CREDY BANKA 2008 English Final

8/13/2019 CREDY BANKA 2008 English Final

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Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language

CREDY BANKA A.D., KRAGUJEVAC

Financial Statements

For the Year Ended December 31, 2008and Independent Auditors Report


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Translation of the Independent Auditors Report Issued in the Serbian language

INDEPENDENT AUDITORS REPORT

To the Management Board and Shareholders of

Credy banka A.D., KragujevacWe have audited the accompanying financial statements (page 3 to 58) of Credy banka A.D., Kragujevac (the Bank), which comprise the balance sheet as of December 31, 2008 and the related incomestatement, statement of changes in equity and cash flow statement for the year then ended, and a summaryof significant accounting policies and other explanatory notes.

Managements Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements inaccordance with the Law on Accounting and Auditing of the Republic of Serbia and regulations of the National Bank of Serbia governing financial reporting of the banks. This responsibility includes:designing, implementing and maintaining internal control relevant to the preparation and fair presentationof financial statements that are free from material misstatement, whether due to fraud or error; selectingand applying appropriate accounting policies; and making accounting estimates that are reasonable in thecircumstances.

Auditors Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conductedour audit in accordance with International Standards on Auditing and the Law on Accounting and Auditingof the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditors judgment, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

(Continued)

Deloitte d.o.o.Makenzijeva 2411000 BelgradeSerbia

Tel: +381 11 3812 100; + 381 11 3812 200Fax: +381 11 3812 101; + 381 11 3812 201www.deloittece.com

Business Registry Agency, registry number 4290Raiffeisenbank a.d., Bulevar AVNOJ-a no. 64aBusiness account no. 265-1040310000266-36

Tax identification number 100048772Inscribed and paid capital 150.750,06 EUR


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Translation of the Financial Statements Issued in the Serbian language 4

BALANCE SHEETAs of December 31, 2008(Thousands of RSD)

Notes 2008 2007ASSETSCash and cash equivalents 3.9, 13 1,361,109 847,062Revocable deposits and loans 14 1,306,400 2,498,591Fee and commission receivables 15 45,143 26,946Loans and deposits to customers 3.4, 16 3,078,646 2,062,032Securities (excluding treasury shares) 3.6, 3.7, 17 228,385 326,568Equity investments (interests) 3.8, 18 1,420 45,264Other placements 19 768,333 953,451Intangible assets 3.3, 20 8,368 13,027Fixed assets and investment property 3.3, 20 957,461 858,008Deferred tax assets 3.11, 12 17,654 13,188Other assets 21 66,429 185,424

Total assets 7,839,348 7,829,561

LIABILITIESTransaction deposits 22 1,547,392 1,914,111Other deposits 23 4,773,840 4,024,348Borrowings 24 122,493 8,432Interest, fee and commission payables

and change in the value of derivatives 19,691 13,067Provisions 26 55,334 41,915Tax liabilities 3,716 2,983Tax and dividend payables 369 -Deferred tax liabilities 3.11, 12 48,201 35,962

Other liabilities 27 102,823 81,818Total liabilities 6,673,859 6,122,636

EQUITY 27Share and other capital 1,709,001 1,708,931Reserves 404,263 329,932Accumulated losses (947,775) (331,938)

Total Equity 1,165,489 1,706,925

Total Liabilities and Equity 7,839,348 7,829,561

OFF-BALANCE-SHEET ITEMS 28 8,102,839 7,665,437

The accompanying notes form an integral partof these financial statements.


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Translation of the Financial Statements Issued in the Serbian language 5

STATEMENT OF CHANGES IN EQUITYYear Ended December 31, 2008(Thousands of RSD)

2008. 2007.SHARE CAPITALBalance, beginning of year 1,426,550 1,300,090 Newly issued shares - 126,460Balance, end of year 1,426,550 1,426,550

OTHER CAPITALBalance, beginning of year 6,260 6,260

Balance, end of year 6,260 6,260

SHARE PREMIUMShare premium arising from new share issuance 276,191 276,191


TREASURY SHARESAcquisition (70) (70)Sale of treasury shares 70 -

Balance, end of year - (70)

RESERVES FOR POTENTIAL LOSSESBalance, beginning of year 11,878 11,878Special reserve for potential losses 245,682 310,442Additional provision for potential losses to be set aside as

appropriation of retained earnings (245,682) (310,442)


OTHER RESERVESBalance, beginning of year 3 3

Balance, end of year 3 3

REVALUATION RESERVESBalance, beginning of year 318,051 33,121Property and equipment appraisal effect 120,246 311,276Effects of deferred taxes arising from the appraisal of property

and equipment (12,024) (31,128)Transfer to accumulated losses based on the sale of fixed assets (87) -(Negative)/positive effects of remeasurement of available-for sale

securities to their fair value (33,804) 4,782Balance, end of year 392,382 318,051

ACCUMULATED LOSSBalance, beginning of year (331,938) (137,216)Loss for the year (615,924) (194,722)Transfer from revaluation reserves based on effects of sale of fixed assets 87 -

Balance, end of year (947,775) (331,938)

TOTAL EQUITY 1,165,489 1,706,925The accompanying notes form an integral part

of these financial statements.


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NOTES TO THE FINANCIAL STATEMENTSDecember 31, 2008

All amounts are expressed in thousands of RSD, unless otherwise stated.

7Translation of the Financial Statements Issued in the Serbian language

1. BANKS ESTABLISHMENT AND OPERATING POLICY

Credy banka A.D. Kragujevac (hereinafter: the Bank) was established as a shareholdingcompany under the name of Jugobanka Jubanka D.D., Kragujevac, pursuant to the June 27, 1991Articles of Incorporation of the Bank and July 3, 1991 Decision issued by the National Bank ofSerbia. It was inscribed in the Register maintained by the Commercial Court in Kragujevac underthe registration number Fi. 1378-91 on July 9, 1991.

In order to comply with the Law on Banks and Other Financial Institutions, the Bank was enteredin the register maintained by the Commercial Court in Kragujevac on June 20, 1995 pursuant tothe Decision numbered Fi. 1355/95.

At the March 30, 2000 Assembly meeting, the Bank enacted the Decision on merger withumadija banka A.D., Kragujevac. The merger was consummated on January 1, 2000 with the balance of assets, equity and liabilities as of December 31, 1999. The Merger and Acquisition

Agreement entered by and between the Bank and umadija banka A.D., Kragujevac was signedon March 30, 2000. Based on its Decision number IV/143 634/1 as of April 20, 2000, the NationalBank of Yugoslavia gave its consent to the Amendments and Addendums to Articles ofIncorporation of Jugobanka Jubanka A.D., Kragujevac which relate to the abovedescribed mergerof umadija banka A.D., Kragujevac. Pursuant to the Decision of the Commercial Court inKragujevac number Fi. 376/2000, the merger with umadija banka A.D., Kragujevac andestablishment of the Main Branch umadija banka Kragujevac were registered.

The change in the registered name into Credy banka A.D., Kragujevac was entered into the CourtRegister maintained by the Commercial Court in Kragujevac on September 3, 2001, pursuant tothe Decision number Fi 1116/2001, and as provided in the NBY Decision as of June 21, 2001,number 1339 and June 14, 2001 Decision enacted by the Banks Assembly.

At the December 10, 2004 Assembly meeting, the Bank enacted a Decision to accept the mergerof Credy banka A.D., Kragujevac with Srpska regionalna banka A.D., Beograd.

The merger was executed on November 1, 2004 with the assets, equity and liabilities as ofOctober 31, 2004.

By its December 24, 2004 Decision register number 5011, the Bank consented to the Decisionnumber 25744 regarding the Proposal of the Decision on Amendments and Addendums to theArticles of Incorporation in order to account for the merger between Credy banka A.D.,Kragujevac and Srpska regionalna banka A.D., Beograd.

