ANNUAL - OTP banka Srbija · Goran Pitic President of Societe Generale Serbia Management Board*...

ANNUAL REPORT 2018. 1

18CONSOLIDATED

ANNUALREPORT

BUILDING TEAM SPIRIT TOGETHER

2 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE

01 SOCIETE GENERALE GROUP �� 4

02 WORD OF MANAGEMENT �� 8

03 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE �� 12

04 MACROECONOMIC OVERVIEW IN 2018 �� 14

05 RETAIL BANKING DIVISION �� 16

06 CORPORATE BANKING �� 22

07 FINANCIAL MARKET SERVICES �� 24

08 HUMAN RESOURCES �� 28

09 CORPORATE SOCIAL RESPONSIBILITY �� 32

10 RISK MANAGEMENT �� 34

11 LIQUIDITY AND INTEREST RATE MANAGEMENT �� 40

12 CAPITAL MANAGEMENT AND CAPITAL ADEQUACY RATIO �� 44

13 CONSOLIDATED FINANCIAL INDICATORS OF THE BANK �� 48

14 EXPECTED FUTURE DEVELOPMENT �� 52

15 ASSOCIATED COMPANIES �� 54

CONTENTS

4 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 5

SOCIETE GENERALE GROUP

Societe Generale is one of the leading financial services groups in Europe. Based on a diversified universal banking model, the Group combines financial solidity and a strategy of sustainable growth. Ambition of the Group is to be the leading relationship-focused bank, a reference in its markets, close to its clients and chosen for the quality and commitment of its teams. With 31 million customers in 67 countries, Societe Generale operates through three main business activities:

French networks

Retail banking in France consists of three complementary brands: Societe Generale, a leading national bank; Crédit du Nord, a group of regional banks; and Boursorama, a major online bank. These brands serve a diverse clientele, which comprises over 12 million customers. The Group’s goal for French retail banking is to be the leading bank in terms of customer satisfaction and protection. Across France, the eight regional banks of the Crédit du Nord Group operate with a high level of independence and have a perfect knowledge of the local economic fabric. Customers enjoy all the advantages of a

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regional bank on a human scale coupled with those of a nationwide banking group. The Boursorama Group offers a complete range of online banking products and services. Established in 1995 and present in three European countries, Boursorama is a pioneer and French leader in its three businesses: online banking, brokerage and financial information.

International retail banking

Our international retail banking and consumer credit network serves over 18 million individual clients across 38 countries. In each of these countries, we implement our diversified and well-balanced banking model, while adapting it to the specificities of local markets.

Financial Services

Our Financial Services offering, which complements the International Retail Banking network, is built on our expertise in three businesses: Insurance, Vehicle Leasing and Fleet Management, and Equipment and Vendor Finance.

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Global Banking and Investor Solutions (GBIS)

Global Banking and Investor Solutions (GBIS) plays a key role as an intermediary between issuers and investors, delivering worldwide expertise in three main areas: investment banking, global financing and global markets.

Financing the economy by linking issuers and investors

A pillar of our universal banking model, Global Banking and Investor Solutions (GBIS) is present in 36 countries in the main financial markets in the Group’s regions of operation, with extensive European coverage and representative offices in Central and Eastern Europe, the Middle East, Africa, the Americas and the Asia-Pacific region. With recognized advisory

and engineering expertise and strong franchises, GBIS offers tailor made solutions to corporates, financial institutions and the public sector.

Investment banking, financing and market services: three complementary activities GBIS assists corporates, financial institutions, public sector institutions and family offices, meeting their needs in terms of investments, strategic advisory services, capital raising and capital structure optimization.

Relying on its internationally recognized expertise in structured finance (acquisitions, exports, natural resources, infrastructure and assets, media and telecom, real estate and lodging, etc.), GBIS can offer a truly global set of financing solutions to its clients. In addition, GBIS offers global access to market via solutions in equities, fixed income and currencies, commodities and alternative investments. GBIS develops advisory, investment and risk management solutions for the specific needs of each investor.

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WORD OF MANAGEMENT

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Goran PiticPresident of Societe Generale Serbia Management Board*

Societe Generale Bank Serbia among the first on the domestic market recognized the need to redefine its business model and joined different platforms in search of sustainable, more efficient and more competitive business models

It’s been five years since we resolutely caught up with trends that were changed daily by the so-called Fourth Industrial Revolution. At that time, we could not even imagine that at the end of 2018, we would deliver biometric logging to m-banking by fingerprinting or face recognition. It is not easy to predict what will happen to the digital banking world in 2019, but I am convinced that Societe Generale Serbia has the capacity and knowledge to provide the best user experience.

In the world full of novelties, digitization is the only “novelty” that has come to stay and constantly changes its shape, the dynamics of development and changes that it brings into the everyday life of not only users of banking services, but the entire online world. The shape of all that we see today in the world of digital globalization we have been spotted with the first traces of the major economic recession that struck (and divided) the world one decade ago.

However, the post-crisis period was also marked by the strong development of new technologies that by 2016 almost had the effect of traditional trade on the world’s GDP.

When I go back to 2016 within our organization, the clear vision which we parallelly applied in understanding the trends in digital flows, implementing new solutions, strengthening internal capacities and expanding innovation culture within the Bank itself is obvious. At the same time, through

a series of mentorships, workshops and educations we trained also our clients to use and explore the possibilities of our online channels.

Societe Generale Bank Serbia among the first on the domestic market recognized the need to redefine its business model and joined different platforms in search of sustainable, more efficient and more competitive business models. February 2019, or three years after we took the first step towards a start-up community and started a strategic partnership with the Centre for Technological Entrepreneurship and Innovation (ICT Hub), is now completely different - in addition to biometric logging, a number of novelties in e-commerce services, cash- in machines and quarterly improvement of our online channels, we are preparing several functionalities that will significantly improve the user experience of clients through mobile application and digital branch.

This is a time of great challenges for both the banking industry as a whole and our bank. We will continue our successful journey if we respond to all of these challenges professionally as before, improving our operational efficiency, as well as the quality of our products and services.

Our obligation to clients is great user experience and continuous investment in modern business and digital solutions that can make using of daily banking services easier for them.

* In the mandate until June 19, 2019, the connection Events after the balance sheet date, note 41.


WORD OF MANAGEMENT

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Maria RoussevaPresident of the Executive Board of Societe Generale Serbia

2018 brought a number of business, strategic, organizational and structural challenges for Societe Generale Serbia. Thanks to the dedication and expertise of our teams, and the quality of the relationship with our clients, we managed to strengthen our internal infrastructure, implement new solutions to optimize and modernize work processes and, finally, present a completely new, modernized business concept that meets the requirements of a modern user of banking services.

The business results of Societe Generale Serbia for 2018 demonstrate that we have achieved one of the highest growth rates on the domestic banking market. We reached about 35 percent higher profit after tax compared to the previous year, we strengthened our market share, confirmed our position among leaders in retail loans and further strengthened the presence in corporate business.

We retained our rank as the third largest lender to companies and realized a significant improvement in efficiency and profitability.

However, what we believe makes a difference on the market for Societe Generale Serbia are not only the financial results, but also the overall relationship with our clients that we nurture and develop to by offering them as appropriate as possible products and services in order to justify their trust.

As a bank that is recognized on the Serbian market for the expertise and competence of our bankers, we have additionally reorganized work processes in the frame of the new branch concept in order to enable account officers, while working with clients, to actively engage in searching for the best solutions for their needs.

At the same time, by introducing a number of new technical solutions and through further implementation of digital services, we adjusted our online channels to an outstanding user experience and optimized work processes to deliver the service in the shortest time possible.

Our priority in the next year remains an efficient, comprehensive and digitally oriented business, with a simultaneous adjustment of the activity in the branch network according to the expectations of our clients. We will continue to provide high quality of service and strive to be the best one-to-one relationship bank for our customers.

