31 December 2017 and 31 December Credit rating A 1,167, , Credit rating B 694, , Credit rating C 260, , Credit rating D 29,861 32, Credit rating E 59,954 56, Gross amount 2,212,764 1,690, Impairment (74,104) (74,330) 0 0 Net amount 2,138,660 1,616, Net non-impaired loans 60, ,890 42, ,916 Total net outstanding loans 2,366,167 1,963,849 42, ,916 FINANCIAL REPORT AND 92

94 LOANS TO CUSTOMERS LOANS AND ADVANCES TO BANKS 31/12/ /12/ /12/ /12/2016 Individual impairments Gross amount 707, , Impairment (283,094) (377,341) 0 (3) Net amount 424, , Collective impairments Credit rating A 1,059, , Credit rating B 521, , Credit rating C 245, , Credit rating D 24,555 32, Credit rating E 55,841 53, Gross amount 1,906,942 1,689, Impairment (69,226) (71,378) 0 0 Net amount 1,837,716 1,617, Net non-impaired loans 60, ,750 42, ,787 Total net outstanding loans 2,322,531 1,948,737 42, ,787 ANALYSIS OF NET LOANS WITHOUT TAKING ACCOUNT OF THE EFFECTS OF LOAN COLLATERAL 31/12/ /12/ /12/ /12/2016 Individual impairments 209, , , ,104 Collective impairments Credit rating A 1,208, ,593 1,097, ,368 Credit rating B 703, , , ,810 Credit rating C 247, , , ,239 Credit rating D 22,285 23,375 17,175 23,515 Credit rating E 18,157 17,529 17,227 17,488 Total net loans 2,409,009 2,082,765 2,365,337 2,067,524 ANALYSIS OF CREDIT RISK BY CUSTOMER SEGMENTS The following two tables set forth, for the periods indicated, the volume of loans and loan impairments. ANALYSIS OF GROSS LOANS AND LOAN IMPAIRMENTS BY CUSTOMER SEGMENTS During the period of 1 January to 31 December 2017, the Group increased its total net loans outstanding by %. As at 31 December 2017, they amounted to 2,409,009 thousand. Loans of 477,712 thousand were individually impaired, with impairments of 310,761 thousand being recorded on these loans. Loans totalling 2,212,764 thousand were collectively impaired, and the level of impairments recorded was 74,104 thousand as at 31 December In 2017, exposure of Nova KBM d.d. to individually impaired customers increased by 125,000 thousand gross. On the purchase of SLS on 18 September 2017, the Bank has refinanced the funding provided by the former owners of SLS. The Bank regularly assesses the creditworthiness of the SLS and establishes a provision which reflects the quality of the underlying assets, the capacity of the company to repay and its collateral package. The provision is booked as an individual assessment rather than as a collective provision. The loan to SLS is treated as a performing loan. For this reason the exposure in the amount of 269,352 thousands is included in the table above as individually impaired. With respect to exposure through funding of SLS, Nova KBM d.d. applies the large exposure exemption in accordance with relevant regulations. The following table shows net loans by credit rating category and impairment method. GROSS LOANS LOAN IMPAIRMENTS GROSS LOANS LOAN IMPAIRMENTS 31/12/ /12/2016 Central bank 0 0 4,000 0 Government 135, , Credit institutions (banks) 44,184 1, ,021 1,105 Other financial intermediaries 49,379 3,867 52,110 8,678 Large non-financial companies 847, , , ,158 Non-financial SMEs 267,246 64, ,449 68,804 SMEs (sole proprietors and non-profit societies) 95,762 17,634 84,979 20,431 Individuals 1,355,483 44,338 1,084,372 37,860 Total 2,795, ,207 2,568, ,288 FINANCIAL REPORT AND 93

95 GROSS LOANS LOAN IMPAIRMENTS GROSS LOANS LOAN IMPAIRMENTS 31/12/ /12/2016 Central bank 0 0 4,000 0 Government 134, , Credit institutions (banks) 42, ,790 3 Other financial intermediaries 331,486 15,888 66,095 19,066 Large non-financial companies 827, , , ,137 31/12/2017 UP TO 30 DAYS 31 TO 60 DAYS 61 TO 90 DAYS OVER 90 DAYS TOTAL Banks Government Corporate customers 1,036 1, , ,394 Households 3, ,928 55,180 Total 4,487 1, , ,273 Non-financial SMEs 198,386 40, ,260 45,867 SMEs (sole proprietors and non-profit societies) 79,090 15,106 81,803 17,675 Individuals 1,103,398 38,172 1,077,864 34,725 Total 2,717, ,320 2,516, ,722 In 2017, the increased exposure to the segment of other financial intermediaries at the Nova KBM d.d. level results from the acquisition of Summit Leasing Slovenija d.o.o. PAST DUE AND UNPAID CLAIMS 31/12/2017 UP TO 30 DAYS 31 TO 60 DAYS 61 TO 90 DAYS OVER 90 DAYS TOTAL Banks Government Corporate customers 2,658 1, , ,648 Households 5, ,314 64,791 Total 8,293 2,189 1, , ,139 31/12/2016 UP TO 30 DAYS 31 TO 60 DAYS 61 TO 90 DAYS OVER 90 DAYS TOTAL Banks Government Corporate customers 3, , ,974 Households 3, ,579 50,873 Total 6,827 1, , ,304 PAST DUE BUT NOT IMPAIRED CLAIMS 31/12/ /12/ /12/ /12/2016 Up to 30 days to 90 days Over 90 days Total /12/2016 UP TO 30 DAYS 31 TO 60 DAYS 61 TO 90 DAYS OVER 90 DAYS TOTAL Banks Government Corporate customers 3, , ,321 Households 3, ,582 57,934 Total 7,134 1, , ,712 FINANCIAL REPORT AND 94

96 NON-PERFORMING LOANS MANAGEMENT NPLS AS A PROPORTION OF TOTAL LOANS For the purpose of managing non-performing loans, Nova KBM has established a special department that, in organisational terms, is placed directly under the Bank s Management Board, and its Director reports to the Chief Risk Officer (CRO). The Non-performing Loan Management Department ( SUPN ) is responsible for management of nonperforming loans (NPLs) granted to corporate and retail clients, management of seized assets; it is also actively involved in management of non-strategic investments of the Group. These substantive elements are used also in the organisational structure of the Department s sub-units. The Non-performing Loan Management Department operates in line with internal rules that comply with applicable legislation and the recommendations given by regulators. The rules are prepared in cooperation with other specialised departments of the Bank. In its work, the Department cooperates with relevant Bank s specialised departments that provide professional support in specific areas centrally organised within the Bank. NPLs are transferred for consideration to the Nonperforming Loan Management Department when a debtor is in default on a materially significant amount for more than 90 days (applicable to corporate customers and sole proprietors) or 60 days (natural person) or in case where an insolvency proceeding or an insolvency remedial action is initiated against the default customer. Until that day, the recovery is carried out in commercial units with assistance of the Non-performing Loan Management Department. In the segment of natural persons, the recovery of a default exceeding 1 day is carried out by the early recovery department (a telephone call by the call centre), while a customer in default of over 60 days is transferred to be managed by the Non-performing Loan Management Department. After non-performing loans are transferred to the Non-performing Loan Management Department, a management strategy for each asset is prepared on the basis of available information and confirmed by the competent body. When all the conditions are met, the Non-performing Loan Management Department, together with the customer, seeks to identify the possibilities of restructuring under the conditions that would enable the default customer to regularly repay their liabilities to the Bank. The final decision is taken by the respective competent body of the Bank on the basis of comparing possible scenarios. In some cases, additional measures can be taken to recover some or all of the nonperforming loans, such as selling the claims to third parties or cooperation with external providers. If there is no suitable exit from a NPL available at a given moment, the Bank may decide to take over the asset, which is then transferred to be managed by a special unit within the Non-performing Loan Management Department. The latter carries out the procedures of acceptance, analysis and subsequent marketing of the asset until it is sold on the market under the standardised sales process. After all legal and actual options for repayment in accordance with laws and internal regulations have been exhausted, any exposures are finally written off. Individual decisions in the process of NPLs management are taken by various competent bodies of the Bank, depending on the amount of exposure or a complexity of the case and covering all the levels from the heads of departments, through the Credit Committee, and to the decision-making and supervisory bodies of the Bank. 31/12/ /12/ /12/ /12/2016 Total gross loans 2,795,216 2,568,053 2,717,657 2,516,246 Total net loans 2,409,009 2,082,765 2,365,337 2,067,524 Net NPLs 205, , , ,292 Net NPLs/total net loans (%) During the period of 1 January to 31 December 2017, the Group continued to collect the unpaid obligations of customers by liquidating instruments of collateral through regular court proceedings and in out-ofcourt settlements. The Group has recorded an adequate level of impairments for NPLs on the basis of anticipated cash flows generated from the liquidation of collateral. The parameters used to calculate individual impairments are verified at least once a year. ANALYSIS OF RESTRUCTURED LOANS If the out-of-court settlement between the customer and the Group member is not successful, the Nonperforming Loan Management Department assesses the expected cash flow generated from the liquidation of pledged property or other collateral, from which cash flows are expected to settle the claims. In cases where the property cannot be sold at auctions, it is purchased by KBM Invest d.o.o., a subsidiary company engaged in the sale and brokerage of real estate. GROSS RESTRUCTURED LOANS Restructured loans with uncertain repayment prospects Loans restructured at a material economic loss and with a low repayment probability 31/12/ /12/ /12/ /12/ ,324 79,764 85,297 79, , , , ,846 Total 325, , , ,567 As at 31 December 2017, the volume of restructured loans in the Group s loan portfolio totalled 325,910 thousand, of which 37,818 thousand were in retail loans, and 288,092 thousand in corporate loans (loans outstanding to companies and sole proprietors). Compared to 2016, the volume of restructured loans has decreased by 2,455 thousand in retail loans, and by 67,192 thousand in corporate loans. FINANCIAL REPORT AND 95

97 ANALYSIS OF NPLS BY INDUSTRY SECTORS The following table presents NPLs for the periods indicated (net amounts) outstanding to individual industry sectors, and the proportion of NPLs by industry sectors. 31/12/ /12/2016 TOTAL LOANS (NET) NPLS (NET) PROPORTION OF NPLS (%) TOTAL LOANS (NET) NPLS (NET) PROPORTION OF NPLS (%) Households 1,311,145 35, ,046,512 36, Agriculture and hunting, forestry, fishing 24,078 2, ,867 4, Mining 19, , Manufacturing industry 287,188 30, ,279 47, Electricity, gas and steam supply 31, , Water supply, waste and sewage management, rehabilitation of the environment 21, , Construction 64,773 17, ,161 27, Trade, maintenance and repair of motor vehicles 151,415 48, ,108 52, Transportation and storage 56,609 14, ,181 15, Accommodation and food service activities 40,882 11, ,286 16, Information and communication activities 18,197 4, ,523 7, Financial intermediation 105,120 4, ,079 6, Real estate activities 27,665 17, ,281 26, Professional, scientific and technical activities 28,211 7, ,485 11, Other various business activities 109,133 1, ,279 1, Public administration and defence services, compulsory social security activities 38, , Education 11, , Health and welfare security 26,309 8, ,173 8, Arts, entertainment and recreation 32, , Other activities 4, , Total net loans 2,409, , ,082, , FINANCIAL REPORT AND 96

98 31/12/ /12/2016 TOTAL LOANS (NET) NPLS (NET) PROPORTION OF NPLS (%) TOTAL LOANS (NET) NPLS (NET) PROPORTION OF NPLS (%) Households 1,065,226 30, ,043,139 34, Agriculture and hunting, forestry, fishing 23,473 2, ,633 4, Mining 19, , Manufacturing industry 278,483 29, ,507 44, Electricity, gas and steam supply 30, , Water supply, waste and sewage management, rehabilitation of the environment 21, , Construction 55,167 16, ,181 26, Trade, maintenance and repair of motor vehicles 127,467 43, ,326 48, Transportation and storage 52,657 14, ,837 15, Accommodation and food service activities 38,322 10, ,465 15, Information and communication activities 16,607 3, ,155 7, Financial intermediation 374,584 5, ,375 9, Real estate activities 27,052 16, ,995 25, Professional, scientific and technical activities 22,245 6, ,863 11, Other various business activities 104, ,176 1, Public administration and defence services, compulsory social security activities 37, , Education 10, , Health and welfare security 25,252 8, ,167 8, Arts, entertainment and recreation 31, , Other activities 3, , Total net loans 2,365, , ,067, , FINANCIAL REPORT AND 97

99 VALUATION OF REAL ESTATE ANALYSIS OF COLLATERAL VALUE OF COLLATERAL FOR GIVEN LOANS For the purpose of secured lending, financial reporting, purchase or sale of real estate, and renting out of real estate, valuation of real estate is regulated by the Group s Methodology for Real Estate Valuation. The Group monitors the quality and value of real estate collateral prior to taking any business decision and during the entire period of its exposure. Assessments of the value of real estate that comply with the International Valuation Standards (IVS) is conducted by an independent real estate appraiser appointed by the Slovenian Institute of Auditors or the Ministry of Justice of the Republic of Slovenia. For the valuation of residential properties with a value of up to 500 thousand, the Group may use the generalised market value as determined by the methods for the mass real estate valuation and published by the Surveying and Mapping Authority of the Republic of Slovenia. The market value of real estate as set out in the applicable sales agreement may also be used for the needs of establishing collateral. The following two real estate valuation methods are used by the Group: Simple valuation method is used for the valuation of real estate whose value does not exceed 1,000 thousand, in particular for family houses, apartments, building plots, individual agricultural land parcels, individual business premises, and smaller industrial buildings, Complex valuation method is used for the valuation of real estate of high value, specialised real estate, investment property under construction, and traderelated property as defined under IVS 310. This method is also used for the valuation of real estate for the purpose of financial reporting. In the case of complex valuations, the Bank selects appraisers to carry out the value assessment (i.e. by a tender). Valuation reports requested by the Group are checked by the Credit Risk Assessment Department, which confirms whether the valuation carried out is appropriate for the Group s needs. The Group uses statistical methods for revaluating the value of real estate. 31/12/ /12/ /12/ /12/ Collateral for individually impaired loans 252, , , ,580 movable and immovable property 202, , , ,923 debt securities equity instruments 1,160 8,524 1,160 8,524 other 48,689 76,719 18,403 33, Collateral for collectively impaired loans 2,244,183 2,311,155 2,237,187 2,311,155 movable and immovable property 1,822,406 1,782,595 1,815,410 1,782,595 debt securities equity instruments 9, ,467 9, ,467 other 411, , , , Collateral for non-impaired loans 35, ,779 35, ,873 movable and immovable property 4,747 25,631 4,743 22,725 debt securities other 30,923 87,148 30,923 87, Total 2,532,307 2,819,627 2,458,644 2,719,608 As at 31 December 2017, the total value of collateral Collateral of 11,018 thousand was in the form of equity provided for loans in the form of movable and immovable instruments, of which % related to collectively property was 2,029,758 thousand, of which % impaired loans, and % related to individually related to collectively impaired loans, 9.98 % related to impaired loans. individually impaired loans, and 0.23 % related to nonimpaired loans. FINANCIAL REPORT AND 98

100 ANALYSIS OF NET LOANS BY MARKET SEGMENTS AND REGIONS LOANS TO CUSTOMERS LOANS AND ADVANCES TO BANKS 31/12/ /12/ /12/ /12/2016 BOOK VALUE (net value) 2,366,167 1,963,849 42, ,916 By market segment 2,366,167 1,963,849 42, ,916 from non-financial companies 741, , central bank ,000 deposit-taking companies, except the central bank money market funds investment funds, except money market funds LOANS TO CUSTOMERS LOANS AND ADVANCES TO BANKS 31/12/ /12/ /12/ /12/2016 BOOK VALUE (net value) 2,322,531 1,948,737 42, ,787 By market segment 2,322,531 1,948,737 42, ,787 from non-financial companies 691, , central bank ,000 deposit-taking companies, except the central bank money market funds investment funds, except money market funds other financial intermediaries, except insurance companies and pension funds 25,850 30, other financial intermediaries, except insurance companies and pension funds 294,283 30, auxiliary financial service providers 6,470 6, captive financial institutions and money lenders 8,096 7, insurance companies pension funds central government 126,607 84, regional government local government 7,890 8, social security funds households 1,385,369 1,107, non-profit institutions serving households 3,904 2, rest of the world 60,554 30,918 42, ,914 By region 2,366,167 1,963,849 42, ,916 Slovenia 2,305,613 1,932, ,002 euro area other than Slovenia 34,335 2,077 40, ,021 non-euro area EU countries 18,957 21,575 2,110 1,893 republics of the former Yugoslavia 5,284 7, other regions 1, auxiliary financial service providers 6,313 6, captive financial institutions and money lenders 8,032 7, insurance companies pension funds central government 126,571 84, regional government local government 7,322 7, social security funds households 1,125,686 1,104, non-profit institutions serving households 3,523 2, rest of the world 59,737 26,414 42, ,785 By region 2,322,531 1,948,737 42, ,787 Slovenia 2,262,794 1,922, ,002 euro area other than Slovenia 34,336 2,077 40, ,021 non-euro area EU countries 20,823 21,755 2,111 1,764 republics of the former Yugoslavia 2,600 2, other regions 1, As at 31 December 2017, the Group s net loans outstanding to banks and to customers totalled 42,842 thousand and 2,366,167 thousand, respectively. Of the latter figure, the largest proportion related to households (58.56 %), followed by nonfinancial companies (31.33 %). Compared to 31 December 2016, loans to banks have decreased by 76,074 thousand, and loans to customers have increased by 402,312 thousand. Loans outstanding to customers established in the Republic of Slovenia accounted for % of the total loans to customers. Of the loans outstanding to nonresident non-bank customers, the largest proportion, i.e % of the total loans to non-bank customers, related to customers residing in euro area other than Slovenia. FINANCIAL REPORT AND 99

101 Loans outstanding to local banks accounted for 0.09 % of the total loans to banks. At %, loans outstanding to banks residing in the euro area other than Slovenia accounted for by far the largest proportion of the total loans outstanding to foreign banks. 4.2 / LIQUIDITY RISK Liquidity risk is the risk of loss resulting from the Bank s inability to meet all of its payment obligations, or the risk that it has to provide necessary funding at significantly higher than usual costs. It arises from maturity mismatches between assets and liabilities. The Group companies monitor daily liquidity in accordance with regulatory requirements and methodologies, taking into account their activities and the volume of operations. In its liquidity projections, the Parent Bank takes into account liquidity needs of other Group companies. A harmonised method for monitoring structural liquidity is used across the entire Group. The Bank carries out the internal liquidity adequacy assessment process (ILAAP). ILAAP concerns the process of determining liquidity requirements under the second pillar. ILAAP is an internal process, which means that it has to comply with the Bank s business model, size, complexity, risk, market expectations, etc. It includes all qualitative and quantitative information on which the risk appetite is based, including a description of the systems, processes and methodology used to measure and manage liquidity and financing risks. The liquidity risk management policy of the Nova KBM Group represents a framework of the ILAAP process in the Nova KBM Group. It sets out the methods and responsibilities for managing assets and liabilities to provide for sufficient cash inflows within a certain period of time. Furthermore, this policy sets out the measures for assessing, measuring, managing and monitoring liquidity risk. The policy includes liquidity planning for the timely repayment of obligations due, measures to be adopted under adverse liquidity conditions, and procedures for checking variables on the basis of which the policy for managing liquidity risk has been formulated. At least once a year, the Bank must provide a clear and formal statement of liquidity adequacy based on an analysis of the ILAAP process results. The Group has drafted a business continuity plan for managing liquidity risk that sets out appropriate measures for early detection of crisis situations as well as adequate steps for restoring a normal liquidity position. The Group carries out, on a monthly basis, liquidity stress tests in compliance with the Methodology for Implementing Stress Scenarios of Liquidity Risk. The results of stress tests at the Group level are used for the purpose of assessing negative effects of potentially critical events on the Group s liquidity position, and for preparing measures for dealing with any liquidity crisis. The Nova KBM Contingency Plan for Managing Liquidity Risk sets out appropriate measures and activities for the prevention and management of various liquidity crisis situations as well as for restoring a normal liquidity position of the Bank. The Parent Bank carries out, on a monthly basis, liquidity stress tests in compliance with the Nova KBM Group Methodology for Implementing Stress Scenarios of Liquidity Risk. The results of stress tests are used by the Parent Bank for the purpose of assessing negative effects of potentially critical events on the Bank s liquidity position, and for preparing measures for dealing with any liquidity crisis. LIQUIDITY GAP The liquidity gap, which is regularly monitored and thoroughly analysed by individual time buckets, is a measure of the level of maturity matching of assets and liabilities. The Group cannot avoid the liquidity gap, but can manage it effectively. A positive gap represents a surplus of funds that can be invested profitably, while a negative gap is a sign of a shortage of funds that needs to be provided for. LIQUIDITY COVERAGE RATIO (LCR) The LCR is a measure used to determine whether a bank has sufficient high-quality liquid assets to cover its total net cash outflows within the next 30 days under a financial stress scenario. It has been developed with the aim of ensuring resilience of the Bank under the conditions of very short-term financial stress. LCR includes all on-balance-sheet items (both asset and liability items) due within one month, as well as all offbalance-sheet liabilities that could be incurred within a period of 30 days, irrespective of their contractual maturities. The Bank monitors LCR on a monthly basis. The obligation of providing the ratio started in October According to the internal limit, the value of the LCR is maintained above 100 %. As at 31 December 2017, the value of the LCR calculated on a consolidated basis stood at 462 % compared to 699 % as at 31 December 2016, while for the Bank alone it stood at 375 % compared to 633 % as at 31 December NET STABLE FUNDING RATIO (NSFR) The NSFR is a measure designed to compare a bank s available stable funding to its required stable funding. It has been developed with the aim of ensuring a bank s ability to withstand any long-term liquidity risk. The Basel III capital framework provides that banks will be obliged to maintain the value of this ratio at the minimum 100 % from 1 January 2018 onwards. The Bank undertakes quarterly monitoring of the NSFR value on a consolidated basis. According to the internal limit, the Bank maintains the NSFR value above 100 %. LIQUIDITY RATIOS AND OBLIGATORY DEPOSITS In 2017, the Parent Bank complied with the Bank of Slovenia s regulations on minimum liquidity. As at 31 December 2017, the Parent Bank s Category I Liquidity Ratio was 1.475, compared to as at 31 December The prescribed minimum value of the liquidity ratio is set at 1.0. In 2017, the Parent Bank complied with the STABILITY OF DEPOSITS The Parent Bank uses its own econometric model for calculating the proportion of stable demand deposits. This model is based on the regression analysis and is used to examine the movements in demand deposits over time. The model is designed on the basis of determining the dependent variable and explanatory variables, and the results derived from the model provide a basis for analysing the predictive power, and for carrying out retroactive testing. In 2017, the results of this model gave a higher level of stable demand deposits than the one that was taken into account in the calculation of liquidity ratios according to the regulations. The average stability of demand deposits stood was 94.4 % in 2017 and 91.9 % in Of these figures, the stability of demand household deposits was as much as 96.1 % against 94.8 % reported for The following tables show the distribution of significant statement of financial position items in terms of expected maturity in accordance with the internal methodology. Bank of Slovenia s regulations on obligatory deposits. FINANCIAL REPORT AND 100