Pursuant to the December 24, 2004 Decision enacted by the Commercial Court of Kragujevacnumber Fi 1376/04, the merger between Credy banka A.D., Kragujevac and Srpska regionalna banka A.D., Beograd was registered.The Bank is registered to perform the deposit, credit and other banking operations in the countryand payment transactions abroad, based on the June 18, 1999 Decision of the National Bank ofYugoslavia registration number 465. Under the Decision of the National Bank of Yugoslaviaregistration number 4162 as of November 23, 2001, the Bank became authorized to perform payment transactions abroad (the so-called grand authorization).

At December 31, 2008, the Bank comprised of the Central Office located in Kragujevac, KraljaPetra I Street number 13, 5 Main Branches, 12 Branches, 33 Branch Offices, 2 Business Units, 4Agencies and 39 outlets.

As of December 31, 2008, the Bank had 707 employees (December 31, 2007: 788 employees).The Banks tax identification number is 101458655.


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2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIALSTATEMENTS

2.1. Basis of Preparation and Presentation of the Financial Statements

Pursuant to the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia no.46 of June 2, 2006), legal entities and enterprises incorporated in Serbia are required to maintaintheir books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity with the prevailing legislation and professional rules which include: the Framework for the Preparation and Presentation of FinancialStatements (the Framework), International Accounting Standards (IAS) and InternationalFinancial Reporting Standards (IFRS), as well as the related interpretations representing anintegral part of these standards.

Pursuant to its Decision numbered 011-00-738-2003-01 of December 30, 2003, the Republic ofSerbia Ministry of Finance determined and issued the Framework and IAS that were applied as ofDecember 31, 2002, and upon which both the previous and the new Law on Accounting andAuditing from 2006 were based.

The amendments to the IAS, as well as the newly-issued IFRS and the related interpretationsissued by the International Accounting Standards Board (IASB) and the International FinancialReporting Interpretations Committee (IFRIC), upon the aforementioned date, were officiallyadopted pursuant to a Decision enacted by the Ministry of Finance of the Republic of Serbia withreference to the issuance of International Financial Reporting Standards (number 401-00-11/2008-16) as published in the Official Gazette of the Republic of Serbia number 16 of February 12, 2008.

However, until the preparation date of the accompanying financial statements, not all amendmentsto Standards and Interpretations had been translated (particularly after the aforesaid Decision ofthe Ministry). The Interpretations in application for the accounting periods commencing January1, 2008, which were not officially translated and adopted by the Ministry are disclosed in Note2.2.

The accounting regulations of the Republic of Serbia depart from IFRS and certain provisions ofIAS 39 Financial Instruments: Recognition and Measurement given that in the Interpretation ofthe Ministry of Finance number 401-00-222/2009-16 dated February 24, 2009, the negative effectsand/or the decline in the value of securities available-for-sale (mostly shares), do not represent a permanent impairment in the value but rather a fluctuation arising from extraordinarycircumstances that have lead to a drop in prices, and accordingly, the negative effects arising fromthe decrease in fair value are not treated as impairment losses on securities available-for-sale, andare not transferred to the income statement, but presented within the balance sheet as an equitydeductible.

In addition, the accompanying financial statements are presented in the format prescribed underthe Guidelines on the Prescribed Form and Content of the Financial Statements of Banks andOther Financial Institutions (Official Gazette of the Republic of Serbia no. 74/2008 and 3/2009).Such statements represent the complete set of financial statements as defined under the law, whichdiffer from those defined under the provisions of IAS 1, Presentation of Financial Statementsand IAS 7, Cash Flow Statement, and differ in some respects, from the presentation of certainamounts as required under the aforementioned standards.


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2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIALSTATEMENTS (Continued)

2.2. Standards and Interpretations Issued, but not yet in Effect

As of the financial statements issuance date, the following standards, amendments andinterpretations were issued by the Board and Committee, but were neither in effect nor officiallyadopted and translated in the Republic of Serbia for the accounting periods commencing on orafter January 1, 2008:

IAS 1 Presentation of Financial Statements (effective for financial periods starting January 1,2009);

IAS 23 (Amended) Borrowing costs (effective for financial periods starting January 1, 2009); IFRS 8 Operating Segments (effective for financial periods starting January 1, 2009);

IFRS 3 (Amended) Business Combinations and IAS 27 (Amended) Consolidated and SeparateFinancial Statements (effective for financial periods starting July 1, 2009); Amendments to IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations

(effective for financial periods starting January 1, 2009); Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial

Statements (effective for financial periods starting January 1, 2009); Amendments to IAS 39 Financial Instruments: Recognition and Measurement Eligible

Hedged Items (effective for financial periods starting July 1, 2009); Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards and

IAS 27 Consolidated and Separate Financial Statements (effective for financial periods startingJanuary 1, 2009);

Improvements to International Financial Reporting Standards 2008 (most changes are effectivefor financial periods starting January 1, 2009);

Improvements to IFRS 1 First-time Adoption of International Financial. Reporting Standards(in effect from July 1, 2009);

IFRIC 17 Distributions of Non-cash Assets to Owners (in effect from July 1, 2009);

Also, as of the financial statements preparation date, the following interpretations were notofficially adopted by the Ministry.

IFRIC 13 Customer Loyalty programs (effective for financial periods starting July 1, 2008); IFRIC 14 Interpretation on IAS 19 The Limit on a Defined Benefit Assets, Minimum

Funding Requirements and their Interaction (effective for the accounting periods startingJanuary 1, 2008);

IFRIC 16 Hedges of a Net Investment in a Foreign Operation. (effective for financial periodsstarting October 1, 2008).

In accordance with the aforementioned, the accompanying financial statements cannot bedescribed as having been prepared in accordance with IFRS and IAS.

In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3 which are in conformity with the accounting, banking and taxregulations prevailing in the Republic of Serbia.

The Banks financial statements are stated in thousands of dinars (RSD). The dinar is the officialreporting currency in the Republic of Serbia.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.3. Property, Equipment and Intangible Assets At December 31, 2008, equipment and intangible assets are stated at cost less accumulateddepreciation/amortization and impairment losses, if any.

Items of property are initially measured at cost. In the subsequent measurement of property (landand buildings), the Bank applies the revaluation model in accordance with IAS 16 Property, Plantand Equipment, whereas the cost model is applied to equipment.

The revalued amount is assessed by a certified appraiser. In the assessment the cost method has been applied. The appraisal is performed on a regular basis, i.e., when the Banks managementassesses that the book value of property significantly differs from its market value. The positive

revaluation effects are credited to revaluation reserves. The decrease in the value of property ischarged to revaluation reserves created in the revaluation of the property at issue. However, thedecrease shall be charged to expenses of the period in which the difference is identified, if therevaluation surplus relating to that asset does not suffice.

Upon disposal of property, revaluation reserves arising from the asset sold are transferred toretained earnings from previous years.

Property and other assets, including tangibles acquired in lieu of debt settlement and leased, areclassified as investment property. Investment property is stated at cost.

Depreciation and amortization are calculated on a straight-line basis by applying the following,annual rates in order to write off the assets over their estimated useful lives:

Intangible assets 20%Computers 20.0% - 50.0%Buildings 1.1% - 4.0%Motor vehicles 14.3% - 33.3%Investment property 1.3%Furniture and other equipment 7.0% - 50.0%Other 7.0% - 16.5%

The depreciation of property and equipment commences when these assets are placed into use.

3.4. Loans

Loans are stated in the balance sheet at amortized value which comprises the initial amount ofapproved placement, increased by the accrued interest less repayment of the loan principal andallowance for impairment, based on the assessment of specifically-identified exposures and lossesthat are inherent in the Banks loan portfolio. The Banks management applies the internallyadopted methodology in its evaluation which is disclosed in Note 3.5.

Loans that are disbursed in dinars and index-linked to the RSD:EUR exchange rate or to theofficially published coefficients derived from the changes in the retail price growth index, arerevalued in accordance with the specific individual loan agreements in question. The effects ofsuch revaluation are included under gains and losses on the valuation of assets and liabilities.


