SOCIETE GENERALE YUGOSLAV BANK a.d. BEOGRAD FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2005
CONTENTS Page(s) Independent Auditor s Report 1 Income Statement 2 Balance Sheet 3 Statement of Changes in Equity 4 Cash Flow Statement 5-6 Notes to the Financial Statements 7-50
INCOME STATEMENT (in thousands of dinars) Note 2005 2004 Interest income 3 2,267,885 1,023,033 Interest expense 3 (495,549) (183,086) Net interest income 1,772,336 839,947 Fee and commission income 4 1,041,931 852,964 Fee and commission expense 4 (237,301) (179,827) Net fee and commission income 804,630 673,137 Net foreign exchange gains / (losses) 5 116,878 (151,579) Other operating income 6 264,841 47,942 Allowance for loan and other losses 7 (1,924,102) (118,160) Other operating expenses 8 (1,593,175) (1,102,026) (Loss) / profit before taxation (558,592) 189,261 Income tax 9 1,377 (1,704) Net (loss) / profit for the year (557,215) 187,557 2
BALANCE SHEET 3
STATEMENT OF CHANGES IN EQUITY (in thousands of dinars) Share capital Share premium Statutory reserves Reserve for unidentified risks (Accumulated loss) / Retained earnings Total Balance at 1 January 2004 624,854-257,223 - (176,693) 705,384 Covering of statutory losses from reserves - - (176,693) - 176,693 - Transfer of general provisions to reserves for unidentified risks (Note 26d) - - - 70,372-70,372 Foreign exchange differences for the 11 months of 2004 82,632 - - - - 82,632 Conversion of share capital from EUR to CSD and homogenisation of shares (1,253) 1,253 - - - - II Issue of shares 772,097 - - - - 772,097 Profit for the year - - - - 187,557 187,557 Allocation from net profit to reserve for unidentified risks - - - 52,944 (52,944) - Balance at 31 December 2004 1,478,330 1,253 80,530 123,316 134,613 1,818,042 Allocation to statutory reserves - - 134,613 - (134,613) - III Issue of shares 1,612,996 - - - - 1,612,996 Loss for the year - - - - (557,215) (557,215) Allocation from reserve for unidentified risks to net profit - - - (18,385) 18,385 - Balance at 31 December 2005 3,091,326 1,253 215,143 104,931 (538,830) 2,873,823 4
CASH FLOW STATEMENT CASH FLOWS FROM OPERATING ACTIVITIES I Cash inflows from operating activities 3,473,042 1,951,545 Inflow from interest 2,249,627 1,011,710 Inflow from fees and commissions 1,041,401 851,132 Inflow from other operating income 168,763 60,606 Inflow from exceptional income 13,251 28,097 II Cash outflows from operating activities 2,067,878 1,479,442 Outflow for interest 496,705 182,010 Outflow for fees and commissions 237,301 179,816 Outflow for gross salaries, benefits and other personal expenses 658,403 423,683 Outflow for taxes, contributions and other duties charged against income 25,965 54,655 Outflow for other operating expenses 642,194 637,619 Outflow for exceptional expenses 7,310 1,659 III Net cash inflow from operating activities before increase or decrease in loans and deposits 1,405,164 472,103 IV Net cash outflow from operating activities before increase or decrease in loans and deposits - - V Decrease of loans and increase in deposits 10,397,726 5,711,035 Decrease in loans to banks and other financial organisations 3,239,465 2,938,813 Decrease in trading securities and other trading investments, and short-term securities held-to-maturity - 9,771 Increase in deposits from banks and other financial organizations - 863,199 Increase in deposits from customers 7,158,261 1,899,252 VI Increase in loans and decrease in deposits 12,340,163 10,766,516 Increase in loans to banks and other financial organizations 6,139,662 1,005,986 Increase in loans and advances to customers 5,643,164 9,760,530 Decrease in deposits from banks and other financial organizations 557,337 - VII Net cash inflow from operating activities before income tax - - VIII Net cash outflow from operating activities before income tax 537,273 4,583,378 Income tax paid 3,346 - IX Net cash inflow from operating activities - - X Net cash outflow from operating activities 533,927 4,583,378 CASH FLOWS FROM INVESTING ACTIVITIES I Cash inflow from investing activities - - II Cash outflow from investing activities 839,888 520,660 Outflow from purchase of intangible and fixed assets 839,888 520,660 III Net cash inflow from investing activities - - IV Net cash outflow from investing activities 839,888 520,660 5
CASH FLOW STATEMENT (Continued) CASH FLOWS FROM FINANCING ACTIVITIES I Cash inflow from financing activities 2,616,107 5,445,458 Inflow from increase in capital 1,612,996 771,674 Inflow from long-term loans and subordinated liabilities 1,003,111 398,652 Net inflow from short-term borrowings - 4,275,132 II Cash outflow from financing activities 273,640 7,432 Net outflows for repayment of short-term borrowings 273,254 - Net outflow for securities 386 7,432 III Net cash inflow from financing activities 2,342,467 5,438,026 IV Net cash outflow from financing activities - - TOTAL NET CASH INFLOW 16,486,875 13,108,038 TOTAL NET CASH OUTFLOW 15,524,915 12,774,050 NET INCREASE IN CASH AND CASH EQUIVALENTS 961,960 333,988 NET DECREASE IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 1,249,647 880,639 FOREIGN EXCHANGE GAINS 62,747 35,020 FOREIGN EXCHANGE LOSSES - - CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 2,274,354 1,249,647 6
NOTES TO THE FINANCIAL STATEMENTS 1. CORPORATE INFORMATION Societe Generale Yugoslav Bank a.d., Belgrade (hereafter referred to as: the Bank ), was founded on 14 December 1990 and registered in the Commercial Court in Belgrade with registration no. Fi- 95/91 dated 14 February 1991. Societe Generale Paris is the majority shareholder of the Bank with 99.99% ownership of the total share capital. The Bank was reregistered in accordance with the requirements of the Law on Banks and other Financial Organisations at the Commercial Court in Belgrade on 31 December 1996, with registration No. Fi-20525/96. The Bank s major activities are: payment transactions in the country and abroad, credit and deposit activities and foreign exchange operations. Other activities include issuing of guarantees, letters of credit and other banking activities. The Bank s registered office is at 6 Vladimira Popovića St., 11070 Belgrade, Republic of Serbia. The Bank had 52 branches as at 31 December 2005 (31 December 2004: 26 branches). As of 31 December 2005, the Bank had 710 employees (31 December 2004: 470 employees). 2. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation of the financial statements The financial statements of the Bank have been prepared in accordance with the regulations of the Republic of Serbia based on the Accounting and Auditing Law ( The Official Gazette of the FRY No. 71/2002), Law on Banks and other Financial Organisations and the decisions issued by the National Bank of Serbia that are based on the mentioned legislation. The Accounting and Auditing Law, effective as of January 1, 2003, prescribes that banks and other legal entities should maintain, prepare and present their financial statements in accordance with the International Financial Reporting Standards, which include the individual International Accounting Standards (IAS) and explanations approved by the Committee for International Accounting Standards. The translation of the International Accounting Standards was published in the Official Gazette of the Republic of Serbia No. 133/2003 on December 31, 2003 and it included the following IASs: 1, 2, 7, 8, 10, 11, 12, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40 and 41. The translation of the changes and additions to the IASs, new IASs as well as replacement of some IASs with new ones carried out by the International Association of Accountants, have not been published until today, and consequently, they have not been applied when preparing the Bank s financial statements for the year ended 31 December 2005. The Bank s financial statements as of December 31, 2005 have been presented in the format prescribed by the Rules on the Format and Contents of Positions in the Forms of Financial Statements for Banks and Other Financial Organisations ( The official Gazette of the RS No. 7/2004, 19/2004 and 16/2005). For the preparation of the presented financial statements, the Bank applied accounting policies disclosed in the Notes 2(a) to 2(p). 7
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (a) Basis of Preparation of the financial statements (continued) The financial statements have been prepared under the historical cost convention, except for the revaluation of the share capital denominated in foreign currency at closing period exchange rates until 30 November 2004, when the conversion of the share capital denominated in Euro to dinars was performed. In accordance with legislation which was in force until 1 January 2001, all entities whose shareholder equity was denominated in foreign currency where obliged to convert such capital into dinars by applying closing exchange rates valid at the balance sheet date. In accordance with amendments to the legislation for the financial years ending 31 December 2001 and 31 December 2002, the revaluation of the equity was performed by applying a general price index, both for shareholdings denominated in foreign currency and in dinars. During 2003, such legislation relating to the revaluation of equity was cancelled. The Bank continued to revaluate the shareholders equity denominated in foreign currency at closing exchange rates for the years ended 31 December 2002, 31 December 2003 and the eleven months ended 30 November 2004. Such revaluation of equity was not in accordance with the legislation. The Bank maintains its records and prepares the financial statements in dinars (CSD), which is the official reporting currency in the Republic of Serbia. The Bank's financial statements are stated in thousands of dinars. (b) Interest income and expense Interest income and expense are recorded in the income statement for all financial instruments which are interest bearing. Interest income and expense, including the penalty interest, are accounted for on an accrual basis and the obligatory terms as defined by a contract signed between the Bank and the customers. The Bank makes provision for interest on all overdue placements for more than 90 days and suspends further calculation of interest for those placements. (c) Fee and commission income and expense Fee and commission income and expense arising from providing, i.e. using banking services, is recognised at the moment when the related service is provided, based on the accrual basis. Fees and direct costs relating to loan origination and loan commitments are deferred and amortized to interest earned on loans and advances over the life of the loan using the straight-line method. 8
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (d) Foreign currency translation Assets and liabilities denominated in foreign currency at the balance sheet date are translated into dinars at the official average exchange rates of the National Bank of Serbia, prevailing at the balance sheet date (Note 35). Gains and losses resulting from foreign currency translations of balance sheet items denominated in foreign currencies are charged to income statement. Foreign currency transactions are translated into dinars at the official average exchange rate determined on the Interbank Market, prevailing at the transaction date. Net foreign exchange gains or losses, arising from foreign currency transactions, are recorded in the income statement as foreign exchange gains or losses. Foreign exchange gains and losses include differences originating from translation of loans with foreign currency clause. Commitments and contingencies denominated in foreign currency are translated into dinars at the official exchange rate of the National Bank of Serbia prevailing at the balance sheet date. (e) Provision for identified and unidentified risks The provision for identified and unidentified risks represents a provision for balance sheet and off-balance sheet items and is calculated in accordance with the Decision of the National Bank of Serbia on the Criteria for Classification of On-Balance Sheet Assets and Off-Balance Sheet Items According to the Level of Collectibility and Level of Special Provision of Banks and Other Financial Organisations. In line with the above mentioned Decision, the total receivables from all debtors (balance and off balance sheet