ANNUAL REPORT 2010 C O N T E N T 1. CEO LETTER 10. RISK MANAGEMENT 2. 3. 4. PIRAEUS BANK GROUP PIRAEUS BANK BULGARIA AD BOARD OF DIRECTORS AND TOP MANAGEMENT 11. INFORMATION TECHNOLOGIES AND ONLINE BANKING 12. HUMAN RESOURCES 13. BRANCH NETWORK 5. MACROECONOMIC OVERVIEW 2010 14. PIRAEUS BANK SUBSIDIARIES IN BULGARIA 6. 7. 8. 9. MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS CORPORATE BANKING AND SME DEVELOPMENT RETAIL BANKING TREASURY 14.1. PIRAEUS LEASING BULGARIA S.A. & PIRAEUS AUTO LEASING BULGARIA S.A. 14.2. PIRAEUS BEST LEASING BULGARIA S.A. 14.3. PIRAEUS INSURANCE BROKERAGE 14.4. BULFINA 15. INDEPENDENT AUDITOR S REPORT
CEO LETTER Dear Shareholders, Dear Clients, Dear Partners, Dear Employees, In 2010 the first signs of exiting the global economical crisis were noted. Although we have witnessed the first positive signs of economical development we are aware that we will need a long period of recovery before we reach the pre-crisis economical environment. What we know for sure is that the world has changed for good. In this complex and strained economical conjuncture, the Bulgarian banking sector remained stable in terms of liquidity and capital adequacy thanks to the conservative policy of the most influential banks in the country. Piraeus Bank Bulgaria managed to keep its leading position among the 10 major commercial banks in the country and thanks to its good clients portfolio and prudent cost management policy managed to maintain its strong performance during the year in terms of net profit. Piraeus Bank Bulgaria managed to keep its leading role in the local market reporting unchanged net profit amounted to BGN 45,924 million. At the end of 2010 the total assets of the Bank rose to BGN 4.1 billion, which is an increase compared to the previous year when they amounted to BGN 3.6 billion. The deposits of non-financial institutions at the end of 2010 amount to BGN 1.3 billion, showing growth of 3.4% compared to the end of 2009, while retail deposits amount to BGN 806 million with an annual growth of 11.6%. Net interest income of the Bank is BGN 130 million and the net income from commissions and fees is BGN 19 million. In 2010 we expanded our beneficial partnerships with prestigious financial institutions which significantly contributed to our Bank s efforts to improve the business climate in the country European Investment Bank, European Bank for Reconstruction and Development, Municipal Guarantee Fund for SMEs. Looking back in 2010, I believe that the capacity of the Bulgarian economy was not fully developed due to objective circumstances. The export oriented companies registered an increase of their activity which is a positive sign for the economical environment, but it is still far below their potential. Still, the low levels of consumption and the reservations of Bulgarian companies to take loans, together with insufficient foreign investments, slow economic recovery. 2
CEO LETTER The main task of Piraeus Bank Bulgaria in 2011 will remain the further development of the Bulgarian economy, maximizing its support to both corporate and SMEs clients. The Bank therefore will be actively searching for new successful projects for funding. I am moderately optimistic for 2011. The sober management policy of Piraeus Bank Bulgaria assured a sufficient capital basis and enough liquidity which will be used in support of activated lending activity of the Bank. We will be searching for different sources to improve the profitability of the Bank through offering innovative and flexible products adapted to the needs of our clients and to the requirements of the market. I am convinced that 2011 will be the year of the full recovery of confidence between clients and the banks, which will result in higher lending activity. The share of the non-performing loans will stop increasing which will release resources of the banking system to activate lending. However, business and people will bear the consequences of the recession long-term. This requires significant responsibility by Piraeus Bank to support and consult its current and potential clients about the risk and opportunities of the new economical environment in order to enhance business initiatives. On behalf of Board of Directors, I would like to thank our corporate and retail clients for their trust. I would like to assure them that we will continue to take care of their interests, keeping our position of a leading Bank in the Bulgarian market. I would like to thank the people of Piraeus Bank Bulgaria and emphasize on the fact that our success is mainly based on their high qualification and true commitment. Thank you all for your trust, support and commitment! Athanasios Koutsopoulos Deputy Chairman of the Board of Directors and Chief Executive Officer of Piraeus Bank Bulgaria 3
PIRAEUS BANK GROUP The Piraeus Bank Group is one of the fastest-developing and most active financial organisations in Greece today. Founded in 1916, Piraeus Bank went through a period of State ownership and management (1975-1991) before becoming privatised in December 1991. Since then, it has continuously been growing in size and activities. Along with its organic growth, Piraeus Bank has made a series of strategic moves in order to establish a strong presence in the Greek market. Thus, in 1998, the Bank absorbed the activities of Chase Manhattan in Greece, took over a controlling interest in Macedonia-Thrace Bank, and acquired specialised bank Credit Lyonnais Hellas. At the beginning of 1999, the Bank acquired Xiosbank and absorbed the activities of National Westminster Bank Plc in Greece. In June 2000, the Bank unified its three commercial banks in Greece (Piraeus Bank, Macedonia-Thrace Bank and Xiosbank), creating one of the three largest private-sector banks in Greece. In early 2002, Piraeus Bank acquired the Hellenic Industrial Development Bank (ETBAbank). ETBAbank was absorbed by Piraeus Bank in December 2003. Also, in the beginning of 2002, a strategic alliance agreement for the Greek market was signed between the Piraeus Bank Group and the ING Group; this agreement concerned the field of bank assurance, and was renewed for another 10 years in October 2007. In early 2005, the Piraeus Bank Group, implementing its strategy for expansion in South-eastern Europe and in the Eastern Mediterranean markets, acquired the Bulgarian Eurobank (renamed into Piraeus Bank Bulgaria). Furthermore, in 2005, the Group entered the Serbian market by acquiring Atlas Bank (renamed into Piraeus Bank Beograd), as well as the Egyptian market by acquiring Egyptian Commercial Bank (renamed into Piraeus Bank Egypt). Finally, in 2007, the Piraeus Bank Group expanded its international presence to Ukraine by acquiring the International Commerce Bank (renamed into Piraeus Bank ICB), and to Cyprus (Piraeus Bank Cyprus) by obtaining an approval to operate a banking institution, and also by acquiring the Cypriot network of the Arab Bank. Today, the Piraeus Bank Group combines business development and social responsibility; it systematically endorses and places special emphasis on its relations with the social, cultural and natural environment. Piraeus Bank is the head of a group of companies which cover all financial and banking activities in the Greek market. With particular know-how, the Piraeus Bank Group operates in the areas of retail banking, small and medium-sized enterprises (SMEs), capital markets and investment banking, leasing and financing of the shipping sector. These services are offered through the Bank s nationwide network, and also through the electronic banking network of Winbank (Internet, mobile phone, call centre and ATMs). This network was launched as the first complete electronic banking service in Greece, offering a full range of services. The Piraeus Bank Group has a growing international presence, focused in South-eastern Europe and the Eastern Mediterranean, but also in the financial centres of London and New York. Specifically, the Group is present in: Albania, with 56 branches of Tirana Bank S.A; Bulgaria, with 101 branches of Piraeus Bank Bulgaria; Romania, with 187 branches of Piraeus Bank Romania; 4
PIRAEUS BANK GROUP Serbia, with 47 branches of Piraeus Bank AD Beograd; Ukraine, with 54 branches of OJSC Piraeus Bank ICB; Cyprus, with 15 branches of Piraeus Bank Cyprus; Egypt, with 48 branches of Piraeus Bank Egypt; London, with 1 Piraeus Bank branch; New York, with 13 branches of the Marathon National Bank of New York; Greece with 360 branches of Piraeus Bank S.A. The main strategic goals of the Piraeus Bank Group are: To increase the Group s market share in Greece and worldwide; To improve the quality of service and increase customer satisfaction; To create new, original products; To strengthen the position of the Group in financing individuals; To finance small and medium-sized enterprises; To strengthen its positions in asset management and bank assurance; To increase profits so as to ensure the constant growth of its share value. By December 2010, the Piraeus Bank Group held EUR 57.7 billion worth of assets, the loans disbursed equalled EUR 37.6 billion, and the deposits and equity shares were EUR 30.0 billion. For the same period, the Group operated through 882 branches (360 in Greece and 522 abroad) and employed 13,320 people. 5
PIRAEUS BANK BULGARIA AD As a universal commercial bank, Piraeus Bank Bulgaria is among the most successful and preferred partners and a leader in the Bulgarian financial market. Specialised in corporate banking, retail banking, financial services for small and medium-sized enterprises (SMEs), capital markets and investment banking, the Bank has subsidiaries also in other financial sectors, such as real estate brokerage, insurance brokerage and leasing. In 2010 Piraeus Bank branch network operates through 101 offices in all strategic towns in the country. To support the needs of small and medium-sized enterprises the Bank keeps opening doors of specialised full service centres which in 2010 operate in, Varna and Stara Zagora and in 2011 will continue to support the business in Blagoevgrad, Burgas, Pleven and Rousse. History Piraeus Bank Bulgaria started operating in Bulgaria in 1993; throughout its 18-year history in the country, it has built a solid reputation as a dynamic, innovative, flexible and stable financial institution with extensive international experience, know-how and expertise, as well as with a broad range of high-quality products and services. In early 2005, the Piraeus Bank Group, implementing its strategy for expansion in South-eastern Europe and the Eastern Mediterranean markets, acquired the Bulgarian Eurobank. The legal merger between the two financial institutions was finalised in March 2006. By combining the Piraeus Bank Group s long years of experience, with the enterprise of Eurobank one of the most active banks in the Bulgarian market Piraeus Bank Bulgaria became one of the 10 most powerful and dynamically developing financial institutions in the country. In December 2006, Piraeus Bank Bulgaria signed a partnership agreement with ING Bank Bulgaria in the fields of retail banking, life insurance and pension products. In 2007, the acquisition of the ING Bank Bulgaria retail portfolio, and also the acquisition of Dirent, a company for operating leasing now renamed into Piraeus Best Leasing, were finalised. Piraeus Bank subsidiaries Piraeus Bank values the expectations of each current or potential client and aims at proposing quality and specialised service by constantly improving and expanding the services it offers and by investing in the development of the relationships with its clients. Through its subsidiaries, which function as independent companies (in sectors like management and real estate brokerage, insurance and leasing), the Piraeus Bank Group offers its clients diverse solutions and a wide range of products. The subsidiaries of Piraeus Bank Bulgaria are represented as follows: Piraeus Leasing Bulgaria S.A. and Piraeus Auto Leasing Bulgaria S.A. started operating in March 2005 offering financial leasing for tangible assets and financial leasing for cars; Piraeus Best Leasing Bulgaria S.A. offering operating leasing for cars; Dirent (renamed Piraeus Best Leasing S.A.), its acquisition finalised in 2007, offering, under operating lease, the financing of passenger cars; Piraeus Insurance Brokerage, established in June 2006. The company provides professional advice on insurance and quality insurance coverage for the collateral securities to loans in the credit contracts granted by Piraeus Bank Bulgaria, and to leased assets; Bulfina is also among the subsidiaries of Piraeus Bank Bulgaria. This is the real estate brokerage company of Piraeus Bank Bulgaria. 6