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3.5. Allowances for Impairment and Provisions for Contingent LiabilitiesIn the assessment of credit risk, the management applies its internal model for risk assessment tothe accompaniment of the methodology for the calculation of allowance for impairment of balancesheet assets and provisions for losses on off-balance sheet items. The credit risk assessment takesthe following into account: financial positions of debtors from the aspect of profit stability,liquidity gap between items of assets and liabilities, cash flow adequacy as a difference betweenthe net cash flow from debtors operating activities and short-term financial liabilities of debtorsand indebtedness expressed as debt to equity ratio, customer regularity in setting its contractualliabilities towards the Bank, i.e. default in settling contractual liabilities and quality of collaterals provided against the Banks receivables (first class, adequate or otherwise rated with respect to itsquality).

Pursuant to internal criteria for the credit risk assessment, the Bank rates customers, receivablesfrom customers and legal entities as belonging to performing assets, risk-weighted assets and non- performing assets.

Receivables from entrepreneurs and registered farmers are rates pursuant to their regularity insettling materially significant liabilities towards the Bank within the last 12 months, based on theirliquidity and due settlement of their tax dues.

The calculation of the allowance for impairment of receivables from retail customers is performedon individual basis for receivables from debtors owing more than RSD 1,500,000.00 (in case offrequent defaults and deterioration in creditworthiness) and collectively, for all other receivablesdue from retail customers designated into groups per type of product: loans, credit cards, current

accounts and receivables for which legal suits have been filed.The methodology for the calculation of allowance for impairment of balance sheet assets and provisions for losses on off-balance sheet items closer determines the procedure and criteria forthe calculation of allowance for impairment.

For the assessment of credit risk, the internal model is applied with the methodology for thecalculation of allowance for impairment of the balance sheet assets and provisions for losses onoff-balance sheet items, according to which all the Banks receivables classified pursuant to the provisions of the Decision of the National Bank of Serbia delineating the classification of balancesheet assets and off-balance sheet items, subject to the credit risk assessment.

Loans in dinars, for which hedging is achieved by linking the dinar to EUR exchange rate, are

revalued in accordance with the agreement pertinent to each loan. The effect of reconciling withthe exchange rate as of the balance sheet date is recorded through income statement.

Special reserve for potential losses is determined in accordance with the relevant NBSRegulations. Loans, other placements, guarantees and off-balance-sheet exposures are classifiedinto categories A, B, V, G and D, in accordance with the evaluation of their collectability andassociated risk exposures, which depend upon the number of days the payments are in arrears,financial standing of the counterparty, and the quality of the collateral obtained on the exposures.The estimated amount of special reserve for potential losses is calculated by applying the percentages ranging between: 1% and 2% for placements classified into the A category, between5% and 10% for the placements classified into the B category, between 20% and 35% for the Vcategory placements, percentage of 40% to 75% for the G category placements and 100% for placements in D category.


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3.5.

Allowances for Impairment and Provisions for Contingent Liabilities (Continued)The difference between the amount of special reserve for potential losses calculated in accordancewith the National Bank of Serbia Decision on the Classification of Balance Sheet and Off-BalanceSheet Exposures, and the amount of allowances for impairment and provision for contingentliabilities estimated in accordance with the internally adopted methodology, is presented as specialreserve for potential losses within the equity.

Special reserve for potential losses is set aside as appropriation of retained earnings. If currentyear profit and retained earnings from prior years are not sufficient to cover the estimated amountof special reserve, the difference is recognized as additional required provision and represents theitem to be deducted from equity.

3.6. Trading SecuritiesTrading securities comprise of securities which are held for the purpose of making a profit bytrading it in the near term. Trading securities are recorded at cost and, as of the balance sheet date,these securities are remeasured to their fair values. All realized and unrealized gains arising onsale, and any changes in their fair values are charged to expenses/credited to income within Gains/(Losses) on sale of securities.

3.7. Securities Held-to-Maturity

Securities held-to-maturity represent securities for which there is a positive intention and ability tohold to maturity. Securities held-to-maturity consist of bills of exchange held-to-maturity. Allsecurities are initially recorded at cost. As at the balance sheet date, securities held-to-maturity are

recorded at amortized cost, using the original effective interest rate, less provisions forimpairment, if any.

3.8. Securities Available-for-Sale

Securities for which there is intention to hold them for an indefinite time period that can be sold tomeet liquidity needs or due to changes in interest rates, foreign exchange rates or prices of equity,are classified as securities available-for-sale. These securities are comprised of equityinstruments issued by banks and other legal entities, as well as other securities available-for-sale.

Following the initial recognition, securities available-for-sale are presented at fair value. The fairvalue of securities not listed on the stock exchange is based on the currently offered prices on themarket. Unrealized gains and losses arising from securities available-for-sale are recorded within

revaluation reserves, until such security is sold, collected or in some other way realized, or untilthe security is permanently impaired. When securities available-for-sale are sold or becomeimpaired, cumulative fair value adjustments recognized within equity are recorded in the incomestatement.

Equity investments in other legal entities that are not quoted on an active market are excludedfrom being measures at fair value and are stated at cost, net of allowance for impairment. Gainsand losses on the sale of these securities are credited or charged to income statement withGains/(losses) on sale of securities available-for-sale.

3.9. Cash and Cash Equivalents

For the purposes of the cash flow statement, Cash and cash equivalents include cash, balances

on the current accounts held with other banks, gold and assets held on the gyro account.


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3.13. Fair Value

The accompanying financial statements are prepared on a historical cost basis, includingadjustments and provisions made to reduce assets to their estimated recoverable amounts.

It is the policy of the Bank to disclose the fair value information on those financial assets andfinancial liabilities for which published market information is readily and reliably available, andwhose fair value is materially different from their recorded amounts. Sufficient market experience,stability and liquidity do not exist for the purchase and sale of loans and other financial assets orliabilities, given that published market information is not readily available. Hence, fair valuecannot be reliably determined. In the opinion of the Banks management, amounts expressed in thefinancial statements reflect the fair value which is most reliable and useful for the needs of the

financial reporting in accordance with the Law on Accounting and Auditing of the Republic ofSerbia.

3.14. Segment Information

The largest portion of its business operations is performed on the territory of the Republic ofSerbia. The concentration of financial assets per separate industries is presented in Notes to thefinancial statements. The revenues which the Bank realizes through its broker-dealer departmentare presented within fee and commission income.

4. RISK MANAGEMENT

Managing risks comprises effective supervision, control and active management of credit and non-credit risks comprising liquidity risks, interest rate risk, foreign currency risk and other risks.

The Banks Management Board is responsible for the establishment of a unique system for therisk management and supervision over the system and is under obligation to ensure that theExecutive Board closer identifies the risks to which the Bank is exposed as well as to exercisecontrol over the risks in accordance with the adopted policies and procedures.

The Banks Executive Board identifies and measures risks to which the Bank is exposed in itsoperations and applies the principles of risk management as approved by the Management Boardof the Bank. The Board for monitoring the Banks business operations analyzes and adopts the proposals of the Banks policies and procedures in respect of risk management and internalcontrols submitted to the Management Board for further consideration and adoption. The Boardfor monitoring and managing risks considers the reports on risks in the Bank and delivers themto the Asset and Liability Management Board. The Investment Board monitors and analyzes thecompliance of the Banks business operations, expressed through the positions in the TradingBook, with the prescribed limits determined pursuant to the Decision enacted by the Bank andanother Decision issued by the NBS.

The Bank has adopted procedures securing the control and consistent application of all internalBanks procedures with reference to risk management, as well as the procedures for regularreporting to the Banks bodies and to the National Bank of Serbia regarding risk management.