102 ANALYSIS OF THE EXPECTED FUTURE CASH FLOWS Assets TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Cash, and cash balances at central bank 546, , Financial assets held for trading 1,524 1, Financial assets designated at fair value through profit or loss 17,237 13,973 2, ,182 0 Available-for-sale financial assets 1,621,581 53,166 41,326 87,531 1,100, ,881 Loans and advances 2,076, ,523 89, , , ,475 Held-to-maturity financial assets 88, ,180 67,091 16,429 Other assets* 189,817 57, ,158 29,244 98,772 Total assets 4,541, , , ,736 2,133,981 1,030,566 Liabilities Financial liabilities held for trading 1, Financial liabilities measured at amortised cost 4,167, , , ,842 1,905, ,585 Other liabilities* 760, ,166 1,344 45,728 6, ,305 Total liabilities and equity 4,929, , , ,599 1,912,140 1,423,890 Assets-liabilities, including equity, mismatch (387,478) 326,013 (207,145) (334,863) 221,841 (393,324) Guarantees 5, ,007 2, * Other assets and other liabilities without a direct impact on liquidity. 1 YEAR TO 5 YEARS 31/12/2017 OVER 5 YEARS Assets TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Cash, and cash balances at central bank 783, , Financial assets held for trading 1,119 1, Financial assets designated at fair value through profit or loss 86,732 19,182 15,266 49,008 3,276 0 Available-for-sale financial assets 1,584,514 50, , , , ,135 Loans and advances 1,803, ,338 98, , , ,966 Held-to-maturity financial assets 90,216 1,182 1, ,378 16,154 Other assets* 151,896 13, ,114 22, ,019 Total assets 4,501,728 1,060, , ,399 1,696,707 1,028,274 Liabilities Financial liabilities held for trading 1,575 1, Financial liabilities measured at amortised cost 4,075, , , ,896 1,891, ,858 Other liabilities* 745,983 90,169 11,802 60,698 6, ,936 Total liabilities and equity 4,823, , , ,594 1,898,323 1,316,794 Assets-liabilities, including equity, mismatch (321,648) 572,139 (57,456) (346,195) (201,616) (288,520) Guarantees 8,712 1, ,085 2, * Other assets and other liabilities without a direct impact on liquidity. 1 YEAR TO 5 YEARS 31/12/2016 OVER 5 YEARS FINANCIAL REPORT AND 101

103 Assets TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Cash, and cash balances at central bank 541, , Financial assets held for trading Financial assets designated at fair value through profit or loss 17,237 13,973 2, ,182 0 Available-for-sale financial assets 1,621,498 53,165 41,326 87,531 1,100, ,881 Loans and advances 1,924, ,860 71, , , ,871 Held-to-maturity financial assets 88, ,180 67,091 16,429 Other assets* 225,393 17, ,010 29, ,972 Total assets 4,418, , , ,915 2,153,691 1,061,162 Liabilities Financial liabilities held for trading 1, Financial liabilities measured at amortised cost 4,178, , , ,761 1,909, ,854 Other liabilities* 733, , ,030 6, ,234 Total liabilities and equity 4,913, , , ,820 1,916,843 1,420,088 Assets-liabilities, including equity, mismatch (494,649) 255,225 (226,891) (400,905) 236,848 (358,926) Guarantees 4, ,008 1, * Other assets and other liabilities without a direct impact on liquidity. 1 YEAR TO 5 YEARS 31/12/2017 OVER 5 YEARS Assets TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Cash, and cash balances at central bank 779, , Financial assets held for trading Financial assets designated at fair value through profit or loss 86,732 19,182 15,266 49,008 3,276 0 Available-for-sale financial assets 1,582,095 48, , , , ,134 Loans and advances 1,803, ,985 98, , , ,438 Held-to-maturity financial assets 90,216 1,182 1, ,378 16,154 Other assets* 184,514 5, ,534 21, ,664 Total assets 4,526,837 1,039, , ,473 1,694,362 1,070,390 Liabilities Financial liabilities held for trading 1,575 1, Financial liabilities measured at amortised cost 4,100, , , ,405 1,900, ,218 Other liabilities* 730,061 92,753 11,341 43,554 6, ,220 Total liabilities and equity 4,831, , , ,959 1,907,027 1,318,438 Assets-liabilities, including equity, mismatch (304,924) 545,085 (61,810) (327,486) (212,665) (248,048) Guarantees 7, ,086 2, * Other assets and other liabilities without a direct impact on liquidity. 1 YEAR TO 5 YEARS 31/12/2016 OVER 5 YEARS FINANCIAL REPORT AND 102

104 The following tables present non-discounted onbalance and off-balance liabilities by their contractual maturities. A significant proportion of the Group s liabilities falls due within a one-month period, refers to demand deposits. The Parent Bank monitors the stability of demand deposits on a daily basis and has a secondary liquidity source available in case of an unexpected drop in these deposits. NON-DERIVATIVE BALANCE-SHEET LIABILITIES BY CONTRACTUAL MATURITY UP TO 1 MONTH TO 3 3 MONTHS TO 12 1 YEAR TO 5 OVER TOTAL 1 MONTH MONTHS MONTHS YEARS 5 YEARS Financial liabilities measured at amortised cost 4,167,844 2,946, , , ,969 72,712 Deposits from banks and savings banks 51,863 34, ,428 12, Deposits from customers 3,638,391 2,832, , ,100 76,706 4,396 Loans 396, ,937 26, ,300 67,624 Debt securities 1,502 1, Subordinated liabilities Other financial liabilities 79,935 77,919 1, Other liabilities 760, ,166 1,344 45,728 6, ,305 Total liabilities 4,928,804 3,072, , , , ,017 Guarantees 247,331 10,800 23, ,546 86,011 6,368 31/12/2017 UP TO 1 MONTH TO 3 3 MONTHS TO 12 1 YEAR TO 5 OVER TOTAL 1 MONTH MONTHS MONTHS YEARS 5 YEARS Financial liabilities measured at amortised cost 4,075,892 2,679, , , ,923 77,760 Deposits from banks and savings banks 41,107 17,825 2,206 3,122 16,954 1,000 Deposits from customers 3,626,247 2,605, , , ,002 4,917 Loans 333,088 3,164 3,041 18, ,492 71,737 Debt securities 14, ,856 1,500 0 Subordinated liabilities Other financial liabilities 61,074 53, , Other liabilities 745,983 90,166 11,803 60,701 6, ,936 Total liabilities 4,821,875 2,769, , , , ,696 Guarantees 264,194 23,236 25, , ,782 9,887 31/12/2016 FINANCIAL REPORT AND 103

105 TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Financial liabilities measured at amortised cost 4,178,881 2,975, , , ,969 72,441 Deposits from banks and savings banks 51,863 34, ,428 12, Deposits from customers 3,671,803 2,865, , ,112 76,706 4,396 Loans 378, ,678 19, ,658 67,353 Debt securities 1,502 1, Subordinated liabilities Other financial liabilities 74,801 73, Other liabilities 734, , ,030 6, ,234 Total liabilities 4,912,882 3,089, , , , ,675 Guarantees 247,344 10,800 23, ,559 86,011 6,368 1 YEAR TO 5 YEARS 31/12/2017 OVER 5 YEARS TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS Financial liabilities measured at amortised cost 4,100,131 2,701, , , ,800 77,662 Deposits from banks and savings banks 41,107 17,825 2,206 3,122 16,954 1,000 Deposits from customers 3,650,858 2,628, , , ,232 4,925 Loans 333,088 3,164 3,041 18, ,492 71,737 Debt securities 14, ,856 1,500 0 Subordinated liabilities Other financial liabilities 60,702 52, ,613 1,622 0 Other liabilities 730,061 92,752 11,341 43,555 6, ,220 Total liabilities 4,830,192 2,794, , , , ,882 Guarantees 264,337 22,425 25, , ,099 10,483 1 YEAR TO 5 YEARS 31/12/2016 OVER 5 YEARS FINANCIAL REPORT AND 104

106 CASH FLOWS FROM DERIVATIVES The following tables present non-discounted cash flows from derivatives. Foreign currency amounts were translated into the euro using the ECB s exchange rate effective on the reporting day. The presentation of figures takes into account the method of settlement, which can be carried out on a gross or net contractual amount basis. 31/12/2017 TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 1 YEAR TO 5 YEARS OVER 5 YEARS Currency derivatives Forwards outflow 36,578 9,501 4,701 21, inflow 36,714 9,522 4,703 22, Interest rate derivatives Interest rate and currency swaps outflow 3,104 0 (10) (32) 3, inflow 3,270 0 (5) (3) 3, Total outflow 39,682 9,501 4,691 21,859 3, Total inflow 39,984 9,522 4,698 22,001 3, /12/2016 TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 1 YEAR TO 5 YEARS OVER 5 YEARS Currency derivatives Forwards outflow 46,562 18,908 23,299 4, inflow 46,481 18,891 23,234 4, Interest rate derivatives Interest rate and currency swaps outflow 94 1 (3) (3) inflow Total outflow 46,656 18,909 23,296 4, Total inflow 46,646 18,892 23,234 4, FINANCIAL REPORT AND 105

107 31/12/2017 TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 1 YEAR TO 5 YEARS OVER 5 YEARS Currency derivatives Forwards outflow 36,578 9,501 4,701 21, inflow 36,714 9,522 4,703 22, Interest rate derivatives Interest rate and currency swaps outflow 3,104 0 (10) (32) 3, inflow 3,270 0 (5) (3) 3, Total outflow 39,682 9,501 4,691 21,859 3, Total inflow 39,984 9,522 4,698 22,001 3, /12/2016 TOTAL UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 1 YEAR TO 5 YEARS OVER 5 YEARS Currency derivatives Forwards outflow 46,562 18,908 23,299 4, inflow 46,481 18,891 23,234 4, Interest rate derivatives Interest rate and currency swaps outflow 94 1 (3) (3) inflow Total outflow 46,656 18,909 23,296 4, Total inflow 46,646 18,892 23,234 4, / MARKET RISKS / POSITION RISK The Group monitors market risks of trading book and markets risks of banking book separately. The method of monitoring and reporting as well as of limiting the exposure is set out in the market risk management policy. The Group companies monitor market risks in compliance with regulatory requirements and methodologies, taking into account their activities and the volume of operations. Position risk is a risk of loss arising due to a change in the price of financial instrument that the Group holds in its portfolio for the purpose of trading on its proprietary account. The Bank values its trading portfolios daily mark-tomarket. In order to determine the risk of a particular financial instrument held for trading, the Bank calculates value at risk (VaR) on a daily basis. The methodology used by the Bank to calculate VaR complies with the Basel standards: 99 % one-sided confidence interval, the calculation of volatility is based on 250-day data history, 10-day securities retention period or one-day retention period for currencies. The reason for a 10-day securities retention period in securities is based on an assumption that in this period, the Bank can sell the securities at liquid stock exchange without additional costs and any significant decrease in the exchange rate. Liquidity of the global currency market allows for an immediate closing of open positions in currencies, without additional costs and any significant decrease in the exchange rate. The basis for determining trading limits is the capital requirement. The Group measures the market value of all trading items on a daily basis. The volume of transactions in each type of financial instruments is defined in detail by the Operative Limits Handbook. FINANCIAL REPORT AND 106

108 The Parent Bank s trading portfolio of equity instruments, which was inactive in 2017, is limited by the highest market value, stop-loss limit, and the VaR measure. The portfolio of debt securities is limited by the highest market value and stop-loss limit. The limits for specific types of transactions are set by the Bank s Management Board. Changes in the structure of limits shall not affect the annual plan of capital adequacy. A detailed breakdown of financial assets held for trading and their movements are presented in the Table Financial assets held for trading in the notes to the financial statements. The Parent Bank controls the position risk in foreign exchange trading by trading limits. Limits for foreign exchange trading for the Bank s proprietary account are defined as the maximum allowable open position of the Trading Department. The Strategic Risk Management Department monitors trading results on a daily basis and reports findings to the responsible bodies. The Parent Bank offers its customers the service of buying and selling derivatives as a broker only and does not take its own positions / INTEREST RATE RISK Interest rate risk is the risk of loss arising due to changes in interest rates or the structure of interest rates for maturity mismatches of interest-sensitive assets and liabilities with regard to interest rate repricing and the remuneration method. The Group identifies, measures, manages and monitors the interest rate risk arising from non-trading items in accordance with the Interest Rate Risk Management Policy of the Nova KBM Group. In accordance with the interest rate risk management strategy, the Group limits the interest rate risk by establishing a limit system. The Group monitors and reports on a monthly basis whether the interest rate risk is within set limits. The interest rate risk management for trading book items is included in the Market Risk Management Policy of Nova KBM. Interest rate risk management of nontrading book items is carried out in accordance with the Interest Rate Risk Management Methodology of Nova KBM Group. The Group monitors interest-bearing statement of financial position items and off-balance-sheet items separated by the key currencies and reference interest rates in which it operates, namely, cash flows from fixed interest rate products with regard to the cash flow maturity date, while cash flows from variable interest rate products are monitored with regard to the first variable interest rate repricing period or their contractual maturity. The Group separately monitors reference interest rate risk for euro, US dollar and Swiss franc. The balance as at 31 December is given in the table below: CURRENCY ASSETS % LIABILITIES % ASSETS % LIABILITIES % EUR % % % % CHF 1.01 % 0.67 % 0.99 % 0.68 % USD 0.76 % 0.87 % 0.85 % 0.88 % Other 0.44 % 0.37 % 0.41 % 0.39 % Total 100 % 100 % 100 % 100 % In 2016 and 2017, as part of the overhaul of its ICAAP, the Parent Bank revised its policy of managing interest rate risk. The Group implements interest rate scenarios for day-to-day internal management and interest rate stress testing scenarios on a monthly basis. Furthermore, the Group undertakes monthly calculations of the extent to which their economic value of equity and net interest income are impacted over a period of one year according to the results of the standardised stress test for interest rate risk resulting from a parallel shift in the interest rate curve. The Group uses in interest rate risk monitoring and management the basis point value. The basis point value method measures the exposure to interest rate risk using the basis point value, which indicates the extent to which the value of the interest-sensitive instruments portfolio is reduced if the general level of interest rates rises by 1 basis point or 0.01 %. For its internal purposes and the purposes of calculating capital requirement for interest rate risk, the Group calculates the impact of the change on the economic value of equity and net interest income in cases of the following shifts in the yield curve (day-to-day internal management scenarios): Parallel shift (a sudden parallel shift of the yield curve for a certain basis point value, which is defined by a preliminary analysis of movements in market interest rates); A shock on the basis of past or predicted market data (shift of the curve to the position held three months ago and the position where three-month forward rates, which are obtained from the Bloomberg financial data source) are taken into account; Flattening yield curve scenario (the Bank identified two scenarios. Scenario of an increase in short-term interest rates and a decline in long-term interest rates and a shock resulting from an increase in short-term interest rates with a slight increase in long-term interest rates); VaR based shock (shift in the yield curve based on its volatility during the previous year, with 95 % confidence interval); Steepening yield curve scenario (increase in longterm interest rates with a slight rise in short-term interest rates). The capital requirement for the interest rate risk is determined by the scenario producing the largest negative impact on the economic value of equity and net interest income. The Group regularly performs also stress testing scenarios, using them to measure its vulnerability in stressful market conditions. In addition to the standardised stress test in the form of a parallel shift in the yield curve by +/-200 basis points using the zero-interest-rate floor, the Bank carries out also other upward and downward yield curve shifts of various proportions that were summarised by the Bank in line with the Basel standards on the interest rate risk management in the banking book. For its internal purposes, the Group calculates the impact of the change on the economic value of equity and net interest income in cases of the following shifts in the yield curve: A parallel upward yield curve shift by 200 basis points; A parallel downward yield curve shift by 200 basis points using the zero-interest-rate floor; Steepener yield curve shock (resulting from a decline in short-term interest rates and an increase in long-term interest rates); Flattener yield curve shock (resulting from an increase in short-term interest rates and a decline in long-term interest rates); An increase in short-term interest rates shock; A decline in short-term interest rates shock. FINANCIAL REPORT AND 107

109 ANALYSIS OF SENSITIVITY TO YIELD CURVE SHIFTS IMPACT OF YIELD CURVE SHIFTS ON NET INTEREST INCOME Standardised stress test NET PRESENT VALUE INTEREST INCOME 31/12/ /12/2016 TOTAL NET PRESENT VALUE INTEREST INCOME TOTAL +200 bp 7,344 4,801 12,145 (5,499) 13,459 7, bp using 0 % interest-rate floor (8,262) 1,075 (7,187) 4,366 1,044 5,410 Parallel yield curve shift Upward parallel yield curve shift 7,380 4,679 12,059 (5,858) 2,077 (3,781) Downward parallel yield curve shift (10,633) (4,722) (15,355) 9,570 (2,068) 7,502 Change in the yield curve slope Steepened yield curve shock 9,823 (3,111) 6,712 (6,123) (1,830) (7,953) Flattened yield curve shock (8,888) 3,931 (4,957) 5,545 2,234 7,779 Change in short-term interest rates Increase in short-term interest rates shock (5,890) 5,112 (778) 3,275 2,769 6,044 31/12/ /12/2016 EUR USD CHF TOTAL EUR USD CHF TOTAL Standardised stress test +200 bp 7,952 (535) (73) 7,344 (7,165) (5,499) -200 bp using 0 % interest-rate floor (8,788) 555 (29) (8,262) 5,387 (1,047) 26 4,366 Parallel yield curve shift Upward parallel yield curve shift 7,952 (535) (37) 7,380 (7,136) (5,858) Downward parallel yield curve shift (11,233) (10,633) 11,028 (1,007) (451) 9,570 Change in the yield curve slope Steepened yield curve shock 9, ,823 (6,734) (6,123) Flattened yield curve shock (8,490) (353) (45) (8,888) 5,839 (194) (100) 5,545 Change in short-term interest rates Increase in short-term interest rates shock (5,296) (538) (56) (5,890) 2, ,275 Decline in short-term interest rates shock 6,184 (5,176) 1,008 (3,382) (2,766) (6,148) Decline in short-term interest rates shock 5, ,184 (3,036) (209) (137) (3,382) 31/12/ /12/ /12/ /12/2016 Standardised stress test NET PRESENT VALUE INTEREST INCOME TOTAL NET PRESENT VALUE INTEREST INCOME TOTAL +200 bp 10,201 5,445 15,646 (5,328) 13,495 8, bp using 0 % interest-rate floor (8,304) 1,185 (7,119) 4,329 1,045 5,374 Parallel yield curve shift Upward parallel yield curve shift 10,237 5,322 15,559 (5,687) 2,243 (3,444) Downward parallel yield curve shift (13,708) (5,365) (19,073) 9,373 (2,235) 7,138 Change in the yield curve slope Steepened yield curve shock 9,102 (3,614) 5,488 (6,125) (1,962) (8,087) Flattened yield curve shock (7,688) 4,552 (3,136) 5,575 2,397 7,972 Change in short-term interest rates Increase in short-term interest rates shock (3,907) 5,894 1,987 3,356 2,973 6,329 EUR USD CHF TOTAL EUR USD CHF TOTAL Standardised stress test +200 bp 10,809 (535) (73) 10,201 (6,994) (5,328) -200 bp using 0 % interest-rate floor (8,830) 555 (29) (8,304) 5,350 (1,047) 26 4,329 Parallel yield curve shift Upward parallel yield curve shift 10,809 (535) (37) 10,237 (6,965) (5,687) Downward parallel yield curve shift (14,308) (13,708) 10,831 (1,007) (451) 9,373 Change in the yield curve slope Steepened yield curve shock 8, ,102 (6,736) (6,125) Flattened yield curve shock (7,290) (353) (45) (7,688) 5,869 (194) (100) 5,575 Change in short-term interest rates Increase in short-term interest rates shock (3,313) (538) (56) (3,907) 3, ,356 Decline in short-term interest rates shock 4,114 (5,961) (1,847) (3,466) (2,971) (6,437) Decline in short-term interest rates shock 3, ,114 (3,120) (209) (137) (3,466) FINANCIAL REPORT AND 108