As a bank that is recognized on the Serbian market for the expertise and competence of our bankers, we have additionally reorganized work processes in the frame of the new branch concept in order to enable account officers, while working with clients, to actively engage in searching for the best solutions for their needs


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At the times when most modern practices become obsolete as soon as they become mainstream, it is important to differentiate short-term trends from long-term directions of development that ensure the growth on the market. We are a bank that understands that it is necessary not only to respond to the new demands of the customers, but also to anticipate future trends and be as innovative as possible. Our imperative is to meet the customers’ needs where it suits them - in one of our 96 branches across Serbia, at our contemporary e-banking platform, or via mobile applications. For 41 years of

doing business in Serbia, from traditional banking, we passed the way to improvement of the market position of one of the leading banks, which is increasingly focusing towards developing a culture of innovation. With the full commitment of all employees of Societe Generale Bank, we provide quality service and a diverse offer of products to our clients, natural persons and legal entities - large private and state companies, national and multinational companies, financial institutions, and sector of small and medium-sized enterprises, microenterprises and entrepreneurs.

SOCIETE GENERALE BANK SERBIA A.D. BELGRADE

1977

2001 2015 2017

20182013 2016

We are the first foreign bank in the domestic market that opened a representative office in 1977.

The first retail branches were opened in 2001.

In 2013 we took a part of the credit portfolio of clients of KBC Bank, which is the first financial transaction of this type in the Serbian market

We have organized the first Fintech Hackathon in Serbia with partners

We launched the first online branch in Serbia in 2015.

We made an arrangement with the company Vip Mobile, established a strategic partnership with the Center for Technological Entrepreneurship (ICT Hub), and our employees themselves get the chance to present their ideas for technological innovation.

The first rewarding competition Generator was lauched in 2017, aim to promote entrepreneurship, digitalization and business

We are constantly looking for innovative ways to, with a different approach to our clients' needs, develop products and services that will facilitate daily banking activities

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Serbia’s GDP increase for the fourth straight year in 2018, up by an estimated 4.3%, an average growth of 2.5% for the four year time span. That growth was achieved even though there was a stringent IMF program which required a significant cut in government spending in order to bring debt under control, which was approaching 80% of GDP. As of November, debt was around 56% of GDP and expected to fall significantly more in the coming period.

As a result of the much better debt figures, the government has been able to raise public sector wages and pensions, without endangering public finances while increasing economic growth in coming years as both spending and borrowing rise. Coinciding with this, low inflation has allowed the National Bank of Serbia to keep interest rates at quite low levels, further stimulating investment, which will lead to greater long-term economic growth, which we forecast to be around 4.0% to 4.5% in coming years.

Unlike in 2017, when the economy underperformed due to a large drop in electricity in the first half of the year and due to the prolonged drought hurting agricultural production, in 2018, nearly all economic sectors performed well. The area which statistically was not up to par was the strong rise in imports, which was a mostly a result of higher oil and gas prices compared to 2017. For this year, we expect energy prices to stabilize, however, global geopolitical tensions could still create obstacles.

Locally, low interest rates continue to prevail and employment figures are improving, as are overall salaries, further spurring on borrowing and in return spending. The unemployment rate has dropped from nearly 25.5% in 2012 to 11.3% in 2018Q3. In 2018, average nominal net wages increased by 6.5% compared to the average nominal net wages in 2017, while average real net wages increased by 4.5%.

Looking back historically, interest rates on RSD loans have never been lower and should not rise much in the foreseeable future, especially as inflation remains well below the NBS’s target inflation rate of 3.0%. At the same time, interest rates on Euro loans cannot expect to rise much due to very low inflation, economic growth and political uncertainties.

Another issue which the Serbian economy will have to contend with this year will be low growth among major Western European trading partners, especially Italy and Germany. The bright side could be neighboring countries, both EU members and those aspiring to be so, are expected to grow once again, which should lead to higher Serbian exports regionally.

As in 2017, last year there was an increase in Current Account Deficit, mostly arising from the rise in exports. However, record FDI in the final month of the year came in at EUR 900M, a month record. Therefore, in 2018, FDI came in at 140% of the CAD, one of the major reasons we continue seeing the dinar stability in higher long-term growth.

MACROECONOMIC OVERVIEW IN 2018


RETAIL BANKING DIVISION

In 2018, the retail banking division remained focused on the needs of its clients and the development of long-term relationships. Constant growth in retail loans is one of the key indicators of support that a bank with affiliates provides to its clients, natural persons. Thus, in the last year, 2018, the loans growth was 4.4% compared to 2017, to RSD 113 billion (EUR 955 million), taking the market share of 11.32%. When it comes to the customer base, it is increased by 5.6%, and in 2018 the bank was among the leaders in the housing loans market. Societe Generale Serbia has also been involved in the loan program for professional military personnel, and last year with the Ministry of Defence and the National Mortgage Insurance Corporation, a contract was signed for granting subsidized housing loans.

When talking about cash loans Societe Generale Banka a.d. Belgrade strengthened its position of one of the leaders in the local market. The total amount of deposits in the Retail Banking Division reached RSD 71.4 billion (EUR 604 million), an increase of 6.7% compared to 2017.

As customer satisfaction and extraordinary user experience are in the focus of the retail business, we continued to introduce a great number of changes in a system that nurtures the innovation-based culture of the whole group, such as Societe Generale, it means continuous work on an offer that has usable

value for the clients and maximally eases the daily banking activities.

New Branch Concept

Thinking about how to properly fit the needs of a modern financial services user – the one motivated by digital society to seek (and receive) products and services ‘online’, with a smart phone and high-speed internet, and who at the same time wants full support from its bankers in branches, the Bank offered a unified solution - a new concept of business, whose main goal is an extraordinary user experience.

The new concept does not only bring a modern ambiance of branches. It’s about one step closer to customers and all potential customers who want the service fast, easily, and without waiting in lines. Our ultimate goal is satisfaction of customers whom we serve where they need it - online or in new branches. New organization of work and functional space design enables customers to have easier access to digital services through the existence of Zone 24/7 where the withdrawal or payment of money in dinars and euros is available at any time, and at the same time, an environment in which the customer can have a new mobile banking application installed and talk about its functionalities. The new ambience does not have a counter, offers comfort of a living room and service that saves time and money. The Bank entered the project of transforming the branch network at

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the beginning of 2018, with first such branch in Novi Sad, and after very positive reactions of customers, another was opened in September in the center of Belgrade. The goal of the new concept is that customers use digital content when and where they want, and when they visit their personal bankers, they have enough time to devote themselves to the essence of such a meeting - financial consulting.

Innovations in digital banking

Societe Generale Bank invests great efforts in digitalisation of business and strives to improve both offer and services to customers on online channels on quarterly basis. Digital tools are used to save time to customers and employees, which additionally improves mutual experience.

Some of the additional innovations introduced to the Bank’s operations in 2018 are:

PIN by SMS - automated process of obtaining a PIN code for credit/debit cards - within which the client himself generates a PIN code by sending an SMS

Withdrawal of euros at ATMs - reduced operational work in branches and increased customer satisfaction. Since implementation of this functionality on all ATMs (June-December), of all withdrawals of euros, 38% was done at ATMs

Introduction of Cash in machines for legal entities - reduction of operational work for the branches, shortened time of daily takings deposit and increased customer satisfaction

Logging on m-banking with a fingerprint (Anroid + IOS), as well as by face recognition on IOS phones

Small businesses banking

The Small Enterprises and Entrepreneurs Sector also in 2018 continued its client base growing trend. The loan portfolio grew by 19%, while deposits increased by 16% compared to 2017. A unique approach to these clients contributed to this, in which the bank is led by the activity of a particular company or entrepreneur, that is, through a segmental offer, it adapts to specific needs in the fields of production, transport, trade and professional services. A network of 96 branches of Societe Generale Bank Srbija a.d. Beograd has personal bankers, specialized in dealing with small businesses and entrepreneurs.

In November 2018, Societe Generale Bank Serbia signed a guarantee agreement with the European Investment Fund (EIF) in the total amount of EUR 75 million for the granting of loans to small and medium-sized enterprises, necessary for investments and working capital.

By signing the contract, Societe Generale Bank Serbia has joined the COSME program of the European Commission, and within its offer for small and medium-sized enterprises (SMEs), approves loans for financing working capital, as well as for the procurement of equipment, machines and vehicles.

The maximum loan amount granted to the clients of Societe Generale Bank Serbia, small and medium enterprises and entrepreneurs is 150,000 euros (17.7 million dinars).