exposures) are classified in categories from A to D, depending on the possibility of collection of these receivables. The possibility for collection is assessed based on the debt servicing history and the financial condition of the debtors. The exposure for provisioning of each debtor can be reduced for the value of certain allowable collateral and deductible items as determined by the Decision of the National Bank of Serbia. Based on the classification of the receivables a provision for identified risks and a reserve for unidentified risks are established. The provision for identified risks is calculated for all receivables classified into rating categories B, V, G and D, on their net exposure for provisioning as follows: 5% for receivables classified as B, 25% for receivables classified as V, 50% for receivables classified as G and 100% for receivables classified as D. A distinction is made between a specific provision, which is charged against entirely impaired assets and a general provision which is charged as for assets classified into the rating categories. The provision for identified losses is recorded as an allowance for loan and other losses in the income statement and as a provision for loan and other losses deducted against assets i.e. as a provision for commitments and contingencies in the liabilities side of the balance sheet for the off balance sheet items. 9
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (e) Provision for identified and unidentified risks (continued) The reserve for unidentified losses is calculated for all receivables (balance sheet and off balance sheet items) classified into the A rating category with 1% provision. The reserve for unidentified losses is recognised as a deduction from net profit for the period and is recorded as a separate reserve for unidentified risks into equity. Up to April 2004, and in accordance with the National Bank of Serbia requirements, the Bank recorded the reserve for unidentified risks as an allowance for loan and other losses in the income statement and as a provision for loan and other losses deducted against assets i.e. as a provision for commitments and contingencies in the liabilities side of the balance sheet for the off balance sheet items. In accordance with changes to the above mentioned Decision effective from 31 March 2004, the Bank transferred the provision for unidentified risks from the provision accounts in the balance sheet to the reserve for unidentified risks in the equity. (f) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents include cash and cash equivalents, as well as obligatory reserves in dinars with the National Bank of Serbia and balances on the current accounts held with the National Bank of Serbia and other domestic and foreign banks. (g) Loans to customers All loans and advances to customers originated by the Bank are recognised in the balance sheet when cash is advanced to borrowers. At the balance sheet date, loans are stated at the principal amount outstanding, net of any amounts written off, and identified provisions for loan losses. The identified provision for potential losses is estimated and allocated in line with the methodology prescribed by the National Bank of Serbia, as disclosed in the Note 2(e) above. Loans and advances in dinars, with contracted exchange rate clause, are revalued in accordance with the middle exchange rate as published by the National Bank of Serbia at the balance sheet date. The difference between the nominal value of the uncollected amount of the principal and the amount calculated from foreign currency clause applied is disclosed within loans and advances to customers. Income arising from foreign currency clause applied is recorded in the income statement as foreign currency gains or losses (Note 5). (h) Investment securities held to maturity Investment securities held to maturity represent financial assets with fixed payments or payments that could be determined, as well as with fixed maturity dates. Securities held-to-maturity entirely comprise of discounted cheques. 10
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Investment securities held to maturity (continued) Investment securities held to maturity are measured at cost, less any identified provision for losses. The provision for losses on investment securities held to maturity is calculated as described in note 2(e) above. (i) Investment securities and equity investments available for sale Securities intended to be held for an indefinite period of time, and that could be sold in order to maintain the liquidity or due to changes in interest rates, foreign exchange rates or value of equity, are classified as securities available for sale. Investment securities comprise equity instruments of other legal entities that do not have a quoted market price in an active market. Investment in share of other legal entities are valued at cost, less of any provision for permanent diminution in value and provision for identified losses, which is estimated as described in note 2(e) above. (j) Reverse repurchase agreements Assets purchased with a corresponding commitment to resell at a specified future date (reverse repurchase agreements) are not recognized in the balance sheet as investments in securities. Amounts paid under these agreements are included in deposits due from banks. The difference between the purchase and resale price is treated as interest income using the effective yield method. All the repurchase agreements and reverse agreements are with the National Bank of Serbia. (k) Property, equipment and intangible assets Property, equipment and intangible assets are stated at cost less accumulated depreciation. Depreciation of property, equipment and intangible assets is provided by applying the straight-line basis, according to which the purchase cost is being written off during the estimated useful lives. The annual depreciation rates are as follows: Computer software 20% Computers 20% Furniture and equipment 10% - 16% Motor vehicles 15.5% Assets in course of construction are not depreciated. Depreciation on property and equipment is applied when the related assets are put into use. The investment and current maintenance expenses are recorded in the income statement at the moment they occur. The expenses related to reconstruction and improvements, which change the capacity or the purpose of the fixed assets, are capitalised and they increase the purchase cost of a fixed asset. 11
