Financial statements and independent auditor s report Sileks Banka ad, Skopje 31 December 2007
Sileks Banka ad, Skopje Contents Page Independent Auditor s Report 1 Statement on income 3 Balance sheet 4 Statement of changes in equity 5 Statement of cash flows 6 Notes to the financial statements 7
Independent Auditor s Report Grant Thornton DOO M.H.Jasmin 52 v-1/7 1000 Skopje Macedonia T +389 (2) 3214 700 F +389 (2) 3214 710 www.grant-thornton.com.mk To the Management and Shareholders of Sileks Banka ad, Skopje We have audited the accompanying financial statements of Sileks Banka ad, Skopje ( the Bank ), which comprise of the Balance sheet as at 31 December 2007, and the Statement of income, Statement of changes in equity and Statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes, included on pages 3 to 33. The financial statements of the Bank as of and for the year ended 31 December 2006 were audited by another auditor whose report dated 19 April 2007 expressed a qualified opinion referring to the fair value of property, plant and equipment, property held for sale, investments properties and available-for-sale securities. Management s responsibility for financial statements The management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. Chartered Accountants Macedonian member firm of Grant Thornton International Ltd
Sileks Banka ad, Skopje 3 Financial Statements 31 December 2007 Statement of income (000 mkd) Year ended 31 December Notes Interest income 50,705 36,727 Interest (expense) (16,688) (19,974) Net interest income 5 34,017 16,753 Fee and commission income 31,577 24,873 Fee and commission (expense) (5,176) (6,381) Net fee and commission income 6 26,401 18,492 Dividend income 7 3,822 1,081 Other operating income 8 11,986 27,902 Operating income 76,226 64,228 Impairment (losses), net 9 (4,682) (5,682) Foreign exchange gains / (losses), net 10 2,643 (3,104) Other operating (expense) 11 (82,446) (53,032) Operating (expense) (84,485) (61,818) (Loss) / profit before tax (8,259) 2,410 Income tax expense 12 - (541) Net (loss) / profit for the year (8,259) 1,869 See accompanying Notes to the financial statements
Sileks Banka ad, Skopje 5 Financial Statements 31 December 2007 Statement of changes in equity Share capital Reserves Accumulated (loss) Total At 01 January 2006 600,522 7,204 (46,961) 560,765 Profit for the year - - 1,869 1,869 Allocation of prior year earnings - 322 (322) - At 31 December 2006 600,522 7,526 (45,414) 562,634 At 01 January 2007 600,522 7,526 (45,414) 562,634 (Loss) for the year - - (8,259) (8,259) Effect from revaluation of property, plant and equipment - 13,996-13,996 Allocation of prior year earnings - 1,869 (1,869) - At 31 December 2007 600,522 23,391 (55,542) 568,371 See accompanying Notes to the financial statements
Sileks Banka ad, Skopje 6 Financial Statements 31 December 2007 Statement of cash flows (000 mkd) Year ended 31 December Notes Operating Interest and commission received 91,848 66,166 Interest and commission paid (21,481) (25,014) Cash paid to suppliers and employees (53,371) (55,814) Cash flows from operating profits before changes in operating assets and liabilities 16,996 (14,662) Changes in operating assets and liabilities Loans and advances to banks (36,437) 18,552 Loans to customers 55,166 (100,629) Property held for sale 2,350 (2,692) Investments properties 39,131 29,562 Other assets 255 9,854 Due to banks 27,916 (41,757) Due to customers 263,006 182,702 Other liabilities (5,416) 4,067 362,967 84,997 Investing Purchase of equipment and other assets (2,385) (18,950) Dividends received 921 370 Sale of available-for-sale securities, net 34,941-33,477 (18,580) Financing Increase in / (proceeds from) borrowings, net 4,429 (1,059) 4,429 (1,059) Change in impairment provision included in cash and balances with the National Bank (570) - Net change in cash and cash equivalents 400,303 65,358 Cash and cash equivalents at the beginning 13 182,687 117,329 Cash and cash equivalents at the end 13 582,990 182,687 See accompanying Notes to the financial statements