The loan repayment period for permanent working capital is 36 months, and the only form of collateral is the bill of exchange. Investment loans for the purchase of equipment are approved with repayment deadlines of 30 to 60 months, exclusively with the bill of exchange or pledge on the subject of financing.

Our common goal is to enable clients from the small and medium-sized segment to finance their needs favourably for further business development, with longer repayment periods and with minimal collateral. We are pleased to join the COSME program as an important additional form of support for business improvement, as part of our overall offer for small and medium-sized businesses.

COSME (Program for the Competitiveness of Enterprises and SMEs) is the European Union Enterprise Competitiveness Program for small and medium-sized enterprises with a budget of EUR 2.3 billion in the period 2014-2020.

Societe Generale Banka Srbija a.d. Beograd further affirms its commitment and conviction that small businesses have great potential and importance for the national economy by support through the second cycle of the competition “Generator”, intended

for entrepreneurs and small and medium-sized enterprises that are registered in Serbia and want to digitally transform their business.

The three winners will win consulting support in the digital transformation of business using digital technologies. The digital transformation will include a complete analysis of the current state of business and recommendations with the action plan, implementation of one of the proposed recommendations worth up to 5,000 euros, as well as marketing make over and media campaign.

Private Banking

The French Societe Generale Bank occupies a leading position in the Private Banking segment in Europe with numerous awards for the best bank in this field from prestigious European institutions, organizations and media that follow the Private Banking sector.


In our country, Societe Generale is also recognized as a bank that high-expecting clients choose as their partner in terms of offer, products and services that support their lifestyle, as well as in terms of professional support they receive from their bankers.

In May, the Societe Generale Bank’s Private Banking in Serbia has launched an exclusive package of accounts and services Eminent that provides clients with first-class, customized services, investment and financial consulting with numerous benefits offered by Visa Infinite debit card.

Users of the Eminent Private Banking Package can also expect support in the domain of investment consulting. Licensed investment consultants, in cooperation with other members of the Private Banking team, with the support of the experts of the Societe Generale Group, recommend to each client individually the way in which they can invest their funds on the domestic or foreign market in accordance with their profile, financial plans and other factors. The Eminent package also offers a variety of other services for quick and easy management of funds, and a range of benefits within Digital Banking services through M-banking or E-banking platforms.

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CORPORATE BANKING

SGS corporate in 2018 is more efficient, diversified and more than ever focused on customer experience.

We maintained market share as third biggest lender to companies and achieved strong improvement of profitability. The steps that we took in previous years, were built on simplifying and standardizing our core end-to-end processes; further development of matrix organization that supports client-led approach and cautious risk approach that contributed to significant decrease of NPL’s. As started in 2017, we insisted on better knowledge of our clients through improving efficiency and effectiveness of our KYC processes.

Business performance

2018 was an important year for SGS Corporate. Although high repayments in Mid-market and significant decrease of NPL’s for more than 60% in Large corporate, we have succeeded to maintain market share through strong production throughout whole year. Breakthrough made by structured finance/ real estate deals was strong pillar of profitability and stabile loan outstanding until the year end.

We continued to expand our presence not only through increased lending but also through diversified client base, high quality services and digitalization of our business. In addition, we leveraged on our expertise regarding international clients we have

managed to further penetrate this market niche for more than 10%. During whole year with different actions, we have succeeded to further improve and diversify our deposit base.

MID corporate continued strong development of client base which consequently led to increase of loan portfolio for close to 22%. Achieved results were significantly higher than projected, despite strong competition and permanent pressure on margins.

Factoring market in 2018 was characterized by new entrants in the market and overall turnover growth. SGS maintained leading position by further exploiting Supply Chain Platform and double-digit increase of international factoring, mostly with France, Italy and Germany.

SGS in 2018 was among the leading banks in foreign currency trading, keeping the stable market share over 10% and doubling its contribution to overall corporate profitability. Dedicated approach to ensuring high quality of service resulted with strengthened relationship with clients through treasury products, moreover interest rate swaps and other hedging instruments.

The strength of SGS cash management, as one of our main businesses, was confirmed in 2018 as important generator of profitability and relationship with clients. Market awareness of our quality in

this segment, was confirmed by Euromoney: SGS received Euromoney 2018 Award for the best cash management bank.

These achievements, and the work that preceded them, were a critical factor in delivering a strong financial performance in 2018.

Strategic actions

SGS will continue to innovate and to better understand and anticipate clients. We believe our future is all about clients and their experience and our goal is to adjust our products and services to that while insuring internal efficiency. We keep working on our strategic goal to be the best one-to-one relationship bank.


FINANCIAL MARKET SERVICES

Financial Market activities

Long-term cooperation and strong partnership with its clients, beneficiaries of products and services in the financial markets are proof that the Bank continuously and carefully monitors and understands their requirements and effectively provides answers and offers adequate innovative solutions.

Bank managed to keep its position in the foreign exchange market in terms of total volume of transactions with corporate clients. According to the official statistics of National Bank of Serbia, the Societe Generale Banka Srbija reached a market share of 10.44 % and was ranked 4th in trading with Domestic Corporate clients, while in the activities with International Corporate clients and financial institutions Bank reached a market share of 10.71 % and was ranked 3rd by transaction volume. Another very important segment is trading with domestic banks where the Bank reached a market share of 12.07 % in 2018 and positioned itself on the 2nd position. Despite the large and strong competition Societe Generale Banka Srbija managed to keep high positions in the all mentioned segments of activities in the foreign exchange market.

On the interbank deposits market Bank has been very active with the actual market share of about 10.63 % in 2018.

Bank has been actively involved in the government debt securities market, through buying government bonds denominated in RSD and in EUR on the primary market. Beside participation in the primary market of government debt securities, Societe Generale Banka Srbija actively participates also and is one of the leading players in the secondary market, with share of 13.96 %.

The Bank was very successful and contracted numerous interest rate swap transactions in 2018.

Investment services and activities

Investment Services Unit, as a separate organizational unit of the Bank with the permission of the Securities Exchange Commission has been providing clients services related to financial instruments and capital markets for 14 years now.

Thanks to continuously improving in services offered, as well as monitoring of trends in developed markets and the introduction of new products, the Unit can offer a truly wide range of services (Brokerage services in trading with financial instruments on Belgrade Stock Exchange as well as OTC market trading; intermediary services in trading with financial instruments on foreign markets; Corporate agent services; Investment advisory services, as well as other services for public and non-public companies, such as the listing, delisting, organizing public offers, shares squeeze outs, etc.).

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26 SOCIETE GENERALE BANK SERBIA A.D. BELGRADE ANNUAL REPORT 2018. 27GODIŠNJI IZVEŠTAJ – 2017 27

In 2018, the largest market share and greatest growth in turnover on the stock exchange was realized in the trading of government debt securities, which continue to be the primary focus of both domestic and foreign investors. By providing brokerage services in trading with this financial instrument on the Belgrade Stock Exchange, the Investment Services Unit has positioned itself on the 2nd position, with an annual turnover of over 19 billion RSD. Further, transactions that the Investment Services Unit realized on the primary market of government debt securities had turnover of 19.6 billion RSD.

In providing brokerage services in shares trading on the Belgrade Stock Exchange, Investment Services Unit has completed over 534 transactions, with an annual turnover of 768 million RSD. During the year Unit was successful also in the segment of Corporate Agent services.

Trust, security and innovation are a hallmark in this segment of Bank services, which has been both recognized and appreciated by clients.

Custody services

Societe Generale Banka Srbija a.d. Beograd is licensed by the Republic of Serbia Securities Commission to provide Custody Services. The quality of services provided to clients, along with the

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experience and expertise of the unit’s employees continue to make a difference resulting in long-term clients’ trust. The world-renowned financial magazine, Global Investor Magazine, has declared in 2018 again Societe Generale as the best bank in Serbia in providing custody services, which is a proof of continuity in providing high-quality services.

Societe Generale is the Custody Bank for seven voluntary pension funds, for which continues to successfully provide all custody services and daily valuation and calculation of Funds assets. As of the end of 2018, the total Funds’ Asset under Custody at Societe Generale Srbija was 40.2 billion RSD. In providing custody services to the voluntary pension funds, the Bank is absolute market leader with a 100% market share.

