Výro Annual Report 2010 ční zpráva 2009 · have been struck by the adversity of fate. 3 The...

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Výroční zpráva 2009

2009

Annual Report 2010

2010

Basic Consolidated Financial Indicatorsx)

under International Financial Reporting Standards (IFRS)

Balance Sheet IndicatorsCZK mil. 2010 2009 2008 2007 2006

Total assets 881,629 855,130 862,230 814,125 728,393Loans and advances to fi nancial institutions 174,947 126,506 93,306 65,688 73,179Loans and advances to clients 459,975 469,192 461,433 418,415 329,105Securities 177,081 177,376 209,888 226,813 230,354Amounts owed to fi nancial institutions 52,214 47,434 57,561 58,482 46,361Amounts owed to clients 661,074 643,420 642,504 588,526 537,487Shareholders’ capital 70,780 63,279 64,805 55,576 48,594

Profi t and Loss Account IndicatorsCZK mil. 2010 2009 2008 2007 2006

Net interest income 30,263 30,892 30,239 24,727 21,206Net fee and commission income 12,167 11,402 11,020 9,639 8,997Operating income 45,421 45,658 42,712 36,075 32,471Operating expenses −18,677 −19,268 −19,541 −18,349 −17,316Operating profi t 26,744 26,390 23,171 17,726 15,155Net profi t attributable to the owners of the parent 12,052 12,640 15,813 12,148 10,385

Basic Ratios2010 2009 2008 2007 2006

ROE 18.2% 20.3% 26.3% 23.8% 23.0%ROA 1.3% 1.4% 1.8% 1.5% 1.5%Operating costs / operating income 41.1% 42.0% 45.8% 50.7% 53.3%Non-interest income / operating income 33.4% 32.3% 29.3% 31.9% 34.7%Net interest margin on interest-bearing assets 4.0% 4.3% 4.1% 3.7% 3.6%Client receivables / client payables 69.6% 72.9% 71.8% 71.1% 61.2%Capital adequacy 13.9% 12.3% 10.3% 9.6% 9.3%

Key Operating IndicatorsNumber 2010 2009 2008 2007 2006

Staff (average headcount) 10,744 10,843 10,911 10,897 10,809Česká spořitelna branches 667 660 646 636 637Clients 5,265,097 5,272,785 5,293,632 5,294,470 5,276,897Giro accounts 2,800,822 2,837,756 2,874,110 2,838,173 2,789,076of which: Private Accounts 2,101,646 1,715,257 1,080,579 425,943 0Active cards 3,229,866 3,258,011 3,304,197 3,340,180 3,095,614of which: Credit 441,989 476,463 553,329 622,161 447,089Active S24 and B24 users 1,318,537 1,252,155 1,199,329 1,142,170 1,033,198ATMs 1,312 1,218 1,164 1,124 1,090

RatingRating agency Long-term rating Short-term rating Outlook

Fitch A F1 StableMoody’s A1 Prime-1 NegativeStandard & Poor’s A A1 Stablex) In 2010, Česká spořitelna changed its accounting policy for valuation of real estate investments held through real estate funds in its consolidated fi nancial statements from the fair value valuation model to the cost valuation model as used by Erste Group Bank. Thus, comparables for 2009 have been adjusted in accordance with this new accounting policy. Comparables for other years have not been adjusted.

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< Key FiguresProfi le of Česká spořitelna 2The Year 2010 in Review 3Foreword by the Chairman of the Board of Directors and CEO 6Board of Directors 8Česká spořitelna’s Supervisory Board and Audit Committee 10Macroeconomic Development in the Czech Republic in 2010 14Report on Performance and Business Activities 15Strategic Plans for the Future 37Risk Management 39Other Information for Shareholders 46Česká spořitelna – Corporate Social Responsibility 50Česká spořitelna Declaration on the Compliance of its Governance with the Code Based on OECD Principles 52Organizational Structure of Česká spořitelna 58Report of the Supervisory Board and Audit Committee 60

Financial Section 1 61Independent Auditor’s Report 62Consolidated Financial Statements 63

Financial Section 2 147Independent Auditor’s Report 148Separate Financial Statements 149

Report on Relations between Related Parties 221Česká spořitelna Financial Group 228Independent Auditor’s Report 235Česká spořitelna Selected Consolidated Financial Performance Figures in 1st Quarter 2011 236Proceedings of the Ordinary General Meeting 237Index 238

Content

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Profi le of Česká spořitelna

We offer a comprehensive portfolio of fi nancial services. The name Česká spořitelna refers to both a bank and a fi nancial group. Our only goal is to satisfy and surpass the expectations of each client – whether individuals, companies, or the public and non-profi t sectors.