PIRAEUS BANK BULGARIA AD Awards Financial Product of the Year award for 2005, 2006 and 2007 in the international financial exhibition Banks, Investments, and Money in the following categories: Consumer crediting, Deposit products and Card products and services ; Best Print Ad award from the annual awards of the Bulgarian Marketing Association for 2005; Brand Manager of the Year 2006 in the global brand category of the Brand Manager of the Year 2006 contest for the most successfully presented global brand in the Bulgarian market; The prestigious Banker of the Year 2006 award, bestowed upon Mr. Athanasios Koutsopoulos, CEO of Piraeus Bank Bulgaria, for the successful merger between Piraeus Bank and Eurobank; In 2008, Piraeus Bank Bulgaria was awarded the titles of Best Business Superbrands in Bulgaria 2007-2008 and Most Dynamic Bank of 2007 at the annual Bank of the Year Ceremony; Piraeus Bank Bulgaria was also awarded the Deutsche Bank Straight-Through Processing award for Excellent quality and a high degree of payment process automatisation in three consecutive years 2006, 2007 and 2008. Mission, vision and core values Our mission is to be a dynamically developing and flexible Bank; a Bank that is friendly and close to its clients and shareholders, that understands and meets their needs and requirements; moreover, a Bank that lives up to and exceeds their expectations, that strives to constantly renew and improve its products and services in order to satisfy their needs; a Bank that is a loyal partner and friend. It is our firm belief that the flourishing of business should be a pursuit invariably linked with social prosperity; and the constant enhancement of corporate responsibility, vis-à-vis society and the employees of the Piraeus Bank Group, is the growth philosophy, success strategy and principal business culture of Piraeus Bank. Our vision is to be a powerful and prestigious financial institution with a solid position and leading role in the Bulgarian banking market. Our goal is to continue the dynamic development of the Bank and be competitive in a constantly changing environment. Our duty is to offer our clients innovative products, an individual approach, and high-quality services. Our commitment is to ensure superior value for our shareholders and to continue to stimulate and invest in our employees. 7
PIRAEUS BANK BULGARIA AD Our values are the following: An individual approach and focus on clients; Development of mutually advantageous partnerships; High-quality service; Creative thinking and a search for innovative solutions; Highly competitive solutions bringing added value to our clients; Prosperity and career development for our employees, through teamwork, respect and trust; Corporate social responsibility in terms of society, culture and employees; Utter respect of the law and procedures; Bank protection against all risks; Commitment to superior shareholder value. 8
BOARD OF DIRECTORS & TOP MANGEMENT BOARD OF DIRECTORS Illias Milis Chairman of the BD Athanasios Koutsopoulos Deputy Chairman of the BD Emil Angelov Member of the BD Margarita Petrova-Karidi Member of the BD George Mantakas Member of the BD Ioannis Delis Member of the BD Vassilios Koutentakis Member of the BD 9
BOARD OF DIRECTORS & TOP MANGEMENT EXECUTIVE MEMBERS OF THE BOARD OF DIRECTORS Athanasios Koutsopoulos Chief Executive Officer Emil Angelov Deputy Chief Executive Officer Margarita Petrova-Karidi Executive Officer 10
MACROECONOMIC OVERVIEW FOR YEAR 2010 Recovery is the word which best encompasses 2011 so far, as regards the economy of both the European Union (EU), as well as Bulgaria. Most of the countries in the EU registered real economic growth during the past year. The average real growth of GDP generated in 2010 by the member-countries of the EU was 1.8%, while in 2009 there was a real decrease of -4.2%. For the Euro area countries this growth was at the level of 1.8% in 2010 (2009: decrease of -4.1%). In Bulgaria there was also registered real-terms growth of GDP, even though this was only 0.2% as at the end of 2010, while the real-terms decrease in 2009 is -5.5%. The first positive real growth of the economy came with the GDP statistics in the third quarter of 2010, which marked growth of 0.7% compared to the previous quarter, and growth of 0.5% on an annual basis. The engine of this growth is the improved level of exports, due to higher foreign demand, while domestic demand, which is reflected in the consumption of households, continues to decrease. The Gross Domestic Product of Bulgaria at current prices in 2010 amounts to BGN 70 474 million (2009: BGN 68 322 million) and constitutes of final consumption in the amount of BGN 54 251 million (2009: BGN 54 293 million), gross capital formation in the amount of BGN 17 565 million (2009: BGN 20 063 million) and negative contribution of the foreign trade of goods and services in the amount of BGN -1 342 million (2009: BGN -6 034 million). The annual average inflation in 2010 in the EU, calculated as per Harmonized Indices of Consumer Prices (HICP), stands at 2.1% (2009: 1.0%), while for the Euro area countries it stands at 1.6% in 2010 (2009: 0.3%). For Bulgaria the annual average inflation in 2010 marks a slight increase from 2.5% in 2009 to 3.0% in 2010. The increase is due to the significant rise in international prices of energy supply and agricultural crops, which exerted influence on the end-customer prices of fuel and food in the country. The level of unemployment measured according Eurostat methodology in the EU countries in 2010 reached 9.6%, compared to 9.0% in 2009. In the Euro area the level of unemployment is a little higher and stands at 10.1% in 2010, while 9.6% in 2009. For Bulgaria the growth in unemployment is higher than the average for the EU countries the unemployment in the country increased from 6.8% in 2009 to 10.2% in 2010. Direct foreign investments for a third consecutive year registered a decrease (32% decrease compared to 2009). In absolute amount foreign direct investments in 2010 amounted to BGN 3 205 million, whereas in 2009 these were BGN 4 718 million. The current account deficit for 2010 registers once again improvement and at the end of the year it stands at BGN 697 million, whereas in 2009 the deficit was BGN 6 098 million, which represents a decrease of 89%. As a percentage of GDP the deficit of the current account improved from 8.9% of GDP as at the end of 2009 to 1.0% of GDP s at the end of 2010. The major reason for the improvement of the current account deficit remains improved exports, which registered growth of 33% in 2010, while the growth in imports was 13%. The trade balance deficit also reflects improved exports it improved from BGN 8 163 million (11.9% of GDP) in 2009 to BGN 4 718 million (6.7% of GDP) in 2010. The general government deficit as at the end of 2010 stands at 3.2% of GDP (BGN 2 269 million). It registered improvement compared both to the deficit from previous year standing at 4.7% of GDP (BGN 3 189 million), as well as to the envisaged government deficit for the end of 2010, which was 3.8% of GDP. As at the end of 2010 the amount of the gross public debt, foreign and domestic, amounts to BGN 10 532 million (14.9% of GDP). The government guaranteed debt as at the end of 2010 amounts to BGN 1 246 million (1.8% of GDP). Thus the total government and government guaranteed debt for 2010 stands at 16.7% of GDP (2009: 15.6%). 11
MACROECONOMIC OVERVIEW FOR YEAR 2010 Macroeconomic expectations for year 2011 The expectations for 2011 are based on forecasts and surveys of the European Commission (EC). The overall mood in the forecasts for 2011 remains optimistic. According to data of the European Commission the accomplished growth of GDP, standing at 1.8% in 2010 for the EU countries, will be maintained in 2011 also, followed by a growth of 1.9% in 2012. For Bulgaria the expectations are for growth of 2.8% in 2011 up to 3.7% in 2012. The deficit of the current account of Bulgaria is expected by the EC to stand at 2.0% of GDP as at the end of 2011 and 2.6% of GDP as at 2012. The annual average inflation in the European Union, as per Harmonized Indices of Consumer Prices (HICP), will increase according to the expectations of the European Commission up to 2.1% in 2010, and will fall back to 2.0% in 2012. For Bulgaria the expected annual average inflation will increase from 3.0% in 2010 up to 4.3% in 2011, and will fall back to 3.4% in 2012. The general government deficit of Bulgaria in 2010 stands at 3.2% of GDP of the country, by which Bulgaria met the expectations of the EC from the previous year to adjust its high deficit from the end of 2009 down to the level of 3% as per Maastricht Treaty criteria. The expectations for 2011 are that the general government deficit of the country will decrease to 2.7% of GDP, and in 2012 further down to 1.6% of GDP. The expectations of the EC for the level of unemployment in most of the EU countries, including Bulgaria, are that it will start to decrease in 2011, which will continue in 2012. For Bulgaria the forecast is for unemployment, measured according Eurostat methodology, standing at 9.4% in 2011, and decreasing down to 8.5% in 2012. Expectations for the bank system of Bulgaria are that in 2011 it will continue to function firmly as it does currently. Bank system overview for year 2010 According to information from the Bulgarian National Bank, as of the end of 2010, the assets of the banking system amounts to BGN 73,726 million, compared to BGN 70,868 million at the end of 2009, which is an increase of 4.0% (2009: 1.9%). The increase of the assets of the banking system is mainly financed via the increase of deposits from customers, which have increased from BGN 43,436 million as of 31 December 2009 to BGN 47,128 million as of 31 December 2010, which represents a growth of 8.5% (2009: 3.6%). Loans to non-financial institutions and other clients constitute the biggest share of the assets of the banking system. As of the end of 2010, gross loans amount to BGN 53,854 million, compared to BGN 52,449 million for year 2009, which represents a growth of 2.7% (2009: 4.5%). The biggest increase is registered in company loans (corporate customers), whose loans increase from BGN 32,712 million in 2009 to BGN 33,993 million in 2010, which is an increase of 3.9% (2009: 2.6%). Mortgage loans also register an increase in 2010 reaching BGN 9,269 million, compared to BGN 8,954 million in 2009, which represents an increase of 3.5% (2009: 8.4%). In 2010 is registered a decrease in consumer loans from BGN 9,711 million as of the end of 2009 to BGN 9,310 million as of the end of 2010, which represents a decrease of 4.1% (2009: increase of 6.7%). The non-audited 2010 net profit of the banking system is BGN 617 million, compared to BGN 780 million for year 2009, which represents a decrease of 21% (2009: decrease of 44%). The banking system remains generally stable, with excellent ratios for capital adequacy and liquidity, and well-functioning bank control. The ratio for total capital adequacy of the banking system is above the required 12% (17.48% as of the end 2010 against 17.04% as at the end of 2009). The adequacy ratio of the Tier I capital is also above the regulatory requirement of 10% (15.24% as of the end of 2010 against 14.03% as of the end of 2009). The liquidity ratio improves up to 24.37% in 2010 from being 21.90% in 2009. 12