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (k) Property, equipment and intangible assets (continued) The annual depreciation rates that the Bank has applied for calculating the depreciation for the year 2005 for financial reporting purposes differ from the prescribed depreciation rates that are recognised in the Bank's Tax return for determining the taxable income. The calculation of the depreciation for tax purposes is determined by the Law on Corporate Income Tax and the Rules on the Manner of Fixed Assets Classification in Groups and Depreciation for Tax Purposes, which prescribes depreciation of buildings by applying the proportional method, while other fixed assets and intangible investments are depreciated by applying the decelerated method, where the depreciation rates are set by depreciation groups. (l) Employees benefits The Bank has neither pension funds nor share-based remuneration options, and consequently there are no identified obligations as of December 31, 2005. The present value of liabilities regarding other short-term employee benefits such as anniversary awards and severance pays for retirement is not material, and no provision has been made for such purposes in the Bank s 2005 financial statements (m) Income taxes Current income tax Income tax represents the amount calculated and payable under tax regulations of the Republic of Serbia. Tax authorities determine the estimated monthly advance payable tax on profit. Final tax on profit of 10%, effective from 1 January 2005, is determined by the Bank's Tax return. Pursuant to the tax regulations, the tax basis includes the income from the income statement, adjusted for certain income and expenses, and reduced for investments in fixed assets and newly hired employees. The Law on Income Tax applicable in the Republic of Serbia does not allow any tax losses of the current period to be used to recover taxes paid within a specific carry back period. However, any current year losses disclosed in the Tax return may be used for reduction of the taxes to be paid in future periods, but no longer than ten years. Deferred income tax Deferred income tax is provided and recorded, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Bank s financial statements. Deferred tax liabilities are recognised for all taxable temporary differences between the tax basis of assets and liabilities at the balance sheet date, and their amounts disclosed for financial reporting purposes, which will result in taxable amounts for future periods. Deferred income tax assets are recognised for all deductible temporary differences, unused tax assets and unused tax losses, to the extent that it is probable that future taxable profits will be sufficient to enable realisation (utilization) of deductible temporary differences, unused tax assets and unused tax liabilities. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised 12
2. SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Derivatives The Bank uses derivative financial instruments such as foreign currency forward, swap and spot contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are stated at fair value. These derivatives do not qualify for special hedge accounting and therefore any gains or losses arising from changes in fair value are taken directly to net profit or loss for the period. The Bank also contracts a currency clause with the borrowers of loans that are financed from foreign currency funds to hedge against exchange losses on receivables. The economic characteristics and risks of this embedded derivative are closely related to the economic characteristics and risks of the host contract and therefore not accounted for separately from the host contract. The change in the value of this embedded derivative is recorded in the income statement as foreign exchange gains. (o) Off balance sheet commitments and contingencies In the ordinary course of its business, the Bank enters into credit related commitments, which are recorded to off-balance sheet accounts and primarily include guarantees, letters of credit and undrawn loan commitments. Such financial commitments are recorded in the Bank s balance sheet if and when they become payable. The provision for losses related to off balance sheet commitments and contingencies is calculated as described in note 2(e), and is included as a liability in the balance sheet. (p) Operating leases - the Bank as a lessee The total payments made by the Bank under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, a payment required to be made to the lessor by way of a penalty is recognised as an expense in the period in which the termination takes place. 13
3. INTEREST INCOME AND EXPENSES Interest income Local banks 3,418 734 Foreign banks 53,498 56,358 National Bank of Serbia 169,933 78,176 Corporate customers 377,618 158,332 Foreign entities 158 116 Citizens 1,654,473 713,890 Securities 8,787 15,427 Total interest income 2,267,885 1,023,033 Interest expense Local banks 8,630 2,268 Foreign banks 103,783 26,013 Corporate customers 150,674 43,255 Other customers 1,101 - Foreign entities 10,826 24,769 Citizens 220,535 86,781 Total interest expense 495,549 183,086 Net interest income 1,772,336 839,947 14
4. FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income Foreign currency transactions 305,842 315,737 Retail operations 222,307 150,272 Loans 115,169 133,496 Visa, Master and Western Union operations 159,307 108,879 Payment operations 140,644 88,369 Guarantees and letters of credit 46,292 29,559 Commission on transactions 26,744 21,482 Brokerage services 21,958 4,083 Refund of telefax, fax, DHL expenses 515 485 Other 3,153 602 Total fee and commission income 1,041,931 852,964 Fee and commission expense Banking services 71,819 57,730 Visa operations 89,415 54,238 Payment operations 27,065 30,336 Maintenance of nostro accounts 2,129 11,543 Borrowing from EBRD 4,059 7,258 Master card operations 17,509 5,006 Transactions through Societe Generale Bank Paris 17,100 3,563 Commission on purchases and transactions with foreign currency 3,413 3,355 Received guarantees 344 975 Other 4,448 5,823 Total fee and commission expense 237,301 179,827 Net fee and commission income 804,630 673,137 5. NET FOREIGN EXCHANGE GAINS Foreign exchange gains Foreign exchange gains 1,640,735 988,971 Gains from translation of loans with foreign currency clause 1,011,162 818,444 Total foreign exchange gains 2,651,897 1,807,415 Foreign exchange losses Foreign exchange losses 2,484,983 1,876,362 Losses from translation of loans with foreign currency clause 50,036 - Losses from revaluation of shareholder s equity denominated in foreign currency at closing rates (Note 26a) - 82,632 Total foreign exchange losses 2,535,019 1,958,994 Net foreign exchange gains / (losses) 116,878 (151,579) 15
6. OTHER OPERATING INCOME Income from reversal of provision: Loans to customers (Note 14) 151,418 10,874 Interest and fees receivable (Note 12) 869 5,423 Investment securities held to maturity (Note 15) 1,741 - Other assets (Note 19) - 45 Commitments and contingencies (Note 24) 97,561 3,521 Income from refundable prepaid sales tax - 24,187 Income from canceled liabilities 11,748 2,281 Income from collected insurance claims 566 - Income from disposal of property and equipment - 284 Other income 938 1,327 Total other operating income 264,841 47,942 Based on assessment and subsequent decision from the tax authorities, the Bank recorded income from refundable prepaid sales tax originated from 2002 of CSD 24,187 thousand. At the time, the Bank recorded receivables for prepaid sales tax in the same amount. At 31 December 2005, these receivables amounted to CSD 3 thousand (31 December 2004: CSD 11,198 thousand) after the Bank offset the amount of CSD 11,195 thousand (31 December 2004: 12,989 thousand) of liabilities in respect of sales tax against these receivables (see Note 19). At 31 December 2005, the amount of CSD 10,655 thousand included under the income from cancelled liabilities relates to revenues from collected insurance fees on retail customer loans for the period from 31 January 2005 to 31 December 2005. The amount was recorded as income from cancelled liabilities because a loan insurance contract with a domestic insurance company was terminated as of 31 January 2005 and the Bank had no further liability to transfer collected insurance fees on retail loans to the third party after the agreement termination date. 7. ALLOWANCE FOR LOAN AND OTHER LOSSES Allowance for loan and other losses was charged against: Loans to customers (Note 14) 1,675,811 91,627 Interest and fees receivable (Note12) 8,110 11,929 Investment securities held to maturity (Note 15) 2,463 - Investment securities available for sale (Note 16) - 130 Other assets (Note 19) 439 6,731 Commitments and contingencies (Note 24) 237,279 7,743 Total allowance for loan and other losses 1,924,102 118,160 16
8. OTHER OPERATING EXPENSES Staff costs 698,520 442,111 Rental expenses 192,702 140,098 Amortisation of intangible assets 67,461 36,525 Depreciation of property and equipment (Note 18) 85,128 66,083 Stationery and office materials 88,995 59,378 Transport, telecommunication and mail expenses 94,363 68,994 Technical support by SG Paris 82,860 53,538 Advertising expenses 67,310 33,356 Entertainment and representation 18,732 9,525 Professional services 9,986 9,995 Maintenance of fixed assets 41,685 30,591 Business cards expenses (VISA and MASTER) 18,261 19,205 Security services 40,283 24,622 VAT 16,529 - Sales tax - 24,433 Insurance 23,364 18,435 Taxes on financial transactions - 32,217 Cleaning services 12,670 8,854 Tax on construction land 6,730 4,453 Professional publications 2,601 1,549 Maintenance of Master card program and software 5,795 8,764 Utilities 3,756 2,081 Write off of uncollected receivables 1,149 1,039 Donations 6,122 895 Complaints 990 801 Other expenses 7,183 4,484 Total other operating expenses 1,593,175 1,102,026 VAT was introduced starting from 1 January 2005. Prior to this date, the Bank was subject to sales tax. The tax on financial transactions was abolished in 2005. The staff costs for the years ended 31 December 2005 and 31 December 2004 are as follows: Net salaries 393,611 247,371 Taxes and contributions 265,135 176,160 Other personal expenses 39,774 18,580 Total staff costs 698,520 442,111 17
9. INCOME TAXES Current income tax expense - 1,845 Deferred income tax income (Note 20) (1,377) (141) Total income tax (income) / expense (1,377) 1,704 The calculation of the current income tax expense as presented in the Bank s final tax return is presented in the table below: (Loss) / Profit for the period (558,592) 189,261 Capital gains - - Capital losses - - Expenses not allowable for income tax purposes Un-supported expenses 44 - Interest on overdue taxes, contributions and other duties 7 1 Penalties paid 45 12 Total depreciation in financial statements 152,589 101,157 Expenses for health, educational, scientific, humanitarian, religious and sport purposes and environment protection 1,577 306 Provision for receivables previously not included in income, not written off as uncollectible and without proof for unsuccessful collection 979 1,816 Expenses allowable for income tax purposes Depreciation calculated for income tax purposes (138,818) (99,743) Profit subject to taxation 542,169 192,810 Accumulated loss - (162,885) Tax basis (542,169) 29,925 Tax rate 10.00% 12.33% Calculated income tax - 3,690 Decrease of tax liabilities for employment of new employees - (1,845) Income tax after decrease - 1,845 Advances paid - - Monthly advance - 125 The current income tax for the year ended 31 December 2005 has been calculated by applying the tax rate of 10% on the taxable income discloses in the Tax return (31 December 2004: 12.33%), while the deferred tax on temporary differences was calculated by applying the tax rate of 10% both for 2005 and 2004, representing the effective tax rate prescribed for the year 2005. 18