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4. RISK MANAGEMENT (Continued)

4.1. Credit RiskCredit risk relates to the risks that customers will not be able to settle its liabilities towards theBank in full and when due. The Bank is secured against credit risk as follows:

- by calculating and allocating reserves for potential losses and losses contingent on balance sheetassets and off-balance sheet items of the Bank, pursuant to the NBS regulations and enactmentsof the Bank,

- by monitoring the changes in operating ratios and reconciling these ratios with percentages prescribed by the NBS,

- by monitoring the Banks exposure to credit risk arising from the impact of dinar exchangefluctuations on the financial position of debtors pursuant to the Banks methodology,

- by monitoring the participation of non-performing assets (G, D category) in the total classified

assets so that it has a tendency towards the average in the banking sector,- by daily customer monitoring from the aspect of default in collection noticing first signs that acustomer may be experiencing certain issues on operations,

- by strict adherence to the rules for the activation of collaterals accepted, as prescribed in theoperating policies,

- by collecting placements so that the percentage of collectability of matured liabilities is not below 90%,

- by dispersion of placements per separate industries and customers, while taking care that theBanks exposures to individual clients or groups of related parties is within the limits prescribed by the NBS.

The credit risk management principles are the following:

a)

Clearly defined competencies and responsibilities, procedures in the decision-making processin the area of credit and other types of engagements with legal entities and entrepreneurs, andtargets and objectives set under the Operating Plan and monitoring the implementation, as inaccordance with the credit policy adopted by the Bank,

b) The application of defined criteria for the loan origination with the prescribed rating ofcustomer creditworthiness, monitoring the compliance with the conditions that are to befulfilled upon loan origination or upon any other engagement, as in accordance with theBanks Operating Policy.

c) Adequate maintenance of credit files in accordance with the NBS Decision on the Procedureand Content of a Credit File.

d) Defined criteria for measuring the risk inherent in placements, pursuant to the Procedure foridentifying assessment, diminishing and monitoring credit risk and Methodology fordefining criteria for the calculation of special reserve for potential losses, and then adeveloped system of communication and instructions exchanged between credit departmentsexposed to risk in direct contact with the customer and Portfolio and Credit Risk Departmentmanaging that risk, as well as periodic control and assessment performed by the internalauditor regarding the effectiveness of risk control.

e) Education of employees within the Risk Management Sector and Portfolio and Credit RiskDepartment, through regular reading of reference books, participations in seminars in thefield of risk management, technological innovations of the work process and constanteducation of employees in the Branch Offices with the object of a more effective applicationof procedures and guidenaces.


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4.1. Credit Risk (Continued) The process of credit risk management is executed in the Portfolio and Credit Risk Departmentwithin the Risk Management Sector. In the aim of easier identification and assessment of creditrisk upon the origination of loans and other sorts of engagement, uniformity is to be applied to allorganizational parts in respect of compiling documentation and delivering standardizedinformation upon placement approval, which is defined in the credit file content procedure, know-your client procedure and guidance on the unique data processing at the request of legal entities,entrepreneurs and unit of the local self-government for the Banks body in charge.

The compilation of all necessary documentation, writing of standardized information for placement approval and delivering it to the Portfolio and Credit Risk Department is theresponsibility of the credit officers that are, jointly with the manager of the organizational part at

issue, also responsible for the accuracy of input data and complexity of documentation included inthe debtors credit file.

Based on the data obtained from the analysis of debtor creditworthiness and its regularity inliability settlement, the officers working in the Portfolio and Credit Risk Department rates debtorsinto risk groups:

a) Low risk (pass) with the following characteristics: the customer maintains significant and/orlong-lasting connection with the Bank through its business operations or if the customer has been operating for 5 years at least and has a high quality management; if its account has not been frozen within the last year; the customer has adequate experience in the activity it performs; it has a clear and stabile source of debt repayment; has been operating with profit inthe last two years; realizes cash flows sufficient to meet its dues; the maturities of its liabilitiesmatch or significantly match the maturities of its assets; there are no debts that exceedcapital; it offers first-class or adequate collaterals. Debtors with the majority of thesecharacteristics are classified into the A or B category and are treated as low credit riskexposures.

b) Medium exposure (risk-weighted assets) imply the following characteristics: the account ofsuch customer was frozen from time to time for more than 10 days in the last year; the sourcefor debt repayment is not clear or is unreliable; the customer invests an insignificant amountof its own resources into the project; its cash flows are insufficient to cover liabilities; thematurities of its liabilities do not match or significantly mismatch the maturities of its assets;the customer did not operate with profit in any of the last two years; the managementfluctuates. Debtors with the majority of such characteristics are classified into V category.

Exceptionally, if the engagement is secured by adequate collateral, the receivable can beclassified into B category.

c) High risk (non-performing assets) show the following characteristics: there is no visiblesource of debt repayment; the customer incurs losses that exceed its equity; it has liabilitiesthat are more than 30 days past due, while operating with loss; its account is frozen for morethan 90 days in succession, it was founded in the last two years, and there is no cash flow projection; the Bank has doubtful receivables from the customer. Debtors showing thesecharacteristics are classified into the categories G and D. The decision on undertaking newengagements with these debtors may be enacted by the Executive Board if the engagementdoes not exceed three months, and if the engagement is within the decision-makinglimitations defined by the Management Board; whereas, the Management Board enactsdecisions on engagements longer in duration. Exceptionally, if the engagement is secured byadequate collateral, the decision on the exposure is enacted by the Banks Credit Board.


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4.1. Credit Risk (Continued) A credit officer involved in the origination process must obtain collaterals pursuant to the BanksBusiness Policy, and in the form of standard information forward it to the Portfolio and CreditRisk Department, whereas the assessment of the collaterals provided by the officer working inPortfolio and Credit Risk Department.

The credit officer is bound to keep track of the customer operations, the customer liabilitysettlement towards the Bank and monitor the updatedness of credit files taking care of itscompleteness, accuracy and any fluctuations in the value of collaterals (adequate collaterals).

A special procedure regulates the manner of managing credit risk occurring and emerging in theBanks receivables based on loans approved and placements with retail customers.

Credit risk in the Bank is identified based on: customer creditworthiness, customer delinquency insettling its liabilities towards the Bank and quality of collaterals that stand surety for the Banksreceivables.

Creditworthiness is the basic condition for obtaining loans and advances from the Bank. Totalmonthly credit liabilities of a private individual are comprised of a sum of liabilities arising fromloans, credit cards (monthly liability from the aggregately approved credit card loan), 5% of entireoverdraft facilities per current account, activated sureties provided against loans or agreed-uponfinance leases, as well as 50% of amounts of sureties against loans.

The assessment of credit risk with receivables from retail customers is conducted according to theMethodology applied in defining criteria for calculating special reserves for potential losses

arising from receivables from retail customers, based on which a degree of risk is determined, as isthe amount at risk, i.e. rate category of receivables.

The service engaged in coordinating, monitors the report on the classification of receivables onquarterly basis and cooperates with the Portfolio and Credit Risk Department within the Sector incharge of placements and risk management, with the object of prescribed timely reporting to the National Bank of Serbia.

The coordination service reports to the Asset and Liability Management Board in respect of thetotal funds engaged in loans and advances to retail sector on daily basis, and based on the Decisionmade by the Banks Commission for approving loans to retail customers.

Once a month or when necessary, the organizational parts involved in retail operations report to

the Board for monitoring and managing risks, as well as to the Asset and Liability ManagementBoard, on the regularity of collections in retail.

4.2. Liquidity Risk

Liquidity risk relates to the adverse effects on the financial results of the Bank contingent on theBanks inability to settle its matured liabilities when due.

For the Bank to insure itself against such risks and avoid the sanctions of the regulatory body, the procedures defining the activities for the implementation of liquidity risk management policy have been adopted and they prescribe the manner of identifying, measuring, mitigating monitoringliquidity risk pursuant to legal requirements.