Sileks Banka ad, Skopje 7 Notes to the financial statements 1 General Sileks Banka AD, Skopje (hereinafter the Bank ) is a Shareholding Company incorporated in the Republic of Macedonia. The address of its registered head office is Gradski Stadion bb, 1000 Skopje, Republic of Macedonia. The Bank has been licensed by the National Bank of the Republic of Macedonia for conducting payment transfers, credit and deposit activities within the country and abroad. The total number of employees in the Bank as of 31 December 2007 and 2006 is 65, and 64 employees, respectively. 2 Accounting policies Following are the principal accounting policies adopted in the preparation of these financial statements. These accounting policies have been consistently applied to all previous years presented, unless otherwise stated. 2.1 Basis of preparation These financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared under the historical cost convention, as modified by the presentation of property, plant and equipment at their revalued cost. The preparation of these financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Bank s management to exercise its judgment in the process of applying the accounting policies. The areas including a higher level of judgment or complexity, or the areas where the assumptions and valuations are significant for the financial statements, have been disclosed in Note 4: Critical accounting estimates and judgments. These financial statements are prepared as of and for the years ended 31 December 2007 and 2006. Current and comparative data presented in these financial statements are expressed in thousands of Denars. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.
Sileks Banka ad, Skopje 8 Accounting policies (continued) Basis of preparation (continued) (a) Standards, amendments and interpretations effective in 2007 IFRS 7 - Financial instruments: Disclosures and the complementary amendment to IAS 1 Presentation of financial statements Capital disclosures, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Bank s financial instruments, or the disclosures relating to taxation and trade and other payables. IFRIC 8 - Scope of IFRS 2 requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Bank s financial instruments financial statements. IFRIC 10 - Interim financial reporting and impairment, prohibits the impairment losses recognized in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Bank s financial statements. (b) Standards, amendments and interpretations effective in 2007 but not relevant The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2007 but they are not relevant to the Bank s operations: IFRS 4 - Insurance contracts, IFRIC 7 - Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies, and IFRIC 9 - Re-assessment of embedded derivatives. (c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Bank The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Bank s accounting periods beginning on or after 1 January 2008, but the Bank has not early adopted them: IAS 23 (Amendment) - Borrowing costs (effective from 1 January 2009). The Bank will apply IAS 23 (Amended) from 1 January 2009 but is currently not applicable to the Bank as there are no qualifying assets. IFRS 8 - Operating segments (effective from 1 January 2009). The Bank will apply IFRS 8 from 1 January 2009. The expected impact is still being assessed in detail by management, but it appears likely that the number of reportable segments, as well as the manner in which the segments are reported, will change in a manner that is consistent with the internal reporting provided to the chief operating decision-maker. IFRIC 11 - IFRS 2 Group and treasury share transactions (effective from 1 March 2007). This interpretation does not have an impact on the Bank s financial statements. IFRIC 12 - Service concession arrangements (effective from 1 January 2008). IFRIC 12 is not relevant to the Bank s operations because the Bank does not provide for public sector services. IFRIC 13 - Customer loyalty programs (effective from 1 July 2008). IFRIC 13 is not relevant to the Bank s operations because the Bank does not operate any loyalty programs. IFRIC 14 - IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction (effective from 1 January 2008). The Bank will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Bank s accounts. According to the Bank s management judgment, the application of these new interpretations will not have a material impact on the entity s financial statements in the period of initial application.