9. INCOME TAXES (Continued) The schedule below shows the reconciliation between the accounting profit and the actual tax expense for the year: (Loss) / Profit per Income Statement (558,592) 189,261 Tax effect of financial result in the Income Statement (55,859) 23,336 Capital gains - Capital losses - Tax effect of expenses that are not deductible in determining taxable profit: Un-supported expenses 4 Interest on overdue taxes and contributions 1 - Penalties paid 5 1 Expenses for health, educational, scientific, humanitarian, religious and sport purposes and environment protection 158 38 Provision for receivables previously not included in income, not written off as uncollectible and without proof for unsuccessful collection 97 224 Tax effect of expenses that are deductible in determining taxable profit: Tax effect of losses carried forward - (22,804) Effect of change in tax rate - 2,720 Total tax expense before deduction for tax credits (55,594) 3,515 Tax credit in respect of investments in fixed assets - (1,845) - Tax expense after deduction for tax credits (55,594) 1,670 Effect of applying different tax rates in the calculation of current and deferred tax: In respect of depreciation 1,377 34 Total tax expense / (income) 1,377 1,704 Effective income tax rate 9.71% 0.90% As at 31 December 2005, the Bank did not recognise the deferred tax asset in the amount of CSD 54,217 thousand in respect of the tax losses carried forward, since it cannot be determined with any reasonable (reliable) accuracy to what extent, if any, it will be utilized in the future. As at 31 December 2005, the Bank has unused tax credits in respect of investments in fixed assets, which are additional to tax depreciation allowances, in the amount of CSD 164,182 thousand (31 December 2004: CSD 97,883 thousand). In accordance with local tax regulations these tax credits can be used to reduce future current tax liabilities, up to 50% of the current tax liability up to 10 years. A deferred tax asset has not been recognised since it cannot be determined with any reasonable (certain) accuracy to what extent, if any, it will be utilized in the future. 19
10. CASH AND CASH EQUIVALENTS In dinars Cash in hand 469,013 206,163 Gyro account 665,708 458,594 1,134,721 664,757 In foreign currency Cash in hand 590,397 336,608 Foreign currency account 549,236 248,282 1,139,633 584,890 Balance at 31 December 2,274,354 1,249,647 As of 31 December 2004, the amount of CSD 7,295 thousand included in the foreign currency account of the Bank, relates to blocked funds with one foreign bank due to the sanctions imposed against the Federal Republic of Yugoslavia. During the year 2005 the funds blocked with foreign bank were released and became available. Pursuant to the Decision of the National Bank of Serbia on Banks Required Reserves Held with the National Bank of Serbia, the Bank is required to calculate and allocate the required obligatory reserves in dinars to its gyro account (effective from May 2004) amounting to 18% (2004: 21%) of the average daily balance of dinars during one month. The National Bank of Serbia pays interest on the average daily balance of allocated dinar obligatory reserves during the maintenance period that does not exceed the amount of calculated reserve requirements at the rates stipulated in the Decision on Interest Rates of the National Bank of Serbia. The average interest rate earned on the Bank s obligatory reserve in dinars for the year 2005 equalled to 2.97% per annum (2004: 2.97% per annum) and is calculated as 35% of the National Bank of Serbia base rate which for the years ended 31 December 2005 and 2004 amounted to 8.50% per annum. At 31 December 2005, the amount of the calculated dinar required reserve amounted to CSD 695,775 thousand (31 December 2004: CSD 498,560 thousand), which represented 95.70% of the calculated obligatory reserve (31 December 2004: 92% of the calculated required reserve). At 31 December 2005, the Bank had funds on its dinar gyro account in excess of the required 80% limit of the calculated obligatory reserve in dinars. 20
11. BALANCES WITH THE CENTRAL BANK AND SECURITIES ELIGIBLE FOR REDISOUNTING WITH THE CENTRAL BANK In dinars Overnight deposits with NBS 500,000 290,000 500,000 290,000 In foreign currency Obligatory reserve with the NBS 7,912,170 1,767,736 7,912,170 1,767,736 Balance at 31 December 8,412,170 2,057,736 The Bank places the excess liquid funds with the National Bank of Serbia as overnight deposits. The average interest rate earned on the overnight deposits for 2005 equalled to 3.40% per annum (2004: 2.97% per annum). The obligatory reserve in foreign currency represents the minimal reserve in foreign currency allocated in line with the National Bank of Serbia s Decision on Banks Required Reserves Held with the National Bank of Serbia, which prescribes that banks are required to allocate the obligatory reserves to their account amounting to 38% (2004: 21%) of the average daily balance of foreign currency deposits during one month, as well as on the amount of average daily bookkeeping balance of deposits in dinars with foreign exchange clause. Pursuant to the Decision of the National Bank of Serbia, from December 2005, the principal amount used for calculation of the obligatory reserve also includes the citizens foreign exchange savings, which were previously held on a separate account with the National Bank of Serbia and they were recorded within the Due to banks section (see Note 13). The National Bank of Serbia pays interest on the average daily balance of allocated foreign currency obligatory reserve during the maintenance period that does not exceed the amount of calculated reserve requirements at the rates stipulated in the Decision on Interest Rates of the National Bank of Serbia. The average interest rates earned on the obligatory reserve in foreign currency in 2005 amounted to 0.40% per annum for EUR (2004: 0.40% per annum) and 0.53% per annum for USD (2004: 0.27% per annum). 21