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4.2. Liquidity Risk (Continued) At the Boards meeting, daily reports are discussed, movements in dinar and foreign currencyliquidity are analyzed, as well as liquidity gaps dating from the day before or from previous periods, while the inflows and outflows of resources are forecasted for that particular day or forthe following days, and based on the data available, for the purpose of timey undertaking thenecessary measures and activities for achieving an optimal level of net cash flows, that ensuretimely dinar and foreign currency payment transactions, timely discharge of all matured liabilitiesof the Bank and meeting all the customer demands (corporate and retail customers) for additionalsources of finances and other forms of the Banks engagement.

Measuring and monitoring liquidity per currencies is performed by the Sector in charge of assetswith its the Service for dinar and foreign currency deposits and liquidity, which measures andmonitors liquidity per separate currencies EUR, USD and CHF, and collectively for all currencies, based on the daily report on the foreign currency ratio supplied through the DEV form. Suchmonitoring also makes it possible to keep track of proportion between long and short positions, onone side, and the Banks equity, on the other. If measuring and monitoring shows that there aresignificant departures in certain currencies or aggregately, which leads to a higher liquidity risk,the Sector in charge of assets - Service for dinar and foreign currency deposits and liquidity,reports to the Executive Board, Asset and Liability Management Board, Risk ManagementDepartment enacting measures aiming to reconcile foreign currency positions in certaincurrencies:

- purchase or sale of certain currency,- conversion from one currency into another,

- purchase and sale of securities denominated in a certain currency,- decreasing or increasing dinar liabilities indexed to a currency clause.

At the proposal of the Asset and Liability Management Board, the Banks Executive Boarddetermines exact measures for the reconciliation of liquidity risk ratios, i.e. elimination of acritical level of liquidity determined in accordance with the Procedure used to identify, measureand assess liquidity risk.

With the object of maintaining the prescribed liquidity level and diminishing risk of critical levelof liquidity, the Bank undertakes the following measures:

- engagement to increase deposits, capital and to obtain other sources of finances,- effective collection of matured receivables, sale of certain type of securities (in dinars or in

foreign currency),- the sale of foreign currency surpluses for dinars up to the desired level, which does not jeopardize the Banks foreign currency liquidity,

- limitation or complete discontinuance in approving and disbursing loans,- limitation or complete discontinuance in discounting securities,- limitation or complete discontinuance in issuing guarantees and other forms of sureties,- limitation or complete discontinuance in issuing letters of credit and other instruments used in

payment transfers,- limitation or complete discontinuance of payments from its gyro account,- use of interbanking loan for liquidity purposes, obtained under most favorable terms,- undertaking other measures aiming to reconcile the inflows and outflows of resources.


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4.3. Currency Risk

Currency risk implies risk from negative effects on the Banks financial result and capital due tochanges in exchange rates. The Bank is exposed to this risk through the items carried in the banking and trading book.

By means of adopted Procedures, the activities in respect of currency risk management policyimplementation are defined and the manner of identifying, measuring, relieving and monitoringrisk is prescribed in accordance with the legal requirements, in the aim of eliminating risk fromincurring negative effects on the financial results and the Banks capital due to the movements inthe foreign exchange, protecting the Bank from these risks and avoiding sanctions that mayotherwise be imposed by the regulatory body.

The currency risk ratio is the proportion between the total net open foreign currency position ofthe Bank and the Banks capital, calculated in accordance with the Decision delineating the capitaladequacy in banks. The total open foreign currency position of the Bank represents the absolutevalue of the total long or total short foreign currency position, whichever is the greater one.

The Bank is under obligation to maintain the balance between its foreign currency assets and itsforeign currency liabilities (including the dinar items of assets and liabilities indexed to a currencyclause), so that its total net open foreign currency position (including the absolute value of netopen position in gold), at the end of each working day, does not exceed 20% of its capital, and inits procedures, the Bank defined a critical level of currency risk as amounting to 18% of theBanks capital.

The hedge against currency risk in the Bank is provided by managing:

- total foreign currency assets and liabilities of the Bank, taking care of their maturity, currency, balance and liquidity matching,

- the risk of changes in intercurrency relations, taking care of its maturity, currency, balance andliquidity matching between the Banks assets and liabilities denominated in a certain currency,

- risk from the change in the value of local currency, so that the risk from changes is transferredto the ultimate beneficiary in the manner defined by the Banks Operating Policy, and theamount of assets for which there is no hedge against currency risk, needs to be reconciled withthe amount of risk-weighted liabilities of the Bank indexed to a currency clause,

- the optimum level of foreign currency liquidity ensures long-term solvency in the Bank andtimely, effective and high quality payment transactions in foreign currency performed abroad. Itmakes it possible for the Bank to extend loans and advances to its customers in the form ofloans and other forms of foreign currency engagements or make deposits with some otherdomestic or foreign bank, its foreign currency surplus that remains once all prescribed and otherliabilities and reserve requirements have been settled,

- the optimal proportion between the repurchase and sale of currency from retail and corporatecustomers, as well as entrepreneurs, and/or by purchasing or sale of foreign currency or cash onInterbank Market,

- when necessary, by converting one into other currency in the aim of unimpeded operations andrealizing the best possible financial results, such as reconciliation of foreign currency ratios, i.e.eliminating the critical level of long or short position of the Bank expressed in a certaincurrency.


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4.3. Currency Risk (Continued)At the proposal of the Asset and Liability Management Board, the Executive Board determinesconcrete steps to be taken as a hedge against currency risk, i.e. measures to be taken to reconcilethe foreign currency risk ratios, by eliminating the critical level of long and short foreign currency positions in certain currency or by increasing the Banks capital by means of increasing profitability or by increasing capital.

The measures for eliminating short foreign currency position of the Bank in a certain currency areas follows:

- the purchase of foreign currency or cash from customer or on Interbank Market in certaincurrency the conversion of foreign currency assets from one currency into another or from

currency into cash and vice versa,- the purchase of securities stated in a foreign currency for dinars decrease in liabilitiesdenominated in dinars indexed to a currency cause.

Measures to eliminate a long position of the Bank in a certain currency are the following:

- the sale of foreign currency or cash to customers or on Interbank Market in a certain currency conversion of foreign currency assets from one currency into another or by converting foreigncurrency assets in the local currency, and vice versa,

- the sale of securities denominated in a foreign currency for dinar amounts decreasing the dinarcredit engagement of the Bank with a currency clause where the Bank did not agree on thehedge against the fluctuations in foreign exchange increase in dinar liabilities with a currencyclause and the like.

4.4. Interest Rate Risk

Interest rate risk relates to the negative effects on the financial results and capital of the Bankcontingent on the movements in interest rates, and the Bank is exposed to such risk based on theitems carried in the banking book.

The Bank separately analyzes the exposure to interest rate risk based on the following:

1) Risk inherent in the maturity mismatch (for items with fixed interest rate) and repricing (foritems with variable interest rate) for separate items of assets and liabilities, as well as off- balance sheet items of the Bank (repricing risk),

2) basis risk (the risk of the so-called imperfect correlation in the movement in rates of collection

and payment arising from different characteristics in respect of maturities, i.e. repricing and3) the risk of options imbedded in the interest sensitive items of assets and liabilities, as well asin the off-balance sheet items of the Bank (optionality risk). The emergence of this risk isassociated with situations such as withdrawal of deposits without defined maturities or earlyloan repayment.

The Procedure used to identify interest rate risk enables timely and comprehensive identificationof interest rates to which the Bank is exposed, as well as the analysis of causes leading to itsappearance.

The Bank is exposed to the interest rate risk in case of a maturity gap between its interest bearingassets and liabilities with fixed interest rates, as in the case of mismatch between the dates ofrecalculation of interest rates applied to assets and liabilities with variable interest rates.