MACROECONOMIC OVERVIEW FOR YEAR 2010 Market share and market position of Piraeus Bank Bulgaria AD in 2010 In 2010 Piraeus Bank Bulgaria AD keept its market position in the banking system with a 7-th place regarding total assets with a share of 5.5% (2009: 5.1%). The Bank kept a 7-th place also in terms of total loans to customers with market share of 5.9% (2009: 5.4%). In 2010 the Bank held the 5-th place in company loans with market share of 7.5% (2009: 6-th place with market share of 6.6%). The improvement in the market position of the Bank in company loans is due to loans recorded in the balance sheet of the Bank in 2010, which had in 2008 been transferred to another company within Piraeus Group. Regarding mortgage loans the Bank stepped back one place in its market position in 2010 it took 6-th place with share of 4.8% (2009: 5-th place with market share of 5.4%). Regarding consumer loans the Bank kept the 11-th place with market share of 1.7% (2009: with share of 1.8%). In 2010 the Bank kept the 10-th place in attracted deposits from individuals with a market share of 2.9%. Piraeus Bank Bulgaria AD registered a higher market position in deposits attracted from companies and individuals in 2010 from 12-th to 10-th place. Changes in legislation in 2010 (based on information from BNB) Among the changes in legislation, which were made in 2010 are: Amendment in BNB Ordinance No.8 on capital adequacy of credit institutions it is expected that these steps would contribute to streamlining the capital budgeting process in banks. The changes aim to harmonise the national requirements with those of EU legislation and fully comply with the requirements of Directive 2006/48/ЕС which member-states must apply. The changes in the treatment of current profits and the profits from the previous year remove the requirement for holding a General Shareholders Meeting for recognising these profits as a capital base element. The new ordinance removes the more severe treatment by other EU member-states, effective until now, of two basic classes of risk exposures under the standardised approach for credit risk the risk weight of Retail Exposures changes from 100% to 75%; and the risk weight of Exposures Secured by Real Estate Property changes from 50% to 35%. The new changes also remove the BNB formal approval regime for the use of the standardised approach for operational risk, thereby encouraging banks to introduce improved methods for operational risk management. Amendment in BNB Ordinance No.7 on Large Exposures of Banks, Ordinance No.8 on capital adequacy of credit institutions and BNB Ordinance No.11 on Bank Liquidity Management and Supervision these amendments reflect the changes in the EU bank capital adequacy directives and specifically the amendments to BNB Ordinance No.7 on Large Exposures of Banks provide for changes in the regime of treatment of large interbank exposures. The scope of permitted ways used by banks to reduce their large exposures is reduced. The amendments provide additional protection against excessive concentration of exposures to companies belonging to the same group; the most significant amendment to BNB Ordinance No.8 on Capital Adequacy of Credit Institutions introduces harmonised criteria and a system of limits for the inclusion in the primary capital of perpetual hybrid instruments; Another amendment is related to the techniques and approaches to credit risk mitigation, including the use of life insurance policies; the amendments to BNB Ordinance No.11 on Bank Liquidity Management and Supervision are related to the implementation of harmonised qualitative requirements to bank liquidity management. The new provisions will enhance the use of stress tests. The results thereof will be used by banks as a basis for 13
MACROECONOMIC OVERVIEW FOR YEAR 2010 determining the amount and composition of their liquidity buffers and positions, and for updating their contingency action plans and liquid crisis scenarios. Amendment in BNB Ordinance No.4 on the requirements regarding the remuneration in banks the new Ordinance No.4 on the requirements regarding the remuneration in banks introduces the requirement that remuneration policies must be implemented with regard to the categories of staff whose activities significantly affect the risk profiles of banks. These policies should encompass all aspects of remuneration and should follow the principles and requirements defined in the Ordinance, placing emphasis on the pay-out and formation of the variable component of the total remuneration. The amendments to the BNB Ordinance No.8 on the capital adequacy of credit institutions primarily pertain to the requirements regarding the disclosure of remuneration policies and practices in banks. Amendment in BNB Ordinance No.16 on Payment Institutions and Payment System Operators Licensing the amendments are aimed at supplementing and detailing the set of documents providing information on the professional experience, qualification and good reputation of persons holding equity interest in companies applying to conduct activities as payment institutions The change is made in line with the requirements under the Law on Payment Services and Payment Systems. In accordance with it persons holding, directly or indirectly, a qualified interest within the meaning of 1, paragraph 1, item 6 of the Additional Provisions of the Law on Credit Institutions in the capital of companies applying to be granted a license as a payment institution, should have proven their reliability ensuring sound and prudent governance of the companies managed by them. 14
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS The total assets of Piraeus Bank Bulgaria AD in 2010 have decreased by 4%, where the registered decrease in loans and advances to customers is 8% against their respective level as at the end of 2009. As regards the loans and advances to banks, on the other hand, those register growth by 15% compared to their respective amounts in 2009. In 2008 Piraeus Bank Bulgaria AD transferred loans to the London-based subsidiary of the Bank, which is part of Piraeus Group. All of these loans belonged to financially stable and correct customers and were serviced regularly without falling overdue. As at the end of 2010 these loans are once again in the balance sheet of the Bank. In order to give a clearer and more accurate presentation of the financial state and the development of Piraeus Bank Bulgaria AD in the current analysis these loans are included in the data for 2009. Selected financial items from the balance sheet of Piraeus Bank Bulgaria AD for year 2010 In thousand BGN Dec. 2010 Dec. 2009 change in % Total assets 4 250 644 4 412 858-4% Loans and advances to customers 3 221 488 3 517 426-8% Loans and advances to banks 712 472 619 251 15% Deposits from customers 1 329 706 1 285 463 3% Share capital 316 797 316 797 0% Equity 565 499 530 526 7% As at the end of 2010 the total assets of Piraeus Bank Bulgaria AD amount to BGN 4 250 644 thousand. They have decreased by BGN 162 214 thousand, or 4%, compared to 2009. The decrease of the total assets of Piraeus Bank Bulgaria AD in 2010 is due mainly to the decrease of loans and advances to customers. As at the end of 2010 loans and advances to customers amount to BGN 3 221 488 thousand, whereas they amounted to BGN 3 517 426 thousand in 2009, which marks a decrease of BGN 295 938 thousand, or 8%. Loans and advances to customers In thousand BGN Dec. 2010 Dec. 2009 change in % Individuals: 609 680 656 972-7% Mortgage 447 453 480 301-7% Consumer 127 918 140 846-9% Credit cards 34 309 35 825-4% Companies: 2 726 067 2 947 349-8% Large enterprises 2 095 009 2 246 972-7% Small and medium-sized enterprises 631 058 700 377-10% Total before impairment for uncollectability 3 335 747 3 604 321-7% Impairment for uncollectability -114 259-86 895 31% Total after impairment for uncollectability 3 221 488 3 517 426-8% 15
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS Loans and advances to customers (individuals and companies) net of allocations for losses and uncollectability as at the end of December 2010 amount to BGN 3 221 488 thousand. They decreased by BGN 295 938 thousand, or 8%, compared to the amount of BGN 3 517 426 thousand as at the end of December 2009. Loans to individuals as at the end of December 2010 include mortgage loans for BGN 447 453 thousand, consumer loans for BGN 127 918 thousand and credit cards for BGN 34 309 thousand. Mortgage loans have decreased by BGN 32 848 thousand in absolute terms compared to the amount of BGN 480 301 thousand as at December 2009, which marks a decrease of 7%. Consumer loans have decreased in 2010 by BGN 12 928 thousand in absolute terms, or 9%, compared to BGN 140 846 thousand as at December 2009. Credit cards have marked a decrease of BGN 1 516 thousand, or 4%, compared to the amount of BGN 35 825 thousand as at December 2009. 16
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS Loans to companies as at the end of December 2010 include loans to large enterprises in the amount of BGN 2 095 009 thousand, and loans to small and medium enterprises in the amount of BGN 631 058 thousand. Loans to large enterprises have decreased by BGN 151 963 thousand, or 7%, compared to the respective amount of BGN 2 246 972 thousand as at the end of December 2009. In loans to small and medium enterprises there is registered a decrease of BGN 69 319 thousand, or 10%, compared to the amount of BGN 700 377 thousand as at the end of December 2009. Total loans to companies in 2010 have decreased by 8% compared to the end of 2009. Loans and advances to banks as at the end of 2010 are in the amount of BGN 712 472 thousand. They mark an increase of BGN 93 221 thousand, or 15%, compared to the respective amount of BGN 619 251 thousand as at the end of December 2009. Deposits from customers In thousand BGN Dec. 2010 Dec. 2009 change in % Individuals: 805 629 722 098 12% Term deposits 691 941 587 489 18% Savings 83 001 95 095-13% Current deposits 30 687 39 514-22% Companies: 524 077 563 365-7% Term deposits 355 914 415 645-14% Current deposits 168 163 147 720 14% Total 1 329 706 1 285 463 3% Deposits from customers (individuals and companies) as at December 2010 amount to BGN 1 329 706 thousand. They show an increase of BGN 44 243 thousand, compared to the level of BGN 1 285 463 thousand as at the end of December 2009, which marks an increase of 3%. The greatest increase in 2010 is registered in term deposits from individuals increase of BGN 104 452 thousand. Thus, as at the end of 2010 more than half of the attracted funds from customers come from the segment term deposits of individuals, which are 52% of all customer deposits (2009: 46%). Deposits from companies as at the end of December 2010 include term deposits in the amount of BGN 355 914 thousand and current deposits in the amount of BGN 168 163 thousand. Term deposits of companies have decreased by BGN 59 731 thousand, or 14%, compared to the amount of BGN 415 645 thousand as at the end December 2009. On the other hand current deposits have increased by BGN 20 443 thousand, or 14%, compared to the amount of BGN 147 720 thousand as the end of December 2009. Deposits from individuals as at the end of December 2010 include term deposits in the amount of BGN 691 941 thousand, savings in the amount of BGN 83 001 thousand and current deposits in the amount of BGN 30 687 thousand. Term deposits of individuals have increased by BGN 104 452 thousand, or 18%, compared to the respective amount of BGN 587 489 thousand as at the end of December 2009, savings have decreased by BGN 12 094 thousand, or 13%, compared to their level of BGN 95 095 thousand as at the end of December 2009, and current deposits have decreased by BGN 8 827 thousand, or 22%, compared to the amount of BGN 39 514 thousand as at the end December 2009. 17
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS Deposits from banks and other liabilities to banks In thousand BGN Dec. 2010 Dec. 2009 change in % Deposits from banks 2 123 156 2 410 666-12% Other liabilities to banks 99 247 35 837 177% 18