110 IMPACT OF YIELD CURVE SHIFTS ON NET INTEREST INCOME 31/12/ /12/2016 EUR USD CHF TOTAL EUR USD CHF TOTAL Standardised stress test +200 bp 4,922 (366) 245 4,801 12, , bp using 0 % interest-rate floor , ,044 Parallel yield curve shift Upward parallel yield curve shift 4,922 (366) 123 4,679 1,760 (48) 365 2,077 Downward parallel yield curve shift (4,964) 365 (123) (4,722) (1,750) 48 (366) (2,068) Change in the yield curve slope Steepened yield curve shock (3,373) 365 (103) (3,111) (1,538) 44 (336) (1,830) Flattened yield curve shock 4,248 (448) 131 3,931 1,871 (55) 418 2,234 Change in short-term interest rates Increase in short-term interest rates shock Decline in short-term interest rates shock 5,498 (557) 171 5,112 2,307 (69) 531 2,769 (5,560) 556 (172) (5,176) (2,304) 70 (532) (2,766) 31/12/ /12/2016 EUR USD CHF SKUPAJ EUR USD CHF SKUPAJ Standardised stress test +200 bp 5,566 (366) 245 5,445 12, , bp using 0 % interest-rate floor , ,045 Parallel yield curve shift Upward parallel yield curve shift 5,565 (366) 123 5,322 1,926 (48) 365 2,243 Downward parallel yield curve shift (5,607) 365 (123) (5,365) (1,917) 48 (366) (2,235) Change in the yield curve slope Steepened yield curve shock (3,876) 365 (103) (3,614) (1,670) 44 (336) (1,962) Flattened yield curve shock 4,869 (448) 131 4,552 2,034 (55) 418 2,397 Change in short-term interest rates Increase in short-term interest rates shock 6,280 (557) 171 5,894 2,511 (69) 531 2,973 The Group calculates its exposure to interest rate changes as the change of the net current value of the difference between assets and liabilities subject to a variable interest rate in a given period. In addition to the standardised stress test analysis, the Group implements several scenarios for day-to-day internal management and stress testing scenarios, separately for each currency and maturity handled. The Group reports its exposure to interest rate risk at the ALCO meetings and in the scope of the CRO Report, on a monthly basis. As at 31 December 2017, the result of the standardised stress test suggested that a potential profit arising from an increase in interest rates by 200 basis points would equal 1.28 % of the Bank s regulatory capital, while the potential loss arising from a decline in interest rates by 200 basis points (taking into consideration the interest-rate floor of 0 %) would equal 1.44 % of the Bank s regulatory capital, which is in line with the regulatory limit. As at 31 December 2016, the result of the standardised stress test suggested that a potential loss arising from an increase in interest rates by 200 basis points would equal 0.94 % of the Bank s regulatory capital, while the potential profit arising from a decline in interest rates by 200 basis points (taking into consideration the interest-rate floor of 0 %) would equal 0.74 % of the Bank s regulatory capital, which is in line with the regulatory limit. As at 31 December 2017, the result with the largest negative change in the economic value of equity in six stress test scenarios equalled 1.85 % of the Bank s Tier-1 capital, which is in line with the regulatory limit. The result with the largest negative change in the economic value of equity and net interest income presented the capital requirement for interest rate risk, which was 7,500 thousand as at 31 December 2017 and complied with the regulatory limit. According to the basis point value method, if the rate of return was changed by one basis point, the value of the position of the euro currency portfolio would change by 46 thousand as at 31 December A more detailed breakdown of the Group s statement of financial position by interest rate maturity as at 31 December 2017 and 2016 is presented in the tables Interest rate risk as at 31 December 2017 and Interest rate risk as at 31 December 2016, which show the distribution of items with regard to the interest rate repricing periods. Decline in short-term interest rates shock (6,345) 556 (172) (5,961) (2,509) 70 (532) (2,971) FINANCIAL REPORT AND 109

111 INTEREST RATE RISK Interest-sensitive assets INTEREST- BEARING UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 31/12/ YEAR TO 5 YEARS OVER 5 YEARS Cash, and cash balances at central bank 460, , Financial assets designated at fair value through profit or loss 3, , ,000 0 Available-for-sale financial assets 1,522,787 39,281 72,594 77,464 1,020, ,572 Loans and advances 2,580, ,572 1,092, , ,798 30,602 Held-to-maturity financial assets 83, ,000 62,752 16,094 Total interest-sensitive assets 4,651, ,503 1,167, ,796 1,272, ,268 Interest-sensitive liabilities Financial liabilities measured at amortised cost 4,086,991 2,955, , , ,289 1,173 deposits from banks and central bank 51,860 49,180 2, deposits from customers 3,636,834 2,867, , ,136 58,453 1,100 loans and advances to banks 396,795 37,679 55,022 96, , debt securities 1,500 1, subordinated liabilities other financial liabilities Total interest-sensitive liabilities 4,086,991 2,955, , , ,289 1,173 Interest sensitivity gap 564,247 (1,970,448) 908, ,395 1,006, ,095 Interest-sensitive assets INTEREST- BEARING UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 31/12/ YEAR TO 5 YEARS OVER 5 YEARS Cash, and cash balances at central bank 706, , Financial assets designated at fair value through profit or loss 67, ,182 53,034 3,380 0 Available-for-sale financial assets 1,551,508 30, ,727 90, , ,734 Loans and advances 2,043,850 1,072, , , ,153 23,147 Held-to-maturity financial assets 90, ,778 16,437 Total interest-sensitive assets 4,459,818 1,809, , , , ,318 Interest-sensitive liabilities Financial liabilities measured at amortised cost 4,068,998 2,783, , , ,776 2,458 deposits from banks and central bank 41,049 28,075 3,139 7,119 2, deposits from customers 3,621,106 2,476, , , ,422 2,187 loans and advances to banks 332, ,494 25,432 57,681 21, debt securities 14,356 9,819 1,098 2, subordinated liabilities other financial liabilities 59,871 41,004 4,564 10,353 3, Total interest-sensitive liabilities 4,068,998 2,783, , , ,776 2,458 Interest sensitivity gap 390,820 (973,316) 487,605 (295,360) 683, ,860 FINANCIAL REPORT AND 110

112 Interest-sensitive assets INTEREST- BEARING UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 31/12/ YEAR TO 5 YEARS OVER 5 YEARS Cash, and cash balances at central bank 455, , Financial assets designated at fair value through profit or loss 3, , ,000 0 Available-for-sale financial assets 1,522,701 39,281 72,594 77,421 1,020, ,572 Loans and advances 2,537, ,470 1,223, , ,161 28,616 Held-to-maturity financial assets 83, ,000 62,752 16,094 Total interest-sensitive assets 4,602, ,003 1,298, ,176 1,231, ,282 Interest-sensitive liabilities Financial liabilities measured at amortised cost 4,102,203 2,987, , , ,453 1,100 deposits from banks and central bank 51,860 49,180 2, deposits from customers 3,670,261 2,900, , ,149 58,453 1,100 loans and advances to banks 378,580 36,437 52,874 89, ,000 0 debt securities 1,500 1, subordinated liabilities other financial liabilities Total interest-sensitive liabilities 4,102,203 2,987, , , ,453 1,100 Interest sensitivity gap 500,154 (2,027,893) 1,040, , , ,182 Interest-sensitive assets INTEREST- BEARING UP TO 1 MONTH 1 MONTH TO 3 MONTHS 3 MONTHS TO 12 MONTHS 31/12/ YEAR TO 5 YEARS OVER 5 YEARS Cash, and cash balances at central bank 706, , Financial assets designated at fair value through profit or loss 67, ,182 53,035 3,380 0 Available-for-sale financial assets 1,551,388 30, ,727 90, , ,734 Loans and advances 2,032,898 1,065, , , ,961 22,272 Held-to-maturity financial assets 90, ,779 16,437 Total interest-sensitive assets 4,448,748 1,802, , , , ,443 Interest-sensitive liabilities Financial liabilities measured at amortised cost 4,094,347 2,806, , , ,921 2,458 deposits from banks and central bank 49,296 26,015 2,206 3,122 16,953 1,000 deposits from customers 3,650,974 2,670, , ,561 94,744 1,458 loans and advances to banks 333,088 63,033 33,690 88, ,000 0 debt securities 14, ,152 8,224 0 subordinated liabilities other financial liabilities 46,613 46, Total interest-sensitive liabilities 4,094,347 2,806, , , ,921 2,458 Interest sensitivity gap 354,401 (1,003,371) 486,442 (294,270) 677, ,985 FINANCIAL REPORT AND 111

113 The tables show only the distribution of interest-sensitive items by individual time buckets with regard to the first interest rate repricing period or the contractual maturity. Figures in the tables present: Nominal value of debt securities (not their market value or amortized cost); Loans after taking into account impairments (excluding interest, fees and commissions, and outstanding unpaid principal amounts of customers classified in all credit rating groups), Future cash flows from interest on loans and securities, Deposits in the amount of principal (excluding interest). A more detailed breakdown of the open foreign exchange position as at 31 December 2017 and 31 December 2016 is presented in the Tables Foreign exchange risk below. A 10-day VaR of the open foreign exchange position is calculated by the Parent Bank on the basis of one-year data and a 99 % confidence interval. These data suggest with a 99 % probability that, by holding an unchanged currency position, the loss over the 10 consecutive business days would not exceed 232 thousand, taking into account the highest level of exposure to foreign exchange risk during The range of VaR movement for the Bank is presented in the table below. AVERAGE INTEREST RATES (%) 10-DAY VaR OF THE BANK S FOREIGN EXCHANGE POSITION IN /12/ /12/ /12/ /12/2016 Average interest rate on assets Average interest rate on liabilities HIGHEST LOWEST AVERAGE 10-DAY VaR OF THE BANK S FOREIGN EXCHANGE POSITION IN / FOREIGN EXCHANGE RISK Foreign exchange risk represents a potential loss arising from an open foreign exchange position and the volatility of foreign exchange rates. The Parent Bank controls its exposure to foreign exchange risk by maintaining neutral position in individual foreign currencies. The Bank maintains a daily aggregate closed foreign exchange position. The aggregate open position for all currencies is limited by its impact on the Parent Bank s capital adequacy. The Parent Bank monitors its exposure in each currency by using the Value at Risk (VaR) method in compliance with the Basel capital requirements. The maximum allowable VaR is established at the individual currency level just as for the entire foreign exchange portfolio. VaR depends on the exposure amount and the volatility of individual pair of currencies. The closed position for each foreign currency is monitored daily, and the Parent Bank calculates the daily result of assumed foreign exchange risk due to discrepancies from the neutral foreign exchange position. In case of an increase in volatility, the Parent Bank reduces the allowable open position in individual currencies, in accordance with the adopted methodology. Any changes in volatility are reviewed by the Parent Bank on a monthly basis. The Group controls its exposure to foreign exchange risk by maintaining target positions in individual currencies. The Group companies monitor currency risk in compliance with regulatory requirements and methodologies, taking into account their activities and the volume of operations. The Group regularly monitors its exposure to the foreign exchange risk in its statement of financial position and off-balance-sheet items by individual currencies. The Group s exposure to the foreign exchange risk in US$, CHF and HRK is presented below. HIGHEST LOWEST AVERAGE FINANCIAL REPORT AND 112

114 FOREIGN EXCHANGE RISK EUR USD CHF HRK Assets OTHER CURRENCIES Cash, and cash balances at central bank 533,070 4,444 1,452 2,877 4, ,521 Financial assets held for trading 1, ,524 Financial assets designated at fair value through profit or loss 17, ,237 Available-for-sale financial assets 1,597,935 23, ,621,581 Loans and advances 2,402,972 8,191 43, ,757 2,464,449 Held-to-maturity financial assets 88, ,700 Other assets 187, , ,817 Total assets 4,828,441 36,295 44,476 3,883 16,734 4,929,829 Liabilities Financial liabilities held for trading 1, ,024 Financial liabilities measured at amortised cost 4,089,282 36,117 27,432 2,167 12,847 4,167,845 Other liabilities 784,170 9,832 0 (28,250) (4,792) 760,960 Total liabilities and equity 4,874,476 45,949 27,432 (26,083) 8,055 4,929,829 Assets-liabilities, including equity, mismatch (46,035) (9,654) 17,044 29,966 8,679 0 Derivatives 17,050 0 (16,920) Assets-liabilities, including equity and derivatives, mismatch (28,985) (9,654) ,966 8, /12/2017 TOTAL EUR USD CHF HRK Assets OTHER CURRENCIES Cash, and cash balances at central bank 760,722 10,840 2,562 1,995 7, ,915 Financial assets held for trading 1, ,119 Financial assets designated at fair value through profit or loss 86, ,732 Available-for-sale financial assets 1,565,357 19, ,584,514 Loans and advances 2,039,837 19,366 58, ,973 2,125,058 Held-to-maturity financial assets 90, ,216 Other assets 142, , ,896 Total assets 4,686,404 49,363 61,011 3,088 23,584 4,823,450 Liabilities Financial liabilities held for trading 1, ,575 Financial liabilities measured at amortised cost 3,984,512 49,135 29, ,857 4,075,892 Other liabilities 773, (27,405) ,983 Total liabilities and equity 4,759,430 49,135 29,778 (26,795) 11,902 4,823,450 Assets-liabilities, including equity, mismatch (73,026) ,233 29,883 11,682 0 Derivatives 30,866 (155) (30,989) (121) Assets-liabilities, including equity and derivatives, mismatch (42,160) ,883 11,839 (121) 31/12/2016 TOTAL FINANCIAL REPORT AND 113

115 EUR USD CHF HRK Assets OTHER CURRENCIES Cash, and cash balances at central bank 528,181 4,444 1,452 2,816 4, ,061 Financial assets held for trading Financial assets designated at fair value through profit or loss 17, ,237 Available-for-sale financial assets 1,597,852 23, ,621,498 Loans and advances 2,358,982 8,189 43, ,307 2,419,507 Held-to-maturity financial assets 88, ,700 Other assets 225, ,393 Total assets 4,816,840 36,293 44,476 2,821 13,475 4,913,905 Liabilities Financial liabilities held for trading 1, ,023 Financial liabilities measured at amortised cost 4,100,420 36,117 27,432 2,109 12,805 4,178,883 Other liabilities 724,137 9, ,999 Total liabilities and equity 4,825,580 45,949 27,432 2,139 12,805 4,913,905 Assets-liabilities, including equity, mismatch (8,740) (9,656) 17, Derivatives 17,050 0 (16,920) Assets-liabilities, including equity and derivatives, mismatch 8,310 (9,656) /12/2017 TOTAL EUR USD CHF HRK Assets OTHER CURRENCIES Cash, and cash balances at central bank 757,458 10,840 2,562 1,758 6, ,469 Financial assets held for trading Financial assets designated at fair value through profit or loss 86, ,732 Available-for-sale financial assets 1,562,938 19, ,582,095 Loans and advances 2,025,022 19,357 58, ,681 2,108,509 Held-to-maturity financial assets 90, ,216 Other assets 184, ,514 Total assets 4,707,112 49,354 61,011 1,758 12,532 4,831,767 Liabilities Financial liabilities held for trading 1, ,575 Financial liabilities measured at amortised cost 4,008,858 49,135 29, ,818 4,100,131 Other liabilities 730, ,061 Total liabilities and equity 4,740,494 49,135 29, ,818 4,831,767 Assets-liabilities, including equity, mismatch (33,382) ,233 1, Derivatives 30,866 (155) (30,989) (121) Assets-liabilities, including equity and derivatives, mismatch (2,516) , (121) 31/12/2016 TOTAL FINANCIAL REPORT AND 114

116 FOREIGN EXCHANGE SENSITIVITY ANALYSIS 31/12/ /12/2016 IMPACT ON PROFIT OR LOSS IMPACT ON PROFIT OR LOSS EXCHANGE RATE CHANGE AGAINST EUR (%) NOVA KBM GROUP NOVA KBM D.D. EXCHANGE RATE CHANGE AGAINST EUR (%) NOVA KBM GROUP NOVA KBM D.D. USD +8 % (772) (772) +11 % 8 7 CHF +11 % % HRK +4 % 1, % 1, Other currencies +6 % % 1, The Bank determines the exchange rate change based on volatility. The Table shows the Bank s sensitivity to exchange rate changes. The impact of foreign exchange rate changes on equity is negligible and is therefore not presented in the table. FINANCIAL REPORT AND NOVE KBM D.D. 115

117 4.4 / GEOGRAPHICAL ANALYSIS OF ASSETS AND LIABILITIES TOTAL SLOVENIA Assets TOTAL FOREIGN COUNTRIES EUROPEAN UNION REPUBLICS OF THE FORMER YUGOSLAVIA Cash, and cash balances at central bank 546, ,177 37,344 31,054 3,478 2,812 Financial assets held for trading 1,524 1, Financial assets designated at fair value through profit or loss 17,237 17, Available-for-sale financial assets 1,621, ,927 1,205,654 1,050, ,770 Loans and advances 2,464,449 2,355, , ,797 5,796 2,199 Held-to-maturity financial assets 88,700 72,802 15,898 15, Other assets 189, ,453 2, ,324 0 Total assets 4,929,829 3,559,404 1,370,425 1,199,046 11, ,781 Liabilities Financial liabilities held for trading 1, Financial liabilities measured at amortised cost 4,167,845 4,050, ,725 98,353 8,034 11,338 Other liabilities 760, , , ,845 (4,782) 0 Total liabilities and equity 4,929,829 4,604, , ,329 3,252 11,338 Assets-liabilities, including equity, mismatch 0 (1,045,506) 1,045, ,717 8, ,443 31/12/2017 OTHER TOTAL SLOVENIA Assets TOTAL FOREIGN COUNTRIES EUROPEAN UNION REPUBLICS OF THE FORMER YUGOSLAVIA Cash, cash balances at central banks and demand deposits at banks 783, ,905 39,010 30,314 4,236 4,460 Financial assets held for trading 1,119 1, Financial assets designated at fair value through profit or loss 86,732 86, Available-for-sale financial assets 1,584, , , , ,894 Loans and advances 2,125,058 1,975, , ,508 7, Held-to-maturity financial assets 90,216 73,823 16,393 16, Other assets 151, ,339 9, ,897 0 Total assets 4,823,450 3,611,714 1,211,736 1,061,155 20, ,590 Liabilities Financial liabilities held for trading 1,575 1, Financial liabilities measured at amortised cost 4,075,892 3,959, ,750 93,465 5,842 17,443 Other liabilities 745, , , , Total liabilities and equity 4,823,450 4,583, , ,442 6,004 17,443 Assets-liabilities, including equity, mismatch 0 (971,847) 971, ,713 14, ,147 31/12/2016 OTHER FINANCIAL REPORT AND 116