Sileks Banka ad, Skopje 9 Accounting policies (continued) 2.2 Foreign currency translation Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated at the balance sheet date using official rates of exchange ruling on that date, and any foreign exchange gains or losses, resulting from foreign currency translation, are included in the statements of income in the period in which they arose. The middle exchange rates used for conversion of the balance sheet items denominated in foreign currencies are as follows: 31 December 2007 31 December 2008 1 EUR 61.2016 Denars 61.1741 Denars 1 USD 41.6564 Denars 46.4496 Denars 1 CHF 36.8596 Denars 38.0693 Denars 2.3 Offsetting Financial assets and liabilities are offset and reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the assets and settle the liability simultaneously. 2.4 Interest income and expense Interest income and expense are recognized in the income statement for all interest bearing financial assets and liabilities using the effective interest method. 2.5 Fee and commission income Fee and commission income is recognized in the income statement on an accrual basis when the service has been provided. 2.6 Dividend income Dividends are recognized when the right to receive payments is established. 2.7 Financial assets The Bank classifies its financial assets in the following categories: loans and receivables, held-tomaturity financial assets and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money or services directly to a debtor with no intention of trading the receivable. Available for sale financial assets Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Held to - maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Were the Bank to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available for sale. As of 31 December 2007 and 2006 the Bank does not have any financial assets held to maturity.
Sileks Banka ad, Skopje 10 Accounting policies (continued) Financial assets (continued) Purchases and sales of financial assets held to maturity and available - for - sale are recognized on trade-date the date on which the Bank commits to purchase or sell the asset. Loans are recognized when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Available-for-sale investments are subsequently stated at their fair value. Loans and receivables and held to maturity investments are carried at amortized cost. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in profit or loss. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. 2.8 Impairment of financial assets Assets carried at amortized cost The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: Delinquency in contractual payments of principal or interest, Cash flow difficulties experienced by the borrower, Breach of loan covenants or conditions, Initiation of bankruptcy proceedings, Deterioration of the borrower s competitive position, and Deterioration in the value of collateral. The Bank assesses the existence of objective evidence for impairment on individual basis for individually significant financial assets and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Bank s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated.
Sileks Banka ad, Skopje 11 Accounting policies (continued) Impairment of financial assets (continued) When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement. Assets carried at fair value The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. Significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for availablefor-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value is recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement. 2.9 Intangible assets Computer software Costs associated with development or maintaining computer software programmes are recognised as an expense as incurred. Costs directly associated with identifiable and unique software products controlled by the Bank that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Computer software development costs recognized as assets are amortized using the straight-line method over a period of four years. Other intangible assets Expenditure to acquire rights and licenses is capitalized and amortized using the straight-line method over a period of four years. 2.10 Property, plant and equipment Property, plant and equipment are carried at their revalued cost, determined through an appraisal carried out by independent certified valuers at 31 December 2007. Any revaluation effect is taken to an asset revaluation reserve, included within the equity. Subsequent purchases are included in the assets carrying value or recognized as a separate asset, respectively, only when there is a probability of future inflow of Bank s economic benefits related with the item, and when the items cost value may be reasonably measured. All other maintenances and repairs are recognized as expenses in the income statement during the financial period in which they occur. Property, buildings and equipment subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Where an asset s carrying amount is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The recoverable amount is the higher of an asset s net selling price and value in use. Gains and losses on disposal or retirement are determined by comparing the disposal proceeds with the carrying amount. These are included in the income statement in the period in which they are incurred.