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS Deposits from banks as at the end of December 2010 amount to BGN 2 123 156 thousand. They have decreased by BGN 287 510 thousand, or 12%, compared to their level of BGN 2 410 666 thousand as at the end of December 2009. The amount of other liabilities to banks as at December 2010 and 2009 include received funding from the European Bank for Reconstruction and Development (EBRD) for financing loans for energy efficiency improvement, loans to Small and Medium-sized Enterprises (SMEs), and loans to municipalities, as well as received funding for financing a syndicated loan. In 2010 this amount increased significantly by 63 410, or 177%, compared to its level from 2009. This increase is due to the fact that in 2010 another treaty was signed with the European Bank for Reconstruction and Development in the amount of EUR 70 million, half of which, as at the end of 2010, has already been utilized. Selected financial indicators from the income statement of Piraeus Bank Bulgaria AD for 2010 Dec. 2010 Dec. 2009 change in % Net profit, in thousand BGN 60 097 56 852 6% Cost to Income, in % 42.45% 39.94% 6% EPS (net profit to number of shares as at the end of the year, 1 share = 1 BGN), in BGN 0.19 0.18 6% ROavE 1 (return on equity), in % 11.03% 11.62% -5% ROavA2 (return on assets), in % 1.39% 1.23% 13% 1 Based on the ratio of net profit to the average capital and reserves 2 Based on the ratio of net profit to average total assets The net profit of Piraeus Bank Bulgaria AD for 2010 is BGN 60 097 thousand. The net profit for 2010 has increased by BGN 3 245 thousand, or 6%, compared to the amount of BGN 56 852 thousand for 2009. The earnings per share (EPS) for 2010 reached 0.19 BGN / share. This financial indicator marks an increase of 6% compared to its level in 2009. Since the amount of share capital remains the same in 2010 as it was as at the end of 2009, the increase of EPS corresponds to the increase of net profit of the Bank for 2009, which is also 6%. The ratio of return on equity for 2010 is 11.03%. The financial indicator of return on assets for 2010 is 1.39%. The cost to income ratio for 2010 is 42.45%. Since the amount of administrative expenses remains the same in 2010 as it was in 2009, the increase of this ratio is related with the lower level of total net operating income, which in 2010 decrease by 5%. 19
MAIN FIGURES PIRAEUS BANK BULGARIA - GENERAL OVERVIEW OF THE 2010 RESULTS Selected financial items from the income statement of Piraeus Bank Bulgaria AD for 2010 In thousand BGN Dec. 2010 Dec. 2009 change in % Interest income, net 143 479 148 120-3% Fees and commissions income, net 17 935 21 248-16% Other income, net 6 586 7 272-9% Total income, net 168 000 176 640-5% Administrative expenses -71 316-70 546 1% Increase in impairment for uncollectability -31 108-44 049-29% Tax expense -5 479-5 193 6% Net profit 60 097 56 852 6% The net interest income as at the end of December 2010 amounts to BGN 143 479 thousand. It decreased by BGN 4 641 thousand, or 3%, compared to its level of BGN 148 120 thousand as at the end of December 2009. The net fees and commission income as at the end of 2010 reached BGN 17 935 thousand, which marks a decrease by BGN 3 313 thousand, or 16%, compared to the respective amount of BGN 21 248 thousand as at the end December 2009. The major components of other income include net trading gains (mainly gains from foreign exchange trading and net foreign exchange translation differences) and income from non-financial services (mainly income from rent of vaults and fees for other services). Total net income from financial operations as at the end of December 2010 reached the amount of BGN 168 000 thousand. It decreased by BGN 8 640 thousand, or 5%, compared to the amount of BGN 176 640 thousand as at the end of December 2009. Administrative expenses as at the end of December 2010 amount to BGN 71 316 thousand, which is by BGN 770 thousand, or 1%, more compared to the respective amount of BGN 70 546 thousand in previous year 2009. Expenses for impairment for uncollectability as at the end of 2010 amount to BGN 31 108 thousand. In absolute terms the decrease of these expenses amounts BGN 12 941 thousand, or 29%. The net profit of Piraeus Bank Bulgaria AD for 2010 is BGN 60 097 thousand, whereas the registered increase compared to year 2009 is 6%. 20
CORPORATE BANKING AND SME DEVELOPMENT In 2010 Piraeus Bank Bulgaria affirmed its position as one of the major banks which finance and service corporate business in Bulgaria by understanding its specific needs and providing tailor-made solutions. The bank continues to maintain its stable customer base from the existing client portfolio in the three main corporate segments Large Corporate, Project Financing and Institutional segment, as well as developing new client relationships. The total corporate loan portfolio reached EUR 1 083 million by the end of 2010 keeping its excellent quality with less than 1% non-performing loans and a well diversified industry and client structure. The main target of Corporate Banking Division is for the Bank to be recognized by corporate business as a valuable partner supporting business with flexible banking products and services. Therefore the bank offers various financing schemes adapted to the individual client as well as specific services for treasury and documentary transactions. Furthermore corporate clients benefit from the preferential retail conditions for both management and employees. Cooperation with the leasing companies of the bank additionally increases the offered financing options. Additionally the bank expanded the provided financing products though the cooperation of the National Guarantee Fund, the Municipal Guarantee Fund of Metropolitan Municipality and the Bulgarian Development Bank for supporting agricultural producers. During 2010, the Bank continued its on-going efforts in the support of existing projects in its portfolio. Piraeus Bank commenced three of the most significant landmark commercial and office developments in the country European Trade Center in, hosting Vivacom s head office in, Varna Towers and Mega Mall Russe, which started its operations with a soft opening in the last quarter of 2010. Parallel to the remarkable projects inaugurated in 2010 the Bank continued its good partnership with many other public and business clients in the country and opened a number of residential and commercial projects in and throughout the country. Piraeus Bank value adding efforts for its customers and the preservation of the environment was highly recognized by EBRD through the Energy Efficiency Awards Bulgaria 2010 winning nomination of Laktima AD s project for Commitment to Financing Sustainable Energy. During 2010 the Bank also made many efforts to participate in a selected number of public procurements to increase its share in servicing the State and municipal organizations in the country as well as to fund some of the projects thereof. SMALL AND MEDIUM-SIZED ENTERPRISES DEVELOPMENT In 2010 the competition in the bank market remained strong. PBB followed its balanced policy of risk and at the same time continued supporting its clients in the very important segment of medium-sized and small enterprises. Loans to SMEs amounted to 631 million BGN, versus BGN 700 million a year ago. Piraeus Banks sustains its market share by a rational and accurate lending policy which helps to maintain a low Non-Performing Loan ratio. The focus was on further developing the SME business, establishing new SME 21
CORPORATE BANKING AND SME DEVELOPMENT business centres. Loans to SME The table below shows the SME sectoral distribution portfolio: SME Loans by Sectors Total Gross Loans in BGN Agriculture 12 672 760 Construction 207 932 685 Energy 510 466 Manufacturing 96 086 301 Other 62 315 872 Real Estate Companies 56 371 454 Tourism 29 723 052 Trade 149 062 128 Transport 16 383 444 Total 631 058 163 22
CORPORATE BANKING AND SME DEVELOPMENT The SME portfolio was well balanced between working capital loans and investment loans. Around 67% of the portfolio comprised investment loans and 33 % working capital loans: LOANS TO SME 631 058 163 Working Capital 210 026 399 Fixed Assets 421 031 764 In 2010 with a view to improving support to the SME business, PBB is continuing by enlarging the number of Business Centres. The creation of SME Business Centres as an organizational and operational model combines personal servicing with the provision of all types of financial products and services offered by the Bank. SME Business Centres customize solutions especially addressed to SME customers, and also provide them the possibility of supporting their business plans. This model is based on the segmentation of SMEs-clients according to their different needs and priorities. Through the Business Centres, every SME customer can ensure immediate access to the branch network, as well as to high quality banking services. The Business Centres are an integral part of the bank and are a basic tool for further development of the SME banking business. The establishment of 5 additional SME business centres took place in all major cities in Bulgaria, Plovdiv, Blagoevgrad, Burgas and Stara Zagora. They are concentrated in those cities where the majority of potential SME clients are located: Business centre 1 (enlarged by the branches in, Pernik and Botevgrad); New Business center 2 (covering branches in ); Varna Business centre (enlarged by the branches in Varna, Shoumen, Dobrich, Targovishte, Razgrad, Silistra); New Plovdiv Business centre (covering the branches in Plovdiv, Pazardjik, Kardjali, Smolyan, Haskovo, Dimitrovgrad, Svilengrad); New Blagoevgrad Business centre (covering the branches in Blagoevgrad, Sandanski, Bansko, Dupnitsa, Gotse Delchev, Petrich); 23
CORPORATE BANKING AND SME DEVELOPMENT New Stara Zagora Business centre (covering the branches in St.Zagora, Kazanlak, Sliven, Yambol, Veliko Turnovo, Gorna Oriahovitsa); New Bourgas Business centre (covering the branches in Bourgas). In 2010 Piraeus Bank Bulgaria continued its beneficial cooperation with different financial institutions. In 2010 Piraeus Bank Bulgaria succeed in allocating agreed tranches amounting to EUR 12 500 000 from the EU/EBRD SME Finance Facility, which is a program of the European Commission and the European Bank for Reconstruction and Development, supporting the development and growth of entrepreneurs by facilitating their access to finance. As of December 2010 the accumulated disbursed amount from the Facility was over EUR 15 000 000 and the outstanding amount reached EUR 11 459 360. The number of disbursed loans under this Facility was 398. The EBRD Facility helped also to increase the share of micro loans in the whole portfolio which is very important from a socio-economic point of view. In October 2010 Piraeus Bank Bulgaria and the EBRD signed an agreement for a credit line of 70 million of new funding from the EBRD that will be used to finance business activity in the country. The EBRD medium term senior funding will be used by Piraeus Bank Bulgaria to enhance lending to the real economy, thus further strengthening Piraeus Bank Bulgaria s presence in the market. This loan is part of a greater agreement, which also comprises Albania and Romania, between Piraeus Bank Group and the EBRD, for credit lines worth a total of 200 million. In November 2010 Piraeus Bank Bulgaria was given an award for its beneficial cooperation from the representatives of European Bank for Reconstruction and Development (EBRD) during the special award ceremony of EBRD for successful energy efficiency projects. Piraeus Bank Bulgaria has been a long-standing partner of EBRD for programs supporting business directed to energy efficiency and sustainable development. In line with its philosophy of an environmentally responsible company, the Bank stimulates green practices in business and supports renewable energy projects which result in sustainable use of natural resources. In 2010 saw the continuation of the beneficial cooperation with Bulgarian Development Bank under the program for financing agricultural producers. PBB has utilized 100 % the credit line of BGN 3 000 000, distributing it to 14 farmers. As a part of its policy to support the agricultural sector in Bulgaria, the Microfinancing Department created a new product for farmers, helping them to develop their business while waiting for EU subsidies. Another product specially designed for free lancers was promoted in the market with preferential interest rate for the first year and attractive interest for the rest of the loan term. In October 2010 the international exhibition for medicine, dental medicine, pharmacy and balneology Medicus Dento Galenia 2010 was held at the International Fair Plovdiv. By invitation from the Association of the Dental Dealers in Bulgaria, Piraeus Bank took place as general sponsor in the competition Dental practice Manager which was held for second consecutive year. The cooperation with National Guarantee Fund continued during 2010. The signed agreement in 2009 allows combining the SME financing with a guarantee scheme which facilitates for SMEs access to our funds by compensating for the lack of sufficient collateral when applying for loans. An agreement with Municipal Guarantee Fund for SMEs was signed in June 2010. The Fund guarantees up to 50% of the principal of the SME loans and provides Piraeus Bank with guarantees up to 100 000 BGN regardless of the loan amount. 24