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4.4. Interest Rate Risk (Continued)

Interest risk is identified based on the following elements:

- movements in interest rates on the financial market, changes in the interest reference rate of the NBS, as well as the retail price growth interest,-liquidity gap between the balance sheet positions,- proportion between the interest bearing and non-interest bearing assets and liabilities,- participation of positions with variable and fixed interest rates in the interest bearing assets and

liabilities,- data included in the balance sheet and income statement and- average weighted interest rate accrued on the assets and liabilities on a certain date.

Information for determining the aforementioned elements is provided by the Sector in charge ofassets, Retail Sector, Finance and Accounts Department on the basis of updated book balancesincluding all bookkeeping changes while using adequate databases comprised in the informationsystem.

For measuring interest rates, quantitative methods and ratios for expressing the scope of interestrate risk are used.

Measuring interest rate risk is performed by determining the gap ratio, being the proportion between interest sensitive assets and interest sensitive liabilities.

In order to determine the ratio of interest sensitivity it is necessary to identify interest-bearing positions within assets and liabilities.

Within the interest-bearing assets and liabilities, it is necessary to establish items with fixed, i.e.variable interest rates.For the items with fixed interest rates, maturities are determined, whereas for the items withvariable interest rates, it is the dynamics of movements in interest rates that is being determined.

Disaggregation of interest-bearing assets and liabilities based on the previously determinedmaturities, makes it possible to determine periodic gaps for individual maturities, as well as todetermine cumulative gap.

The interest sensitivity quotient may have the value of 1 when the gap position equals zero and thesensitivity of assets and liabilities is matched. If the quotient has the value above 1, then the gap position is positive, implying faster growth of interest income, as well as the exposure of the Bankto the risk in case of a decrease in interest rates.

If the quotients value is below 1, it is a negative gap position which assumes faster growth ofincome arising from the movements in interest rates, as well as the exposure of the Bank to therisk in case interest rate marks a growth.


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4.4. Interest Rate Risk (Continued)

Based on the outstanding maturities, i.e. recalculation of interest rates, the scenarios for analyzingthe impact of projected changes in interest rates relating to interest bearing assets and liabilities, by calculating the net change in the financial results under the assumption of:

- changes in interest rates applied to placements made and deposits received with the sameintensity for all time intervals on annual basis,

- changes in interest rates applied to placements made and deposits received with differentintensity for all time intervals and

- changes in interest rates applied to placements made and deposits received with the sameintensity for different time intervals.

Interest risk is assessed as acceptable:

- if the average weighted interest rate applied to interest bearing assets is above the averageweighted interest rate applied to interest bearing liabilities by 8 percentage points,

- if the analysis performed based on the scenario indicates a positive effects on the financialresult in case of projected changes in interest rates.

Mitigating risk involves determining measures and rules for the application of those measuresrelating to the assumption, reduction, diversification, transfer and aversion of risks identified orassessed, which means continued analysis and proposing measures for removing the reasons forthe unacceptable level of interest rate risk.

4.5. Investment Risk

The Bank is bound by the legal requirements and secondary legislation acts to provideassumptions indicating successful business operations of the Bank under terms of acceptable risk parameters, so as to achieve its business objectives, including positive financial result and preservation of the Banks equity.

The risk inherent in the Banks investments in other legal entities relates to the following:

a) investments of the Bank in a single entity outside the financial sector b) total investment of the Bank in the entities outside the financial sector and capital expenditures.

The Banks investments in a single person outside the financial sector pursuant to the NBSDecision must not exceed 10% of the total Banks capital. The total Banks investments in entitiesoutside the financial sector and into the Banks fixed assets (capital expenditures) must not exceed60% of the Banks capital.

The Banks investments in the entities outside the financial sector do not include purchase ofshares for the purpose of their resale within 6 months from the share acquisition date.

The Procedure for identifying risks inherent in the Banks investments enable timely andcomprehensive identification of risks to which the Bank is exposed, as well as the analysis ofreasons leading to its appearance. The Bank is exposed to investing risk and risk from potentialfluctuations in the value of investment in other legal entities that are outside the financial sector

and capital expenditures.


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4.5. Investment Risk (Continued)Measuring and/or assessment of investment ratios of the Bank is performed on monthly, quarterlyand annual basis and when so requested by the Banks Executive Board, by preparing reports based on the Banks bookkeeping data and defined parameters applied in the calculation stipulatedin the NBS Decision on risk management, where the critically high level of investments in otherlegal entities and capital expenditures is considered to be the following:

- 8% for the Banks investments in a single entity outside the financial sector and- 58% for the Banks total investments in the entities outside the financial sector and capital

expenditures.The report on the ratio is prepared by the Banks Finance and Accounts Departments and it isdelivered to the regulatory body in the manner and following the timeline stipulated in the relevant

NBS Decision.The assessment of fluctuations in the ratio entails the projections of the amount of ratio for acertain time interval, and it is determined by assessing the expected changes:

- amount of capital expenditures,- amount invested in shares and equity investments and- amount of the Banks capital in accordance with the Decision on Capital Adequacy in Banks.

For the purpose of mitigating investment risk, the causes of unacceptable risk are continuallyexamined and the steps for their removal may be the following:

- efforts invested to increase the profitability of the Banks operations based on actually proposed

activities,- increase in the Banks capital via recapitalization, distribution of profit into capital, conversionof liabilities into equity and the like.

- discontinuance of capital expenditures except for those necessary to maintain the Banks business activities,

- sale of shares and equity investments,- sale and disposal of fixed assets andmonitoring the dates for disposal and sale of shares acquired for the purpose of their resale.

4.6. Counterparty Risk

The Banks exposure to a single entity or a group of related entities and risk towards a Banksrelated party is inherent in the Banks involvement with an entity or a group of related entities and

risk towards a Banks related party above the limits prescribed in the NBS Decision.The Counterparty Risk Management Policy providing for exposures towards a single entity or agroup of related entities and risk towards a Banks related party, comprises a set of all activitiesused to identify, measure, control and monitor this risk, and define clear guidelines fordetermining the responsibilities of persons in charge of collecting documents relevant for noticingthe form of relatedness and in the aim of reconciliation with the defined limits and legal provisions.

Managing counterparty risk in the Bank is performed by the Portfolio and Credit Risk Serviceestablished within the Placement and Risk Management Department is performed by observingthe following limits:


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4.6. Counterparty Risk (Continued)- the Banks exposure towards a single entity or a group of related entities must not exceed 20% ofthe Banks capital and

- the Banks exposure towards its related party must not be above 5% of the Banks capital.

The Risk Management Service reviews the total Banks exposure towards a single entity or agroup of related entities, as well as the total exposure towards the Banks related parties in themanner prescribed in the Decision on Risk Management by Banks and the Law on Banks so that:

- sum of all great exposures must not exceed 400% of the Banks capital,- the total of the Banks exposure to the Banks related party must exceed 20% of the Banks

capital.

If the aforesaid exposures attain a level 10% below the prescribed limits observed individually, theRisk Management Service informs the Asset and Liability Management Board, i.e. the ExecutiveBoard in the aim of limiting further exposure.

The Risk Management Service informs the Board in charge of monitoring and managing risk,Asset and Liability Management Board in respect of the Banks exposure towards related partiesand related parties themselves on quarterly basis. The Asset and Liability Management Boardreviews the report, and together with its recommendations forwards the report to the ExecutiveBoard and to the Board for monitoring the Banks business operations further delivering the reportfor the adoption to the Management Board.

4.7. Operational Risk

Operational risk relates to the probability of negative effects on the Banks financial results andcapital based on omissions in the work of its employees, inadequate internal procedures andinadequate management of information and other systems, as well as from unforeseen externalevents.

The Bank identifies events representing sources of operational risk, where the sources ofoperational risk are considered to be the following categories of events:

- internal frauds,- external frauds,- omissions in relations with employees and in the system, safety at work,- issues with customers, placements, products and in the business practice of the Bank,- damage suffered by the Banks tangibles,

- interruptions in the operations and errors in the Banks systems and- transactions, delivery and managing processes in the Banks.