118 TOTAL SLOVENIA Assets TOTAL FOREIGN COUNTRIES EUROPEAN UNION REPUBLICS OF THE FORMER YUGOSLAVIA Cash, and cash balances at central bank 541, ,250 33,811 30, ,812 Financial assets held for trading Financial assets designated at fair value through profit or loss 17,237 17, Available-for-sale financial assets 1,621, ,844 1,205,654 1,050, ,770 Loans and advances 2,419,507 2,313, , ,938 2,716 2,197 Held-to-maturity financial assets 88,700 72,802 15,898 15, Other assets 225, ,755 8, ,635 0 Total assets 4,913,905 3,543,680 1,370,225 1,199,088 11, ,779 Liabilities Financial liabilities held for trading 1, Financial liabilities measured at amortised cost 4,178,883 4,061, ,588 98,284 7,966 11,338 Other liabilities 733, , , , Total liabilities and equity 4,913,905 4,646, , ,524 7,975 11,338 Assets-liabilities, including equity, mismatch 0 (1,102,388) 1,102, ,564 3, ,441 31/12/2017 OTHER TOTAL SLOVENIA Assets TOTAL FOREIGN COUNTRIES EUROPEAN UNION REPUBLICS OF THE FORMER YUGOSLAVIA Cash, cash balances at central banks and demand deposits at banks 779, ,904 34,565 30, ,460 Financial assets held for trading Financial assets designated at fair value through profit or loss 86,732 86, Available-for-sale financial assets 1,582, , , , ,894 Loans and advances 2,108,509 1,963, , ,228 3, Held-to-maturity financial assets 90,216 73,823 16,393 16, Other assets 184, ,832 17, ,682 0 Total assets 4,831,767 3,621,312 1,210,455 1,059,969 20, ,580 Liabilities Financial liabilities held for trading 1,575 1, Financial liabilities measured at amortised cost 4,100,131 3,983, ,570 93,350 5,777 17,443 Other liabilities 730, , , , Total liabilities and equity 4,831,767 4,564, , ,732 5,895 17,443 Assets-liabilities, including equity, mismatch 0 (943,385) 943, ,237 15, ,137 31/12/2016 OTHER FINANCIAL REPORT AND 117

119 AVAILABLE-FOR-SALE FINANCIAL ASSETS OF FOREIGN ISSUERS COUNTRY OF ISSUER 31/12/ /12/ /12/ /12/2016 Australia 13,362 13,401 13,362 13,401 Austria 69,697 57,316 69,697 57,316 Belgium 66,899 55,513 66,899 55,513 Bulgaria 17,605 29,041 17,605 29,041 Czech Republic 36,012 18,966 36,012 18,966 Denmark 38,731 28,402 38,731 28,402 Finland 25,062 23,336 25,062 23,336 France 147, , , ,243 Ireland 43,314 18,038 43,314 18,038 Italy 14,557 18,203 14,557 18,203 Japan 3,142 3,140 3,142 3,140 Canada 32,229 23,323 32,229 23,323 Latvia 10,165 10,128 10,165 10,128 Luxembourg 34,721 28,524 34,721 28,524 Hungary 19, ,004 0 Germany 67,104 89,776 67,104 89,776 The Netherlands 112, , , ,641 Norway 26,435 20,404 26,435 20,404 Poland 76,539 57,099 76,539 57,099 Romania 26,241 26,418 26,241 26,418 Slovakia 23,819 14,029 23,819 14,029 Spain 77,693 50,721 77,693 50,721 Sweden 75,747 62,053 75,747 62,053 United Kingdom 68,518 50,802 68,518 50,802 USA 79,602 64,626 79,602 64,626 Total 1,205, ,143 1,205, , / OPERATIONAL RISK The official definition of the operational risk determined by Basel II is as follows: a risk of loss arising from inappropriate or failed internal processes, people and systems or external events. This definition includes legal risk (in accordance with CRR regulation), while excluding the strategic risk and the risk of losing business reputation. It is known, however, that some ORs (operational risks) can lead to subsequent issues related to loss of reputation. Although OR may have a number of sub-categories, such as legal risk, risk of conduct, and information and communication technology (ICT) risk, Nova KBM treats all these risks as a general OR. The Bank established in 2017 the Operational Risk Management Department, which coordinates a systematic recording of OR events. The reporting system on OR incidents covers the entire Nova KBM Group and is carried out on a monthly and quarterly basis. The report for the whole Group is discussed by the Operational Risk Committee, which meets at least once every quarter. The committee referred to above works with organisational units at all hierarchical levels of Nova KBM to ensure an appropriate flow of information needed to manage operational risk in a comprehensive manner. Operational risk management reports are discussed by the Management Board and senior management, responsible for operational risk management. The Operational Risk Committee reviews the report on incidents recorded by all important business segments, on a quarterly basis or more frequently, adopts necessary measures in this regard, and monitors their implementation. The Operational Risk Committee is responsible for dealing in the following matters: Operational risk loss events of the Nova KBM Group, Review of Risk control self-assessment (RCSA) Control over outsourcing, Physical and information security. The Bank calculates capital requirements for operational risk according to the Pillar I for the Nova KBM Group by using the Basic Indicator Approach (BIA). In 2017, the Bank introduced under the ICAAP Project an internal capital adequacy calculation for ORs according to Pillar II based on its own models resulting from OR financial loss events, OR non-financial and potential events, and Risk Control self-assessments. The Bank identifies and distinguishes operational risk events to the following: Financial loss events, Loss events arising from operational risk and resulting either in financial loss (impact on the profit and loss account [IPI]) or misstatement of items in IPI. Non-financial and potential events. A non-financial event arising from operational risk is the event producing an effect of regulatory nature, or an effect relating to customers, market/competitors, and/or reputation. A potential event arising from operational risk is the event with no financial/non-financial effects, while having the potential to cause such effects. Since it is not possible to measure all operational risk losses, the Bank assesses them additionally, yet separately, under its annual risk profile. The determination of the risk profile with respect to operational risk is of particular importance, given that this risk makes up the largest proportion of loss events, which cannot be reliably measured; therefore, they have to be assessed. The Bank classifies operational risk loss events in accordance with the guidelines of the Basel capital standards, i.e. by operating segments and type of loss events. FINANCIAL REPORT AND 118

120 In 2017, the Bank renewed its operational risk management by introducing five new internal regulations (Operational Risk Framework Policy, Outsourcing Policy, Operational Risk Loss and Event Data Rule Book, Operational Risk and Control Self- Assessment Methodology, Operational Risk Reporting and Monitoring Rule Book). Furthermore, the Bank prepared a new Operational Risk Register (ORR) and a new RCSA, both adapted to Basel II categorisation of loss events, which will enable the Bank to ensure a better comparison between the reported loss events and the assessed risks and, therefore, a higher-quality of operational risk analyses. The Bank has established an operational risk appetite and monitoring of key risk indicators (KRI) with respect to the new Operational Risk Register. The Bank renewed also the loss event reporting application, which now allows also entries of nonfinancial events and potential events, which enables improved monitoring of operational risk. The Bank classifies measured risk loss events by operating segments and type of loss events, in accordance with the guidelines of the Basel capital framework and the Regulation (EU) 575/2013, Article 324 thereof (CRR Regulation). Operational risk gross loss events of the Nova KBM Group include also loss events of Pošta Slovenije d.o.o. The Bank will receive the compensation for operational risk loss events in full amount from Pošta Slovenije d.o.o. Without taking into account legal risk events, the compensation for loss at the Group level was 91.6 % in By taking into account the legal risk (actual losses + provisions made), the net loss of the Nova KBM Group for the year was 8.41 %. STRUCTURE OF OPERATIONAL RISK LOSS EVENTS THE GROUP In terms of type (the Basel II classification), the majority of loss events recorded by the Group related to Business Disruption and System Failures %, followed by Execution, Delivery & Process Management %, Employment Practices and Workplace Safety 7.71 %, and External Fraud 4.72, which is presented in Figure 1: The structure of operational risk loss events the Group, in BASEL II CATEGORISATION OF THE The Group companies report all operational risk loss events to the Operational Risk Management Department regularly, on a monthly basis. In 2017, the largest total operational risk gross loss in the Nova KBM Group was recorded by Nova KBM d.d. in the amount of 10,212 thousand. The largest portion of this loss related to the 10 largest loss events in the amount of 8,608 thousand, which accounted for 84.3 %. In 2017, the gross loss of the Nova KBM Group companies alone amounted to 271,074 thousand. Total gross loss of the Nova KBM Group amounted to 10,483 thousand in Business Disruption and System Failures % Execution, delivery & process management % Employment Practices and Workplace Safety 7.71 % External fraud 4.72 % Damage to physical assets 3.03 % Internal fraud 0.26 % Clients, products & business practise 0.07 % FINANCIAL REPORT AND 119

121 A DETAILED STRUCTURE OF OPERATIONAL RISK LOSS EVENTS RECORDED BY THE GROUP, STANDARD CLASSIFICATION ACCORDING TO BASEL II IN 000: TYPES OF LOSS EVENTS (BASEL CLASSIFICATION) NOVA KBM SUMMIT LEASING GORICA LEASING IN LIQUIDATION KBM INFOND KBM LEASING IN LIQUIDATION KBM LEASING HRVATSKA IN LIQUIDATION M-PAY KBM-ASCO TOTAL 1. Internal fraud External fraud Employment practices and workplace safety Clients, products & business practice Damage to physical assets Business disruption and system failures 6, , Execution, delivery & process management 2, ,801 Total 10, , / CAPITAL RISK Capital risk arises from inadequate size of capital, inadequate structure of capital with regard to the volume and the method of operation, or from difficulties in acquiring new capital, particularly in case of the need for a rapid increase, or in the event of unfavourable conditions in the business environment. The Group has adopted the Risk Appetite Framework, including the Risk Appetite Statement, and set up a system of limits, policies, methodologies, and Monitoring the key performance indicators related to the management of capital, Long-term planning of capital, risk weighted assets and capital adequacy ratio, Effective system of established limits with the early warning system (EWS), Managing its Risk appetite statement and Risk appetite framework. The Group nominated Moody s and Standard&Poor s rating agencies as appropriate external credit rating agencies to determine the risk weight based on external ratings for the category of exposures to corporates. The Group calculates capital requirements for market risk using the standardised approach and does not use internal models for the time being. The capital requirement for operational risk is calculated using the basic indicator approach. PILLAR II CAPITAL REQUIREMENTS The Group s internal capital represents additional capital requirements for covering the risks that are not covered or not sufficiently covered within the Pillar I minimum capital requirements. The Bank calculates its internal capital using the going-concern approach and has a harmonised policy, methodology for calculating internal capital, and a stress-testing methodology established at the Group level. adequate procedures and mechanisms to ensure adequate structure and size of its capital. PILLAR I CAPITAL REQUIREMENTS The Group manages its capital at all the three reporting levels by: The Group calculates capital requirements for credit using the standardised approach. The Group nominated Moody s rating agency as a suitable external credit Managing, monitoring and measuring actual and potential capital requirements, rating agency to determine the risk weight based on external ratings for the following categories: Monitoring its regulatory capital and examining Exposure to central governments and central banks, options to increase its additional capital through recapitalisation or by raising subordinated Exposure to regional governments or local authorities, instruments, taking into account regulatory restrictions, Exposure to public sector entities, Monitoring movements in its capital adequacy ratio, Exposure to institutions, Exposures to corporates. FINANCIAL REPORT AND 120

122 COMPOSITION OF REGULATORY CAPITAL AND CAPITAL REQUIREMENTS 31/12/ /12/ /12/ /12/2016 Tier-1 capital 574, , , ,429 Paid-in capital instruments 150, , , ,000 Paid-in capital surplus 403, , , ,302 (-) Own CET1 capital instruments Retained earnings and value adjustments from previous years in respect of investment property 44,746 49,719 33,685 31,890 Profit/loss for the current financial year Accumulated other comprehensive income 5, ,617 1,756 Other reserves 20,543 20,545 20,228 20,228 (-) Intangible assets (27,197) (18,463) (15,364) (13,113) (-) Deferred tax assets (20,211) (8,087) (19,234) (8,087) (-) Deductions from CET1 capital for the net impact of impairments and provisions, and the fair-valued assets (2,224) (3,454) (2,223) (3,547) Additional Tier-1 capital Additional capital Total capital 574, , , ,429 Risk weighted exposure amounts for credit risk 2,444,044 2,130,379 2,578,706 2,165,433 Central governments or central banks 5,148 5,391 4,825 5,391 Regional governments or local authorities 3,113 11,672 2,975 10,712 Public sector entities 20,401 1,140 20,373 1,140 Multilateral development banks International organisations Institutions 186, , , ,287 Corporates , , ,370 Retail 968, , , ,979 Exposures secured by mortgages on immovable property 119, , , ,595 Exposures in default 215, , , ,843 Items associated with particular high risk 41,315 37, , ,394 Collective investment undertakings 5,353 7,836 5,353 5,542 Equity 2,271 2,068 2,271 2,068 Other items 190, , , ,112 Risk weighted exposure amounts for market risks 47,619 41,847 27,970 38,298 Traded debt instruments Equity instruments and funds 27,946 41,829 27,946 38,280 Foreign exchange 15, Funds 4, Credit value adjustment Risk weighted exposure amounts for operational risk 356, , , ,996 Total risk weighted exposure amount 2,848,045 2,475,576 2,915,047 2,503,727 Total capital adequacy ratio % % % % Tier-1 capital adequacy ratio % % % % CET1 capital adequacy ratio % % % % FINANCIAL REPORT AND 121

123 5/ FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Where possible, the Group determines the fair value of financial instruments on the basis of exchange rates provided by the Bloomberg information system as a source. The Group starts measuring the value of financial assets according to the valuation model once it establishes that the market is not active. In accordance with the IFRSs, the Group divides fair values of financial instruments into three levels. Classified into Level 1 are financial assets whose fair value is determined entirely on the basis of prices quoted on one or more active markets. Classified into Level 2 are financial assets whose fair value is estimated on the basis of valuation models, which take into account variables derived from public market data, such as yield curves, market interest rates, exchange rates, and the volatility of currency exchange rates and interest rates. Included in Level 2 are also investments in illiquid bonds that are valued based on the Bloomberg BVAL exchange rate. Classified into Level 3 are currency exchange rates whose fair value is estimated on the basis of valuation models which take into account subjective variables that are not publicly available. 31/12/ /12/2016 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Derivatives Financial assets held for trading debt securities equity instruments Available-for-sale financial assets 1,621,498 1,564,864 51,995 4,639 1,582,095 2,347 1,576,658 3,090 debt securities 1,589,042 1,562,286 26, ,551, ,551,388 0 equity instruments 32,456 2,578 25,239 4,639 30,707 2,347 25,270 3,090 Financial assets designated at fair value through profit or loss 17,237 17, ,732 19,140 67,592 0 debt securities 3,264 3, , ,592 0 equity instruments 13,973 13, ,140 19, Financial liabilities Derivatives 1, , , ,575 0 ANALYSIS OF FAIR VALUE HIERARCHY 31/12/ /12/2016 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Derivatives Financial assets held for trading 1,014 1, debt securities equity instruments 1,014 1, Available-for-sale financial assets 1,621,581 1,564,864 52,078 4,639 1,584,514 4,766 1,576,658 3,090 debt securities 1,589,125 1,562,286 26, ,551, ,551,388 0 equity instruments 32,456 2,578 25,239 4,639 33,002 4,642 25,270 3,090 Financial assets designated at fair value through profit or loss 17,237 17, ,732 19,140 67,592 0 debt securities 3,264 3, , ,592 0 equity instruments 13,973 13, ,140 19, Financial liabilities Derivatives 1, , , ,575 0 FINANCIAL REPORT AND 122

124 The following table presents for each type of financial instrument the triggers that lead to the transfer of a financial instrument between the fair value hierarchy levels. TRANSFERS FINANCIAL INSTRUMENTS REASON FOR TRANSFER BETWEEN LEVELS From Level 2 to Level 1 From Level 3 to Level 1 From Level 1 to Level 2 From Level 1 to Level 3 From Level 2 to Level 3 From Level 3 to Level 2 Bonds Shares and funds Bonds Shares and funds Derivatives Derivatives ANALYSIS OF TRANSFERS BETWEEN FAIR VALUE HIERARCHY LEVELS In 2017, the Bank reclassified most of the financial assets subject to exchange rates from Bloomberg data source into debt securities. FROM LEVEL 1 TO LEVEL 2 Re-availability of the market price of the financial instrument. The price of a bond is considered to be available if the published market price is the result of the actual turnover in the period of less than one month. Re-availability of the market price of the financial instrument. The price of a share or an investment fund is considered to be available if the published market price is the result of the actual turnover in the period of less than one month. Valuation of bonds that have been previously valued according to the market price. The reason for the valuation of a bond and for changing its level is either the withdrawal of a bond from the regulated market or its illiquidity (no transaction has been concluded in a one-month period). Valuation of shares and investment funds that have been previously valued according to the market price. The reason for the valuation of a share or an investment fund and for changing its level is the withdrawal of a share or an investment fund from the regulated market. The underlying instrument to which the derivative refers has been reclassified from Level 1 to either Level 2 or Level 3. The market price of the underlying instrument is no longer available. The underlying instrument to which the derivative refers has been reclassified to Level 1. The market price of the underlying instrument is available. FROM LEVEL 2 TO LEVEL 1 The Bank argues that Bloomberg has become a MTF trading venue (organised market) and the Bloomberg s price reflects fair value, since most deals are concluded just through the Bloomberg information system. Namely, other sources do not provide liquidity of the price. 31/12/ /12/2016 FROM LEVEL 1 TO LEVEL 3 FROM LEVEL 1 TO LEVEL 2 FROM LEVEL 2 TO LEVEL 1 FROM LEVEL 1 TO LEVEL 3 Financial assets held for trading Available-for-sale financial assets 0 1,562, debt securities 0 1,562, Financial assets designated at fair value through profit or loss 0 3, debt securities 0 3, FROM LEVEL 1 TO LEVEL 2 FROM LEVEL 2 TO LEVEL 1 31/12/ /12/2016 FROM LEVEL 1 TO LEVEL 3 FROM LEVEL 1 TO LEVEL 2 FROM LEVEL 2 TO LEVEL 1 FROM LEVEL 1 TO LEVEL 3 Financial assets held for trading Available-for-sale financial assets 0 1,562, debt securities 0 1,562, Financial assets designated at fair value through profit or loss 0 3, debt securities 0 3, DETERMINING THE FAIR VALUE OF FINANCIAL ASSETS CLASSIFIED IN LEVEL 2 The Group classifies into Level 2 of the fair value hierarchy those less liquid debt financial instruments that are valued on the basis of the Bloomberg BVAL exchange rate and financial instruments and derivatives that are valued on the basis of models using data derived from the market. Debt securities with determinable cash flows and without an available market price are valued at the end of each month using the discounted cash flow method. The interest rate applicable to the discounting is the sum of the interest rate on a risk-free instrument of comparable maturity, plus a margin for credit risk. For valuing interest rate derivatives, the Group uses models that take into consideration the market interest rate curve and the forward interest rate curve. The models used to value currency derivatives are based on market exchange rates for individual pairs of currencies. Derivatives on securities are valued using models that take into account market prices of underlying securities. If the market price is not available, the valuation of a derivative is based on the price of the underlying security determined using a fair value model. Whichever model is used to determine the value of derivatives, the future cash flows are discounted to the present value on the basis of risk-free yield curves. If the fair value of stocks and shares of companies cannot be determined on the basis of current prices on an active market, the Group recognises and discloses the fair value of an asset within Level 2 fair value determined on the basis of valuation models that take into consideration variables derived from publicly available market data (e.g. market or quoted prices of comparable companies). Stocks and shares of such companies are valued by the Group using a value assessment methodology that is based on three hierarchical levels approaches, methods and procedures used for value assessment. For the purpose of assessing values, the Group uses the market comparison approach, and within this approach, it uses the comparable listed company s method. The comparable listed companies method is the most appropriate method used to assess the value of assets classified into Level 2 of the fair value hierarchy. The market comparison approach is designed on the assumption that the quoted (market) prices of assets similar to those being valued provide satisfactory information and empirical proof regarding the value of the asset that is subject to the value assessment. This concept is based on the use of market value, meaning that a market category (quoted or market price) is used as the numerator, while as the denominator, various categories from financial statements are used. When using the comparable listed company s method, the basic financial categories of the assessed company are multiplied by market multiples derived from listed comparable companies. FINANCIAL REPORT AND 123