CORPORATE BANKING AND SME DEVELOPMENT The bank has a representative in the Working Group on EU and other funding in Association of Bulgarian Banks. The bank will continue focusing on the selective development of the SME portfolio through new products and new financial programs and will specifically target funding under the European financial instruments. The SME business will be a key component of the bank strategy and its goals are to increase the market share in both the bank portfolio and in the market. 25
RETAIL BANKING Retail Banking In 2010 Piraeus Bank Bulgaria has demonstrated stability and the ability to react adequately in challenging market conditions. The management of the retail products and services portfolio successfully identified the market trends and met the changing and increasingly demanding customer attitudes. New products and solutions were developed and imple mented following the bank s strategic plan and responding to consumers needs and demands. Some significant projects and highlights from the Retail banking activities are: Development and implementation of new loan products - promotional housing loan Miracle, a new housing loan Own home for first home buyers; Flexible solutions for effective and smooth banking operations by promoting and selling package offers - Piraeus daily banking package and Piraeus payroll package, introducing a new service for the Bank Utility payments ; Development of two new segments for the Bank - students and pensioners by offering a series of products specifically designed for the targeted groups; Actively running programs for cross-selling and retaining of existing customers; Improvement of the processes supporting those clients who experience difficulties to fulfil the agreed loan repayment conditions. The market environment in terms of employment, earnings and particularly reduced consumption continued to affect seriously the demand for credit products for individuals. The outlined trend for early repayment of active loans increased during 2010. The combination of these factors is the main reason for a decrease of the balances in all categories of loan products for individuals. 26
RETAIL BANKING Though with very limited lending, the Bank did not substantially retreat from the achieved market positions. The year end results in terms of market shares per main product categories are as follows: Using purposeful management activities, timely and efficient organization of the processes, Piraeus Bank succeeded in adjusting retail products and services offered according to new regulatory requirements, to maintain the loan portfolio quality, to meet the needs and enhance the existing clientele satisfaction and to offer competitive solutions for attracting new clients. Deposits In 2010 Piraeus Bank Bulgaria has continued to develop its deposit portfolio with priority on innovative and flexible solutions and attractive promotional offers to its loyal clients. Following the market trends and conditions Piraeus Bank Bulgaria rationalized its pricing policy offering wide range of deposit product for both individuals and companies at reasonable price. Piraeus Cash Manager Program for individuals was launched in the market in March. The Program is unique combination of savings account and weekly term deposit providing benefits of the two products at the same - flexibility, convenience plus high return and soon has become preferred product for many clients. The leading offer for 2010 remained Piraeus Deposit 30 which allows up to 30% withdrawing of the amount and unlimited additional depositing. Both products were supported by full advertising campaigns at the beginning of the year. In the autumn of 2010 promotional campaign New deposit New luck was launched, aimed at attracting new resources directed to the loyal customers of the Bank. 1700 awards were handed. 27
RETAIL BANKING Numerous internal incentive sales programs with attractive rewards also contribute for the stable increase of deposit base of Piraeus Bank Bulgaria last year. The total attracted amount of deposits from individuals and companies has increased with 3.44% - from 1 285 463 000 BGN as of December 2009 to 1 329 706 000 BGN as of December 2010. The amount attracted from individuals and households increased with 12% - from BGN 722 098 186 at the end of 2009 to BGN 805 628 355 at the end of 2010. 28
TREASURY DEVELOPMENT Extensive growth in the asset base was successfully accompanied by an increase in the financing capabilities of the Bank, both from domestic and international markets and institutional customers. The challenging financial environment during 2010 in international markets did not disrupt normal operational activity of the Bank and proved our strong and respected position on interbank money markets. Sound and prudent management of the Bank s assets and liabilities did not allow undesirable volatility in performance despite emerged disorder in global financial markets. Throughout 2010 the Bank continued to be a key player on the domestic interbank markets. The traded volumes in FX and Money Markets increased significantly and reached 11% from the total market turnover. Despite the lower customer turnovers the profit of the treasury was within the budget for 2010. The Bank continued to offer the full range of brokerage services as well as successfully developing the repo deal market with shares traded on BSE showing a professional and risk measured approach. The promotion of Treasury products covering the needs of the business units and customers was continued through the offering of a wider range of treasury solutions for corporate and retail clients, effectively helping them to manage market risks and increase profitability. Regardless of the difficulties presented by the financial markets nowadays and the uncertainty prevailing, Piraeus Bank Bulgaria shows the quality and professional expertise that guarantees future successful expansion in operational activity hence allowing our customers to enjoy innovative thinking and quality Treasury services. In this respect, in 2010 we have created a special unit - Treasury Sales, whose mission is to better satisfy the needs of our clients through the application of a strict professional and individual approach to each of them. Quality service and dedication are the factors that drive our success, despite the keen competition in the sector, and guarantee future positive results for the Bank. 29
RISK MANAGEMENT Risk management is a function, which covers all of those main activities at Piraeus Bank Bulgaria AD, that expose the Bank to risks, which could generate material losses for it. Implemented internal policies, rules and methodologies ensure the overall identification, measurement, monitoring and control of the risks for the Bank and their communication to the management in due time, in order to support the decisionmaking process. Risk management systems are subject to review and amendments on a periodical basis, in compliance with the development of the institution s risk profile (from the point of view of types and the volumes of the undertaken risks), the requirements of Piraeus Group, the local legislation and good banking practices. The Bank applies a risk control system, which ensures the assessment of the quantitatively measurable and immeasurable risks, the internal and external sources of risks, review and periodic assessment for compliance of the risk management internal rules with the market conditions. The Bank s structure is organized in a way which aims at efficiency in operating activities and ensures clear segregation of duties between business and control units. All main processes, which originate credit, liquidity and market risks are managed centrally, and the mechanisms for identifying, collecting data and measurement of operational risk cover all organizational structural units. Decisions in any area of activity are taken based on clearly defined scales within the authority of employees and units. Measurement, Monitoring and Management of Credit Risk Lending decisions are taken based on a clear and transparent scale of limits and authorities, based on the client segmentation and product types. All credit limits to customers are reviewed and/or renewed at least once per year, and the authorities responsible for the credit decisions are defined according to amount and category (in terms of customer segment and collateralization) of the total credit risk exposure, assumed by the Bank to every customer or obligor group of borrowers/applicants. Creditworthiness of customers is examined in the lending decision-making process, as well as through yearly reviews of all clients with active credit exposures. In accordance with internal policy, all business customers and/or obligor groups, are subject to full review of their financial standing at least once per year, when a detailed analysis of their creditworthiness, market position and forecasts for business development are performed. The Bank implements an assessment process (identical to the one at the application stage for credit product, including update of credit rating) also in the review process of already approved loans. The Bank implements scoring models for its customers using unsecured credit products in the Retail sector. Risk Management Division (RMD) measures and monitors the credit exposures quality by clients segments, economic sectors, ratings, products, loan purposes, coverage level and types of collateral. The Bank forms provisions for impairment, so as to insure coverage of the expected losses, by clients segments and products, through assessment of probability of default and loss given default. All individual exposures above 50 000 (in all customer segments) are subject to individual impairment tests, and for exposures at lower amounts the impairment test is implemented on a portfolio basis by products, under uniform methodology, valid for the whole Banking group. The process of measurement and monitoring of credit risk is supplemented with scenario analyses and stress tests, performed under instructions from the local banking regulator (BNB) or the Bank management. They aim to estimate the degree of potential deterioration of the credit portfolio quality, reduction of net income, own funds and capital adequacy ratios, in case that certain strongly unfavourable scenarios are realized. RMD informs the management about the sensitivity of the above-mentioned indicators to various unfavourable events. The assumptions for deterioration of the credit portfolio quality and the necessity for increase of provisions, resulting from market shocks, are based on the existing structure and the current quality of the credit portfolio. If it is necessary (based on the results from the performed stress tests) RMD proposes to the 30