Sileks Banka ad, Skopje 12 Accounting policies (continued) 2.11 Investments properties Investments properties are initially recognized at cost, including also the expenses related directly to the purchase of assets. Subsequently, the investments properties are carried at fair value. Gains or losses resulting from changes in fair value of investments properties are included in proft or loss for the period when incurred. 2.12 Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and balances with Central Bank. 2.13 Provision A provision is recognised when the Bank has a present obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of provision is the present value of the expenditures expected to be required to settle the obligation. 2.14 Employee benefits The Bank contributes to its employees as prescribed by the local social security legislation. Contributions, based on salaries, are made to the national Pension Fund and the obligatory private pension funds. There is no additional liability regarding these contributions as at the balance sheet date. In addition, all employers in the Republic of Macedonia are obligated to pay to the employees a separate minimum amount on retirement equal to three months of the average monthly salary applicable in the country at the time of retirement. The Bank has not provided for the employees accrued separate minimum amount on retirement, as this amount would not have a material effect on the financial statements. 2.15 Income tax Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is calculated and paid in accordance with the Macedonian Tax Law. Final taxes on profit of 12 % (2006: 15%) are payable based on the annual profit shown in the statutory statement of income as adjusted for items, which are non-assessable or disallowed. According to the changes in the tax legislation, legal entities may use the tax losses of the current period either to recover tax paid within a specific carry-back period or to reduce or eliminate tax to be paid in future periods. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used in determination of deferred income tax. Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The Bank has not recognized any deferred tax liability or asset at 31 December 2007 and 2006, as there are no temporary differences existing at that date. 2.16 Borrowings
Sileks Banka ad, Skopje 13 Accounting policies (continued) Borrowings are recognized initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. 2.17 Share capital Ordinary shares and preference shares are classified as equity. Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. Dividends on ordinary shares Dividends on ordinary shares are recognized in equity in the period in which they are approved by the Company s shareholders. Dividends for the year that are declared after the balance sheet date are dealt with in the subsequent events note. Treasury shares Where the Bank purchases equity share capital, the consideration paid is deducted from total shareholders equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders equity. 2.18 Fiduciary activities The Bank commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Bank. 2.19 Off balance commitments and contingencies The Bank undertakes liabilities in its operating activities arising from loan placements accounted for in the off balance accounts, which primarily include guarantees and letter of credits. These financial liabilities are accounted for in the balance sheet when become recoverable. Impairment provision related to off balance commitments and contingencies are recognized as disclosed within impairment of financial assets in this Note and are included as a liability within the Balance sheet. 2.20 Subsequent events Subsequent events that provide additional information about the Bank s financial position at the balance sheet date (adjusting events) are reflected in the financial statements. Those subsequent events that are not adjusting events are disclosed in the notes when material.
Export & Credit Bank Inc., Skopje 14 3 Financial risk management The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of risks. The Bank s aim is to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank s financial performance. The Bank s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. Risk management is carried out by the Risk Management Department under policies approved by the Board of Directors. This department identifies and evaluates financial risks in close co-operation with the Bank s operating units. The Board of Directors provides certain pre approved writen policies and procedures that cover overall risk management, as well as specific areas, such as foreign exchange risk, interest rate risk and credit risk. 3.1 Credit risk The Bank takes on exposure to credit risk, which is the risk that a counter party will cause a financial loss for the Bank by failing to discharge an obligation. Credit risk is the most important risk for the Bank s business. Therefore, the Bank s management carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances. The credit risk management and control are centralized in Risk Management Department and reported to the Board of Directors regularly. Credit risk measurement Loans and advances. The Bank s credit risk measurement is based on the established credit rating levels from A to D, each level bearing certain percentage of provision for possible impairment loss, i.e. 0-2%, 10%, 25%, 50% and 100%, respectively. This system takes into account the borrowers ability to meet interest and capital repayment obligations and the respective collaterals, as well. The Bank monitors its credit risk exposure on a revolving basis, including monthly reviews and quarterly reports. Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified in particular, to individual counter parties and groups, and to industries and countries. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sector and by country are approved quarterly by the Board of Directors. Exposure to credit risk is also managed through regular analysis of the ability of borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Collateral is one of the most traditional and common practice to mitigate the credit risk. The Bank implements guidelines on the acceptability of specific classes of collateral. The principal collateral types for loans and advances are: Mortgages over residential and business properties, Charges over business assets such as equipment, inventory and accounts receivable, and Charges over financial instruments such as shares and debt instruments (bonds).