125 DETERMINING THE FAIR VALUE OF FINANCIAL ASSETS CLASSIFIED IN LEVEL 3 If the fair value of stocks and shares of companies cannot be determined either on the basis of current prices on an active market, or on the basis of valuation models that take into consideration variables derived from publicly available market data, the Group recognises and discloses the fair value of an asset within Level 3 fair value determined on the basis of valuation models that take into consideration subjective variables that are not publicly available on markets. Stocks and shares of such companies are valued by the Group using a value assessment methodology that is based on three hierarchical levels approaches, methods and procedures used for value assessment. For the purpose of assessing values, the Group uses the following three value assessment approaches: the return-based valuation approach, and within this approach the discounted cash flow model; the market comparison approach, and within this approach the comparable transactions method; and the asset-based valuation approach. The return-based valuation approach is the most commonly used approach to value assessment, and within this, the discounted cash flow model is used. According to definition, the value of an asset is the sum of all future returns to the owner of that asset, whereby each return is discounted to the present value using the discount rate that reflects the time value of money and the level of risk associated with the realisation of return. Thus, it takes into consideration the inflow of expected future returns, the distribution of these returns over time, and the risks borne by the asset owner. The bases for the prediction of expected future returns are performance projections (the income statement and the statement of financial position) for at least the next five years. Using these projections, the net cash flows are calculated for the discrete projection period. The net cash flows for the discrete projection period are then discounted at a discount rate to arrive at the present value of net cash flows generated in the discrete projection period. The weighted average cost of capital (WACC) is taken as the discount rate. The present value of expected cash flows generated after the discrete projection period (i.e. when the company enters the mature stage of operations) is determined by calculating the remaining value, usually by applying the Gordon growth model. When calculating the remaining value, the normalised net cash flow is taken into consideration (calculated on the basis of individual assumptions profitability of operations, depreciation and amortisation, gross investments, tax rate, and changes in the operating working capital), as is the expected constant long-term rate of growth of net cash flows (between 2 % and 2.5 %). USE OF UNOBSERVABLE INPUTS The assessment of the fair value of stocks and shares classified into Level 3 is made on the basis of inputs for which market information and data are not available and which are developed using the best available information and assumptions that the market participants would use in determining the price of an asset. When assessing the fair value of stocks and shares classified into Level 3, the Group uses, as the values of unobservable inputs, the projections of performance (income statement, net cash flows) made on the basis of a reasonable and potential volume of operations, but selects those inputs that are in line with the expectations of other market participants. SENSITIVITY ANALYSIS Using a sensitivity analysis, a simulation is made of the impact of changes in key parameters (market input data), such as a change in the discount rate (WACC) and a change in the expected constant long-term rate of growth of normalised net cash flows on the estimated value or fair value. The sensitivity analysis aims to present changes in fair values of stocks and shares (classified in Level 3) deriving from the range of increase or decrease in the value of key parameters. MOVEMENTS IN FINANCIAL ASSETS CLASSIFIED IN LEVEL 3 AVAILABLE-FOR-SALE FINANCIAL ASSETS TOTAL SHARES STOCKS TOTAL SHARES STOCKS Balance at 1 January ,008 5, ,797 5, Revaluation (2,966) (2,966) 0 (2,966) (2,966) 0 New investments Rounding adjustments reconciliation of balances with the statement of financial position Balance at 31 December ,090 2, ,090 2, Revaluation 1,549 1,591 (42) 1,549 1,591 (42) Rounding adjustments reconciliation with the statement of financial position 0 (1) 1 0 (1) 1 Balance at 31 December ,639 3, ,639 3, As at 31 December 2017, all of the Group s investments classified in Level 3 were attributable to the portfolio of the Bank. The 2017 changes in Level 3 of the fair value hierarchy were mainly due to the revaluation of investments. FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED AT AMORTISED COST 31/12/2017 BOOK VALUE FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Cash, and cash balances at central bank 546, , , Loans and advances to banks 42,842 42, ,842 0 Loans and advances to customers 2,366,167 2,385, ,385,055 Other financial assets 55,440 55, ,440 Held-to-maturity financial assets 88,700 96,014 85,836 10,178 0 Financial liabilities Deposits from banks 51,863 51, ,883 0 Deposits from customers 3,638,391 3,640, ,640,729 0 Loans from banks 396, , ,578 0 Loans from customers Debt securities 1,502 1, ,502 0 Subordinated liabilities Other financial liabilities 79,936 79, ,936 FINANCIAL REPORT AND 124

126 31/12/2016 BOOK VALUE FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Cash, and cash balances at central bank 783, , , Loans and advances to banks 118, , ,916 0 Loans and advances to customers 1,963,849 1,974, ,974,484 Other financial assets 42,293 42, ,293 Held-to-maturity financial assets 90,216 99, ,298 0 Financial liabilities Deposits from banks 41,107 41, ,107 0 Deposits from customers 3,626,247 3,629, ,629,199 0 Loans from banks 333, , ,524 0 Loans from customers Debt securities 14,376 14, ,738 0 Subordinated liabilities Other financial liabilities 61,074 61, ,074 31/12/2016 BOOK VALUE FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Cash, and cash balances at central bank 779, , , Loans and advances to banks 118, , ,787 0 Loans and advances to customers 1,948,737 1,959, ,959,372 Other financial assets 40,985 40, ,985 Held-to-maturity financial assets 90,216 99, ,298 0 Financial liabilities Deposits from banks 41,107 41, ,107 0 Deposits from customers 3,650,858 3,653, ,653,810 0 Loans from banks 333, , ,524 0 Loans from customers Debt securities 14,376 14, ,738 0 Subordinated liabilities Other financial liabilities 60,702 60, ,702 31/12/2017 BOOK VALUE FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 Financial assets Cash, and cash balances at central bank 541, , , Loans and advances to banks 42,806 42, ,806 0 Loans and advances to customers 2,322,531 2,341, ,341,419 Other financial assets 54,170 54, ,170 Held-to-maturity financial assets 88,700 96,014 85,836 10,178 0 Financial liabilities Deposits from banks 51,862 51, ,882 0 Deposits from customers 3,671,799 3,674, ,674,137 0 Loans from banks 378, , ,337 0 Loans from customers Debt securities 1,502 1, ,502 0 Subordinated liabilities Other financial liabilities 74,808 74, ,808 The Nova KBM Group determines fair values of financial instruments according to the following hierarchy: i. Market value, ii. Value determined using a market interest rate model, iii. Amortised cost. The tables above present fair values of individual statement of financial position items. The fair value of held-to-maturity financial assets has been, where possible, determined on the basis of market prices of financial instruments. The fair value of items measured at amortised or acquisition cost is determined on the basis of a model that takes into account market interest rates. The fair value is calculated for items with a fixed interest rate and residual maturity of over one year. The fair value of each item is established on the basis of discounted cash flows, taking into consideration the market interest rates prevailing at the reporting date. The same amount of credit risk is taken into account to determine the fair value of an asset as is used to determine its amortised or book value. As for other items, the Parent Bank considers there is no material difference between their book and fair values. FINANCIAL REPORT AND 125

127 6/ REPORTING BY OPERATING AND GEOGRAPHICAL SEGMENTS 6.1 / ANALYSIS OF RESULTS BY OPERATING SEGMENTS BANKING LEASING FUND MANAGEMENT REAL ESTATE ACTIVITY OTHER TOTAL INTER-SEGMENT RELATIONSHIPS 1/1 31/12/2017 RELATIONSHIPS WITH THIRD PARTIES A. Net income/expenses 131,442 4,957 5,834 (35) (1,060) 141,138 (1,784) 142,922 Interest income 88,747 5, ,453 1,509 92,944 Interest expenses (10,163) (2,293) 0 0 (1,283) (13,739) (3,364) (10,375) Net interest income 78,584 3, (1,069) 80,714 (1,855) 82,569 Dividend income 1, , ,926 Fee and commission income 69,738 1,722 6, , ,663 Fee and commission expenses (29,560) (1,484) (1,638) (2) (2) (32,686) (479) (32,207) Net fee and commission income 40, ,017 (2) (2) 45,429 (27) 45,456 Realised gains/losses on financial assets and liabilities not measured at fair value through profit or loss 7,227 (70) , ,963 Net gains on financial assets and liabilities held for trading 3, , ,017 Gains on financial assets and liabilities designated at fair value through profit or loss Net gains/losses from foreign exchange rate differences (2,231) (1,541) 0 (1,541) Net gains/losses on derecognition of assets (749) (915) (1,251) 1 (1,252) Other net operating income and loss 1,686 1,041 (28) (45) 394 3, ,954 B. Other items by segments (95,848) (3,223) (3,651) (378) (4,903) (108,003) (3,870) (104,133) Administration costs (100,477) (4,319) (2,525) (404) (442) (108,167) (126) (108,041) Depreciation and amortisation (8,384) (1,500) (1,113) (6) 0 (11,003) (10) (10,993) Provisions 570 1,314 (13) ,903 (638) 2,541 Impairments 12,146 1, (4,461) 8,967 (3,321) 12,288 Share of profits of associates and joint ventures accounted for using the equity method Net profit from non-current assets and disposal groups classified as held for sale C. Profit or loss PROFIT/LOSS FROM CONTINUING OPERATIONS 35,594 1,734 2,183 (413) (5,963) 33,135 (5,654) 38,789 Income tax on continuing operations 10,219 (187) (415) 0 (109) 9,508 (25) 9,533 NET PROFIT/LOSS FROM CONTINUING OPERATIONS 45,813 1,547 1,768 (413) (6,072) 42,643 (5,679) 48,322 Net profit after tax from discontinued operations NET PROFIT/LOSS FOR THE REPORTING PERIOD 45,813 1,547 1,768 (413) (6,072) 42,643 (5,679) 48,322 D. Segment assets and liabilities Total assets 4,913, ,497 11, ,105 5,317, ,223 4,929,829 non-current assets held for sale and discontinued operations 8, , ,104 - investments in the equity of subsidiaries, associates and joint ventures accounted for using the equity method 85, ,762 85,762 0 Liabilities (excluding equity) by segments 4,230, , ,066 4,567, ,422 4,232,415 Total equity 683,057 61,489 10,630 0 (5,961) 749,215 51, ,414 Increase in property, plant and equipment and intangible assets 8,696 5, , ,520 The column Inter-segment relationships includes the following items: intra-group income and expenses, income from dividends from subsidiaries, additional impairments/reversal of impairments as a result of changing over to a harmonised customer classification across the Group, impairments of investments and loans given to subsidiaries, intra-group assets and liabilities, investments in subsidiaries and the proportional share of equity of subsidiaries, and other consolidation entries. FINANCIAL REPORT AND 126

128 BANKING LEASING FUND MANAGEMENT REAL ESTATE ACTIVITY OTHER TOTAL INTER-SEGMENT RELATIONSHIPS 01/01-31/12/2016 RELATIONSHIPS WITH THIRD PARTIES A. Net income/expenses 146,422 (937) 4, , ,786 Interest income 104,212 1, , ,787 Interest expenses (13,484) (690) 0 (58) (3) (14,235) (748) (13,487) Net interest income 90, (49) ,913 (387) 92,300 Dividend income Fee and commission income 68, , , ,967 Fee and commission expenses (30,485) (37) (1,190) (9) (11) (31,732) (196) (31,536) Net fee and commission income 37,885 (35) 4,602 (9) (11) 42, ,431 Realised gains/losses on financial assets and liabilities not measured at fair value through profit or loss 10,120 (1,059) (340) 8, ,593 Net gains on financial assets and liabilities held for trading (1) 127 Gains on financial assets and liabilities designated at fair value through profit or loss 5, , ,491 Net gains/losses from foreign exchange rate differences (1) 0 (2) Net gains on derecognition of assets (3,040) 28 (3) 24 0 (2,991) 0 (2,991) Other net operating income and loss 4,118 (646) (35) 495 (25) 3, ,731 B. Other items by segments (117,354) 1,101 (3,512) (427) 349 (119,843) 1,077 (120,920) Administration costs (92,067) (2,791) (2,279) (419) (351) (97,907) (221) (97,686) Depreciation and amortisation (10,409) (352) (1,106) (5) 0 (11,872) (9) (11,863) Provisions 2,022 2,329 (12) (3) 454 4, ,744 Impairments (16,487) 1,915 (115) (14,441) 804 (15,245) Share of profits of associates and joint ventures accounted for using the equity method Net profit from non-current assets and disposal groups classified as held for sale (870) (870) 0 (870) C. Profit or loss PROFIT/LOSS FROM CONTINUING OPERATIONS 29, , ,074 1,208 29,866 Income tax on continuing operations 3,936 (14) (228) 0 (104) 3,590 (215) 3,805 NET PROFIT/LOSS FROM CONTINUING OPERATIONS 33, , , ,671 Net loss after tax from discontinued operations (3,196) (3,196) 0 (3,196) NET PROFIT/LOSS FOR THE REPORTING PERIOD 29, , , ,475 D. Segment assets and liabilities Total assets 4,831,767 42,531 11,725 4,551 17,928 4,908,502 85,052 4,823,450 non-current assets held for sale and discontinued operations 1, , ,646 long-term investments in the equity of associates and joint ventures accounted for using the equity method 55, ,476 55,476 0 Liabilities (excluding equity) by segments 4,161,186 18, ,782 4,198,810 58,721 4,140,089 Total equity 670,581 23,627 10,943 4, ,692 26, ,361 Increase in property, plant and equipment and intangible assets 6, , ,894 The column Inter-segment relationships includes the following items: intra-group income and expenses, income from dividends from subsidiaries, additional impairments/reversal of impairments as a result of changing over to a harmonised customer classification across the Nova KBM Group, impairments of investments and loans given to subsidiaries, the effects of valuation of the associated company using the equity method, intra-group assets and liabilities, investments in subsidiaries and the proportional share of equity of subsidiaries, and other consolidation entries. FINANCIAL REPORT AND 127

129 6.2 / ANALYSIS OF RESULTS BY GEOGRAPHICAL SEGMENTS BUSINESS ACTIVITY/ NAME OF THE COMPANY TURNOVER NON-CURRENT ASSETS NUMBER OF EMPLOYEES PROFIT OR LOSS BEFORE TAX INCOME TAX 2017 PUBLIC SUBSIDIES RECEIVED Slovenia total 142, ,154 1,541 42,846 (9,615) 0 Banking total 131, ,012 1,396 38,594 (10,219) 0 Nova KBM d.d. 131, ,012 1,396 38,594 (10,219) 0 Leasing total 5,313 18, , KBM Leasing d.o.o. in liquidation (38) Gorica Leasing d.o.o. in liquidation Summit Leasing d.o.o. 4,563 17, Fund management 5,834 4, , KBM Infond d.o.o. 5,834 4, , Real estate total (35) 0 7 (413) 0 0 KBM Invest d.o.o. (35) 0 7 (413) 0 0 Other M-Pay d.o.o Eastern Europe total (1,431) 2 2 (6,711) Banking total (1,075) 0 0 (5,975) KBM ASCO d.o.o. (1,075) 0 0 (5,975) Leasing total (356) 2 2 (736) 0 0 KBM Leasing HR d.o.o. in liquidation (356) 2 2 (736) 0 0 Total 141, ,156 1,543 36,135 (9,508) 0 In accordance with the recommendation provided by the EBA (European Banking Authority under question ID 2014_1045, the category Turnover comprises net banking income before consolidation adjustments and elimination of transactions with subsidiaries. Included in turnover are the following items: net interest income, net fee and commission income, dividend income, realised gains or losses on financial assets and liabilities not measured at fair value through profit or loss, net gains or losses on financial assets and liabilities held of trading, gains or losses on financial assets and liabilities designated at fair value through profit or loss, net foreign exchange rate differences, net gains or losses on derecognition of assets, other net operating income or loss, net profit or loss from investments in the equity of subsidiaries, associates and joint ventures, and net profit or loss from non-current assets and disposal groups classified as held for sale. The item Non-current assets comprises property, plant and equipment, intangible assets, investment property, and investments in the equity of subsidiaries, associates and joint ventures. The number of employees is expressed in full-time equivalent terms. FINANCIAL REPORT AND 128

130 BUSINESS ACTIVITY/ NAME OF THE COMPANY TURNOVER NON-CURRENT ASSETS NUMBER OF EMPLOYEES PROFIT OR LOSS BEFORE TAX INCOME TAX 2016 PUBLIC SUBSIDIES RECEIVED Slovenia total 152, ,409 1,275 32,627 3, Banking total 146, ,794 1,229 29,068 3, Nova KBM d.d. 146, ,794 1,229 29,068 3, Leasing total 1,609 1, ,173 (14) 0 KBM Leasing d.o.o. in liquidation 1, ,720 (14) 0 Gorica Leasing d.o.o. in liquidation (547) 0 0 Fund management 4,854 5, ,342 (228) 0 KBM Infond d.o.o. 4,854 5, ,342 (228) 0 Real estate total 361 6, (97) 0 KBM Invest d.o.o KBM Asco d.o.o. (100) 5,793 0 (1) (97) 0 Other (2) 0 M-PAY d.o.o (2) 0 Western Europe total (5) 0 Other activities total (5) 0 Adria Abwicklungs GmbH in Liqu (5) 0 Eastern Europe total (2,546) 68 2 (2,009) 0 0 Banking total Leasing total (2,546) 68 2 (2,009) 0 0 KBM Leasing Hrvatska d.o.o. in liquidation (2,546) 68 2 (2,009) 0 0 Total 150, ,477 1,277 31,074 3, / RECONCILIATION OF OPERATING SEGMENTS INCOME Segment income turnover 141, ,504 Elimination of inter-segment items (2,522) (1,136) Consolidation adjustments 4, Consolidated segment income 142, ,916 ASSETS Segment assets 5,317,052 4,908,502 Consolidation adjustments (69,305) (9,345) Elimination of inter-segment items (317,918) (75,707) Consolidated segment assets 4,929,829 4,823,450 PROFIT FROM CONTINUING OPERATIONS Profit from continuing operations 36,135 31,074 Consolidation adjustments 5,654 (1,208) Consolidated profit from continuing operations 41,789 29,866 LIABILITIES Segment liabilities 4,564,837 4,198,810 Consolidation adjustments (17,505) 16,986 Elimination of inter-segment items (317,917) (75,707) Consolidated segment liabilities 4,229,415 4,140,089 FINANCIAL REPORT AND 129

131 7/ STRUCTURAL CHANGES IN THE 8/ ACQUISITION OF SUMMIT LEASING SLOVENIJA 7.1 / SUMMARY WINDING UP OF KBM INVEST D.O.O. WITHOUT LIQUIDATION On 22 May 2017, Nova KBM as the sole shareholder of KBM Invest, took a decision on launching the procedures of summary winding up of KBM Invest d.o.o. without liquidation. In accordance with the instructions set out in the decision, activities were started to regulate the relations with the company s creditors and employees that were a pre-condition for a summary dissolution procedure. As at 31 August 2017, the summary winding up procedure of the company without liquidation was completed, and on 1 September 2017, the Parent Bank, as a legal successor, acquired the assets of KBM Invest d.o.o. totalling 4,000 thousand. When doing so, the Parent Bank recognised the loss amounting to 290 thousand as a difference between the acquired assets and the value of the investment made in KBM Invest d.o.o. As at 13 October 2017, the company was deleted from the court register. 7.2 / ACTIVE SALE OF KBM LEASING HRVATSKA In May 2017, based on its management decision, the Parent Bank started actions to sell KBM Leasing Hrvatska d.o.o. in liquidation, which is 100-% owned by the Group (of which % are directly owned by the Parent Bank). The subject of the sale agreement (SPA) is the ownership interest in KBM Leasing Hrvatska d.o.o. in liquidation, including the claims of the Parent Bank. In spite of being under an active selling process and receiving non-binding offers, KBM Leasing Hrvatska in liquidation is fully consolidated in the consolidated financial statements due to immateriality (see the provisions in 3.1), i.e. without taking into account the IFRS 5 standard, according to which the assets and liabilities of the company should be reclassified as non-current assets and liabilities related to noncurrent assets held for sale. In the consolidated financial statements as at 31 December 2017, the assets of KBM Leasing Hrvatska in liquidation are already impaired, i.e. up to the sale price less the cost of sale, based on the amount of compensation (purchase price) that is already known and will be received upon the derecognition of the equity investment. At the Group level, the effect is negative, amounting to 3,400 thousand. Other transactions (call on the guarantee) that will occur at the end of the sale procedure, have also been properly taken into account. On 3 March 2016, Biser Bidco S.à r.l. entered into a sales In accordance with the legislation of the Republic contract (hereinafter: SPA) with Sumitomo Corporation of Slovenia, SLS is established as a limited liability and Sumitomo Corporation Europe Limited to purchase company, with its registered office in Flajšmanova ulica a 100 % stake in SLS capital. 3, Ljubljana. The company is registered as a leasing company offering a wide range of financial products On 10 March 2017, Biser Bidco S.à r.l. and Nova KBM d.d. (finance and operating lease, car loans, and consumer concluded a transfer contract, pursuant to which all the financing) on the Slovenian market. rights and obligations of Biser Bidco S.à r.l. arising from SPA were transferred to Nova KBM d.d. By acquisition of SLS, Nova KBM pursues its strategic goal of becoming the leading universal bank in Slovenia, After receiving all necessary regulatory approvals and both in terms of its competitive position and its market by fulfilling the conditions of the sales contract, the share, while providing its customers with a full range of acquisition of the 100 % stake (and voting rights) of SLS financial services. ended on 18 September 2017, and the ownership title for the 100 % stake and voting rights was transferred The Table below presents the compensation paid for to Nova KBM. SLS, together with the amounts of assets acquired and liabilities assumed, which were recognised as at the date of the business combination: PURCHASE PRICE ARRANGEMENT (PPA) 30/09/2017 Transferred compensation at fair value Cash 44,417 Total transferred compensation at fair value 44,417 Acquired identifiable assets 334,133 Assumed liabilities (297,015) Net acquired identifiable assets 37,118 Proportion for non-controlling interests 0 Goodwill 7,299 Total acquired compensation at fair value 44,417 The sale of KBM Leasing Hrvatska in liquidation was completed on 16 January FINANCIAL REPORT AND 130