Other Bank clients that use custody services are, mostly, from the segment of domestic and foreign professional investors. Compared to 2017, the value of the Asset under Custody belonging to custody clients increased by 6%. Custody servicing abroad is performing through Global Custodian of Societe Generale Group (Societe Generale Securities Services).

Fulfilled custody clients’ expectations and met high standards remain in focus of the Bank, through fostering professional business relationship, trust, constructive exchange of information, responsibility and commitment.


HUMAN RESOURCES

For Societe Generale Bank Serbia, the year 2018 was very successful in the field of human resources.

144 colleagues chose our Bank as their new employer. We have been particularly working on improving the knowledge and competences we have in the small business and information technologies, and the new employees have helped us expand our experience and expertise in these domains.

Strengthening Leadership

We continued with the “Fundamentals of Management” program and organized a new certification method with the key participation of the management team. Having in mind the successful results and the satisfaction of our employees with the project, we have begun a continuation through the program “Managers of the Managers”. The goal of this program is to strengthen already experienced managers in their role and to enable them to share their knowledge in the best way and establish a healthy culture of feedback with their employees. The program includes an interactive exchange between mentors and their “learners” that will contribute to the flexibility that the present manager should possess and as a true leader leads the team through changes and transformations in the banking sector. Through visits and stories of successful leaders from our region, we wanted to show our managers that the fundamentals of human management are the same, regardless of the area in which they work.

Reminding of the importance of the Group Conduct Culture Policy was a great opportunity for our managers to gather their teams and discuss the policy of the Bank through an interactive workshop. This useful experience has solved the dilemmas of employees on how to behave in different situations, bearing in mind the importance of complying to regulations and codes of conduct.

Client in the Focus of the Company

By strengthening leadership capabilities we never forget that our client is in our focus and that we have set ourselves the goal of being the number one bank in client relations. We, as a human resources team, see our role in actively promoting this approach among employees and in fostering these values in our own work. Together with colleagues from other parts of the Bank, we started working on user experience. In cooperation with the company Clientology, we have defined the strategy and methodology for understanding how best to recognize the needs of clients, and then apply them to our work and our products. In order to truly devote ourselves to the client, most of the workshops were interactive exchange and listening to our users. We have been meeting not only in the premises of our bank, where we tried to be good hosts for our clients, but we have been also giving visits to clients in order to help us respond to the needs of their everyday life.

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After the practice, the best of them were given opportunity to start their first employment. The fact that this year we received over 250 applications from candidates of the final years of studies speaks of the success of the first two generations of the program.

As a responsible company we are aware of all the risks that come with the new technologies. That’s why we especially take care that our employees have appropriate training on general security, as well as on data and information security. With the new Client Knowledge procedure, we started trainings that were aimed at teaching our employees to ask the right questions and to provide the best service to clients on the basis of the information received, at the same time protecting personal data and ensuring that the data remain within the system.

This year, the Bank also opened door to the students of the Faculty of Economics in Belgrade, so a group of students had the opportunity to, through our four-hour program in the Bank, in an interactive way get to know our business and organization. Bearing in mind that our Bank cooperates with the University of Texas, we hosted thirty PhD students from this university and presented them our Bank, which enabled them to gain insight into the banking business sector in Serbia.

During this year we participated in several student conferences aimed at career orientation of the young and informal education on finance and banking.

Employee care and development

This year again we have provided Private Health Insurance Program for our employees. This benefit was intended to enable our colleagues to have treatments under favourable conditions in the best health care institutions in the country.

The additional pension insurance is also continued, the Bank’s participation in the voluntary pension fund for employees.

In order to make the necessary documentation always accessible to employees, we developed processes of automatic delivery of certificates of annual income, as well as confirmation of the quarterly average of the salary, directly to the employee’s email.

For the youngest members of our Societe Generale team, same as every year, we have prepared New Year gifts. This practice makes the holidays of our children beautiful, and it is especially important for our employees because of the New Year’s spirit the Bank promotes.

The trainings that we prepared for our employees this year were aimed to strengthen expertise in specific areas, but also to provide their personal development. In particular, we put the accent to small business, and accordingly, we started the Small Business Academy program, which included the best individuals from the network. As a strategically important segment for the Bank, working with small businesses is the competence we want to develop. That’s why we

The Universal Banker principle is a step further in our aspirations to open up to our clients and to adapt our way of working to them. Our employees have become bankers who at any moment can jump in and solve all the concerns of users in one place, universally covering more fields of expertise. This principle has increased their polyvalency, as well as the competence of our people in the labour market. Following this practice, we have enabled our universal bankers to work in the New Concept of a branch that transforms the conservative banking environment into an open space that invites clients to socializing and providing banking services in an informal atmosphere. With this concept, we meet the client’s needs, new trends and lifestyle where an increasing number of users turn to digital channels, and in our Bank there is an conversational partner with whom the user can advise on financial possibilities.

Cash management is an important topic for us, so in accordance with the strategy, we have developed numerous services such as cash express, cash in machines, etc. Our goal is to make transactional banking available and fast, and that internal resources have more opportunities to devote to the clients. Cash management training has helped our employees to confidently perform all the cash-related business, and have protected our clients from potential risks.

Employer Branding

As a company that helps employment of the young, this year we continued with the third generation of the “Tour de SoGe” program. The best students of the final years at our universities have been given a chance to present their ideas through a one-year program of practice in our Bank and to get career-orientation. The basic competencies we have been developing during the program are sales, project management, and other general financial knowledge.

have enabled the best individuals to expand their knowledge and expertise, learn about small business and to apply for this position. We have additionally emphasized and developed important data management competencies through the participation of our key data experts in the Data science academy.

As one of our main values is innovation, we continued with workshops of creative thinking at the regional level, in Nis and Zrenjanin, as well as with the “Innovation Curriculum” program. We encouraged our employees to participate in innovation and, in partnership with ICT Hub, organized an Innovation Academy that includes training and conferences that further enhance the innovative spirit. Within the academy, the Corporate Innovation Conference was held, as well as the Block chain meet up. This is supported by many initiatives that took place at the Bank’s level that have influenced the opening of new business lines and enabled more efficient processes.

We also continue to nurture our talents by opening up their space for participation in various projects and development programs such as the IBFS Cup, the leadership program VELA, the Recharge program.

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CORPORATE SOCIAL RESPONSIBILITY

Societe Generale Serbia, as a part of a major banking group, integrates corporate social responsibility in all its business activities using high standards for its employee policy, working with clients, local community and environment.

As a member and one of the founders of the UN Global Compact Agreement in Serbia, as well as a member and one of the founders of the Responsible Business Forum (RBF) Serbia, the Bank mobilized the most important initiatives in the country that brings together socially responsible companies.

Societe Generale Serbia grounds its corporate social responsibility on support to entrepreneurship and innovation, for creation of better environment and giving back to the community in which we operate, supporting culture and young talents, supporting vulnerable groups of citizens (through social inclusion and professional integration through the education of socially vulnerable groups and volunteer actions)

The Strategic Guideline for Corporate Social Responsibility in Societe Generale Serbia are strongly based on corporate values and are applied in accordance with the following priorities:

Integration of the social responsibility principles into business activities

Responsible management and human resource management policy

Reduction of negative effects to the environment

Same as different industries merge in business, so the concepts of social responsibility will develop in this direction. Since 2016, Societe Generale Serbia has been included in the Responsible Business Index list – the first national corporate social responsibility assessment platform that enables an objective comparison of the effects and impacts that the company generates to the society through its operations.

With the wish to give additional contribution to empowering technological entrepreneurship in Serbia, the Bank has initiated cooperation with the ICT Hub Centre for Technological Entrepreneurship and Innovation, which created a long-term partnership with benefits for all involved parties.

Together we organized various events, such as three FinTech Hackathones and the Open Innovation Challenge, which rewarded teams with the best ideas applicable in the development of the banking future. Also, the cooperation opened the bank’s door to new partners from the start-up ecosystem that are developing innovative products and services for users in an increasingly advanced digital environment.

In the year 2017, when Societe Generale Serbia celebrated 40 years of business in Serbia, the need has emerged to strategically unify all that the bank has done in the field of innovation in the last couple of years. Thus, the Generator platform was created, which was launched through a competition for the

selection of 40 entrepreneurial innovations that are innovative, feasible and sustainable.