Sileks Banka ad, Skopje 15 Financial risk management (continued) Credit risk (continued) Longer-term finance, lending to corporate entities and revolving individual credit facilities are generally secured. In addition, in order to minimize the credit loss the Bank will seek additional collateral from the counter party as soon as impairment indicators are noticed for the relevant individual loans and advances. Impairment and provisioning policies The impairment provision at year-end is derived from each of the Bank s internal rating grades as explained in Credit risk measurement paragraph above. The table below shows the percentage of the Bank s balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank s internal rating categories: Loans and advances (%) Impairment provision (%) Loans and advances (%) Impairment provision (%) A0 9.61-68.27 - A1 - - - - A2 69.96 1.4 11.38 0.23 B 7.76 0.78 4.23 0.42 V 0.48 0.12 1.01 0.25 G 1.23 0.61 1.86 0.93 D 10.96 10.96 13.25 13.25 100.00 13.87 100.00 15.08 The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the Bank: Delinquency in contractual payments of principal or interest, Cash flow difficulties experienced by the borrower, Breach of loan covenants or conditions, Initiation of bankruptcy proceedings, Deterioration of the borrower s competitive position, and Deterioration in the value of collateral. Maximum exposure to credit risk before collateral held The maximum exposure to credit risk is presented with the carrying amounts of financial assets in the balance sheet. Loans and advances The credit quality of the portfolio of loans and advances can be assessed by reference to the internal rating system adopted by the Bank as follows: Internal rating system A0 A1 A2 B V G D Total Impairment provision Fair value of collateral 31 December 2007 Individuals - - 82,491 10,791 2,129 5,497 12,687 113,595 18,696 28,500 Legal entities - - 135,906 23,839 - - 33,737 193,482 38,839 392,350 Fin. institutions 42,842-93,700 - - - 2,488 139,030 4,362 - Total 42,842-312,097 34,630 2,129 5,497 48,912 446,107 61,897 420,850 31 December 2006 Individuals 126,987-11,760 1,198-5,724 4,050 149,719 7,267 67,260 Legal entities 122,503-23,605 19,243 4,900 543 59,936 230,730 63,829 480,000 Fin. institutions 80,257-19,600 - - 2,736-102,593 1,760 - Total 329,747-54,965 20,441 4,900 9,003 63,986 483,042 72,856 547,260
Sileks Banka ad, Skopje 16 Financial risk management (continued) Credit risk (continued) Debt securities and equity instruments The following table analyses the quality of debt securities and equity capital portfolio according to the established internal ranking system adopted by the Bank. Internal rating system Impairment provision A0 A1 A2 B V G D Total 31 December 2007 Equity instruments 5,571-1,331 - - - 6,591 13,493 6,618 Treasury bills 331,400 - - - - - - 331,400-336,971-1,331 - - - 6,591 344,893 6,618 31 December 2006 Equity instruments 2,768-37,920 - - 725 6,591 48,004 7,712 Treasury bills 25,000 - - - - - - 25,000-27,768-37,920 - - 725 6,591 73,004 7,712 Concentration of risks of financial assets with credit risk exposure Geographical sectors The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorized by geographical region as of 31 December 2007 and 2006. Republic of Macedonia EU member countries Other European countries Other countries Total Cash and balances with Central Bank 582,990 - - - 582,990 Loans and advances to banks 58,840 - - 75,828 134,668 Loans to individuals 94,899 - - - 94,899 Loans to legal entities 154,643 - - - 154,643 Securities available-for-sale 6,875 - - - 6,875 Interest and other receivables 12,654 - - - 12,654 Total as of 31 December 2007 910,901 - - 75,828 986,729 Total as of 31 December 2006 549,369 - - 99,357 648,726 Industry sectors The following table breaks down the Bank s main credit exposure at their carrying amounts, as categorized by the counter parties industry sectors: Financial institutions Manufactu ring Trading Other industries Individuals (citizens) Total Cash and balances with Central Bank 582,990 - - - - 582,990 Loans and advances to banks 134,668 - - - - 134,668 Loans to individuals - - - - 94,899 94,899 Loans to legal entities - 14,977 57,593 82,073-154,643 Securities available-for-sale 6,875 - - - - 6,875 Interest and other receivables - 2,658 2,970 2,345 4,681 12,654 Total as of 31 December 2007 724,533 17,635 60,563 84,418 99,580 986,729 Total as of 31 December 2006 206,014 32,190 92,328 198,163 120,031 648,726