132 In accordance with the sales contract terms and conditions, Nova KBM committed to refinance the outstanding debt of SLS upon completion of the sale procedure, in addition to pay the compensation (purchase price) for the acquisition of a 100 % stake in SLS. The refinancing arrangement is a transaction that is separated from the business combination transaction. Amounts recognised on the day of acquisition for significant identifiable assets acquired and liabilities assumed: Gross book values and fair values of important types of receivables, including estimated cash flows that are not expected to be recovered are shown in the Table below: FAIR VALUE GROSS LOANS ESTIMATED CASH FLOWS THAT ARE NOT EXPECTED TO BE RECOVERED 30/09/2017 Cash, cash balances at central banks and demand deposits at banks 3,844 Loans 295,306 Loans 295, ,383 6,077 deposits and loans to customers 294, ,111 5,573 other financial assets 768 1, deposits and loans to customers 294,538 other financial assets 768 Property, plant and equipment 18,859 Intangible assets 154 Current income tax assets 1,754 current tax assets 625 deferred tax assets 1,129 Other assets 14,216 TOTAL ASSETS 334,133 Financial liabilities measured at amortised cost 285,024 loans from banks and central banks 20,270 loans from customers 258,041 other financial liabilities 6,713 Provisions 276 Current income tax liabilities 863 current tax liabilities 863 Other liabilities 10,852 TOTAL LIABILITIES 297,015 On the date of acquisition, commitments were not recognised. The acquisition of SLS contributed to the recognition of goodwill in the amount of 7,299 thousand, which is recognised in the consolidated statement of financial position under the item Intangible assets. Recognition of goodwill results from expected synergy effects due to combined business (transfer of knowledge and experience, increased operational efficiency), strengthening of market share and competitive position that will result from a high-quality and diversified range of the Group s financial services. These expected benefits do not meet the criteria to be recognised as an identifiable intangible asset; therefore, they are recognised as goodwill. The costs related to business combination with SLS amounted to 2,684 thousand and are recognised in the consolidated income statement as expenses under item Administration costs. SLS profit or loss is included in the consolidated income statement of the Nova KBM Group from the date of acquisition to the reporting date (31 December 2017) and amounted to 537 thousand. In case the acquisition of SLS was made at the beginning of 2017, SLS revenues would be included in the consolidated income statement of the Nova KBM Group and amount to 31,041 thousand. If SLS was included in the consolidated financial statements from the beginning of the financial year 2017, the Nova KBM Group s profit or loss would amount to 56,754 thousand. Results of operations were calculated upon the assumption that Nova KBM has financed SLS from the assumed control date (i.e. 1 January 2017), taking into account the estimated SLS s income tax (due to the financial year that does not correspond to the calendar year, SLS calculates only an income tax estimate). SLS revenues are included in the consolidated income statement of the Nova KBM Group from the date of acquisition to the reporting date (31 December 2017) and amounted to 7,936 thousand. FINANCIAL REPORT AND 131

133 NOTES TO THE INCOME STATEMENT ITEMS 132

134 9/ INTEREST INCOME AND INTEREST EXPENSES 9.1 / ANALYSIS OF INTEREST BY TYPE INCOME EXPENSES INCOME EXPENSES INCOME EXPENSES INCOME EXPENSES Regular interest 89,316 10,375 99,494 13,487 85,194 10,163 97,990 13,484 Default interest 3, , , ,222 0 Total 92,944 10, ,787 13,487 88,747 10, ,212 13,484 Net interest 82,569 92,300 78,584 90,728 income 9.2 / ANALYSIS OF INTEREST BY MARKET SEGMENTS INCOME EXPENSES INCOME EXPENSES INCOME EXPENSES INCOME EXPENSES Non-financial companies 23, , , , Government 15, , , , Banks 2,563 5,311 2,520 4,676 2,563 5,099 2,548 4,676 Other financial organisations 1, ,599 1,003 3, ,431 1,004 Households 47,435 3,710 42,291 6,892 44,169 3,710 42,190 6,892 Non-residents 1, , , , Non-profit institutions serving households Total 92,944 10, ,787 13,487 88,747 10, ,212 13,484 Net interest 82,569 92,300 78,584 90,728 income FINANCIAL REPORT AND 133

135 9.3 / ANALYSIS OF INTEREST INCOME AND INTEREST EXPENSES BY TYPE OF ASSETS AND LIABILITIES CURRENT NON-CURRENT CURRENT NON-CURRENT CURRENT NON-CURRENT CURRENT NON-CURRENT Interest income Financial assets held for trading Financial assets designated at fair value through profit or loss Available-for-sale financial assets 16, ,825 3,601 16, ,661 3,601 Loans and deposits (including finance leases and other financial assets) 11,369 62,322 14,963 58,881 10,648 58,900 14,276 58,127 Held-to-maturity financial assets 0 2, , , ,239 Other assets Total by maturity 28,150 64,794 40,867 64,920 27,375 61,372 40,015 64,197 Total 92, ,787 88, ,212 Interest expenses Financial liabilities held for trading Financial liabilities measured at amortised cost 1,151 6,320 1,004 10, ,273 1,001 10,597 Other liabilities 2, , , ,867 0 Total by maturity 3,976 6,399 2,871 10,616 3,811 6,352 2,868 10,616 Total 10,375 13,487 10,163 13,484 Net interest income 82,569 92,300 78,584 90, / AVERAGE INTEREST RATES Average interest rate on assets (%) Average interest rate on liabilities (%) FINANCIAL REPORT AND 134

136 10/ 11/ DIVIDEND INCOME FEE AND COMMISSION INCOME AND FEE AND COMMISSION EXPENSES Dividends from financial assets held for trading stocks and shares of other issuers Dividends from financial assets designated at fair value through profit or loss stocks and shares of other issuers Dividends from available-for-sale financial assets 1, , stocks and shares of other issuers 1, , Total 1, , / ANALYSIS OF FEES AND COMMISSIONS BY TYPE Fee and commission income 77,663 73,967 69,738 68,370 Guarantees 2,340 2,639 2,340 2,640 Services provided to other companies in the Group Local payment transactions 39,337 39,648 39,339 39,643 Transactions on current accounts 12,084 11,328 12,084 11,329 Payment card operations 6,806 6,932 6,806 6,932 Cross-border payment transactions 1,733 1,579 1,733 1,580 Brokerage and agency services 1, Transactions in securities for customers 2,246 1,457 2,246 1,458 Lending operations 4,980 3,366 3,634 3,364 Safekeeping of valuables and other items Other services 6,813 6, Fee and commission expenses 32,207 31,536 29,560 30,485 Local banking services 981 3, ,953 Banking services abroad 3,425 2,338 3,420 2,330 Brokerage and agency services 3, , Stock exchange transactions and other transactions in securities Payment transactions 23,571 22,907 23,138 22,902 Services provided to banks in the Group Other services Net fee and commission income 45,456 42,431 40,178 37,885 FINANCIAL REPORT AND 135

137 11.2 / ANALYSIS OF FEES AND COMMISSIONS BY MARKET SEGMENTS Fee and commission income 77,663 73,967 69,738 68,370 Non-financial companies 31,969 33,156 31,971 33,171 Government Banks 5,272 4,509 5,272 4,510 Other financial organisations 7,786 6,845 1,508 1,271 Households 30,357 27,786 28,742 27,786 Non-residents 1,681 1,039 1,647 1,000 Non-profit institutions serving households Fee and commission expenses 32,207 31,536 29,560 30,485 Net fee and commission income 45,456 42,431 40,178 37, / FEE AND COMMISSION INCOME AND FEE AND COMMISSION EXPENSES RELATING TO CUSTOMERS FROM BROKERAGE BUSINESS Fee and commission income related to investment services and activities and ancillary investment services and activities for customers ,554 6,542 1, Receipt, transmission and execution of orders 2, , Management of financial instruments 6,486 5, Investment advice Administration of book-entry securities accounts of customers Fee and commission expenses related to investment services and activities and ancillary investment services and activities for customers Fees and commissions relating to the Central Securities Clearing Corporation and similar organisations Fees and commissions relating to the stock exchange and similar organisations / NET REALISED GAINS ON FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS Available-for-sale financial assets (Note 28.3) Loans and advances (including finance leases) Financial liabilities measured at amortised cost Other financial assets and liabilities REALISED GAINS REALISED LOSSES NET REALISED GAINS REALISED GAINS REALISED LOSSES NET REALISED GAINS 2, ,773 5, ,659 9,752 3,594 6,158 5,683 1,950 3, Total 12,221 4,258 7,963 11,112 2,519 8, Available-for-sale financial assets (Note 28.3) Loans and advances (including finance leases) Financial liabilities measured at amortised cost Other financial assets and liabilities REALISED GAINS REALISED LOSSES NET REALISED GAINS REALISED GAINS REALISED LOSSES NET REALISED GAINS 1, , ,786 9,602 3,375 6,227 5, , Total 11,265 4,038 7,227 11,240 1,120 10,120 FINANCIAL REPORT AND 136

138 13/ NET GAINS ON FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING 14/ NET GAINS ON FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS GAINS LOSSES NET GAINS GAINS LOSSES NET GAINS/ LOSSES Trading in equity instruments Trading in debt securities (32) AND Financial assets designated at fair value through profit or loss GAINS LOSSES NET GAINS GAINS LOSSES NET GAINS 4,149 3, , ,491 Total 4,149 3, , ,491 Trading in foreign exchange (purchase/sale) 2, ,304 2, ,297 Trading in derivatives 3,952 1,265 2,687 1,772 2,973 (1,201) futures/forwards 2, ,078 1,305 1,406 (101) swaps other derivatives ,371 (1,144) Total 6,064 2,047 4,017 4,081 3, Gains and losses on financial assets designated at fair value through profit or loss are attributable to the realised gains and valuation of the Group s shares and stocks for which joint-selling agreements have been made by the Group. In 2017, the Bank has realised profits in the amount of 830 thousand from disposal of equity instruments (Petrol, Cinkarna Celje), while in 2016, the Bank recognised positive revaluation gain in the amount of 5,491 thousand GAINS LOSSES NET GAINS GAINS LOSSES NET GAINS/ LOSSES Trading in debt securities (33) Trading in foreign exchange (purchase/sale) 2, ,304 2, ,297 Trading in derivatives 3,952 1,265 2,687 1,772 2,973 (1,201) 15/ NET GAINS/LOSSES FROM FOREIGN EXCHANGE RATE DIFFERENCES futures/forwards 2, ,078 1,305 1,406 (101) swaps other derivatives ,371 (1,144) Total 6,038 2,047 3,991 4,011 3, Foreign exchange gains 20,484 28,077 19,498 27,649 The Group uses derivatives (futures/forwards) to economically hedge its exposure to foreign exchange risk. The effects of derivatives are linked to the effects arising from foreign exchange rate differences (Note 15). Foreign exchange losses 22,025 27,766 21,729 27,385 Total (1,541) 311 (2,231) 264 FINANCIAL REPORT AND 137

139 16/ NET LOSSES ON DERECOGNITION OF ASSETS 17/ OTHER NET OPERATING INCOME Derecognition of items of property, plant and equipment GAINS LOSSES NET GAINS/ LOSSES GAINS LOSSES NET GAINS/ LOSSES Derecognition of intangible assets 0 1,005 (1,005) 0 3,047 (3,047) Derecognition of investment property Derecognition of other assets other than those held for sale 797 1,744 (947) Total 1,697 2,949 (1,252) 363 3,354 (2,991) Income 29,566 17,418 7,824 10,641 Income from non-banking services 224 1, Income from investment property leased out under operating leases 4,638 3,616 2,928 3,141 Other operating income 24,704 12,772 4,896 7,500 Expenses 26,612 13,687 6,138 6,523 Taxes Contributions Other charges Membership fees and similar fees Derecognition of items of property, plant and equipment GAINS LOSSES NET GAINS/ LOSSES GAINS LOSSES NET GAINS/ LOSSES (469) Expenses for investment property leased out under operating leases Other operating expenses 25,134 12,125 4,793 5,309 Other net operating income 2,954 3,731 1,686 4,118 Derecognition of intangible assets 0 1,005 (1,005) 0 2,572 (2,572) Derecognition of investment property Derecognition of other assets other than those held for sale Total 282 1,031 (749) 119 3,159 (3,040) The largest proportion of other operating income totalling 16,975 thousand and other operating expenses totalling 16,830 thousand generated by the Group in 2017 related to the sale of vehicles on consignment (Summit Leasing). The Group s lease income (operating lease) amounted to 680 thousand. Other operating income/expenses item includes income ( 2,226 thousand) and expenses ( 1,141 thousand) relating to the sale of property. The largest proportion of other operating income totalling 5,178 thousand and other operating expenses totalling 5,427 thousand generated by the Group in 2016 related to the sale of real estate. FINANCIAL REPORT AND 138

140 18/ ADMINISTRATION COSTS Staff costs 61,311 51,493 57,788 49,264 Gross salaries 46,511 38,250 43,911 36,565 Social security contributions 3,261 2,820 2,937 2,660 Pension insurance contributions 3,699 3,353 3,583 3,244 Transportation allowances 1,140 1,067 1,086 1,033 Meal allowances 1,884 1,811 1,792 1,750 Employee bonuses Severance benefits and early retirement payments Supplementary pension insurance premiums 1, , Pay for annual leave 3,004 2,382 2,863 2,302 Solidarity aid and long-service bonuses Other staff costs under employment contracts General and administrative costs 46,730 46,193 42,689 42,803 Costs of materials 864 1, Costs of energy 1,205 1,170 1,123 1,134 Costs of professional literature Other costs of materials Costs of renting business premises 4,043 3,724 3,979 3,716 Postal costs 2,268 2,958 2,240 2,934 Transport costs 1,799 1,836 1,799 1,836 Information system costs 2,527 1,860 2,527 1,864 Costs of other services 5,779 5,044 5,020 4,538 Business travel expenses Maintenance costs of fixed assets 8,551 8,544 7,957 8,320 Advertising costs 3,474 4,047 3,198 3,844 Entertainment costs Costs related to consulting, auditing, accounting and other services 13,882 12,862 11,992 10,746 School fees, scholarships and other training costs Cost of insurance 1,138 1,277 1,084 1,237 Other administrative costs Total administration costs 108,041 97, ,477 92,067 In order to properly present financial information to investors or the regulator, in 2017, the Bank recognised restructuring costs (extraordinary costs related to the reorganisation of the Bank and the Group) in the amount of 9,723 thousand ( 11,234 thousand in 2016). At the Group level, these expenses amounted in 2017 to 13,699 thousand ( 14,724 thousand in 2016). The Nova KBM Group recognises restructuring costs on separate analytical accounts of the general ledger, and for disclosure purposes within Administration costs. REMUNERATION OF AUDITORS Audit of the annual report Other audit services Total The Group did not order any other non-audit services in 2017 and / DEPRECIATION AND AMORTISATION Depreciation of property, plant and equipment (Note 33) ,369 4,829 3,876 4,431 Amortisation of intangible assets (Note 35) 5,624 7,034 4,508 5,978 Total 10,993 11,863 8,384 10,409 20/ PROVISIONS Provisions for pensions and similar benefits (Note 42) Provisions for restructuring costs (Note 42) 3,407 3,490 3,411 3,490 Provisions for off-balance-sheet liabilities (Note 42) (5,227) (5,195) (5,963) (5,241) Provisions for tax claims and other pending legal issues (Note 42) 1,220 (1,963) 1,694 (889) Other provisions (Note 42) (2,227) (1,261) 0 0 Total (2,541) (4,744) (570) (2,022) FINANCIAL REPORT AND 139

141 21/ IMPAIRMENTS 21.1 / IMPAIRMENT OF FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS Available-for-sale financial assets 0 3, ,395 Financial assets measured at amortised cost (24,612) 6,829 (18,883) 8,813 demand deposits at banks (28) 29 (28) 29 loans and advances to banks (Note 29.1) loans and advances to customers (Note 30.1) (26,098) 5,989 (19,741) 8,309 other financial assets (Note 31.1) 1, Held-to-maturity financial assets measured at amortised cost Total impairments of financial assets not measured at fair value through profit or loss The increased volume of repayments due to positive economic conditions, active management (sale) of distressed receivables and improved credit quality 21.2 / IMPAIRMENT OF OTHER ASSETS (1,657) (24,612) 10,224 (18,883) 10,551 of the lending portfolio had a positive impact on the extent of impairments both at the level of the Parent Bank and the Group Property, plant and equipment 0 5, ,404 Investment property (Note 34) 2, (4) Investments in the equity of subsidiaries, associates and joint ventures 0 0 4,990 (436) 22/ SHARE OF PROFITS OF SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES 23/ INCOME TAX ON CONTINUING OPERATIONS Income tax on continuing operations (714) Deferred tax relating to continuing operations (Note 37.3) Moja naložba d.d KBM Infond d.o.o KBM Invest liquidation 0 0 (290) 0 Total In 2017, the Parent Bank received a subsidiary s dividend from KBM Infond d.o.o. totalling 515 thousand ( 457 thousand in 2016). 10,247 3,581 10,219 3,363 Total 9,533 3,805 10,219 3,936 Other assets (Note 38.1) 9,969 (530) 1, Total impairments of other assets 12,324 5,021 6,737 5,936 Impairment of the equity investment in the subsidiary KBM Asco amounting to 4,990 thousand, which was recognised in financial statements in 2017, is reflected in the Parent Bank s financial statements in the equity of subsidiaries item, and in the consolidated financial statements as a decrease in the value of the company s assets. FINANCIAL REPORT AND 140

142 23.1 / RECONCILIATION OF EFFECTIVE TAX RATE / BASIC EARNINGS PER SHARE Profit before tax 38,789 29,866 35,594 29,068 Income tax calculated using the official tax rate of 17 % 7,369 5,077 6,763 4,942 Non-taxable income (1,525) (1,545) (733) (766) Non-allowable tax expenses 3, , Effects of non-recognised deferred taxes in respect of investment impairments for a company in the Nova KBM Group (5,082) (10,872) (5,082) (10,872) Tax reliefs 1,612 (40) 1,587 0 Effects of an increase in tax rate 0 (276) 0 (276) Effects of non-recognised deferred taxes in respect of the current tax loss 0 3, ,953 Taxes in respect of previous years 0 (582) 0 (582) Net profit for the financial year ( 000) 47,835 30,167 45,813 33,004 Weighted average number of ordinary no-par-value shares 10,000,000 10,000,000 10,000,000 10,000,000 Basic earnings per share ( ) Basic earnings per share is calculated as the ratio between the net profit/loss reported for the period and the weighted average number of ordinary no-parvalue shares. Other adjustments (11,730) 446 (11,171) (107) Total income taxes (9,533) (3,805) (10,219) (3,936) Most of the Parent Bank s non-taxable income relates to dividend income and income that is similar to dividends. Nova KBM excluded from its 2017 tax base the dividend income and income that is similar to dividends, totalling 3,824 thousand ( 1,250 thousand in 2016). The effect of the unrecognised deferred tax assets recorded by the Parent Bank for impairment of Group companies investments relates to the recognition of expenses from impairment of the equity investment, which ceased its operations in As a rule, the Bank does not establish deferred tax assets for impairment of equity investments of Group companies. The largest item among other adjustments is the amount of adjustments made in respect of deferred tax assets. In 2017, the Parent Bank determined its tax base, 50 % of which was used to cover the tax loss carried forward from previous years, while the remaining part was subject to tax relief. Significant portion of tax relief was attributable to the investment allowance and the tax relief in respect of supplementary pension saving. In 2017, the Bank used the amount of 4,177 thousand (in 2016: zero euros; the Bank recorded tax loss) to cover part of its tax loss carried forward from previous years. FINANCIAL REPORT AND 141