Generator is actually a long-term platform as a place where the initiatives and events that contribute to the development of innovation and entrepreneurship are promoted. The “Connect” slogan is an invitation for all those who wish to enter into entrepreneurial waters or expand the existing business to follow Societe Generale’s activities in Serbia, whether they want to connect with a bank or some of the partners, to be participants in one of the events such as Hackathones and other gatherings having innovation in focus, or a part of events and conferences that promote digital business and entrepreneurship.

Under the slogan “Do you have a million worth innovation?” the first Generator Competition, held in 2017, had entrepreneurial innovations in its focus. Nearly 800 applications were received for the competition, and the winner received a million dinars for further development of innovation, while the best idea in the opinion of the audience won 500,000 dinars.

The Fluo Generator followed in May 2018, which continued the mission of the first competition, supporting the ideas of those who create the future. In the final, 10 best student entrepreneurial initiatives competed, the winning team travelled to Paris and discovered the world of innovations, while many partners of the competition gratified other participants with valuable prizes.

This year’s Generator competition began in November 2018. This year’s Generator 2.0 contest is intended for entrepreneurs and small and medium sized enterprises that are registered in Serbia and want to digitally transform their business.

The three winners will win consulting support in the digital transformation of business using digital technologies. The digital transformation will include a complete analysis of the current state of business and recommendations with the action plan, implementation of one of the proposed recommendations worth up to 5,000 euros, as well as marketing make over and media campaign.


RISK MANAGEMENT

Risk Management Policy

In its operations the Group pays special attention to develop a risk management system which guarantees stable growth of portfolio, profitability and long-term business success. In order to establish an effective system of risk management the Group continuously identifies, assesses, measures, evaluates, prevents, controls and internally communicates its risk exposure.

The Risk management system is implemented through appropriate policies, methodologies and procedures of the Group. With this in mind, the Group is devoted to constantly upgrade its risk management processes in order to tackle the challenges on the market and provide compliance with changes in local legislation and demands of Societe Generale Group.

Key goals in risk management are related to protection and optimization of the structure of capital, as well as increase of its economic value.

In its operations the Group is primarily exposed to the following risks: credit risk, exposure to a single entity or group of related entities (concentration risk), liquidity risk, interest rate risk, market risks and operational risk.

Organization of Risk Management Process

Risk management is organized in accordance with the provisions of the Law on Banks, the relevant decisions of the National Bank of Serbia which define the field of risk management and capital adequacy of banks, as well as the best practice and international standards.

An important role in this process plays the management of the Bank. In this sense, the Board of Directors is in charge of establishing the risk management strategy, capital management strategy of the Bank, as well as risk management policies for individual risks. The Executive Board is responsible for implementing strategies and policies for risk management, as well as for the strategy for managing capital. The Executive Board is in charge of adopting procedures for the identification, measurement, assessment and risk management. It also reports to the Board of Directors on the adequacy of the risk management process.

In order to create an adequate framework for risk management, the Bank defines and updates the risk management strategy. Main aspects of the strategy are Risk Appetite Framework and Risk Appetite Statement. These documents define the level of the risk that the Group is willing to accept in order to reach its long-term strategic business goals. The

strategy is further implemented through individual risk management policies in the segments of work with individuals, entrepreneurs and small business entities and legal entities. In this way, the Group ensures that the implementation of business policy takes place within acceptable limits from the point of view of credit risk, which should be reflected in the overall quality of the loan portfolio.

Key principle in risk management process is independence of the risk management function in relation to functions that assume risks. Therefore a central role in the process of risk management is played by a separate and independent organizational unit of the Bank that specializes in risk management - Risk Division.

Credit Risk

Credit risk is the risk that the Group will incur a loss because its borrowers will not be able to fully or partially fulfill its obligations according to contractually defined deadlines. Credit risk mainly originates from loans disbursed to clients of the Group and similar exposures.

Credit Risk Management

The Group manages its credit risk exposure on the level of individual counterparties as well as on the level of its portfolio.

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At the level of individual customers the Group adheres to rules not to approve loans or other placements unless having enough information to be able to adequately assess the financial position and creditworthiness of borrowers as well as all risks associated with a specific transaction with the client. The Group also does not engage itself in approving loans and similar exposures whose characteristics deviate from the Group’s credit risk management policies.

At the level of the total portfolio the Group manages the credit risk by matching loan maturities with the purpose of the loan, type of loan or client as well as by using appropriate instruments of collateral.

By analyzing the individual debtors of the Group and their business activities as well as macroeconomic trends Risk Division provides guidance to management to direct the business activities towards customers, markets and products whose risk profile is acceptable to the Group.

Collateral Policy

The Group seeks to secure all its placements with appropriate collateral. By using collaterals the Group reduces exposure to credit risk. The Group pays special attention to marketability and adequate appraisal of the collateral value as well as constant analysis of the collateral instruments.


Impairment and Provisioning Policy

Under impaired loans the Group includes all exposures for which it was determined that in total or partially cannot be collected due to significant deterioration in the financial condition of the debtor.

With its procedures, the Group has provided adequate identification and measurement of the amount of impairment of receivables that are accounting-wise covered through the allowance for impairment of balance sheet assets and off-balance sheet provisions.

Allowance for impairment of balance sheet assets and off-balance sheet provisions are determined based on available historical data on losses arising from placements with similar characteristics in terms of credit risk, as well as on the basis of individual assessments of debt collection from defaulted clients.

Credit Risk Management Achievements

In macroeconomic environment characterized by modest economic growth, the Group has continued with significant improvements in its risk management processes, in order to prevent potential negative consequences for its business. Operational plan for management of bad assets has been adopted and it is continued with the improvements in collection of non-performing loans by active implementation of the strategy for sale of problematic exposures as well as realization of collateral instruments, which affected significant decrease in the level of non-performing exposures. Continuation of the accounting write-off process established by the NBS decision from 2017 additionally reduced problematic receivables throughout 2018.

After first time implementation of IFRS 9 standard on January 1st, 2018, the Group continued with the improvements of impairment calculations

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methodology for non-performing exposures as well as estimation of credit losses for sound portfolio, with additional focus on Leasing portfolio.

Conservative policy of credit risk management provides a sound basis for further development of the business model and obtaining positive results in the future.

On annual level the Group carries out internal capital adequacy process (ICAAP) which in course of 2018 has confirmed good level of capital adequacy and resilience to various risks even in stressed circumstances.

In 2019 the Group will continue to improve its Risk Appetite Framework and Risk Appetite Statement to guarantee the stability of the Group and its successful performance.

Detailed overview and analysis of the process of credit risk management is given in the notes to financial statements for 2018.

Operational Risk

Operational risk is a risk of negative effect on financial result and capital of the Bank due to failures (intentional or non-intentional) in the work of employees, inappropriate procedures and processes, inadequate management of IT and other systems in the Bank, as well as unforeseeable external events, in particular including events that are unlikely to occur but that might entail great losses, risks of internal and external frauds and risks related to models. With the exception of strategic risk, operational risk includes legal risk, compliance risk and reputation risk, in accordance with SG Group standards.

For the purpose of successful operational risk management, Societe Generale Banka Srbija a.d. Beograd has implemented permanent system of


identification, measurement, follow up and control/mitigation of operational risk.

Operational risk management encompasses:

Activities aiming to identify, monitor and measure operational risk:

- Internal loss collection

- Key Risk Indicators

- Risk Control and Self Assessment

- Scenario Analysis

- Operational risk assessment at implementation/modification of new products and outsourcing of certain activities

- Business Impact Analyses in case of interruption of activities

Preventive activities:

- Managerial Supervision as a base for internal control system

- Business Continuity planning which provides protection in case of interruption in business activities and extreme risks.

Operational risk is inherent to all products, activities, procedures and systems of the Bank. Dealing with operational risk is an integral part of management positions at all levels. It is based on part of internal control system, which notably includes the Managerial Supervision carried out at all levels and the periodic controls performed through audits. This system implies that operational risk shall be considered a risk category in its own right and thus subject to special detection and assessment, monitoring and control methods, all contributing to the development of appropriate risk mitigation measures, and possibility to determine the Bank’s overall risk profile. To be

effective, management of operational risk needs the settlement of an adapted governance, leaded particularly through Operational Risk Committee and the mentioned implemented internal controls, as well as appropriate organisation structure, cornerstone being Permanent Control and Operational Risk unit that proposes policies, methodologies, plans and procedures for operational risk management, and the deployment of appropriate tools (loss collection, RCSA etc).