12. INTEREST AND FEES RECEIVABLE (in thousands of dinars) In dinars 2005 2004 In foreign currency Total In dinars In foreign currency Total NBS 2,607-2,607 1,848 5,603 7,451 Related banks - 296 296-89 89 Other banks 503 787 1,290 - - - Corporate customers 38,488 10,161 48,649 20,444 7,880 28,324 Citizens 183-183 45-45 Other 121 2 123 - - - Total interest and fees 41,902 11,246 53,148 22,337 13,572 35,909 Provision for impairment (7,663) (614) (8,277) (1,036) - (1,036) Interest and fee receivables, net at 31 December 34,239 10,632 44,871 21,301 13,572 34,873 The movement in the provision for impairment for the years ended 31 December are as follows: Balance at 1 January 1,036 5,517 Transfer of category A provisions to reserves for unidentified risks (Note 26d) - (142) Charge for the year (Note 7) 8,110 11,929 Reversal of provisions (Note 6) (869) (5,423) Transfer to suspended interest - (10,845) Balance at 31. December 8,277 1,036 The transfer of the general provision for losses to suspended interest in amount of CSD 10.845 thousand entirely relates to one corporate customer that during 2004 was specifically provisioned. 22
13. DUE FROM BANKS In dinars Overnight placements with other banks 50,000 - Amounts held with the NBS in respect of REPO operations 532,642 - Other financial placements: - Transfer account of the gyro account (93) 423 - The NBS - 3,539 582,549 3,962 In foreign currency Short-term deposits and loans: - Short-term deposits with related banks 1,629,066 1,507,055 - Loans to other banks 85,500 - Other financial placements: - The NBS - Guarantee deposit with The Central Registry for Securities 3,420 3,155 - Citizens foreign exchange savings deposited with the NBS - 3,412,130 1,717,986 4,922,340 Balance at 31 December 2,300,535 4,926,302 Overnight placements with other banks in amount of CSD 50,000 thousand are entirely concentrated with one local bank. The overnight deposit is with maturity of 5 days and bears interest of 9.50% per annum. The amounts held with the NBS in respect of REPO operations comprise of CSD 526,168 thousand paid to the National Bank of Serbia for acquiring bonds issued by the Ministry for Finance of Serbia and CSD 6,474 thousand of interest accrued on these bonds. These reverse repurchase agreements are for period of 12 to 61 days and bear annual interest rates ranging between 18.25% to 20% per annum. The nominal amount of the acquired bonds (CSD 503,800 thousand) is recorded as an off balance sheet item (see Note 27b). The short-term deposits with related banks are entirely concentrated with Societe Generale Paris. The deposits are for a period of 5 days (2004: 4 days) and bear the following interest rates (at year end): deposits in EUR 2.27% per annum, deposits in USD 4.09% per annum and deposits in GBP 4.45% per annum. The time deposits with related banks by currency are as follows: Short-term deposits with related banks: In EUR 940,500 1,348,934 In USD 613,861 86,903 In GBP 74,705 71,218 Balance at 31 December 1,629,066 1,507,055 23
13. DUE FROM BANKS (Continued) Short term loans with other banks in amount of CSD 85,500 thousand (equivalent of EUR 1,000,000) are entirely concentrated in one local bank. The short-term loan is for a period of two months and bears an annual interest rate of 6.50% per annum. Foreign currencies amounting to CSD 3,412,129 thousand as of 31 December 2004 were placed with the National Bank of Serbia in accordance with the Decision on the Measures of Maintaining Foreign Exchange Liquidity of the Banks to Assure Payment of Citizens' Foreign Exchange Savings Deposits, which prescribes that banks are obliged to maintain the savings deposits on accounts held with the NBS amounting to 47% of the foreign exchange savings deposits outstanding on the last day of the month, reduced by the amount of foreign exchange funds or foreign cash deposited for a contractual earmarked use, as well as the amount of foreign exchange funds credited to bank accounts for the purpose of payout of foreign exchange pensions. Pursuant to the NBS's Decision, from December 2005, the citizens' foreign exchange savings are included in the principal amount for calculation of obligatory foreign exchange reserves allocated on the account held with the NBS (see Note 11). 24
14. LOANS TO CUSTOMERS (in thousands of dinars) Short term loans 2005 2004 Short Long term Long term loans Total loans term loans Total In dinars Corporate customers 4,554,188 2,617,054 7,171,242 2,361,959 1,617,439 3,979,398 Citizens 1,032,455 10,618,026 11,650,481 565,738 7,553,572 8,119,310 Other entities 250-250 - - - Current maturity of long-term loans 5,434,745 (5,434,745) - 3,840,330 (3,840,330) - 11,021,638 7,800,335 18,821,973 6,768,027 5,330,681 12,098,708 In foreign currency Corporate customers 956,014 629,227 1,585,241 606,560 698,729 1,305,289 Other entities - 974 974 - - - Current maturity of long-term loans 127,509 (127,509) - 123,915 (123,915) - Payments on behalf of guarantees and letters of credit 37,225-37,225 - - - Receivables for repurchase of foreign currencies - - - 266,896-266,896 Other receivables in calculation 4,058-4,058 2,670-2,670 1,124,806 502,692 1,627,498 1,000,041 574,814 1,574,855 Total gross loans to customers at 31 December 12,146,444 8,303,027 20,449,471 7,768,068 5,905,495 13,673,563 Specific provision (52,464) (68,817) (121,281) (51,053) (839) (51,892) General provision (430,884) (1,099,569) (1,530,453) (29,295) (46,172) (75,467) (483,348) (1,168,386) (1,651,734) (80,348) (47,011) (127,359) Loans net loans to customers at 31 December 11,663,096 7,134,641 18,797,737 7,687,720 5,858,484 13,546,204 The amount of CSD 397,755 thousand included in the Bank s long-term loan portfolio to citizens comprises loans disbursed to individuals from the EBRD long-term borrowing for financing housing purposes (see Note 22). The interest rates on the granted sub-loans range from EURIBOR plus 2.25% to EURIBOR plus 9% per annum. In 2005, short-term loans to corporate customers in dinars and foreign currency bear interest rates ranging from 4% to 18.50% per annum. Long-term loans to corporate customers in dinars and foreign currency bear interest at the rate ranging from 2% to 18.50% per annum. Short-term loans to citizens have been granted at the rate from 7% to 18% per annum. 25