143 NOTES TO THE STATEMENT OF FINANCIAL POSITION ITEMS 142

144 25/ CASH, CASH BALANCES AT CENTRAL BANKS AND DEMAND DEPOSITS AT BANKS 26/ FINANCIAL ASSETS HELD FOR TRADING 31/12/ /12/ /12/ /12/2016 Cash in hand 85,812 75,758 85,812 75,758 Cash balances at central bank 419, , , ,650 Demand deposits at banks 41,065 41,506 35,605 37,061 Total 546, , , , / CASH AND CASH EQUIVALENTS Cash, cash balances at the central bank and demand deposits at banks 31/12/ /12/ /12/ /12/ , , , ,469 Loans and advances to banks 17,526 54,920 17,332 54,791 Total 564, , , ,260 31/12/ /12/ /12/ /12/2016 Derivatives Equity instruments 1, equity instruments issued by other issuers 1, Debt securities sovereign bonds Total 1,524 1, Unquoted 1,524 1, No assets held in the Group s portfolio of financial assets held for trading have been pledged as collateral / MOVEMENTS IN FINANCIAL ASSETS HELD FOR TRADING None of the instruments included in the portfolio of financial assets held for trading have the characteristics to qualify as subordinated debt Balance at 1 January 1,119 1, Increase during the year , ,774 assets acquired through a business combination 0 2, ,649 acquisition , ,994 change in fair value (recovery and reversal of impairment) other (deferred interest, realised gains) Decrease during the year 36 39, ,658 disposal (sale and redemption) 4 39, ,658 change in fair value (impairment and reversal of recovery) other (deferred interest, realised losses) Balance at 31 December 1,524 1, FINANCIAL REPORT AND 143

145 27/ FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS 31/12/ /12/ /12/ /12/2016 Equity instruments 13,973 19,140 13,973 19,140 Debt securities 3,264 67,592 3,264 67,592 Total 17,237 86,732 17,237 86,732 Quoted 17,237 86,732 17,237 86,732 Total 17,237 86,732 17,237 86,732 The portfolio of financial assets designated at fair value through profit or loss includes Petrol shares for which joint-selling agreements have been made by the Group. The Group s portfolio of debt securities includes sovereign bonds in the amount of 3,264 thousand. As at 31 December 2017, the Group had assets of the portfolio of financial instruments designated at fair value in profit and loss worth 1,182 thousand in total pledged as collateral with the pool of collateral. The Group did not receive any financial assets of this portfolio from the realisation of collateral provided as security for loans. None of the instruments included in the portfolio of financial assets designated at fair value through profit or loss have the characteristics to qualify as subordinated debt / MOVEMENTS IN FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS Balance at 1 January 86,732 13,421 86,732 13,421 Increase during the year 5, ,840 5, ,840 assets acquired through a business combination 0 84, ,185 acquisition 0 15, ,595 change in fair value (recovery and reversal of impairment) 2,042 5,737 2,042 5,737 deferred interest other 3, ,160 0 Decrease during the year 74,848 32,529 74,848 32,529 disposal (sale and redemption) 69,648 32,059 69,648 32,059 change in fair value (impairment and reversal of recovery) 4, , deferred interest interest received Balance at 31 December 17,237 86,732 17,237 86,732 FINANCIAL REPORT AND 144

146 28/ AVAILABLE-FOR-SALE FINANCIAL ASSETS 28.1 / ANALYSIS BY TYPE AND QUOTATION 31/12/ /12/ /12/ /12/2016 Equity instruments measured at fair value 32,456 33,002 32,456 30,707 Debt securities 1,589,125 1,551,512 1,589,042 1,551,388 issued by the state and the central bank 941,942 1,023, ,942 1,023,455 issued by banks 438, , , ,326 issued by other issuers 208, , , ,607 Total 1,621,581 1,584,514 1,621,498 1,582,095 Quoted 1,589,215 1,551,607 1,589,132 1,551,483 Unquoted 32,366 32,907 32,366 30,612 Total 1,621,581 1,584,514 1,621,498 1,582,095 Skupaj As at 31 December 2017, the Group had assets of this portfolio worth 321,580 thousand pledged. These assets are pledged with the Bank of Slovenia for the pool of collateral, guarantee scheme, and the Single Resolution Fund. A total of 798 thousand was paid by the Group into the Single Resolution Fund in In 2017, the Group did not receive any financial assets of this portfolio from the realisation of collateral provided as security for loans. None of the instruments included in the portfolio of available-for-sale financial assets have the characteristics to qualify as subordinated debt / ANALYSIS BY TYPE AND MARKET SEGMENTS 31/12/ /12/ /12/ /12/2016 Equity instruments measured at fair value 32,456 33,002 32,456 30,707 equity investments in other financial organisations 29,231 31,064 29,231 28,769 equity investments in non-financial organisations 3,215 1,929 3,215 1,929 equity investments in other non-residents Debt securities 1,589,125 1,551,512 1,589,042 1,551,388 issued by the state and the central bank 941,942 1,023, ,942 1,023,455 issued by banks 438, , , ,326 issued by other issuers 208, , , ,607 Total 1,621,581 1,584,514 1,621,498 1,582,095 Quoted 1,589,215 1,551,607 1,589,132 1,551,483 Unquoted 32,366 32,907 32,366 30,612 Total 1,621,581 1,584,514 1,621,498 1,582, / MOVEMENTS IN AVAILABLE-FOR-SALE FINANCIAL ASSETS EQUITY INSTRUMENTS DEBT SECURITIES TOTAL Balance at 1 January ,002 1,551,512 1,584,514 Recognition of additional financial assets 0 428, ,665 Interest 0 (17,776) (17,776) Net revaluation through equity 1,111 (6,438) (5,327) Derecognition of financial assets upon disposal (2,537) (67,876) (70,413) Derecognition of financial assets upon maturity 0 (299,855) (299,855) Net gains/losses on sale (Note 12) ,773 Balance at 31 December ,456 1,589,125 1,621,581 EQUITY INSTRUMENTS DEBT SECURITIES TOTAL Balance at 1 January ,736 1,649,171 1,675,907 Assets acquired through a business combination 12, ,153 Recognition of additional financial assets , ,058 Interest 0 (9,198) (9,198) Net revaluation through equity (2,572) 4,972 2,400 Net impairments through profit or loss (Note 21.1) (3,395) 0 (3,395) Derecognition of financial assets upon disposal (4,962) (77,869) (82,831) Derecognition of financial assets upon maturity 0 (457,239) (457,239) Net gains/losses on sale (Note 12) 4,972 (313) 4,659 Balance at 31 December ,002 1,551,512 1,584,514 FINANCIAL REPORT AND 145

147 EQUITY INSTRUMENTS DEBT SECURITIES TOTAL Balance at 1 January ,707 1,551,388 1,582,095 Recognition of additional financial assets 0 428, ,665 Interest 0 (17,780) (17,780) Net revaluation through equity 1,790 (6,438) (4,648) Derecognition of financial assets upon disposal (115) (67,876) (67,991) Derecognition of financial assets upon maturity 0 (299,810) (299,810) Net gains/losses on sale (Note 12) Balance at 31 December ,456 1,589,042 1,621,498 EQUITY INSTRUMENTS DEBT SECURITIES TOTAL Balance at 1 January ,095 1,420,193 1,442,288 Assets acquired through a business combination 13, , ,852 Recognition of additional financial assets , ,058 Interest 0 (9,362) (9,362) Net revaluation through equity (2,598) 4,630 2,032 Net impairments through profit or loss (Note 21.1) (3,395) 0 (3,395) Derecognition of financial assets upon disposal (4,071) (77,867) (81,938) Derecognition of financial assets upon maturity 0 (452,226) (452,226) Net gains/losses on sale (Note 12) 4, ,786 Balance at 31 December ,707 1,551,388 1,582,095 29/ LOANS AND ADVANCES TO BANKS 31/12/ /12/ /12/ /12/2016 Current loans 43, ,021 42, ,790 Impairment of current loans (1,342) (1,105) 0 (3) Non-current loans Total net amount 42, ,916 42, ,787 Impairment 1,342 1, Total gross amount 44, ,021 42, , / MOVEMENTS IN IMPAIRMENTS OF LOANS AND ADVANCES TO BANKS Balance at 1 January 1, ,170 Assets acquired through a business combination Additional impairment of principals Write-offs of loans and advances to banks (5,177) Foreign exchange rate differences Other (3) 1,096 (3) 1 Balance at 31 December 1,342 1, Recognition of additional impairments/reversal of impairments of interest on loans and advances given to banks is reflected in Note Interest income and interest expenses (Note 9) to the income statement. FINANCIAL REPORT AND 146

148 30/ LOANS AND ADVANCES TO CUSTOMERS 31/ OTHER FINANCIAL ASSETS 31/12/ /12/ /12/ /12/2016 Current loans 335, , , ,031 Impairment of current loans (81,829) (100,301) (70,020) (84,460) Non-current loans 2,409,644 2,108,804 2,364,686 2,079,522 Impairment of non-current loans (299,663) (380,858) (279,111) (361,425) Claims under guarantees 5,550 5,115 5,353 4,903 Impairment of claims under guarantees (3,373) (3,024) (3,189) (2,834) Total net amount 2,366,167 1,963,849 2,322,531 1,948,737 Impairment 384, , , ,719 Total gross amount 2,751,032 2,448,032 2,674,851 2,397, / MOVEMENTS IN IMPAIRMENTS OF LOANS AND ADVANCES TO CUSTOMERS Balance at 1 January 484, , , ,380 Additional impairment/(reversal of impairment) of principals (26,098) 5,989 (19,741) 8,309 Additional impairment/(reversal of impairment) of interest 1,914 (1,115) 1,916 (1,585) Additional impairment/(reversal of impairment) of fees 84 (70) 84 (70) Write-offs of loans and advances to customers (82,437) (212,171) (79,115) (151,767) Foreign exchange rate differences Assets acquired through a business combination 5,574 54, ,454 Other 1,118 16, (2) Balance at 31 December 384, , , ,719 In 2016, the Bank changed the methodology for transferring (write-offs) impaired loans from onbalance-sheet to off-balance-sheet records The written-off loans transferred to off-balance-sheet records have not been written off for good and will continue to be on the Group s books as long as the legal recovery procedures are under way. Other increases in impairments recorded by the Group in 2016 resulted mainly from the loans purchased by KBM Asco, a subsidiary of Nova KBM. Recognition of additional impairment/reversal of impairment of interest and fees on loans and advances given to customers is reflected in Interest income and interest expenses (Note 9) and Fee and commission income and fee and commission expenses (Note 11) to the income statement. 31/12/ /12/ /12/ /12/2016 Cheques Claims for fees and commissions 2,215 1,805 1,688 1,295 Accounts receivables Surplus of funds arising from fiduciary operations Other 52,384 39,517 52,352 39,508 Total net amount 55,440 42,293 54,170 40,985 Impairment 5,451 9,962 2,620 2,069 Total gross amount 60,891 52,255 56,790 43,054 As at 31 December 2017 and 31 December 2016, other financial assets of the Group were mostly made up of the claims accounted for in respect of 31.1 / MOVEMENTS IN IMPAIRMENTS OF OTHER FINANCIAL ASSETS Balance at 1 January 9,962 11,674 2,069 2,170 Assets acquired through a business combination Additional impairment of principals 1, Additional impairment/(reversal of impairment) of interest Additional impairment/(reversal of impairment) of fees (6) 15 (6) Write-offs of other financial assets (5,861) (2,837) (170) (930) Foreign exchange rate differences (1) Other (533) 8 (534) 0 Balance at 31 December 5,451 9,962 2,620 2,069 Recognition of additional impairment/reversal of impairment of interest and fees on other financial assets is reflected in Interest income and interest transactions with households (transactions under credit and charge cards). expenses (Note 9) and Fee and commission income and fee and commission expenses (Note 11) to the income statement. FINANCIAL REPORT AND 147

149 32/ HELD-TO-MATURITY FINANCIAL ASSETS 33/ PROPERTY, PLANT AND EQUIPMENT 31/12/ /12/ /12/ /12/2016 Debt securities 88,700 90,216 88,700 90,216 non-current securities issued by the state and the central bank 80,124 81,629 80,124 81,629 non-current securities issued by other issuers 8,576 8,587 8,576 8,587 Total 88,700 90,216 88,700 90,216 Quoted 88,700 90,216 88,700 90,216 Total 88,700 90,216 88,700 90,216 As at 31 December 2017, the Group had assets of this portfolio worth 34,312 thousand pledged. These assets are pledged with the Bank of Slovenia for the pool of collateral, and the Single Resolution Fund / MOVEMENTS IN HELD-TO-MATURITY FINANCIAL ASSETS Balance at 1 January 90, ,548 90,216 28,566 Increase during the year 2,145 2,244 2, ,883 assets acquired through a business combination ,982 Cost LAND AND BUILDINGS COMPUTER EQUIPMENT OTHER EQUIPMENT FINANCE LEASES PPE IN PROGRESS TOTAL Balance at 1 January ,031 23,214 32, ,815 Assets acquired through a business combination ,194 22, ,761 Transfers between types of assets (3,281) 1,020 (1,101) (129) (1,103) (4,594) Additions , ,542 Disposals (565) (5,536) (1,314) (5,786) (22) (13,223) Foreign exchange rate differences Balance at 31 December ,333 19,632 31,869 22, ,303 Accumulated depreciation Balance at 1 January ,172 21,669 28, ,501 Assets acquired through a business combination , ,902 Transfers between types of assets (1,442) 299 (1,427) (129) 0 (2,699) Additions Depreciation (Note 19) 2, ,252 1, ,369 Disposals (359) (5,504) (1,022) (1,234) 0 (8,119) Foreign exchange rate differences Balance at 31 December ,388 18,053 28,252 4, ,015 Book value at 1 January ,859 1,545 4, ,314 Book value at 31 December ,945 1,579 3,617 18, ,288 reversal of impairments ,657 other (deferred interest) 2,145 2,244 2,145 2,244 Decrease during the year 3,661 41,576 3,661 43,233 disposal (sale and redemption) , ,314 other (interest received) 3,398 3,919 3,398 3,919 Balance at 31 December 88,700 90,216 88,700 90,216 In 2017 (2016), neither the Group nor the Bank has sold held-to-maturity financial assets from the respective portfolio. FINANCIAL REPORT AND 148

150 LAND AND BUILDINGS COMPUTER EQUIPMENT OTHER EQUIPMENT FINANCE LEASES PPE IN PROGRESS TOTAL Cost Balance at 1 January ,435 22,053 31, ,575 Assets acquired through a business combination 14,467 3,172 3, ,483 Transfers between types of assets (1,707) 501 1,068 0 (2,156) (2,294) Additions ,000 2,032 Disposals (167) (2,540) (3,278) 0 0 (5,985) Foreign exchange rate differences Balance at 31 December ,031 23,214 32, ,815 Accumulated depreciation Balance at 1 January ,704 20,187 26, ,250 Assets acquired through a business combination 6,033 2,847 3, ,393 Transfers between types of assets (988) (132) 55 0 (428) (1,493) Additions Depreciation (Note 19) 2,174 1,307 1, ,829 Disposals (154) (2,540) (3,190) 0 0 (5,884) Revaluation 5, ,404 Foreign exchange rate differences (1) Balance at 31 December ,172 21,669 28, ,501 Book value at 1 January ,731 1,866 4, ,325 Book value at 31 December ,859 1,545 4, ,314 LAND AND BUILDINGS COMPUTER EQUIPMENT OTHER EQUIPMENT FINANCE LEASES PPE IN PROGRESS TOTAL Cost Balance at 1 January ,273 14,569 25, ,906 Assets acquired through a business combination 24,586 10,040 6, ,016 Transfers between types of assets (1,707) 501 1,068 0 (1,728) (1,866) Additions ,000 2,003 Disposals (163) (2,354) (2,628) 0 0 (5,145) Foreign exchange rate differences Balance at 31 December ,989 22,758 30, ,914 Accumulated depreciation Balance at 1 January ,375 13,144 22, ,998 Assets acquired through a business combination 10,365 9,326 5, ,469 Transfers between types of assets (988) (132) (1,065) Additions Depreciation (Note 19) 2,154 1,271 1, ,431 Disposals (151) (2,354) (2,562) 0 0 (5,067) Revaluation 5, ,404 Foreign exchange rate differences (2) (2) Balance at 31 December ,157 21,255 26, ,168 Book value at 1 January ,898 1,425 3, ,908 Book value at 31 December ,832 1,503 3, ,746 LAND AND BUILDINGS COMPUTER EQUIPMENT OTHER EQUIPMENT FINANCE LEASES PPE IN PROGRESS TOTAL Cost Balance at 1 January ,989 22,758 30, ,914 Transfers between types of assets (3,223) 1, (129) (1,103) (3,124) Additions Disposals 0 (5,464) (645) 0 (22) (6,131) Foreign exchange rate differences Balance at 31 December ,869 18,323 30, ,522 Accumulated depreciation Balance at 1 January ,157 21,255 26, ,168 Transfers between types of assets (1,377) 299 (84) (129) 0 (1,291) Additions Depreciation (Note 19) 2, ,876 Disposals 0 (5,433) (582) 0 0 (6,015) Balance at 31 December ,788 17,033 26, ,797 Book value at 1 January ,832 1,503 3, ,746 Book value at 31 December ,081 1,290 3, ,725 As at 31 December 2017, the acquisition cost of completely depreciated items of property, plant and equipment still used by the Group totalled 41,553 thousand ( 41,752 thousand as at 31 December 2016). As at 31 December 2017, the Group s liabilities to suppliers of items of property, plant and equipment equalled 19 thousand ( 140 thousand as at 31 December 2016). No items of property, plant and equipment were pledged by the Group as at 31 December FINANCIAL REPORT AND 149

151 34/ INVESTMENT PROPERTY 35/ INTANGIBLE ASSETS Balance at 1 January 37,807 31,184 30,459 28,439 Transfers between types of assets (6,807) 6 (5,186) 0 Additions 2,934 8,680 2,932 2,852 Disposals (3,247) (1,917) (44) (837) Change in fair value (Note 21.2) (2,355) (147) 0 4 Other changes Balance at 31 December 28,576 37,807 28,161 30,459 As at 31 December 2017, the Group had in place 53 agreements for renting out investment properties (67 agreements for renting out as at 31 December 2016). The aggregate annual rent amounted in 2017 to 3,945 thousand, inclusive of VAT ( 3,941 thousand in 2016). Direct operating expenses incurred by the Group in respect of investment property amounted to 44 thousand in 2017 ( 185 thousand in 2016). Items of investment property are not subject to any sale restrictions. Investment properties are recognized in financial statements in accordance with revaluation model. Cost COMPUTER SOFTWARE INTANGIBLE ASSETS IN PREPARATION GOODWILL OTHER INTANGIBLE ASSETS TOTAL Balance at 1 January ,472 2, ,699 94,511 Assets acquired through a business combination 0 0 7,299 1,242 8,541 Transfer between types of assets 3,270 (3,668) 0 (509) (907) Additions 45 7, ,978 Disposals (6,986) 0 0 (17) (7,003) Balance at 31 December ,801 6,504 7,299 11, ,120 Accumulated depreciation Balance at 1 January , ,638 76,048 Assets acquired through a business combination ,088 1,088 Transfer between types of assets (142) 0 0 (699) (841) Additions Amortisation 4, ,075 5,624 Disposals (5,978) 0 0 (18) (5,996) Balance at 31 December , ,084 75,923 Book value at 1 January ,062 2, ,061 18,463 Book value at 31 December ,962 6,504 7,299 4,432 27,197 The Group may freely dispose of its intangible assets and none of these assets are pledged as collateral. As at 31 December 2017, the acquisition cost of completely amortised intangible assets still used by the Group totalled 55,818 thousand ( 47,349 thousand as at 31 December 2016). As at 31 December 2017, the Group s liabilities to suppliers of items of intangible assets equalled 2,224 thousand ( 1,781 thousand as at 31 December 2016). Development costs were not capitalised in FINANCIAL REPORT AND 150

152 COMPUTER SOFTWARE INTANGIBLE ASSETS IN PREPARATION OTHER INTANGIBLE ASSETS TOTAL Cost Balance at 1 January , ,806 90,105 Assets acquired through a business combination 6, ,777 Transfer between types of assets 3,320 (3,286) (16) 18 Additions 216 4, ,862 Disposals (8,250) 0 0 (8,250) Foreign exchange rate differences (1) 0 0 (1) Balance at 31 December ,472 2,340 10,699 94,511 Accumulated depreciation Balance at 1 January , ,871 68,299 Assets acquired through a business combination 5, ,900 Transfer between types of assets 31 0 (13) 18 Amortisation (Note 19) 6, ,034 Disposals (5,203) 0 0 (5,203) Balance at 31 December , ,638 76,048 Book value at 1 January , ,935 21,806 Book value at 31 December ,062 2,340 5,061 18,463 COMPUTER SOFTWARE INTANGIBLE ASSETS IN PREPARATION OTHER INTANGIBLE ASSETS TOTAL Cost Balance at 1 January , ,572 Assets acquired through a business combination 14, ,964 Transfer between types of assets 3,136 (3,102) (16) 18 Additions 178 4, ,775 Disposals (8,250) 0 0 (8,250) Foreign exchange rate differences (1) 0 0 (1) Balance at 31 December ,874 2, ,078 Accumulated depreciation Balance at 1 January , ,664 Assets acquired through a business combination 9, ,508 Transfer between types of assets 31 0 (13) 18 Amortisation (Note 19) 5, ,978 Disposals (5,203) 0 0 (5,203) Balance at 31 December , ,965 Book value at 1 January , ,908 Book value at 31 December ,715 2, ,113 COMPUTER SOFTWARE INTANGIBLE ASSETS IN PREPARATION OTHER INTANGIBLE ASSETS TOTAL Cost Balance at 1 January ,874 2, ,078 Transfer between types of assets 3,270 (3,668) (509) (907) Additions 0 7, ,832 Disposals (6,863) 0 0 (6,863) Balance at 31 December ,281 6, ,140 Accumulated depreciation Balance at 1 January , ,965 Transfer between types of assets (142) 0 (699) (841) Amortisation (Note 19) 4, ,508 Disposals (5,856) 0 0 (5,856) Balance at 31 December , ,776 Book value at 1 January ,715 2, ,113 Book value at 31 December ,654 6, ,364 FINANCIAL REPORT AND 151