For the purpose of calculation of capital requirement for operational risk the Bank uses Basic Indicator Approach in line with Decision on Capital Adequacy by Banks. Internal capital requirement for operational risk is quantified using the special approach based on expected losses and scenario analyses.

Business Continuity Plan

To ensure continuity of its operation, the Bank adopted Business Continuity Plan, which ensures smooth and continuous functioning of all important systems and processes of the bank, as well as limitation of losses in emergency situations.

Internal Audit

Through performance of planned audit missions and special engagements / investigations, Internal Audit assesses adequacy and reliability of Bank’s internal control system and compliance of its business operations. The Internal Audit communicates the results of its work to the Bank’s management, thus ensuring that risks are appropriately identified and controlled. The Internal Audit regularly prepares reports on its activities and submits them to the Board of Directors and the Audit Committee.

Compliance risk

Compliance risk arises as a result of Bank’s failure to harmonize its activities with the laws, by-laws, bank’s internal acts, as well as with professional standards, good business practices and business ethics of the bank.

The compliance function enables identification, assessment and monitoring of the risk of non-compliance of the bank’s operations that includes the following three risk categories:

Risk of regulatory sanctions

Risk of financial loss

Reputation risk

In accordance with the Law on Banks, the Bank has established an independent organizational unit – Compliance unit in charge of identifying, monitoring and managing compliance risk.

In order to perform tasks within its scope, Compliance unit monitors compliance of Bank’s internal acts with the regulations, in particular those relating to the protection of client’s interests, adequate informing and notification of clients, protection of personal data and banking secrecy, identification and assessment of clients, customer complaints management, sales and marketing relations, market integrity, market abuse and insider dealing, respect of code of conduct, risk of conflict of interest, risk of bribery and corruption, use of internal whistleblowing rights and other regulatory areas in accordance with the adopted compliance program.

The unit conducts control in a manner that ensures identification and management of existing and potential compliance risks which are duly reported to the competent authorities of the Bank.

It strives to promote the highest compliance standards and raises employees’ awareness on the need to operate in accordance with regulations, internal acts and good business practices.

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LIQUIDITY AND INTEREST RATE MANAGEMENT

Liquidity management represents a continuous process of reviewing the need for liquidity in regular business situations (“business as usual”), but also management planning in unforeseen circumstances, by providing an adequate level of liquid assets based on an analysis of needs for liquidity, as well as reviewing changes in the structure of the balance sheet and off-balance sheet.

Liquidity is the ability of the bank to provide sufficient liquid assets to unconditionally satisfy all due liabilities arising from balance sheet liabilities (withdrawal of deposits and other sources of financing), balance sheet assets (financing of new placements), as well as on off-balance sheet positions.

The assets and liability management department within the Finance sector is responsible for managing the liquidity of the bank. Daily and short-term liquidity management for up to 90 days is delegated to the Dealer Department. Operational liquidity is managed with the aim of providing sufficient liquid assets in each currency and performing unconditional and timely payment of all due liabilities, both in regular business conditions and in stressful circumstances. The Assets and Liability Management Department is responsible for assessing the liquidity position over a longer period that arises from the overall balance sheet structure of the Bank. The Assets and Liabilities Management Department reports on a regular basis to the Assets and Liabilities Management Committee

(ALCO), which is primarily responsible for monitoring the Bank’s exposure to the risks arising from the structure of assets and liabilities of balance sheet and off-balance sheet items, as well as to propose, consider and adopt measures in order to mitigate structural risks.

Within the liquidity management process, the Bank:

It continuously monitors and analyses all the factors that influence the Bank’s liquidity position,

Provides diversified sources of funding,

Provides optimum current daily liquidity by providing funds in sufficient amount and currency structure (at the level of each currency) for the smooth settlement of liabilities, which includes estimating the expected cash flows for a period of 30 days,

Reviews and monitors the long-term liquidity position based on the projections of liquidity gaps, i.e. monitoring the compliance of cash inflows and outflows on the basis of balance sheet and off-balance sheet items in the long run,

Provides a liquidity reserve based on an analysis of the compliance of maturity of the balance sheet positions and in such a way as to ensure the marketability of the receivables and assets in a short term if needed,

Maintains a portfolio of liquid securities of the highest credit rating (securities issued by the NBS or the state of Serbia),

Places short-term interbank deposits within defined limits,

It also has at its disposal frame credit lines that can be used at any moment for liquidity maintenance purposes, and

It maintains the required level of obligatory dinar and foreign currency reserves, in accordance with the regulations of the National Bank of Serbia.

The Bank manages liquidity in a way that ensures the stability, diversification and flexibility of the funding sources. In the process of diversifying the sources of funding, in 2018, the Bank successfully worked to preserve the stability of the deposit base of both retail and corporate, with further diversification in terms of maturity structure and cost reduction. The Bank also achieves diversification of funding sources by contracting loan arrangements with the International Financial Institutions and credit lines with the parent bank, as well as using all available capacities of the interbank money market.

The level of liquidity is expressed, inter alia, by the Daily liquidity indicator which represents the ratio of the sum of liquid assets of the first and second class (cash, funds on accounts with other banks with adequate credit rating, deposits with the National Bank of Serbia, receivables in the process of execution, irrevocable credit lines approved to the Bank, financial instruments listed on the stock exchange and other Bank receivables that are due in up to one month) and sum of the liabilities without the agreed maturity date in the appropriate percentage and liabilities with the agreed maturity within the following month.

The Bank is required to manage liquidity in a way to ensure that the liquidity indicator is:

At least 1.0 when calculated as the average of liquidity indicators for all working days of the month

It shall not be less than 0.9 for more than 3 consecutive working days

At least 0.8 when calculated for one business day

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The daily indicator of the level of liquidity during 2018 was always within the prescribed limit (not less than 1) and it is presented in the following table:

Liquidity indicator 2018 2017

Average during the period 1.67 1.59

Highest 2.26 1.94

Lowest 1.42 1.35

On 31st of December 1.51 1.58

In addition to the above mentioned, the Bank calculates and monitors the narrow liquidity ratio prescribed by the National Bank of Serbia, which was also in compliance with the defined limits in 2018.

The Bank also calculates the Liquidity Coverage Ratio (LCR), which aims to strengthen resilience of the banks to short-term shocks, or liquidity disturbances on the market. The Liquidity Coverage Ratio (LCR) is a measure of the bank’s ability to provide sufficient liquid assets in order to fulfil all outstanding liabilities under the assumed conditions of stress. The Liquidity Coverage Ratio (LCR) during 2018 was above the prescribed limit of 100%.

Long-term or structural liquidity is monitored by analysing the structure of balance sheet and off-balance sheet items, as well as by projecting cash flows and liquidity gaps, especially for each of the significant currencies. The projection of liquidity gaps is carried out on the basis of agreed maturity dates and depreciation plans, but taking into account both behavioural assumptions and modelling of cash flows for items with no agreed maturity (current accounts, A Vista savings and the like).

For the purpose of comprehensive monitoring of liquidity risk exposure, the Bank has established an early warning indicators system for the purpose of timely identification of a potential liquidity crisis. The

Bank also assesses the cash flows and the adequacy of liquidity reserves in the event of occurrence of unforeseen, unfavourable events, i.e. develops a scenario analysis and performs stress testing in accordance with the Liquidity Continuity Management Plan as well as the Recovery Plan.

Interest Rates Risk

Interest rate risk is defined as the risk of possible negative effects on the financial result and capital of the Bank due to unfavourable trends in the interest rates market. The main types of interest rate risk are: the risk of maturity time mismatch (for items of assets and liabilities related to a fixed, invariable interest rate) and re-determination of prices (for items related to variable interest rate), yield curve risk, base risk and embedded options risk, i.e. optionality risk.