Sileks Banka ad, Skopje 17 Financial risk management (continued) 3.2 Market risks The Bank is exposed to market risks. Market risks arise from the open position of the Bank to the effect of fluctuation in the prevailing level of market interest rates, as well as from the effect of fluctuation in the foreign exchange rates. The Bank s management sets limits of the value of risk that may be accepted, which is mainly based on a day by day monitoring. Interest rate risk The Bank takes on exposure to effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The tables below summarizes the Bank s exposure to interest rate risks. Included in the tables are the Bank s assets and liabilities at carrying amounts as of 31 December 2007 and 31 December 2006 (in Denar thousand). Less than one month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Non interest bearing Total Assets Cash and balances with NBRM 331,401 159,454 - - - 92,135 582,990 Loans and advances to banks 58,800 73,420 2,448 - - - 134,668 Loans to customers 131,134 5,898 26,335 68,355 17,820-249,542 Securities available-for-sale - - - - - 6,875 6,875 Interest and other receivables - - - - - 12,654 12,654 521,335 238,772 28,783 68,355 17,820 111,664 986,729 Liabilities Due to banks 56,552-23,000 - - - 79,552 Due to customers 337,832 258,291 168,416 12,148 - - 776,687 Borrowings - - - 5,487 5,103-10,590 Interest and other payables - - - - 11,016 11,016 394,384 258,291 191,416 17,635 5,103 11,016 877,845 Net interest rate risk 126,951 (19,519) (162,633) 50,720 12,717 100,648 108,884 31 December 2006 Total assets 125,894 103,620 132,557 174,735 56,067 55,853 648,726 Total liabilities 57,797 230,428 266,114 10,978 6,161 15,745 587,223 Net interest rate risk 68,097 (126,808) (133,557) 163,757 49,906 40,108 61,503 The table below summarizes the effective interest rates for the monetary financial instruments during 2006 and 2007 (in %): 31 December 2007 31 December 2006 EUR USD Other MKD EUR USD Other MKD Assets Cash and balances with NBRM - - - 1.5 - - - 1.5 Loans and advances to banks 4.3-4.8 - - 3 3.5 5.24 - - Loans to customers - - 13.-15.9 4.6-17.8 20.4 6.6-21.3 Available-for-sale securities - - - - - - - - Liabilities Due to banks - - - - - - - - Due to customers 1.1-3.8 1-2.8 0.5-1.5 1-9 1.1-3.8 1-2.8 0.5-1.5 1.5-9.5 Borrowings 5 - - - - - - -
Sileks Banka ad, Skopje 18 Financial risk management (continued) Market risks (continued) Foreign currency risk The Bank takes on exposure to effects on fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The following tables summarize the net foreign currency risk position of the Bank at 31 December 2007 and 2006 (in Denar thousand). 31 December 2007 EUR USD Other MKD Total Assets Cash and balances with NBRM 184,058 3,475 2,097 393,360 582,990 Loans and advances to banks 66,483 9,025 320 58,840 134,668 Loans to customers - - 38,890 210,652 249,542 Securities available-for-sale - - - 6,875 6,875 Interest and other receivables - - - 12,654 12,654 250,541 12,500 41,307 682,381 986,729 Liabilities Due to banks 24,331 - - 55,221 79,552 Due to customers 246,837 6,643 4,811 518,396 776,687 Borrowings 5,487 - - 5,103 10,590 Interest and other payables - - - 11,016 11,016 276,655 6,643 4,811 589,736 877,845 Net currency position (26,114) 5,857 36,496 92,645 108,884 31 December 2006 Total assets 142,272 68,471 3,146 434,837 648,726 Total liabilities 129,208 7,280 5,126 445,609 587,223 Net currency position 13,064 61,191 (1,980) (10,772) 61,503 3.3 Liquidity risk The Bank is exposed to dailly calls on its available cash resources from current accounts, maturing deposits, loan draw downs and other cash calls. The tables below analyses assets and liabilities of the Bank into relevant maturity based on the remaining period at balance sheet date to the contractual maturity date (in Denar thousand). 31 December 2007 Less than one month From 1 to 3 months From 3 to From 1 to 12 months 5 years Over 5 years Total Assets Cash and balances with NBRM 331,401 251,589 - - - 582,990 Loans and advances to banks 58,800 73,420 2,448 - - 134,668 Loans to customers 131,134 5,898 26,335 68,355 17,820 249,542 Securities available-for-sale - - - - 6,875 6,875 Interest and other receivables 12,654 - - - - 12,654 533,989 330,907 28,783 68,355 24,695 986,729 Liabilities Due to banks 56,552-23,000 - - 79,552 Due to customers 337,832 258,291 168,416 12,148-776,687 Borrowings - - - 5,487 5,103 10,590 Interest and other payables 11,016 - - - - 11,016 405,400 258,291 191,416 17,635 5,103 877,845 Net liquidity gap 128,589 72,616 (162,633) 50,720 19,592 108,884 31 December 2006 Total assets 125,894 103,620 132,557 174,735 111,920 648,726 Total liabilities 73,542 230,428 266,114 10,978 6,161 587,223 Net liquidity gap 52,352 (126,808) (133,557) 163,757 105,759 61,503