The business lines are the operations based on which the Bank disaggregates its activities and based on which events representing sources of operational risks are monitored. The business linesinclude:- financing the corporate sector,- trade and sale,- retail operations,- commercial banking,- payments and calculation,- agency services,- services of asset management and- brokerage services rendered to retail customers.


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4.7. Operational Risk (Continued)

The Management Board monitors the disaggregation of business activities of the Bank, where the process of classifying the Banks business activities is the subject of internal audit.

Following the identification of potential events which are at the same time the cause of operationalrisk, the Bank applies itself to the measuring stage. The measurement is performed cyclicallythrough the records and analysis of event database.

For the record-keeping needs, a database is established regarding the following events:

- events that have occurred as a result of operational risk which have led to a loss exceeding (or

estimated to be in excess of) RSD 10.000,00 in its gross amount- events that have occurred as a result of operational risk which could have led (but did not lead)to a loss exceeding (or estimated to be in excess of) RSD 10.000,00 in its gross amount

Organizational parts are under obligation to prepare daily reports (e-mails) to the RiskManagement Department regarding the events that have occurred and which are included in thedatabase. Such reports are also prepared in the case when there are no events to report. Recordingevents in databases are also the responsibility of heads of departments, heads of branch offices andtheir deputies.

The Risk Management Department is responsible for monitoring all events recorded in respect ofoperational risk and reporting to competent bodies.

Risk management is the process of balancing costs, hedging against risks as opposed to costs ofrisk exposure. When the cost of hedge and cost of risk exposure are almost equal, the measurestaken by the Bank with respect to operational risk management are balanced in an adequate wayand thought through.

There are three basic choices available to the Bank with respect to operational risk management:

- to accept risk in cases when the risk exposure is insignificant, and the Bank is more thanadequately hedged against these risks (full observance of the measures implied by theOperating Policy, procedures, laws, insurance, acquisition of the necessary equipment and thelike),

- to distribute risk in certain instances it is cheaper to distribute risk to third parties than itsdirect hedge (maintenance agreements, supervision),- to avert risk act preventively, i.e. establish in all organizational parts the necessary safetymeasures so that the event does not happen at all or take such measures that the incident becomes less probable (preventive periodic controls and supervisions, constant education ofemployees, making plans for introducing new technological solutions)

- contingency plans with the object of securing continued operations, in case of seriousdisruptions in the Banks business operations caused by the situations that are outside theBanks control, prepare the contingency plan which must be adopted by the BanksManagement Board. The plan sets the priorities in hedging against risk, profitability, procedures for incidental situations, back-up locations, back-up hardware in a distant location, back-up IT communication system, measures for regular plan verification and revisions aimingto improve the plan, and all in the aim of securing continued bank operations in extraordinary

situations.


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4.7. Operational Risk (Continued)

The Risk Management Department is under obligation to submit the report to the NBS on thelosses that have occurred as a consequence of operational risk, as well as those that could have, but did not occur, exceeding (or estimated to be in excess of) 1% of the Banks capital, as well asmeasures taken for the purpose of adequate managing increased operational risks no later thanfive working days from the day the loss occurred.

The Risk Management Department reports to the Board in charge of risk managing andmonitoring business activities and the Asset and Liability Management Board on monthly orquarterly basis regarding events that have occurred due to operational risk. The Asset and LiabilityManaged Board considers the Report and, with its suggestions, forwards it to the Executive Board

and the Board in charge of risk managing and monitoring business activities, which is thensubmitted to the Management Board.

4.8. Country Risk

The risks inherent in the country of origin of the entity to which the Bank is exposed (country risk)are the risks from negative effects on the financial results and the Banks capital due to the Banksinability to collect its receivables from this entity for the reasons of political, economic or socialnature of the country of the entitys origin.

Country risk comprises:

- political and economic risk of the country implying the probability of incurring loss due to theBanks inability to collect receivables for reasons of limitations imposed by the enactments ofstate and other bodies of the country of debtors origin, as well as general and systemcircumstances in the country,

- transfer risk implying the probability of loss being incurred due to the inability to collectreceivables stated in the currency that is not the official currency of the debtors country oforigin, and due to the limitations to discharging amounts to creditors from other countriesdenominated in a certain currency, as determined by the enactments of state and other bodies inthe debtors country of origin.

The limits of exposures to country risk are individually determined by the Bank, and in case aconcentration is identified in certain geographical areas these limits are determined for eachindividual region.

The first step in setting limits to country risk exposure is to determine the resources available forthe loss absorption.

It is necessary to decide how much capital will be provided per each risk category, starting fromthe A category (the smallest risk), from B to E categories (category with greatest possible risk).

The choice of agencies rating country risk determines which categorizations lists will be regularlyassumed and applied internally. The Bank chose to rely on the categorization of Euromoney,Moodys and ICERC.


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5. INTEREST INCOME AND EXPENSE

a) Interest IncomeYear Ended December 31,

2008 2007 National Bank of Serbia:- repo transactions 176,078 92,630- obligatory reserve 8,975 7,117- Deposits 2,417 3,772Banks and other financial organizations 32,450 43,701Corporate entities 354,981 273,315Public sector 191 472Retail 128,407 115,817Other customers 1,237 568

Securities 13,440 11,646718,176 549,038

b) Interest ExpensesYear Ended December 31,

2008 2007

National Bank of Serbia 389 194Banks and other financial organizations 142,885 38,011Corporate sector 50,928 49,584Public sector 30,697 27,506Retail 95,018 62,654Other customers 15,566 30,807

335,483 208,756

6. FEE AND COMMISSION INCOME AND EXPENSE

a) Fee and Commission IncomeYear Ended December 31,

2008 2007Payment transaction fees from:- banks 3,880 4,983- corporate customers 146,998 123,211

- retail customers 13,794 16,968Cash payment transactions 9,649 7,940Loan origination fees 31,673 19,264Exchange operations 37,730 26,683Safekeeping charges 1,316 999ATM charges 6,337 1,298Fees and commission charged for other banking services 74,010 80,562Payment card charges 23,801 22,223Broker-dealer services 6,378 8,824Other fees and commissions 13,035 15,914Fees for issued guarantees, letters of credit and

other contingent liabilities 25,183 29,366

393,784 358,235


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6. FEE AND COMMISSION INCOME AND EXPENSE (Continued)

b) Fee and Commission ExpenseYear Ended December 31,

2008 2007Fee and commission expense arising from domestic payment transfers 15,123 15,391

Fees and commissions on payment cards 38,219 23,722Other fees and commissions 7,195 11,712

60,537 50,825

7. FOREIGN EXCHANGE (LOSSES) /GAINS, NetYear Ended December 31,

2008 2007Foreign exchange gains:

- unrealized foreign exchange gains 2,309,712 1,524,022- realized foreign exchange gains 56,257 56,004

2,365,969 1,580,026Foreign exchange losses:

- unrealized foreign exchange losses (2,389,016) (1,531,392)- realized foreign exchange losses (5,913) (4,018)

(2,394,929) (1,535,410)

(28,960) 44,616

8. NET IMPAIRMENT LOSSES AND PROVISIONS

a) Credited/(charged) to resultsYear Ended December 31,

2008 2007Reversal of allowance for impairment of balance

sheet assets (Note 8b) 885,756 108,160Reversal of provisions against off-balance sheet items

(Note 26b) 102,724 21,773Reversal of provisions against retirement benefits (Note 27b) 1,904 -

Suspended interest collected 491 -Losses on impairment of placements:- loans and deposits (757,970) (94,352)- interest, fees and commissions (27,094) (7,698)- securities and equity investments (9,812) (10,957)- other placements and assets (263,437) (50,056)- off-balance sheet positions (Note 26b) (120,826) (19,975)Provisions for employee retirement benefits (Note 26b) - (5,443)

(188,264) (58,548)