The process of managing the interest rate change risk is done through monitoring, identifying, measuring and mitigating the effects that adverse interest rate movements can have to the financial result and capital of the bank. Measurement of the impact of the interest rate risk to the Bank’s financial result can be made by calculating changes in the net interest margin in certain scenarios of future trends of market interest rates (NIM sensitivity analysis), while the measurement of the impact of the interest rate risk to the Bank’s capital is monitored by monitoring the change in the economic value of capital in the event of a change of interest rates (EVE sensitivity analysis).

In order to adequately manage the interest rate risk, the Bank has established limits that are monitored on a regular basis. Compliance with the limits is regularly reported to the relevant boards (Assets and Liabilities Management Board of the Bank).

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CAPITAL MANAGEMENT AND CAPITAL ADEQUACY RATIO

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The main strategic goal of the Bank in terms of capital management is the effort to use available capital resources economically and in accordance with the defined business development prospects of the Bank. The Bank’s capital management policy priority is to cover the potential losses of the Bank, the resulting negative effects arising from risk exposure, in relation to yield performance. In the process of capital management, the focus is on continuous monitoring of capital adequacy. The Bank’s capital level that is considered as adequate is the level of capital that ensures the implementation of the Bank’s strategy and business policy, and at the same time provides cover for all risks that the bank is exposed to in its operations.

Capital management is based on:

The process of the risk identification, measurement and assessment

Ensuring an adequate level of capital in accordance with the risks that the Bank is exposed to in its operations

Adequate incorporation of capital management into the bank’s management and decision-making System

Regular analyzes, monitoring and verification of the capital management process of the bank.

The central role in the capital management process is the management of the Bank - the Assembly, Board of Directors and the Executive Board. It is the responsibility of the Bank’s Assembly to decide on all capital increases, as well as the adoption of the Bank’s business policy and strategy, which defines the input data for the Bank’s capital planning for the next business year.

It is within the competence of the Bank’s Board of Directors to establish a strategy for risk management and risk supervision that the bank takes over as part of its business activities, which affect the level of the Bank’s capital adequacy, as well as the strategy for managing the Bank’s capital.

Within the function of the Bank’s strategic risk management, the Executive Board of the Bank proposes the business policy and strategy of the Bank, capital management strategy and risk management strategy and policies to the Board of Directors, implement all these policies and strategies, and adopt procedures to identify, measure, and assess the risks to which the Bank is exposed in its operations, which affect the adequacy of the Bank’s capital and hence the future business decision.

Within the process of capital management, the competence of the Executive Board of the Bank is to


incorporate the planning of capital into all business decisions and procedures related to business planning, timely inform the Board of Directors of the needs for capital and enable adequate reporting of the bank’s external supervisory authorities on the level of capital adequacy. Considering that the Bank’s capital management is in high correlation with the risk profile of the Bank, in addition to the Bank’s organizational parts belonging to the standard management hierarchy, the Bank has established a number of committees in charge of monitoring the exposure to existing risks, as well as planning and anticipating the potential exposure to new types of risks.

Capital of the Bank in 2018

The total capital of the Bank consists of Common Equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital.

The Tier 1 capital of Bank consists of: share capital based on ordinary shares, share premium, revalorization reserves, profit reserves, regulatory adjustments of the Bank’s basic share capital elements value, intangible investments, deferred tax assets that are dependent on the future profitability of the Bank, other than those arising from temporary differences, decreased for deferred tax liabilities and required reserves from profit for assessed losses on

balance sheet assets and off-balance sheet items of the Bank as deductible item.

Tier 2 capital consists of subordinated liabilities that are included in the supplementary capital of the Bank in accordance with the valid Decision on capital adequacy. In accordance with the valid Decision on capital adequacy, the Bank is obliged to calculate the following indicators:

the Bank’s basic Common Equity Tier 1 capital adequacy ratio which is equal to the ratio of the CET1 capital and the risk-weighted assets of the bank and cannot be below 4.5%

the Bank’s Tier 1 capital adequacy ratio that is equal to the ratio of the Tier 1 capital and risk-weighted assets of the bank and cannot be below 6%

The Bank’s total capital adequacy ratio, which is equal to the ratio of the total capital and risk weighted assets of the bank, and cannot be below 8%.

The Bank’s risk assets represent the sum of the total amount of risk-weighted exposure to loan risk, counterparty risk, and price risk for trading book activities, foreign exchange risk, and risk of adjusting loan exposure for all business activities of the bank and for operational risk.

In 2018 the level of capital and the indicator of adequacy had the following trend:

In 000 RSD JUN 2018 DEC 2018

Total capital 37,609,075 44,294,468

Tier 1 capital 34,001,296 34,777,408

Cpmmon equity Tier 1 capital 34,001,296 34,777,408

Share capital 23,724,274 23,724,274

Retained earnings 9,966,616 11,168,027

Revalorization reserves 1,171,256 926,162

Intangible assets -813,632 -994,342

Deffered taxes

Other CET 1 regulatory adjustements -47,218 -46,712

Addiotional Tier 1 capital 0 0

Tier 2 capital 3,607,980 9,517,060

Subordinated liabilities 3,607,980 9,517,060

Total risk weighted assets 221,205,127 246,124,016

Total risk weighted assets for credit risk 190,252,213 212,854,312

Total risk weighted assets for market risk 5,870,577 6,324,798

Total risk weighted assets for operational risk 24,997,788 26,817,531

Total risk weighted assets for CVA risk 84,550 127,375

Total capital adequacy ratio 8% 17.00% 18.00%

Tier 1 capital adequacy ratio 6% 15.37% 14.13%

CET 1 capital adequacy ratio 4.5% 15.37% 14.13%

During 2018, the Bank maintained the level of capital adequacy in regulatory frameworks.

During 2018, there was no need for recapitalization in the form of a new issue of shares.

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CONSOLIDATED FINANCIAL INDICATORS OF THE BANK

Consolidated net banking income reached RSD 15.9 billion (EUR 134.2 million), which is 14.0% more than in the previous year. Despite the low interest rates environment, net interest income has increased, largely due to an increase in interest income (9.7%) due to ongoing organic growth in retail and corporate placements, as well as a positive effect from the takeover of the retail loan portfolio at the end of 2017. On the other hand, interest expenses remained under control and had a slight increase of 3.2% despite the increase in the deposit level of 8.3%. Also, there was a significant increase in net income from fees and commissions by 20.4%, which comes from a significant increase in net income on the basis of buying and selling foreign currency (22%), an increase in the net income of card business fees (41%) and net income of payments based on payment transactions (10%).

At the end of 2018, total operating expenses amounted to RSD 7.4 billion (EUR 62.6 million), which is above the level of 2017 by 5.3%, primarily due to the increase of information system investment expenses (25.6%) and deposits insurance costs (10.6%) which follows the deposits increase, while the costs of salaries, wages and other personal expenses are kept at a stable level with slight increase of 4.0%.

On consolidated level, the income of RSD 8.6 billion was made (EUR 72.3 million), which is 35.3% more compared to 2017 level, primarily due to excellent commercial performance followed by cost controlling, as well as significant positive effect of the net cost of the risk arising from the improved quality of the loan portfolio and the activities of solving the portfolio with problematic loans.