Sileks Banka ad, Skopje 19 Financial risk management (continued) 3.4 Fair value estimation Fair value represents the amount at which an asset could be replaced or a liability settled on an arms length basis. Fair values have been based on management assumptions according to the profile of the asset and liability base. The following table summarizes the carrying amounts and fair values to those financial assets and liabilities not presented on balance sheet at their fair value. Carrying value Fair value Financial assets Loans and advances to banks 134,668 100,833 134,668 100,833 Loans to customers 249,542 309,353 249,542 309,353 Securities available-for-sale 6,875 40,292 8,993 44,017 Financial liabilities Due to banks 79,552 51,636 79,552 51,636 Due to customers 776,687 513,681 776,687 513,681 Borrowings 10,590 6,161 10,590 6,161 Loans and advances to banks Loans and advances to other banks comprise inter-bank placements. The fair value of placements and overnight deposits is their carrying amount due to their short-term nature. Loans and advances to customers Loans and advances are carried at amortized cost and are net of provisions for impairment. The loans and advances have predominantly floating rate. The fair value approximates their carrying value. Investments Investments comprise securities held to maturity and securities available-for-sale and are measured at fair value. Fair value is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. Other financial assets The fair value of monetary assets that includes cash and cash equivalents is considered to approximate their respective carrying values by definition and due to their short-term nature. Deposits and borrowings The estimated fair value of deposits with no stated maturity, which includes non-interestbearing deposits, is the amount repayable on demand. The fair value of the term deposits at variable interest rates approximates their carrying values as of the balance sheet date. Borrowed funds carry predominantly floating rates and due to the interest rate reprising carrying value is not materially different from their fair value.
Sileks Banka ad, Skopje 20 Financial risk management (continued) 3.5 Capital management The bank s objectives regarding capital managements are: To comply with the capital requirements by the regulators; To safeguard the Bank s ability to provide returns to shareholders; To maintain a strong capital base to support the development of its business. Capital adequacy and the use of regulatory capital are regularly monitored by the Bank s management, using techniques prescribed by national regulatory authority (National Bank of Republic of Macedonia). The required information is submitted to regulatory authority on a quarterly basis. The regulatory authority requires that each bank has to maintain capital adequacy ratio above 8%. As a result of changes in the local legislative which have occurred in 2007, there is different approach in regulatory capital calculations in 2007 regarding 2006. The Bank s regulatory capital is divided in two groups: Tier 1 that includes: ordinary and non-cumulative non-voting shares and share premium, statutory reserves and retained earnings or loss, items as a result of consolidation, less: intangible assets. Tier 2 that includes: cumulative non-voting shares and share premium, hybrid capital liabilities and subordinated liabilities. Investment in other banks or financial institution over 10% and investments in insurance and reinsurance companies and pension fund management companies are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital. According to national regulations, the risk weighted assets (on-balance and off-balance) are measured by means of a hierarchy of four risk weights classified according to nature of assets, taking into consideration the collateral or guarantees. Calculation of capital adequacy ratio includes