153 36/ LONG-TERM INVESTMENTS IN THE EQUITY OF SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES 31/12/ /12/2016 Investments in the equity of other Group companies 85,762 55,476 equity investments in other subsidiary financial organisations 77,152 33,586 equity investments in non-financial subsidiary companies 8,610 21,890 Total 85,762 55,476 Of the 2016 increase in the equity investments in the subsidiaries, a total of 17,600 thousand was attributable to the establishment of the subsidiary, KBM Asco d.o.o., the amount of 280 thousand was attributable to the acquisition of a % minority stake in PBS d.d. and the reversal of impairments in respect of the equity investment in Adria Abwicklungs GmbH in Liqu, which was made upon the completion of its liquidation. The 2016 decrease in equity investments in the subsidiaries was attributable to the following factors: a derecognition of 41,258 thousand in equity investment in PBS d.d. as a result of the acquisition, additional impairments of 547 thousand recorded on the equity investment in Gorica Leasing d.o.o., the repayment by the KBM Infond d.o.o. of an additional capital contribution of 2,000 thousand, and the derecognition of equity investment in Adria Abwicklungs GmbH in Liqu totalling 982 thousand, which was recorded upon the completion of its liquidation / INFORMATION ABOUT COMPANIES IN WHICH THE BANK HOLDS AT LEAST A 20 % EQUITY STAKE 36.1 / MOVEMENTS IN INVESTMENTS IN THE EQUITY OF SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES Balance at 1 January 55,476 81,400 Increase during the year 44,417 18,863 acquisition 44,417 17,880 reversal of impairments Decrease during the year 14,131 44,787 derecognition upon the acquisition/liquidation of a subsidiary company 4,291 41,258 impairments 4, repayment of investments 4,850 2,982 Balance at 31 December 85,762 55,476 In 2017, increases in equity investments in subsidiaries relate to the acquisition of a 100 % stake in the subsidiary Summit Leasing Slovenija d.o.o. in the amount of 44,417 thousand. In accordance with the Nova KBM Group s restructuring plan, the subsidiary KBM Invest d.o.o. ceased its operation in 2017, and the investment in company s equity in the amount of 4,291 thousand was derecognised. Other decreases in equity investments in subsidiaries relate to: Impairment of the equity investment in the subsidiary KBM Asco d.o.o. in the amount of 4,990 thousand, and a partial repayment of the equity investment in the amount of 4,000 thousand, and Repayment of additional equity of KBM Infond d.o.o in the amount of 850 thousand. NAME OF THE COMPANY Investments in the equity of other customers Summit Leasing Slovenija d.o.o., Ljubljana Gorica Leasing d.o.o., Nova Gorica in liquidation KBM Infond d.o.o., Maribor KBM Invest d.o.o., Maribor KBM Leasing d.o.o., Maribor in liquidation KBM Leasing Hrvatska d.o.o., Zagreb in liquidation M-PAY d.o.o., Maribor 31/12/ /12/ /12/2017 TOTAL EQUITY NET PROFIT/ LOSS EQUITY ATTRIBUTABLE TO NOVA KBM ACQUISITION COST EQUITY STAKE (%) VOTING RIGHTS (%) INVESTMENT VALUE 36, ,904 44, ,417 19, ,850 45, ,852 10,630 1,768 7,731 1, ,809 0 (413) , ,471 48, ,016 (10,736) (736) (10,579) 17, KBM Asco (6,215) (6,082) (6,215) 13, ,610 Total 171,774 85,762 FINANCIAL REPORT AND 152

154 37/ TAX ASSETS AND LIABILITIES 37.1 / TAX ASSETS 31/12/ /12/ /12/ /12/2016 Current income tax assets 114 1, ,067 Deferred tax assets (Note 37.3) 20,592 8,329 19,371 8,329 Total 20,706 9,438 19,389 9, / NET DEFERRED TAXES 31/12/ /12/ /12/ /12/2016 Deferred tax assets (Note 37.1) 20,592 8,329 19,371 8,329 relating to tax loss 20,050 12,434 20,050 12,434 relating to available-for-sale financial assets (4,672) (4,911) (4,672) (4,911) relating to other provisions for employees relating to other 4, ,291 8 Deferred tax assets (Note 37.2) relating to available-for-sale financial assets relating to other provisions for employees 0 (17) 0 0 The amount of 114 thousand recorded in the Current income tax assets item related to the Group s claim against the Financial Administration of the Republic of Slovenia (FURS) arising from the difference between the amount of tax prepayments made during 2017, the reported tax liability for the year, and the tax paid at 37.2 / TAX LIABILITIES source abroad. The Parent Bank recorded a claim to FURS totalling 18 thousand, which relates solely to the tax on interest income paid at source abroad. The Parent Bank s deferred tax assets totalled 19,371 thousand net or 26,764 thousand gross. Included in profit or loss (Note 23) 10,247 3,581 10,219 3,363 relating to tax loss 7,616 2,175 7,616 2,175 relating to available-for-sale financial assets (644) 1,395 (644) 1,179 relating to other provisions for pending legal issues 0 (2) 0 (2) relating to other provisions for employees (21) 61 (36) 58 relating to other 3,296 (48) 3,283 (47) Included in equity (7,022) (7,939) (7,024) (7,847) relating to available-for-sale financial assets (Note 46) (7,008) (7,985) (7,008) (7,891) relating to provisions for retirement benefits (Note 46) (14) 46 (16) 44 31/12/ /12/ /12/ /12/2016 Current income tax liabilities Deferred tax liabilities (Note 37.3) Total The Group recorded income tax liabilities for 2017 in the amount of 393 thousand. The Parent Bank determined the tax base. As a result of using tax relief and covering the tax loss carried forward from previous tax periods, the Group, however, did not determine its income tax base and income tax liabilities. The Group recorded net deferred tax assets totalling 20,592 thousand (the respective amount for the Parent Bank was 19,371 thousand), the largest part of which was attributed to deferred tax assets recorded for tax losses. For a portion of its uncovered tax loss, totalling 105,524 thousand, the Parent Bank recorded deferred tax assets for losses in the amount of 20,050. The remaining portion of tax loss, in respect of which the Group had not established any deferred tax assets, amounted to 865,522 thousand (of which 798,065 thousand was attributable to the Parent Bank), while the unrecognised deferred tax assets totalled 164,449 thousand (of which 151,632 thousand was attributable to the Parent Bank). The negative amount of 4,672 thousand included in the line item Deferred tax assets relating to available-for-sale financial assets is the result of disclosing net deferred taxes by individual types. The total deferred tax assets in respect of available-for-sale financial assets amounted to 2,261 thousand, and tax liabilities in respect of available for sale securities to 7,333 thousand. As at 31 December 2017, the Parent Bank had deferred tax assets in the amount of 3,291 thousand recognised in respect of the impairment of equity investments in KBM Leasing Hrvatska. For other impairments of equity investments, totalling 68,689 thousand, the Bank had no deferred tax assets recognised, while unrecognised assets in this respect totalled 13,051 thousand. The total level of deferred tax assets was determined on the basis of the projections of future taxable income in the next five years. FINANCIAL REPORT AND 153

155 38/ 39/ OTHER ASSETS NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 31/12/ /12/ /12/ /12/2016 Inventory 26,135 25,350 15,019 16,224 assets received in settlement of claims 5,768 6,930 13,205 16,210 other inventory 20,367 18,420 1, Claims arising from advance payments 1, Prepayments and accrued income 6,569 1,505 1,662 1,282 Other claims Total net amount 34,946 27,228 16,957 17,678 Impairment 50,601 43,293 35,845 34,351 Total gross amount 85,547 70,521 52,802 52,029 31/12/ /12/ /12/ /12/2016 Items of property, plant and equipment held for sale 2,694 1,241 2,625 1,241 Items of investment property held for sale 5, , Total 8,104 1,646 8,035 1,646 40/ Real estate units held for sale, totalling 9,628 thousand ( 14,463 thousand in 2016), movable and immovable items seized under lease agreements and held for the purpose of sale or lease out, totalling 2,040 thousand ( 2,462 thousand in 2016), and the stock of vehicles totalling 7,183 thousand, accounted for the largest proportion of the Group s inventory as at 31 December FINANCIAL LIABILITIES HELD FOR TRADING 38.1 / MOVEMENTS IN IMPAIRMENTS OF OTHER ASSETS Balance at 1 January 43,293 48,984 34,351 33,479 Assets acquired through a business combination /12/ /12/ /12/ /12/2016 Derivatives 1,024 1,575 1,023 1,575 forwards swaps other derivatives 730 1, ,181 Total 1,024 1,575 1,023 1,575 Additional impairment/(reversal of impairment) of principals 9,969 (530) 1, Write-offs of other assets (3,531) (4,975) (303) (52) Foreign exchange rate differences Other 822 (221) 50 (810) Balance at 31 December 50,601 43,293 35,845 34,351 FINANCIAL REPORT AND 154

156 41/ FINANCIAL LIABILITIES MEASURED AT AMORTISED COST 41.3 / DEPOSITS AND LOANS BY MARKET SEGMENTS 31/12/ /12/ /12/ /12/2016 Deposits 3,690,254 3,667,354 3,723,661 3,691,965 from banks 51,863 41,107 51,862 41,107 from non-financial companies 568, , , ,868 31/12/ /12/ /12/ /12/2016 Deposits (Note 41.1) 3,690,254 3,667,354 3,723,661 3,691,965 Loans (Note 41.2) 396, , , ,088 Debt securities (Note 41.4) 1,502 14,376 1,502 14,376 Other financial liabilities (Note 41.6) 79,936 61,074 74,808 60,702 Total 4,167,845 4,075,892 4,178,883 4,100,131 from the state 78, ,610 78, ,610 from other financial organisations 73,895 89, , ,531 from non-residents 47,253 54,600 47,270 54,605 from non-profit institutions serving households 72,961 69,877 72,961 69,877 from households 2,796,784 2,750,367 2,796,784 2,750,367 Loans 396, , , ,088 from banks 396, , , ,088 Total 4,086,407 4,000,442 4,102,573 4,025, / DEPOSITS BY TYPE OF CUSTOMERS AND MATURITY 31/12/ /12/ /12/ /12/2016 Deposits from banks 51,863 41,107 51,862 41,107 demand deposits 34,308 16,095 34,308 16,095 current deposits non-current deposits 17,555 24,046 17,554 24,046 Deposits from customers 3,638,391 3,626,247 3,671,799 3,650,858 demand deposits 2,613,772 2,307,253 2,646,143 2,329, / DEBT SECURITIES BY TYPE AND MATURITY 31/12/ /12/ /12/ /12/2016 Non-current securities issued 0 6, ,724 bonds 0 6, ,724 Certificates of deposit issued 1,502 7,652 1,502 7,652 non-current 1,502 7,652 1,502 7,652 Total 1,502 14,376 1,502 14,376 current deposits 357, , , ,310 non-current deposits 667, , , ,691 Total 3,690,254 3,667,354 3,723,661 3,691, / LOANS BY TYPE OF CUSTOMERS AND MATURITY 31/12/ /12/ /12/ /12/2016 Loans from banks 396, , , ,088 non-current loans 396, , , ,088 Total 396, , , ,088 FINANCIAL REPORT AND 155

157 41.5 / OTHER FINANCIAL LIABILITIES 31/12/ /12/ /12/ /12/2016 Liabilities for fees and commissions Liabilities arising from gross salaries of employees 3,829 3,476 3,429 3,316 Liabilities to suppliers 9,881 3,731 6,540 3,318 Liabilities arising from payment card transactions 29,466 23,986 29,466 23,986 Liabilities arising from ATM transactions 2,599 1,416 2,599 1,416 Liabilities in respect of funds provided by customers for cross-border payments 4,153 1,627 4,153 1,627 Liabilities in respect of cash transactions 6,338 5,680 6,338 5,680 Liabilities in respect to profit participation dividend, share Accruals and deferred income 11,676 9,318 10,486 8,701 Other financial liabilities 11,981 11,832 11,793 12,650 Total 79,936 61,074 74,808 60,702 The largest proportion of the amount shown in the line item Other financial liabilities arises from the balances held in transitional accounts. FINANCIAL REPORT AND 156

158 42/ PROVISIONS PROVISIONS FOR RESTRUCTURING COSTS PROVISIONS FOR PENDING LEGAL ISSUES PROVISIONS FOR PENSIONS AND SIMILAR BENEFITS PROVISIONS FOR OFF-BALANCE-SHEET LIABILITIES OTHER PROVISIONS Balance at 1 January ,860 16,714 6,938 28,314 2,394 59,220 Assets acquired through a business combination Net creation/(reversa)l of provisions through profit or loss (Note 20) 3,407 1, (5,227) (2,227) (2,541) provisions made during the year 3,411 4, , ,222 provisions (reversed= during the year (4) (3,253) (79) (27,200) (2,227) (32,763) Net creation/(reversal) of provisions through equity 0 0 (526) 0 0 (526) Provisions used during the year (4,183) (2,629) (110) 0 0 (6,922) Foreign exchange rate differences Other (9,845) 9,783 (62) Balance at 31 December ,084 15,305 6,864 13,242 9,950 49,445 TOTAL As at 31 December 2017, legal actions brought against the Group totalled 40,242 thousand ( 32,609 thousand as at 31 December 2016). Considering legal opinions obtained the Group has built 15,305 thousand of provisions for pending legal issues as at 31 December 2017 ( 16,417 as at 31 December 2016). The Bank has transferred the provision of 9,781 thousand from Provisions for off-balance sheet liabilities for the issued guarantee to Other provisions, since the provision has no longer met the criteria for recognition in its original category (the potential debtor has gone bankrupt). PROVISIONS FOR RESTRUCTURING COSTS PROVISIONS FOR PENDING LEGAL ISSUES PROVISIONS FOR PENSIONS AND SIMILAR BENEFITS PROVISIONS FOR OFF-BALANCE-SHEET LIABILITIES OTHER PROVISIONS Balance at 1 January ,456 20,672 6,160 33,387 4,201 66,876 Assets acquired through a business combination ,555 Net creation/(reversal) of provisions through profit or loss (Note 20) 3,490 (1,963) 185 (5,195) (1,261) (4,744) provisions made during the year 3,490 6, , ,445 provisions (reversed) during the year 0 (8,144) (582) (26,202) (1,261) (36,189) Net creation/(reversal) of provisions through equity Provisions used during the year (1,639) (2,550) (378) 0 (367) (4,934) Other (2) (6) (258) (8) Balance at 31 December ,860 16,714 6,938 28,314 2,394 59,220 TOTAL FINANCIAL REPORT AND 157

159 PROVISIONS FOR RESTRUCTURING COSTS PROVISIONS FOR PENDING LEGAL ISSUES PROVISIONS FOR PENSIONS AND SIMILAR BENEFITS PROVISIONS FOR OFF-BALANCE-SHEET LIABILITIES OTHER PROVISIONS Balance at 1 January ,860 15,967 6,695 29, ,785 Net creation/reversal of provisions through profit or loss (Note 20) 3,411 1, (5,963) 0 (570) provisions made during the year 3,411 4, , ,884 provisions (reversed) during the year 0 (2,706) (47) (26,701) 0 (29,454) Net creation/(reversal) of provisions through equity 0 0 (652) 0 0 (652) Provisions used during the year (4,183) (2,629) (93) 0 0 (6,905) Other (9,845) 9,783 (62) Balance at 31 December ,088 15,032 6,238 13,394 9,844 48,596 TOTAL PROVISIONS FOR RESTRUCTURING COSTS PROVISIONS FOR PENDING LEGAL ISSUES PROVISIONS FOR PENSIONS AND SIMILAR BENEFITS PROVISIONS FOR OFF-BALANCE-SHEET LIABILITIES OTHER PROVISIONS Balance at 1 January ,456 19,054 4,318 32, ,085 Assets acquired through a business combination ,376 1, ,898 Net creation/(reversal( of provisions through profit or loss (Note 20) 3,490 (889) 618 (5,241) 0 (2,022) provisions made during the year 3,490 6, , ,300 provisions (reversed) during the year 0 (6,992) (128) (26,202) 0 (33,322) Net creation/(reversal) of provisions through equity Provisions used during the year (1,639) (2,550) (87) 0 (364) (4,640) Other (6) 0 (6) Balance at 31 December ,860 15,967 6,695 29, ,785 TOTAL FINANCIAL REPORT AND 158

160 43/ 46/ OTHER LIABILITIES ACCUMULATED OTHER COMPREHENSIVE INCOME 31/12/ /12/ /12/ /12/2016 Liabilities arising from advance payments received 1, Liabilities in respect of taxes and contributions 1,593 1,457 1,512 1,336 Accruals and deferred income 10,270 1, ,339 Total 13,708 3,169 2,338 2,687 Accumulated other comprehensive income in respect of available-for-sale financial assets 31/12/ /12/ /12/ /12/ ,877 34,041 29,876 33,640 revaluation 36,885 42,026 36,884 41,531 deferred taxes (Note 37.3) (7,008) (7,985) (7,008) (7,891) 44/ SHARE CAPITAL Accumulated other comprehensive income/(loss) in respect of actuarial gains on defined benefit pension plans 16 (470) 153 (439) revaluation 30 (516) 169 (483) deferred taxes (Note 37.3) (14) 46 (16) 44 Total 29,893 33,571 30,029 33,201 AND 31/12/ /12/2016 Ordinary shares 150, ,000 subscribed by non-residents 150, ,000 In 2017 and 2016, the Group did not purchase or sell treasury shares. As at 31 December 2017, no treasury shares were held by the Parent Bank, nor were shares of the Parent Bank held by any of the Group companies. 45/ SHARE PREMIUM 46.1 / MOVEMENTS IN ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at 1 January 33,571 32,815 33,201 25,799 Net change arising from the valuation of availablefor-sale financial assets (5.141) (4.648) recognised gains/losses (3,588) 4,556 (3,682) 4,338 transfer of gains to profit or loss (1,553) (2,120) (966) (2,306) Net change in accumulated other comprehensive income in respect of actuarial gains on defined benefit pension plans 546 (464) 652 (470) Net change in deferred taxes 917 (1,216) 824 (1,135) Other ,975 Balance at 31 December 29,893 33,571 30,029 33,201 31/12/ /12/ /12/ /12/2016 Paid-in capital surplus 403, , , ,302 Total 403, , , ,302 FINANCIAL REPORT AND 159

161 47/ RESERVES FROM PROFIT 49/ DISTRIBUTABLE PROFIT 31/12/ /12/ /12/ /12/2016 Regulatory reserves 3,833 3,835 3,518 3,518 Other reserves from profit 16,710 16,710 16,710 16,710 Total 20,543 20,545 20,228 20,228 31/12/ /12/2016 Net profit for the financial year 45,813 33,004 Retained earnings from previous years 63,850 16,710 Increase in reserves from profit 0 16,853 statutory reserves 0 33, / MOVEMENTS IN RESERVES FROM PROFIT Payment of dividends (30,167) (16,567) Other 2 (2,717) Distributable profit 79,498 63, Balance at 1 January 20,545 54,069 20,228 53,648 (Decrease) in regulatory reserves (2) (104) 0 0 (Decrease) in statutory reserves 0 (33,420) 0 (33,420) Balance at 31 December 20,543 20,545 20,228 20,228 The allocation of the distributable profit is subject to a decision of the Shareholders Meeting of the Parent Bank. The Management and Supervisory Boards will propose to the Shareholders Meeting that 45,813 thousand of the distributable profit be used for the payment of dividends. 48/ RETAINED EARNINGS (INCLUDING NET PROFIT FOR THE FINANCIAL YEAR) 31/12/ /12/ /12/ /12/2016 Retained earnings from previous years 44,746 45,705 33,685 30,847 Net profit for the financial year 46,089 27,459 45,813 33,003 Total 90,835 73,164 79,498 63,850 FINANCIAL REPORT AND 160

162 OTHER NOTES 161