14. LOANS TO CUSTOMERS (Continued) Movements on the account of loans to customers gross for the years ended 31 December are shown in the table below: Short-term loans Long-term loans Other placements (in thousands of dinars) In dinars In foreign currency In dinars In foreign currency In foreign currency Total Gross loans to customers at 1.1.2004. 1,784,509 303,523 757,207-4,291,106 7,136,345 Current maturity - 2003 (804,832) (824) 804,832 824 - - Transfer of deposits with related banks to due from banks (Note 13) - - - - (4,179,252) (4,179,252) New placements 11,468,108 1,043,805 10,447,086 750,856-23,709,855 Net increase of other placements - - - - 157,342 157,342 Loans repaid (9,718,921) (814,741) (3,457,725) (92,951) - (14,084,338) Current maturity - 2004 3,840,330 123,915 (3,840,330) (123,915) - - Foreign exchange gains - 74,797-40,000 370 115,167 Revaluation of loans with foreign currency clause 198,833-619,611 - - 818,444 Gross loans to customers at 31.12.2004. 6,768,027 730,475 5,330,681 574,814 269,566 13,673,563 Current maturity - 2004 (3,840,330) (123,915) 3,840,330 123,915 - - New placements 19,394,946 2,799,423 12,998,360 710,963-35,903,692 Net decrease of other placements - - - - (241,089) (241,089) Loans repaid (17,299,513) (2,510,402) (9,331,654) (829,041) - (29,970,610) Current maturity - 2005 5,434,745 127,509 (5,434,745) (127,509) - - Foreign exchange gains - 60,433-49,550 12,806 122,789 Revaluation of loans with foreign currency clause 563,763-397,363 - - 961,126 Gross loans to customers at 31.12.2005. 11,021,638 1,083,523 7,800,335 502,692 41,283 20,449,471 26
14. LOANS TO CUSTOMERS (Continued) Concentration of loans to customers, stated in gross amount as of December 31, is significant in the following industries: Citizens 11,650,480 8,468,215 Industry 4,139,433 4,136,928 Trade 2,796,984 630,975 Agriculture 291,750 253,938 Mining and energy 38,604 - Communications 52,655 - Construction 212,635 145,011 Services 101,754 38,496 Other 1,165,176 - Total loans to customers, gross at 31 December 20,449,471 13,673,563 The movement in the provision for loan impairment for the years ended 31 December 2004 and 31 December 2005 is as follows: (in thousands of dinars) Specific provision General provision Total Balance at 1 January 2004 17,577 89,206 106,783 Transfer of category A provisions to reserves for unidentified risks (Note 26d) - (60,177) (60,177) Charge for the year (Note 7) 34,315 57,312 91,627 Reversal of provisions (Note 6) (10,874) (10,874) Balance at 31 December 2004 51,892 75,467 127,359 Charge for the year (Note 7) 79,112 1,596,699 1,675,811 Reversal of provisions (Note 6) (9,723) (141,695) (151,418) Write-offs - (18) (18) Balance at 31 December 2005 121,281 1,530,453 1,651,734 27
15. INVESTMENT SECURITIES HELD TO MATURITY Discounted cheques - in dinars Nominal value 2,919 - Unamortized discount (32) - 2,887 - Less: Provision for impairment (722) - Total 2,165 - The movement in the provision for impairment for the years ended 31 December is as follows: Opening balance at 1 January - - Charge for the year (Note 7) 2,463 - Reversal of provisions (Note 6) (1,741) - Balance at 31 December 722-16. INVESTMENT SECURITIES AND EQUITY INVESTMENTS AVAILABLE FOR SALE In dinars Other entities 398 398 In foreign currency Other entities 167 153 Investment in shares, gross at 31 December 565 551 Less: Provision for impairment (132) (132) Investment in shares, net at 31 December 433 419 The movement in the provision for impairment for the years ended 31 December is as follows: Balance at 1 January. 132 10 Transfer of category A provisions to reserves for unidentified risks (Note 26d) - (8) Charge for the year (Note 7) - 130 Reversal of provisions (Note 6) - - Balance at 31 December 132 132 28
17. INTANGIBLE ASSETS Leasehold improvements 246,807 141,128 Software 57,817 48,762 Patents, licenses and similar rights 24,494 15,107 Prepaid long term leases 89,476 21,770 418,594 226,767 Provision (130,416) (62,955) Balance at 31 December 288,178 163,812 The movement of intangible assets for the years ended 31 December is as follows: (in thousands of dinars) Leasehold improvements Software Patents, licenses and similar rights Prepaid long term leases Total Cost Balance at 1.1.2004. 120,393 38,676 3,804-162,873 Additions 21,544 - - 21,770 43,314 Transfers from advances for fixed assets 1,164 10,086 11,303-22,553 Transfers to other accounts (1,904) - - - (1,904) Disposals and write offs (69) - - - (69) Balance at 31.12.2004. 141,128 48,762 15,107 21,770 226,767 Additions 106,453 - - 67,706 174,159 Transfers from assets under construction - 7,540 9,387-16,927 Transfers from other accounts (774) 1,515 - - 741 Balance at 31.12.2005. 246,807 57,817 24,494 89,476 418,594 Accumulated depreciation Balance at 1.1.2004. 22,737 3,595 - - 26,332 Depreciation 25,372 7,937 1,765 1,451 36,525 Transfer from fixed assets - 110 - - 110 Transfer to other accounts (12) - - - (12) Balance at 31.12.2004. 48,097 11,642 1,765 1,451 62,955 Depreciation 35,718 10,151 3,335 18,257 67,461 Balance at 31.12.2005. 83,815 21,793 5,100 19,708 130,416 Net book value at 31.12.2005. 162,992 36,024 19,394 69,768 288,178 Net book value at 31.12.2004. 93,031 37,120 13,342 20,319 163,812 29
18. PROPERTY AND EQUIPMENT The movement of property and equipment for the years ended 31 December 2004 and 31 December 2005 is as follows: (in thousands of dinars) Buildings Equipment Advances Assets under construction Total Cost Balance at 1.1.2004. - 367,126 11,511 146,664 525,301 Additions - - 128,588 350,984 479,572 Transfers - 48,784 (117,546) 68,762 - Transfer to intangible assets - - (22,553) - (22,553) Disposals - (331) - - (331) Balance at 31.12.2004. - 415,579-566,410 981,989 Additions 272,747 - - 392,426 665,173 Transfer to assets under construction (1,639) 196,958 - (195,319) - Transfer to intangible assets (16,927) (16,927) Disposals - (293) - - (293) Balance at 31.12.2005. 271,108 612,244-746,590 1,629,942 Accumulated depreciation Balance at 1.1.2004. - 83,183 - - 83,183 Depreciation - 66,083 - - 66,083 Transfer to intangible assets - (110) - - (110) Disposals - (67) - - (67) Balance at 31.12.2004. - 149,089 - - 149,089 Depreciation - 85,128 - - 85,128 Disposals - (108) - - (108) Balance at 31.12.2005. - 234,109 - - 234,109 Net book value at 31.12.2005. 271,108 378,135-746,590 1,395,833 Net book value at 31.12.2004. - 266,490-566,410 832,900 30