RISK MANAGEMENT management implementation of measures, aimed at credit risk management process improvement and/or which would lower the sensitivity of the Bank to unfavourable market factors. Liquidity risk management The liquidity risk of the Bank is managed through regular forecasting of the incoming and outgoing cash flows. The Bank aims at maintaining an adequate amount of liquid funds in order to meet its current obligations and securing sufficient coverage of its expected outflows on liabilities with incoming flows on assets with a longer term perspective, as well as maintaining a diversified depository base. The management of short-term liquidity is realized through constant monitoring of the contractual and expected daily incoming and outgoing cash flows in gross amounts within a one month horizon. Structural liquidity is subject to monthly monitoring and measurement through the distribution of the expected cash flows by time buckets, according to their agreed or presumed maturity. The resulting values and the ratios calculated from them are the framework for liquidity management. The monitoring and the management of the liquidity are carried out centrally by the Asset-Liability Committee, and the responsibility for liquidity management and operations on the capital markets are held by an Executive Committee member. At operational level, the management of the liquidity is performed by Treasury and Financial Markets Division, while the control is under the responsibility of the Operational, Market and liquidity risk management Department as part of RMD, based on the data from various reports from different sources. The Department is responsible for maintaining and reporting of complete and timely information to the liquidity management authority in order to enhance the decision making process. Liquidity risk management is realized through a system of short-term and structural liquidity limits, which utilization is monitored by the above mentioned department. It compares the liquid assets and short-term and total liabilities, keeps an eye on the size and the structure of the mismatches between net and cumulative incoming and outgoing cash flows by time buckets, taking into account the residual maturity of the cash flows, as well as the historical experience of the clients behaviour in respect of the deposits and loans. The above mentioned Department monitors for the appearance of warning signals for possible liquidity crises. The department forecasts the potential incoming and outgoing cash flows in accordance with the scenarios - Going concern and Liquidity crisis. Market risk management Market risk stems from the existence and dynamics of the open interest, currency and equity positions. Its level is monitored through reports and an internal limits system. The Bank uses a system of indicators in the process of market risks management. They are used to measure the potential effect of changes in market conditions on the net interest income (Earnings at Risk (EaR), which measures the change in net interest income as a result of changes in market interest rates over the whole interest curve); Interest rate sensitivity of the balance sheet present value (BPV), measuring the change of the economic value, as a result of changes in the market interest rates along the whole yield curve; Value at risk (VaR), measuring the maximum potential loss from unfavourable changes in the market currency rates at predetermined probability (confidence interval) within a defined time horizon. The Bank performs stress-tests in order to evaluate the changes in the net interest income and the present value of the balance sheet through examining the impact of strongly unfavourable (but possible) changes in interest rates. The applied simulations for measuring the impact of these changes are based on the shifts in the level and/or the slope of the yield curve, changes in the interrelations between the basic market interest rates, the internal base interest rates, which the Bank applies in its credit activity, interest rates on deposits, etc. The Bank has adopted a complete system of market risk limits, which could be grouped by types: Interest 31
RISK MANAGEMENT rate sensitivity limits (in two perspectives EaR and BPV); Position limits (FX position size limits; securities positions limits; money market position limits; derivatives positions limits; mismatch coefficient limits [based on the gaps between the interest rate sensitive assets and liabilities, grouped according to the reprising terms and frequency of their interest rates]); Stop-loss limits (daily/monthly regulating the day/month-to-date results); Value at Risk (VaR). The goal of the limits is to maintain the market risk exposure within acceptable boundaries, taking into account the Bank s risk bearing capacity. The limits (showing the maximum acceptable loss levels by types of risks/activities) are related to the volatility of the respective market and the desired yield, determined by the management for the specific activities. These limits are revised yearly, but they could be corrected at any time if the market conditions raise the necessity for that. The monitoring and the control of interest rate risk are directed to maintain the exposure within the approved limits. The limits are monitored on a monthly basis by the Operational, Market and liquidity risk management Department and their excesses are reported to Asset-Liability Committee. The Department makes monthly simulations and uses them to evaluate the potential changes in net interest income from interest-sensitive positions due to adverse changes in the market interest rates (parallel and/or non-parallel). Treasury & Financial Markets Division manages foreign exchange risk of the Bank by constantly monitoring the size of the open foreign exchange positions to be within the specified limits. The Operational, Market and liquidity risk management Department monitors on a daily basis the utilization of all limits and if necessary promptly alerts management about relevant excesses. Operational risk management The Bank applies internal rules and operational procedures, which have established the strategy, principles and responsibilities for operational risk management and the processes of monitoring, measuring, analyzing and minimizing the consequences of its occurrence. Reporting of events/problems is carried out by the unit (branches and structural units at Headquarters) where it occurs or if any other information about the case is available to the Operational, Market and Liquidity Risk Management Department. The collected data is stored in a register of operational events. Creating and maintaining the register is regulated with a procedure on operational events loss data collection. The methods for operational risk management are improving constantly within Piraeus Group. Currently, a project for the implementation of the Standardized approach for operational risk measurement is under development within the Group. The responsibilities of the Bank units, related to the scrutinizing of operational risk in their work, have increased with the implementation of this approach. According to the Standardized approach, the Bank allocates its activities into separate groups with different risk profiles, in order to refine the way of assessing the capital requirements for operational risk. The Bank performs Risk and Control Self Assessment, in the process of which every unit assesses the risk areas in its own activities and the existing control environment, and upon identifying the necessity to do so, takes measures to curb operational events emerging from its activities. In relation to that, the Bank identifies risk areas in particular business activities (on the basis of historical and expertise experience) for which it applies key risk indicators that facilitate the monitoring of the respective risks over time. The responsibilities for the operational risk management are allocated between the Senior management, the Internal Audit Division and the Risk Management Division, in which an independent unit carrying out monitoring and control of the Bank s exposure to operational risk operates. The monitoring and the control of 32
RISK MANAGEMENT operational risk are performed at operational level through separation of activities, responsibilities and daily subsequent operations control. The Bank seeks to minimize the adverse effects of operational events by taking immediate action to limit losses, optimization of the business processes and use of tools for risk mitigation, including outsourcing and the conclusion of specific insurance policies. The Bank developed an Action Plan for unexpected circumstances, in the event of interruption of systems (hardware, software, telecommunications, electricity supply problems, etc.) and periodically tests the reliability of the established protective mechanisms. The Bank applies the following techniques to reduce the operational risk: Insurance policies; Outsourcing service activities; Operational Controls (distribution of responsibilities; four eyes principle verification, Regional auditors, etc.); System of preliminary notification - Key risk indicators; Optimization and improvement of processes and procedures depending on the specifics of the particular operational event and/or problem. Implementing the capital adequacy framework Basel II and Directives 48/2006 and 49/2006 of the European Commission The Bank has developed and implemented a comprehensive framework which provides that the level of available internal (economic) capital at all times will be sufficient to cover all significant risks assumed. The resulting procedures are grouped under the general name ICAAP (Internal Capital Adequacy Assessment Process). ICAAP covers all banking procedures and indicators designed to ensure reliable identification and measurement of risks, appropriate level of internal capital, which corresponds to the risk profile of the Bank and the implementation and continued development of an adequate risk management system. ICAAP framework is based on and complies with regulatory requirements and principles of Basel II, Pillar 2, according to Article 11 in BNB Ordinance 8 and guidance for carrying out a supervisory review process. The operations performed by the Bank and the risks that evolve from them comply with its capacity to take risks (according to regulatory restrictions) and economic capital that is needed to cover the specific risks associated with different activities. The mother Bank pursues a consistent policy of reinvesting all profits realized by the activity, thus providing capital growth to the subsidiary, and supports its future development. The Bank makes a monthly analysis of the size and structure of required and available capital to cover the capital requirements for individual risks covered by the first and second pillar of the regulatory framework, including interest rate risk in the banking portfolio, liquidity risk and credit concentration risk. The internal analysis of the capital position is complemented by scenario analysis and stress tests, based on which strong adverse changes and their impact on income and capital of the Bank are simulated. 33
INFORMATION TECHNOLOGIES In 2010 IT continued to be one of the main areas where the Bank has strategically focused in supporting business stability, maintaining its market share and potential growth. The vision for the Bank continued to be the establishment of the best information technology infrastructure in Bulgaria, providing competitive advantage in measurable business terms. Piraeus Bank IT has a strategy always consistent with that of the institution. It is based on a mid-range plan along with strategic directions regarding platform selection, overall IT model, realistic investment plan, including all the elements and components which clearly define the vision, the objectives and roadmap. Investments in technology were made to ensure customer and user satisfaction and to assist the Bank in facing market challenges, facilitate modernization of existing operations and thus enable the Bank to gain and sustain competitive advantage. Emphasis was given to the quality of the systems operations and management, meaning that systems were always available, well maintained and performing at adequate levels, with low administrative overheads. The mission was achieved using clear and proven methodologies for all system development projects, ensuring prompt and adequate response, effective and timely problem resolution and giving emphasis on the root of the problem rather than on the symptoms. In addition the continuation of the financial crisis has routed the Bank to flexible development targeting to meet the new customer s needs and be in line with the regulatory and credit risk requirements. Therefore, in 2010 the focus was on: Completing the implementation of the ATLAS Accounting system for Financial Control Division, providing modern accounting and IFRS capabilities as well as efficient Fixed Assets and Suppliers control; Developing a system to fully support the automation of the Treasury Sales Pillar activities; Enhancing the Bank s Telecommunications Network achieving big bandwidths for our branches and Head Quarters; Enhancing the Telecommunications infrastructure introducing Cisco Security Solutions and Network Monitoring; Enhancing Security Infrastructure upgrade to IT systems for protection from malicious attempts; Reviewing, optimizing and re-engineering of all business processes; Enhancing our loans applications creating functionality to service new flexible products to enable new lending requirements and needs; Enhancing Bank applications to support smart deposit products; Continuing the Group s Green Banking project, by creating paperless processes and products; Completing the necessary infrastructure for the online control of the cash in the branch network aiming to establish an advanced Cash Management system; Continuing the creation of the infrastructure for the ongoing need to provide the necessary information for Credit Risk; 34