1. Consolidated income statement

RSD 000 2018 2017 VAR 18/17

NET BANKING INCOME 15,873,022 13,927,597 14.0%

Interest income 15,010,574 13,679,256 9.7%

Interest expenses (2,646,242) (2,563,169) 3.2%

Net interest income 12,364,332 11,116,087 11.2%

Fees and commissions income 5,653,059 4,778,248 18.3%

Fees and commissions expense (2,644,719) (2,279,968) 16.0%

Net fees and commissions income 3,008,340 2,498,280 20.4%

Net gains (losses) on change in fair value of financial instruments 268,369 (710,172)

Net (losses)/gains on derecognition of the financial instruments recognized at fair value

(7,326) 48,417

Net exchange rate gains (losses) and gains (losses) from agreed currency clause

(310,068) 576,244

Net gains (losses) from derecognition of investments in associated companies and joint ventures

44,023 29,223

Other operating incomes 37,923 64,620

Other incomes 467,429 304,898

OPERATING EXPENSES (7,403,641) (7,028,029) 5.3%

Salaries, wages and other personal expenses (3,594,903) (3,455,740) 4.0%

Depreciation expenses (523,051) (501,878) 4.2%

Other expenses (3,285,687) (3,070,411) 7.0%

GROSS OPERATING INCOME 8,469,381 6,899,568 22.8%

Net charge from reduction in impairment of financial assets not measured at fair value through income statement

270,247 2,302,450

Net gains (loss) from derecognition of the financial instruments measured at amortised cost

983,749 (2,144,723)

PROFIT / LOSS BEFORE TAXES 9,723,377 7,057,295 37.8%

Income tax (1,157,668) (521,889)

Loss from deferred taxes (9,583) (209,871)

PROFIT/LOSS AFTER TAXES 8,556,126 6,325,535 35.3%

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2. Consolidated balance sheet

Assets (in RSD 000) 31.12.2018. 31.12.2017. VAR 18/17

Cash and assets with the central bank 29,741,938 30,596,133 -2.8%

Receivables under derivatives 137,598 68,929

Securities 46,457,254 38,900,806 19.4%

Loans and receivables from banks and other financial organizations 3,857,646 2,222,869 73.5%

Loans and receivables from customers 240,542,534 217,272,549 10.7%

Retail 112,847,844 108,068,253 4.4%

Corporate 127,694,690 109,204,296 16.9%

Investments in associated companies and joint ventures 266,942 242,701 10.0%

Investments into subsidiaries - -

Intangible investments 994,342 781,002 27.3%

Property, plant and equipment 2,904,861 2,968,306 -2.1%

Investments immovable 17,114 18,384 -6.9%

Current tax assets 1,616,198 1,683,151 -4.0%

Deferred tax assets 326,536,427 294,754,830 10.8%Other assets

Liabilities

Liabilities under derivatives 117,356 42,272 177.6%

Deposits and other liabilities to banks, other financial organizations and central bank

79,949,741 72,431,890 10.4%

Deposits and other financial liabilities to other customers 179,130,096 165,425,303 8.3%

Retail 71,385,950 66,875,805 6.7%

Corporate 107,744,146 98,549,498 9.3%

Subordinated liabilities 15,389,344 8,889,583 73.1%

Provisions 378,719 1,002,735 -62.2%

Current tax liabilities 644,856 259,186

Deferred tax liabilities 77,915 38,238

Other liabilities 5,702,608 5,712,989 -0.2%

Total Liabilities 281,390,635 253,802,196 10.9%

Capital

Share capital 23,724,274 23,724,274 0.0%

Profit 9,253,338 6,515,155 42.0%

Loss - -

Reserves 12,168,180 10,713,205 13.6%

Total Capital 45,145,792 40,952,634 10.2%

Total Liabilities 326,536,427 294,754,830 10.8%

The consolidated balance sum increased for 10.8% to RSD 326.5 billion (EUR 2.8 billion) in 2018 from RSD 294.7 billion (EUR 2.5 billion) at the end of 2017.

At the end of 2018, the amount of loans to customers reached RSD 240.5 billion (EUR 2.0 billion), which is an increase of 10.7% compared to the previous year. As in previous years, the retail business segment has recorded placement growth by 4.4% in 2018 to RSD 112.8 billion (EUR 955 million), which is the result of growth in the segment for cash and mortgage loans and the small business segment during the year, thus consolidating the position of the second largest bank in retail banking in Serbia.

In the corporate sector, the level of placements at the end of 2018 amounted to RSD 127.7 billion (EUR 1.1 billion), which is a growth of 16.9%

compared to 2017, due to the continuation of dynamic growth in the segment of medium-sized enterprises (+22%), while the level of loans in the segment of large business entities remained stable, however with a change in the loans structure where the healthy loan portfolio increased by 10.6% and problematic loans significantly decreased. A significant increase in leasing portfolio of 20% has been achieved as well.

Total deposits at the end of 2018 reached the level of RSD 179.1 billion or EUR 1.5 billion (+8.3% compared to 2017). The retail deposits at the end of 2018 reached the level of RSD 71.4 billion (EUR 604 billion, +6.7% compared to 2017). The growth of corporate deposits continued in 2018, reaching RSD 107.7 billion (EUR 912 million), which is +9.3% compared to 2017.

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EXPECTED FUTURE DEVELOPMENT

After the growth of the economy of 4.3% in 2018, with the positive contribution of all production and service sectors, in 2019, as in the coming years, a continuation of faster economic growth is expected, with the support of further growth of private and public investments as well as recovery of spending, with the implementation of public sector reform and with continuation of the process of harmonizing the regulatory framework with EU standards and frameworks, as well as more favourable trends in the labour market (reducing unemployment and wage growth). Bearing in mind such macroeconomic environment, the Bank expects further growth of client base and placements to clients, both in the retail sector and business sector, and its goals for future development are defined as follows:

Further growth of the number of clients, with a focus on improving understanding of their needs and fostering long-term cooperation with them

Further growth of retail and small business placements with the focus on digital communication channels in order to increase efficiency and customer satisfaction

With proactive approach and focus on better understanding of client needs, growth of placements in the corporate banking segment

Continuation of the focus on maintaining a stable level of expenditures and directing expenditures towards projects/activities that will lead to improvement of operational efficiency

Adequate management of limited resources in the long run (sources of funding, risk of weighted credit assets, and equity)

Responsible risk management

Human resources development, as well as talent management

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ASSOCIATED COMPANIES

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Sogelease Serbia

Sogelease Serbia, a company 100% owned by Societe Generale Bank Serbia, involved in financial leasing, was established in 2006. Although a young company, in a relatively short time, it managed to position well on the market, with constant improvement in its financial market domain, despite the intensity of the effects of the global financial crisis. At the end of 2018, Sogelease Serbia is ranked first at the financial leasing market, and ended the year as a leader in financing passenger and commercial vehicles.

In the leasing company at the end of 2018, there were 39 employees, who, as always, received the unconditional support of all staff members of the Societe Generale Bank branch network, in which Sogelease products are available.

The successful cooperation with important partners in financing passenger and commercial vehicles for the needs of legal entities continued, as well as successful cooperation with partners in the field of financial leasing for natural persons. Sogelease maintained continuity in cooperation with a long-standing partner for the procurement of passenger and commercial vehicles.

Thanks to the applied technological innovations and excellent cooperation with the partners, as well as the support of Societe Generale Bank, the company

Sogelease achieved remarkable results in 2018. 3164 of new contracts were concluded, while the amount of new placements is 83.25 million euros, which is an increase of 11% compared to 2017. Sogelease achieved a significant financial result in 2018. Profit after tax is EUR 3.02 million. With this result, Sogelease is on the leading position in the leasing market.

Societe Generale Insurance

During 2018 Societe Generale osiguranje a.d.o. Beograd maintained a positive trend in its business results. The positive trend is expected to continue in 2019. At the end of 2018, the Company’s net profit amounted to RSD 90 million, representing an increase of 53% compared to 2017. During 2018, Societe Generale Insurance continued to innovate when it comes to offering life insurance products, as well as working on the digital transformation of its business. This trend will continue in 2019 with the aim of expanding the client base and opening new channels of sales. Sogecap Insurance Company (with a 51% share) and Societe Generale Banka Srbija a.d. Beograd (with a share of 49%), established in 2009 the insurance company Societe Generale osiguranje a.d.o. Društvo za životno osiguranje Beograd. Sogecap, with 40 years of banking experience, currently present in 16 countries, provides expertise in insurance business, while Societe Generale Banka Srbija a.d. Beograd provides access to its retail network.

Consolidated Annual report of the Banking Group, consisting of the parent company Societe Generale banka Srbija a.d. Beograd (hereinafter: the “Parent company” or the “Bank”), Sogelease Srbija d.o.o. Beograd where the parent company owns 100% share in equity and associated legal entity Societe Generale Osiguranje akcionarsko društvo za životno osiguranje Beograd, in which the Parent company owns 49% equity share, for the year that ended on December 31, 2018, is approved by the management of the Bank on June 21st, 2019.

Vladimir Pejčić Branimir Spasić Sonja Miladinovski Maria Rousseva

Accounting Department Manager

Executive Director of Finance Executive Board Member President of the Executive Board

ANNUAL - OTP banka Srbija · Goran Pitic President of Societe Generale Serbia Management Board*...

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