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8. NET IMPAIRMENT LOSSES AND PROVISIONS (Continued)

b) Movements on accounts of allowance for impairment of receivables 2008

Loans andAdvances

Interest , Feesand

Commissions

Securities andEquity

Investments

OtherPlacementsand Other

Assets Total

Balance, beginning of year 482,353 17,897 63,090 210,171 773,511Charge for the year (Note 8a) 757,970 27,094 9,812 263,437 1,058,313Foreign exchange fluctuations 17,474 562 (1) 36,062 54,097Reversal of provisions (Note 8a) (605,701) (20,097) (18,601) (241,357) (885,756)Write-offs (226) - - (522) (748)

Balance, end of year 651,870 25,456 54,300 267,791 999,417

c) Special reserve for potential losses

In accordance with the regulations of the National Bank of Serbia as of December 31, 2008, aspecial reserve for potential losses on the Banks aggregate credit risk exposure was as follows:

December 31, December 31,2008 2007

Special reserve for potential losses determined as perthe National Bank of Serbia requirements with respect to:- balance sheet exposures 1,233,260 1,004,555- off-balance sheet exposures 63,747 92,436

1,297,007 1,096,991Allowances for impairment and provisions determined

in accordance with the internally adopted methodology(IAS 39):

- allowance for impairment of balance sheet items (999,417) (773,511)- provision for losses contingent on off-balance sheet

items (41,681) (23,579)(1,041,098) (797,090)

Provisions determined in accordance with the internalmethodology exceeding the amount of provision as perthe NBS Decision 1,651 22,419

Provisions for potential losses contingent on balance sheet assets and off-balance sheet items 257,560 322,320

Reserve for potential losses formed in prior years (11,878) (11,878)Additional provision for potential losses to be set aside as

appropriation of retained earnings 245,682 310,442

In accordance with the National Bank of Serbia Decision on the Classification of Balance Sheetand Off-Balance Sheet Exposures, the difference between the amount of special reserve for potential losses calculated in accordance with the National Bank of Serbia requirements and theamount of allowance for impairment of balance sheet items and provision for losses contingent onoff-balance sheet items estimated in accordance with the internally adopted methodology, is presented as reserve for potential losses within equity.

Once a relevant Decision has been enacted by the Banks Assembly, the outstanding amount ofreserve for potential losses will be allocated from retained earnings.


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9. STAFF COSTSYear Ended December 31,

2008 2007

Net salaries and benefits 356,381 346,033Taxes and contributions on salaries and benefits 144,125 139,603Other staff costs 103,861 6,348

604,367 491,984

Other staff costs include retirement benefits of RSD 94,511 thousand paid to 118 employees whohave left the Bank on redundancy grounds pursuant to the Collective Bargaining Agreement.

10. OTHER OPERATING EXPENSESYear Ended December 31,

2008 2007

Cost of materials 51,027 47,692Communications 29,926 29,358Maintenance of fixed assets 18,992 20,372Rentals of business premises 62,943 46,029Marketing and advertising 8,417 10,258Cost of intellectual services 22,601 19,330Insurance premiums 12,540 11,170Securing property 16,936 10,461

Compensations to employees 13,345 12,184Entertainment 5,345 6,209Indirect taxes and contributions 104,961 101,367Write-off of bad debts - 2,948Donations and sponsorships 13,727 9,120Broker charges 15,344 8,552Other costs 24,047 15,155

400,151 350,205


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12. INCOME TAXES (Continued)

c) Components of deferred tax assets and liabilities

December 31,2008

December 31,2007

Deferred tax assets - credits for capital expenditures 17,654 13,188Deferred tax liabilities - the difference between

depreciation and amortization recognized for tax purposes and accounting purposes (48,201) (35,962)

(30,547) (22,774)

d) Changes in deferred tax assets/(liabilities)Year Ended December 31,

2008 2007Deferred tax assetsBalance, beginning of year 13,188 1,052Increase based on recognized tax credits for

capital expenditures 4,466 13,188Release based on unrecognized deferred tax

assets arising from provisions for retirement benefits - (1,052)


Deferred tax liabilitiesBalance, beginning of year (35,962) (4,478)Increase based on deferred tax liabilities - the difference between depreciation and amortization recognized for tax purposes and accounting purposes (215) (356)

Increase based on appraisal effects (12,024) (31,128)

(48,201) (35,962)

e) Unused tax losses

Total tax assets

Origination Expiry TaxYear Year Losses

2003 2013 53,9702004 2014 201,1552005 2015 86,1402006 2016 -2007 2017 186,3252008 2018 606,594

1,134,184


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12. INCOME TAXES (Continued)

e) Unused tax losses (Continued)

Pursuant to Article 32 of the Corporate Income Tax Law, the losses incurred in business,financial and non-business transaction are determined in the tax return except for those givingrise to capital gains and losses determined in accordance with the abovementioned Law, may beused as deductible items in calculating the tax base for the future periods, but for no longer than10 years.

Due to the uncertainty over the availability of profit in future periods against which tax lossescould be utilized, in 2008 the Bank did not recognize deferred tax assets arising from tax lossesrealized thereof in the current year.

13. CASH AND CASH EQUIVALENTSDecember 31,

2008December 31,

2007Cash in hand:- in RSD 224,277 208,603- in foreign currency 180,376 202,462Gyro account 795,657 219,438Gold and other precious metals 2 2Foreign currency accounts with:- National Bank of Serbia 3,590 3,211- domestic banks 7,791 9,345- foreign banks 146,519 196,001Foreign currency cheques in the process of collection 2,922 8,000

1,361,134 847,062Less: Allowance for impairment (25) -

1,361,109 847,062

Pursuant to the Decision on Obligatory Reserves of Banks with the National Bank of Serbia, therequired reserve is to be calculated at the rate of 10% on the dinar deposits (5% of time depositswith over 30-day maturity), to the amount of average daily balance of dinar assets in a singlecalendar month to its gyro account held with the National Bank of Serbia, 45% to dinar depositsindexed by a currency clause, at the rate of 45% to the portion of dinar basis comprised of dinarliabilities arising from deposits and loans received from abroad up to the level of basis registeredin September 2008, at the rate of 0% to the positive difference between the portion of dinar basiscomprised of deposits and loans received from foreign creditors in the preceding calendar monthand that potion of basis dating from September 2008.

The average interest rate charged to the amount of allocated reserve in dinars during 2008amounted to 2.50% annually.


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14. REVOCABLE DEPOSITS AND LOANSDecember 31,

2008

December 31,

2007

Obligatory reserves in foreign currencies 798,748 841,795Securities acquired in repurchase transactions

with the Central Bank 450,000 1,400,000Liquidity surpluses deposited with the Central Bank 50,000 250,000Revocable placements with banks in foreign currency 7,672 6,796

1,306,420 2,498,591Less: Allowance for impairment (20) -

1,306,400 2,498,591

In accordance with the Decision on Obligatory Reserves of Banks with the National Bank ofSerbia published in the RS Official Gazette numbers 116/2006, 3/2007, 31/2007, 93/2007,35/2008, 94/2008, 100/2008, 107/2008, 110/2008 and 112/2008, the required reserve representsthe minimum reserve which the Bank calculates at the rate of 45% to the amount of average daily balance of foreign currency funds registered in the previous calendar month:

The National Bank of Serbia prescribed that, exceptionally to the aforementioned, banks calculatethe required reserve by applying the following ratios:

- 40% on the portion of foreign currency reserving base comprised of obligations arising fromforeign currency savings deposited with banks;

- 20% on the portion of foreign currency reserving base comprised of subordinated obligations,

up to the level of such base as in September 2008;- 100% on the portion of foreign currency reserving base comprised of foreign currency assetskept by leasing companies on special accounts opened with banks;

- 0% on the amount of positive difference between the portion of foreign currency reserve basecomprised of foreign currency obligations in respect of foreign deposits an

CREDY BANKA 2008 English Final

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