INFORMATION TECHNOLOGIES Improving the e-banking platform by introducing new functionality and products; Introducing the project in creating a Group wide Data Warehouse platform. In conclusion, 2010 was year of an ongoing effort in providing Piraeus Bank with a leading role in IT and Technologies. It was achieved by focusing on the alignment with the Business Objectives, ensuring secure and continuous operations (24X7X365), quality and speed in services, operational cost reduction, innovation and merit, and a competitive, organized and productive environment for our employees. Piraeus Online Banking In 2010 Piraeus Bank Bulgaria continued developing alternative channels for distribution, which are being chosen by an increasing number of customers as a preferred way for getting access to certain banking services and products. The Bank has been aiming at ensuring non-stop (24/7) access of its e-banking users to their banking products, constantly expanding the range of services offered, improving the system functionality, alongside the convenience to bank remotely from any PC or mobile phone that is connected to the internet, under high security levels, realized through the implementation of the two-factor authentication method. In addition to this, the Internet Banking and Credit Cards Online channels serve to support Piraeus Bank s initiative for responsible usage of exhaustible resources and materials, reprocessing and recycling. To meet the above goals, Piraeus Group continued to work under the Winbank International project, a newly proprietary multi-channel e-banking platform, based on the most advanced technologies and system architecture standards. In 2010 new services were added to the traditional ones for access to products and accounts and execution of payments in domestic and foreign currencies: the possibility to automatically register for SMS and email notifications for credit cards; access to multiple profiles with single user codes (Single Sign-On), new formats of recurring electronic account statements, etc. During the year Piraeus Online Banking improved and redesigned its user interface. As at 2010 year-end Piraeus Online Banking reported a rise in the number of customers by over 55% to over 37,000, compared to 24,050 for the previous year. At an average 40% of all payments in BGN effected through the low value customer payments system (BISERA) were executed by customers via Piraeus Online Banking (38% in 2009). For the RTGS (RINGS) payments the respective share was 60% (no change over 2009) and for customer payments in foreign currency: 46% (42% in 2008). 35
HUMAN RESOURCES The number of employees in Finance Group Piraeus Bulgaria at the end of 2010 was 988 people: Piraeus Bank Bulgaria AD - 940 people; Piraeus Leasing Bulgaria S.A. - 33 people; Piraeus Best Leasing Bulgaria S.A. - 6 people; Piraeus Insurance Brokerage - 7 people; Bulfina - 2 people. During 2010 Piraeus Bank Bulgaria welcomed 116 new employees, while 63 employees made a step forward in their career development and undertook new and more challenging roles. The number of employees in the Bank at the age below 35 years was 571 or 60% of the total staff. This fact proves the adopted practice of the Bank to give a chance for a flying career start to the young people in the country and to allow them to develop themselves in the area of banking and financial services. More than 71% of the employees in Piraeus Bank Bulgaria have a Master s degree, which is a prerequisite for successful selection of the right people for the right positions. 36
HUMAN RESOURCES Piraeus Bank Bulgaria worked pro-actively to further strengthen its image of a preferred employer among young people. Through our participation in the Forum Career days 2010 more than 1 200 students and young specialists became acquainted with our internship program and expressed their ambitions to join our team. During 2010 thirty two of the promising students were invited to join our internship program and they started their professional realization in different units of the Bank. After completing the internship program, 31% of the interns started their career as employees of Piraeus Bank Bulgaria. The Training centre of the Bank managed to train intensively and systematically all newly hired employees in the Branch network and helped them in their new roles. To ensure the on-going development of the necessary professional skills there were 100 training events held with 952 participants. 77% of the training events focused on managerial and selling skills. 37
HUMAN RESOURCES Thanks to the support of the senior management, the cross-functional teamwork and the engagement of internal trainers, the total number of the training hours invested in the employees in 2010 was 18 752 manhours. Continuing our corporate tradition of ongoing development and continuous training of our employees and aiming at enhancing their professional and personal competences, Piraeus Bank Bulgaria successfully launched a new project - elearning Management E-Academy. The objective of the Management E-Academy is to give practical advice and guidance to the participants, to help them to develop their management skills and to adapt their work to the contemporary challenges of the financial market in more efficient ways. In the first edition of the program in 2010 forty-five managers with potential and very good performance over the years were trained using Harvard Business School training, including 43 separate modules over a period of 10 months. Another new successfully realized project in the field of training and people development is the internal training Cross-selling skills. During this training colleagues from Branches had the opportunity to systematize their knowledge for successful sales of products, creating loyal customers with a focus on cross-sales. For the second time Piraeus Bank Bulgaria Group conducted the Employee Satisfaction Survey in November 2010. The conducting of this survey aims at improving work process and internal communication in the Bank as well as at facilitating the formation of efficient work teams with clear understanding of the main guidelines and priorities for the sustainable long-term development of Piraeus Bank Bulgaria Group. This opportunity was communicated to all employees and 76% of them shared anonymously what they value in the 38
HUMAN RESOURCES organization and what they believe should be further improved. The next steps of this project will be work-inprogress in 2011-2012. In the past year Piraeus Bank Bulgaria won financial support from the European Social Fund for the project Increasing the efficiency and the production of the employees of Piraeus Bank Bulgaria. The project aims at raising the qualification of about 80% of the employees of the Bank. The Bank was ranked first among 68 projects. The European Social Fund will grant 70% of the total value of the project which is BGN 316 843 in total. The remaining 30% is provided by the Bank. The program includes training on effective customer services and sales, time management, teamwork, effective management of people, English language, cash and currency operations, and measures against money laundry. For this project Piraeus Bank Bulgaria won 1st prize in the category Best project designed up to 15.12.2010 under the initiative of the Ministry of Labour and Social Policy - Employer of the Year. Another major focus was Performance management and People development. In order to make the process of managing and developing people more effective and better planned during the year a new initiative was successfully implemented including processes of Evaluation of the performance and potential of each employee and Succession planning in the structural units of the Bank. The Bank s management believes that proper people management and development at all levels is an ongoing process and the best way to ensure the long-term sustainable performance of the organization. 39
BRANCH NETWORK VIDIN PERNIK DUPNITZA MONTANA LOM VRATZA SOFIA BLAGOEVGRAD BOTEVGRAD BANSKO PAZARDZIK PLEVEN LOVECH TROYAN PLOVDIV ASSENOVGRAD SVISHTOV GORNA ORYAHOVITZA VELIKO SEVLIEVO TURNOVO GABROVO KAZANLAK STARA ZAGORA BYALA RUSE DIMITROVGRAD SLIVEN HASKOVO SVILENGRAD RAZGRAD TURGOVISHTE YAMBOL SILISTRA DOBRITCH SHUMEN BURGAS VARNA SANDANSKI PETRICH GOTZE DELTCHEV SMOLYAN KARDZALI Assenovgrad Bansko Blagoevgrad Botevgrad Burgas Burgas Byala Dimitrovgrad Dobrich Dupnitsa Gabrovo Gorna Oriahovitsa 1, Akademik Nikolai Haitov Sq. 100, Pirin Str. 1, Krali Marko Str. 7, Saransk Str. 10 Cyril & Methodius Sq. Transportna Str., Mall Burgas Plaza 3, Hadzhi Dimitar Str. 2, Bulgaria Blvd. 25, 25-ti Septemvri Blvd. 22, Sv. Ivan Rilski Str. 30, Skobelevska Str. 2, Ivan Vazov Str. 40
BRANCH NETWORK Gotse Delchev Haskovo Kardzhali Kazanlak Lom Lovech Montana Pazardzhik Pernik Pernik Petrich Pleven Pleven Plovdiv Plovdiv Plovdiv Plovdiv Plovdiv Plovdiv Plovdiv Razgrad Rousse Rousse Rousse Sandanski Sevlievo Shoumen Silistra Sliven 5, Targovska Str. 20, Rakovski Blvd. 47, Bulgaria Blvd. 15, Sevtopolis Sq. 20, Dunavska Str. 42, Targovska Str. 107, Treti Mart Blvd. 20, Plovdivska Str. 15, Krakra Str. 1, Vladaisko Vustanie Str. 14, Vanga Str. 14, Danail Popov Str. 1, Rayko Zhinzifov, Str. 9, Bethoven Str. 4, Hristo G. Danov Str. 2, Kolyu Ficheto Str. 23, Maria Luiza Blvd. 13 A, Patriarh Evtimii Str. 92 B, Hristo Botev Blvd. 72, Filip Makedonski Str. 1, Vasil Levski Str. 14, Konstantin Irechek Str. 1, Zaicher Str. 1, Kiril Startsev Str. 1, Macedonia Sq. 88, St. Peshev Str. 3, Slavyanski Blvd. 23, Simeon Veliki Str. 12, H. Dimitar Str. 41
BRANCH NETWORK Smolyan 51, Bulgaria Blvd., Block 14 7, Gotse Delchev Blvd. 103, Gotze Delchev Blvd. Business Park, Building 1a, Mladost 4 Mladost III, Bl. 314/319 115, Tsarigradsko Shosse Blvd. 127 A, Tsarigradsko Shosse Blvd, 7-th Km 180, Tsarigradsko Shosse Blvd. 37, Montevideo Blvd. 62, Vasil Levski Blvd. 111, Vasil Levski Blvd. 97, Simeonovsko Shosse Blvd. 2a, Boris Hristov Blvd. 228, Slivnitsa Blvd. 3, Vitosha Blvd. 146, Vitosha Blvd. 90, Slivnitsa Blvd. 63 Sevastokrator Kaloyan Str. Bl. 22 31, Cherni Vrah Blvd. 43, Cherni Vrah Blvd. 90, Akad. Stefan Mladenov Str. 43, Christopher Columb Blvd. 104, Akad. Geshov Blvd. 31 A, Nikola Mushanov Blvd. 30, Sveti Naum Str. Zh.k. Ljulin-6, Dzhavaharlal Neru Blvd., Bl. 601 98, Bulgaria Blvd. Lomsko Shosse Blvd., Bl. 171 3, Oborishte Str. 42
BRANCH NETWORK Stara Zagora Stara Zagora Svilengrad Svishtov Targovishte Troyan Varna Varna Varna Varna Varna Varna Varna Varna Veliko Tarnovo Veliko Tarnovo Veliko Tarnovo Vidin Vratsa Yambol 46-48, Opalchenska Str. 5, Pencho Slaveikov Blvd. 49, Madrid Blvd. 92 A, Slatinska Str. 53 A, N. I. Vaptsarov Blvd., East Park Bldg. 22 A, Al. Stamboliyski Blvd. 82, Tsar Simeon Str. 2, Knyaginya Maria Louisa Blvd. 130-132, Al. Stamboliyski Blvd. 38, Rouski Blvd. 65, Lyuben Karavelov Str. 111, Bulgaria Blv. 88, Tsar Osvoboditel Str. 1, Svoboda Square 76, Vasil Levski Str. 33, Bratya Georgievich Str. Vladislav Varnenchik Compl., Burlex Supermarket 33, Slivnitsa Blvd. 6, Kniaz Nikolaevich Str. 10, Ivan Drasov Str. 256, Vladislav Varnenchik Blvd. 1, Piskyuliev Str. 57, Vladislav Varnenchik Blvd. 5, Bacho Kiro Str. 29 B, Bulgaria Blvd. 4, G. S. Rakovski Str. 1, Alexander Batenberg Str. 2, Antim I Str. 5, Georgi Drazhev Str. 43