regulatory capital and total of credit risk-weighted assets and foreign exchange risk-weighted assets. The table below summarizes the compositions of regulatory capital and the capital adequacy ratio of the Bank for the years ended 31 December regarding the requirement of regulatory authority. During these two years, the Bank complied with all of the regulatory imposed capital requirements to which the Bank is subject. Tier 1 capital 2007 Ordinary and non-cumulative non-voting shares and share premium 600,522 Items as a result of consolidation - Less reserves and retained earnings or loss 23,891 Less loss from end of year or current loss 8,259 Total qualifying Tier 1 capital 568,372 Tier 2 capital Cumulative non-voting shares and shares premium - Hybrid capital liabilities - Subordinated liabilities - Total qualifying Tier 2 capital - Deduction from regulatory capital - Total regulatory capital 568,372 Credit risk-weight assets On-balance sheet 698,801 Off-balance sheet 50,545 Total credit risk-weighted assets 749,346 Forex risk-weighted assets 26,313 Capital adequacy ratio 73.28%
Sileks Banka ad, Skopje 21 Financial risk management (continued) Capital management (continued) Tier 1 capital 2006 1. Issued ordinary shares or directly deposited funds 600,522 2. Reserves 5,970 3. Retained earnings - 4. Half year earnings discounted by 50% - 5. Less uncovered loss from previous years 47,283 6. Less current loss - 7. Less goodwill - Total Tier 1 capital 559,209 Tier 2 capital 8. Issued preference shares - 9. Revaluation reserves 1,556 10. Hybrid capital liabilities - 11. Subordinated liabilities - Total Tier 2 capital 1,556 12. Less investment in associates 40,292 13. Less no allocated provision for impairment - Total regulatory capital 520,473 Risk-weight assets On-balance sheet 881,992 Off-balance sheet 108,877 Less items 5, 6, 7, 12 and 13 87,575 Total risk-weighted assets 903,294 Aggregate open forex position 90,470 Capital adequacy ratio 53% 3.6 Compliance with legal provisions According to Article 78 of the Banking Law, Bank s property consisting of land, buildings, equipment and equity participation in non-financial institutions, as well as property acquired on the basis of uncollected receivables, that has not been sold by the Bank for 3 (three) years, should not exceed 60% of the Bank s regulatory capital. As of 31 December 2007, the Bank s property consisting of land, buildings, equipment and equity participation in non-financial institutions, as well as property, acquired on the basis of uncollected receivables, that has not been sold by the Bank for 3 (three) years, amounts to 75% of the Bank s regulatory capital.
Sileks Banka ad, Skopje 22 4 Critical accounting estimates and judgments The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Impairment losses on investments in securities available-for-sale The Bank determines that investments in securities available-for-sale are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.
Sileks Banka a.d. Skopje 23 As of and for the years ended 31 December 2007 and 2006 (All amounts expressed in Denar thousand, unless otherwise stated) 5 Net interest income Income (Expense) Income (Expense) Citizens 15,562 (14,515) 19,484 (13,845) Legal entities 18,747 (171) 12,623 (1,629) Local banks 9,159 (1,598) 1,232 (3,725) Public sector 1,063 (273) - (356) Non-residents 6,174 (1) 3,388 - Other customers - (130) - (419) 50,705 (16,688) 36,727 (19,974) Net interest income 34,017 16,753 6 Net fee and commission income Income (Expense) Income (Expense) Citizens 5,344-9,660 - Legal entities 12,232-10,754 - Local banks 487 5,176 204 6,381 Non-residents 13,514-4,255-31,577 (5,176) 24,873 (6,381) Net fee and commission income 26,401 18,492 7 Dividend income Capitalized dividends (Note 16) 2,901 711 Dividend income 921 370 3,822 1,081 8 Other operating income Rents 6,158 8,164 Income from sale of property held for rent (Note 19) - 5,937 Income from prior years 3 970 Income from collected bad and doubtful debts 4,569 10,985 Other 1,256 1,846 11,986 27,902 9 Impairment losses, net Charge/(recovery) for the year, net Charge / (recovery) for: Cash and Balances with National Bank 570 - Placements with, and loans to banks 2,602 203 Loans to customers 9,214 5,164 Available-for-sale securities (1,094) (299) Interest (6,962) (475) Other assets 48 (49) Commitments and contingencies 304 1,138 4,682 5,682