PIRAEUS BANK SUBSIDIARIES IN BULGARIA Piraeus Leasing Bulgaria S.A. and Piraeus Auto Leasing Bulgaria S.A. Piraeus Leasing Bulgaria S.A. was established at the beginning of 2005 and is 100% owned by Piraeus Bank AD Greece. The operating activity is performed by Piraeus Leasing Bulgaria and Piraeus Auto Leasing Bulgaria. To the end of 2010 the receivables from the leasing contracts are more than BGN 170 million. These results place the company among the leading leasing companies working in the Bulgarian market. Since the beginning of 2006 the company has been a member of the Bulgarian Leasing Association, and for the three years 2007 2010 it contributed to the development and improvement of state regulation and the investment environment in the country. The financial year 2010 was influenced by the world economical crisis; this is obvious from the financial data of the leasing companies in the group; they continue to finance but with more conservative measures without reducing the product range. Piraeus Leasing Bulgaria and Piraeus Auto Leasing Bulgaria S.A. offer financing under the form of financial leasing for fixed assets as follows: Passenger cars, LCVs, truck, trailers and semitrailers; Production lines, machines, equipment for all industrial branch purposes; Construction machinery and equipment; Medical and dentist equipment; Real estate. The financing is mainly of brand new assets, but after evaluation of the client and the asset we can finance used assets. As independent leasing units, the companies in Piraeus Group give to the clients the freedom to choose the leasing asset with defined technical specification and to negotiate with the supplier. Among the clients of the company are one of the biggest companies in the Bulgarian market as well as an enormous number of small and medium enterprises. Financing of individuals is related mainly for purchasing of passenger cars. 44
PIRAEUS BANK SUBSIDIARIES IN BULGARIA Piraeus (Auto) Leasing Bulgaria S.A. Balance sheet 2010 ( 000 BGN) 2009 ( 000 BGN) Change In % Total assets 190 526 241 353 (21%) Financial lease receivables 170 821 228 584 (25%) Equity 8 062 14 295 (44%) Share capital 11 007 11 007 0% Income statement Interest income, net 8 320 9 015 (8%) Other expenses (3 179) (1 640) 94% Operating expenses ( 2 806) (3 683) (24%) Increase in impairment for uncollectability ( 8 568) (5 976) 43% Loss (6 233) (2 284) 173% Main indices RoE (return in equity), in % (3%) (1%) RoA (return in assets), in % (77%) (16%) Piraeus Best Leasing Bulgaria S.A. Piraeus Best Leasing Bulgaria S.A., is registered under company file 2730/2004 in the records for 17.03.2004 of the City Court, as its sole shareholder. With Court decision 10 of 31.10.2007, the company has changed its name from Dirent Bulgaria S.A. to Piraeus Best Leasing Bulgaria S.A. The company has a share capital of BGN 600 thousand, distributed in 600 000 shares with a nominal value of 1 BGN each. The sole owner is Piraeus Bank Bulgaria AD. Piraeus Best Leasing Bulgaria S.A. provides, under operating lease, financing for passenger cars. Operating Leases are offered for brand new as well as for used assets. 45
PIRAEUS BANK SUBSIDIARIES IN BULGARIA Piraeus Best Leasing Bulgaria S.A. Balance sheet 2010 ( 000 BGN) 2009 ( 000 BGN) % increase Total assets 6 586 9 271 (29%) Operating leased vehicles 6 112 8 376 (27%) Equity 326 301 9% Share capital 600 600 0% Income statement Rentals income 4 029 4 578 (12%) Operating expenses (incl. operating expenses for rented vehicles) (3 787) (4 194) (190%) Interest expenses (216) (338) (164%) Profit before tax 27 48 (44%) Profit after tax 25 26 4% Main indices RoE 7.67% 8.64% RoA 0.38% 0.28% Piraeus Insurance Brokerage Piraeus Insurance Brokerage Ltd. was founded in June 2006 with Piraeus Bank Bulgaria as its sole shareholder. In August 2006, the company was granted a license for operating as an Insurance broker by the Financial Supervision Commission. The main goals of the company are: To provide quality Insurance coverage for the collateral to loans granted by Piraeus Bank Bulgaria and to assets leased by Piraeus Leasing Bulgaria S.A., Piraeus Auto Leasing Bulgaria S.A. and Piraeus Best Leasing Bulgaria S.A.; To achieve the optimum balance between quality and price for the Insurance coverage provided, while maintaining a fast and high-grade level of service; To strengthen the ties of the client base with the Piraeus Bank Group as well as attract new customers; To gather deposits from the Insurance Companies operating in Bulgaria; 46
PIRAEUS BANK SUBSIDIARIES IN BULGARIA To provide professional consultation about Insurance in the Piraeus Bank Bulgaria Group, as well as in the member Companies; To represent the Insurance interests of the Piraeus Bank Bulgaria Group and the member Companies to first class Insurance Companies in the Bulgaria market, both in the conclusion of Insurance contracts and in the liquidation of incurred losses. Piraeus Insurance Brokerage main achievements: A complete insurance coverage of Piraeus Bank Bulgaria Group property and operations from the local market; The linking of the Group s insurance needs with specific insurance products from the best Insurance Companies in Bulgaria; The conclusion of new brokerage agreements with renowned Insurance Companies; An increase in profitability with better commission agreements; The creation of an insurance product unique to the local market for the Piraeus Leasing and Piraeus Auto Leasing Bulgaria stock financing needs; A penetration in the Bulgarian Insurance Market, achieving market share in terms of premium. In thousand BGN Index 2010 2009 Change Income 2 835 2 300 23,26 % Profit before income tax 2 526 1 868 35,22 % Profit for the year 2 274 1 681 35,28 % 47
PIRAEUS BANK SUBSIDIARIES IN BULGARIA Bulfina Bulfina is a subsidiary of Piraeus Bank AD established at the beginning of 2003. From the outset, Bulfina has aimed at meeting the constantly growing needs of Piraeus Bank Bulgaria AD and at continuously increasing the range of services offered. The general purposes of the company are: The purchase, construction and refurbishment of real estate with the purpose of selling or renting it The extension of professional consultation in the field of real estate To accomplish commercial representation and brokerage in favour of Piraeus Bank Bulgaria AD. Statement of comprehensive income As at 31 December In thousand BGN 2010 2009 Rental revenue 1,365 1,371 Revenue from consultancy and other services - 36 Net gain/(loss) from revaluation of investment property 3 59 Administrative expenses (247) (300) Operating profit /(loss) 1,121 1,166 Finance cost (184) (248) Profit /(loss) before tax 937 918 Income tax (expense)/credit (93) (91) Net profit/(loss) for the year 844 827 Other comprehensive income - - Total comprehensive income for the year 844 827 48
PIRAEUS BANK SUBSIDIARIES IN BULGARIA Balance sheet As at 31 December In thousand BGN 2010 2009 Non-current assets Investment property 11,568 11,565 Property, plant and equipment 78 106 Investment in a joint venture 25 25 Loans to joint venture 53 37 Total non-current assets 11,724 11,733 Current assets Trade and other receivables 20 11 Cash and cash equivalents 408 121 Total current assets 428 132 Total assets 12,152 11,865 Equity Share capital 586 586 Legal reserves 326 - Retained earnings 4,894 4,376 Total equity 5,806 4,962 Non-current liabilities Borrowings from related parties 5,271 5,792 Deferred tax liability 403 367 Total non-current liabilities 5,674 6,159 Current liabilities Borrowings from related parties 521 521 Other payables to related parties 102 102 Trade payables 49 121 Total current liabilities 672 744 Total equity and liabilities 12,152 11,865 49
INDEPENDED AUDITOR S REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December In thousand BGN 2010 2009 Interest income 229,379 241,689 Interest expense (99,783) (107,195) Net interest income 129,596 134,494 Fee and commission income 24,566 27,037 Fee and commission expenses (3,107) (2,764) Net fee and commission income 21,459 24,273 Gains from available for sale securities 1,025 - Net trading gains 4,128 8,055 Net foreign exchange translation differences 1,132 (1,066) Other operating income 3,004 3,439 Personnel cost (17,751) (17,760) General and administrative expenses (42,788) (41,455) Depreciation (13,631) (14,483) Impairment (32,259) (42,898) Profit before income tax 53,915 52,599 Income tax expense (5,763) (5,339) Profit for the year 48,152 47,260 CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME Year ended 31 December In thousand BGN Profit for the year 48,152 47,260 Available for sale securities Net changes in fair value, net of tax 922 4 Transfer of profit to Gains from AFS securities (922) - TOTAL Comprehensive income 48,152 47,264 50
INDEPENDED AUDITOR S REPORT CONSOLIDATED BALANCE SHEET Year ended 31 December In thousand BGN 2010 2009 ASSETS Cash and balances with the central bank 231,194 185,060 Financial assets held for trading 14,260 16,788 Available-for-sale financial assets 1,409 384 Loans and advances 3,761,270 3,347,757 Property, plant and equipment 47,917 55,237 Intangible assets 6,454 8,587 Current tax assets 150 1,930 Other assets 6,097 9,370 Repossessed assets 15,770 7,580 TOTAL ASSETS 4,084,521 3,632,693 LIABILITIES Financial liabilities held for trading 579 377 Financial liabilities carried at amortized cost 3,494,478 3,085,960 Provisions 1,544 1,430 Deferred tax liabilities 164 54 Other liabilities 16,063 21,331 TOTAL LIABILITIES 3,512,828 3,109,152 EQUITY Share capital 316,797 316,797 Revaluation reserves for available for sale assets 4 4 Other reserves 22,787 18,194 Retained earnings 232,105 188,546 TOTAL EQUITY 571,693 523,541 TOTAL LIABILITIES AND EQUITY 4,084,521 3,632,693 51
INDEPENDED AUDITOR S REPORT CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December In thousand BGN OPERATING ACTIVITIES 2010 2009 Net profit 48,152 47,260 Interest (income) (229,379) (241,689) Interest received 216,948 235,255 Interest expense 99,783 107,195 Interest (paid) (98,438) (96,623) Current and deferred tax expenses, recognized in income statement 5,763 5,339 Unrealized foreign currency (gains)/losses 201 1,177 Depreciation / amortization 13,631 14,483 Impairment 32,259 42,898 Provisions, net 140 306 Unrealized fair value (gains)/losses through profit and loss - (71) (Gains) on sale of investments, net 17 (60) (Gains) from available-for-sale financial assets (1,025) - Cash flows from operating activity before changes in operating assets/liabilities 88,052 115,470 (Increase) / decrease in balances with central banks (45) 36 (Increase) / decrease in loans and advances (314,215) 188,247 Decrease in financial assets held for trading 3,765 1,457 Decrease / (increase) in other assets (definition balance sheet) 3,444 (4,522) Increase / (decrease) in deposits from credit institutions 384,296 (586,795) Increase in deposits other than from credit institutions 28,781 40,009 (Decrease) in debt certificates including bonds (29,991) (9,377) Increase in financial liabilities held for trading 202 377 (Decrease) in other financial liabilities (2,008) (1,324) (Decrease) in other liabilities (definition balance sheet) (5,658) (14,031) Cash flow from operating activities 156,623 (270,453) Income tax (paid) (3,873) (9,724) NET CASH FLOW FROM OPERATING ACTIVITIES 152,750 (280,177) 52
INDEPENDED AUDITOR S REPORT CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December In thousand BGN INVESTING ACTIVITIES 2010 2009 Cash (payments) to acquire tangible assets (4,717) (9,051) Cash proceeds from the sale of tangible assets 986 767 Cash (payments) to acquire intangible assets (425) (4,646) Cash (payments) for repossessed assets or liabilities, held for sale Cash proceeds from repossessed assets or liabilities, held for sale (9,929) (6,989) 599 119 NET CASH FLOW FROM INVESTING ACTIVITIES (13,486) (19,800) NET CHANGES IN CASH AND CASH EQUIVALENTS 139,264 (299,977) Effect of exchange rate changes on cash and cash equivalents (1,333) (111) Cash and cash equivalents at beginning of year 803,918 1,103,895 Cash and cash equivalents at end of year 943,182 803,918 53
INDEPENDED AUDITOR S REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY In thousand BGN Share capital Revaluation reserve on AFS securities Retained earnings Other reserves Total Balance as of 1 January 2009 316,797-147,263 12,217 476,277 Profit for the year - - 47,260-47,260 Gain on available for sale investments Total comprehensive income in 2009-4 - - 4-4 47,260-47,264 Transfers from retained earnings - - (5,977) 5,977 - Balance as of 31 December 2009 316,797 4 188,546 18,194 523,541 Profit for the year - - 48,152-48,152 Total comprehensive income in 2010 - - 48,152-48,152 Transfers from retained earnings - - (4,593) 4,593 - Balance as of 31 December 2010 316,797 4 232,105 22,787 571,693 54
INDEPENDED AUDITOR S REPORT 55