We are a member of the strong Central European Erste Group, with more than 17 million clients. We have operated in the Czech Republic since 1825, and although much has changed since then, we are still a bank where people feel good and on which they can rely during both good times and bad. Evidence of this is the number of awards we receive every year from industry profes-sionals, as well as clients.

We set the direction – we are always among the fi rst to come out with new products and services. We offer customised products. Every client has the opportunity to open his / her own account, or

get a mortgage or a credit card, such that it would most benefi cially suit his / her wishes and needs. And that applies not only to natural persons, but also to entrepreneurs and towns and municipalities.

We have the greatest number of ATMs and bank branches in the Czech Republic. We offer accounts to children from the age of eight years. For everyone, we have a wide selection of products and services that are available at branches, on the internet, and at mortgage, commercial, and development centres.

Each of our more than fi ve million clients will fi nd the right advi-sor. The task of our advisors is to offer precisely that, which is in line with the wishes and needs of our clients. The decision is made by the client. We also understand that life takes place in cycles, that better and worse times come. Even during those times, clients can turn to us: we have an understanding and a solution for those who have been struck by the adversity of fate.

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The Year 2010 in Review

January

Česká spořitelna launched a new educational portal for youth called Moneymánie designed to teach them about fi nancial matters in a fun and interactive way. At www.moneymanie.cz, users get information about topics such as how banks operate, what types of payment cards exist or how to obtain fi nancial support for studies. The information offered is general and in no way promotes the products of Česká spořitelna.

As of January, selected Česká spořitelna corporate clients have access to the Česká spořitelna Corporate Club, an exclusive club that uniquely builds on our standard products and services. The Corporate Club offers its members a combination of banking and non-banking benefi ts for the fi rm, its managers and employees. Annual Corporate Club membership renewal is based on an as-sessment of the Bank’s relationship with the given corporate cli-ent. This affords Česká spořitelna the opportunity to offer addi-tional benefi ts to its longstanding corporate partners.

February

The Česká spořitelna Women’s Investment Club celebrated its sec-ond anniversary. In this time, it has attracted more than 1,900 reg-istered members interested in investing. The majority of these women are Česká spořitelna clients.

March

Česká spořitelna began installing payment machines in selected branches. Clients use these self-service machines, which can scan a giro transfer or payment order form and are able to read data di-rectly from document bar codes, to effect quick and easy payments when they wish.

Česká spořitelna launched an e-learning initiative on its website (www.csas.cz/bezpecnost) in the form of comics to foster aware-ness of the principles of safe internet use. Another Bank undertak-ing in this area is the Secure internet portal, a collaborative effort between Česká spořitelna, Microsoft and Seznam.cz with the sup-port of the Czech Police.

April

Penzijní fond České spořitelny passed the 850,000 client mark, becoming second on the Czech market by number of participants, and this fi gure exceeded 900,000 by year’s end. Penzijní fond ČS also introduced Penze PLUS products offering clients an opportu-nity to secure their fi nancial future.

The ordinary General Meeting of Česká spořitelna approved, inter alia, the proposal for the distribution of 2009 profi t. A total of CZK 4,560 million was allocated for dividend payment, i. e. a dividend of CZK 30 per share.

At 1 April 2010, the ČS Premier department catering to high-net-worth and high-earning individuals was established at Česká spořitelna. The new department’s responsibilities include the man-agement of a separate branch network reserved exclusively for this clientele. There are currently three branches – two in Prague and one in Brno – all of which opened in early April.

May

Bar code readers were installed in one hundred Česká spořitelna ATMs, enabling clients to make simple giro transfer payments. For the time being, the bar code readers only process Czech Post SIPO payments, but in future they will enable payment of bar-coded in-voices.

The Bank established a new equity participation in the form of the company Erste Group Shared Services (“EGSS”), s. r. o., with its registered offi ce in Hodonín, which processes foreign payment or-ders for all Erste Group Bank companies.

June

The Česká spořitelna Client Centre won an award in the Best Cus-tomer Services category in London in an international competition for EMEA (Europe, Middle East and Africa) contact centres organ-ised by the international ContactCenterWorld.com association.

With a 16% market share, Penzijní fond České spořitelny became the second largest fund on the market by volume of funds on client personal accounts.

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Profi le of Česká spořitelna | The Year 2010 in Review | Foreword by the Chairman of the Board of Directors and CEO

Česká spořitelna received EUR 300 million to fi nance the Czech economy from the European Investment Bank (EIB). Of this amount, EUR 200 million was allocated for SME and public sector projects and EUR 100 million for producers of electricity from re-newable sources. Thanks to this EIB funding, Česká spořitelna can offer favourable loan interest rates to clients. As regards the funds for electricity production, it is the fi rst time the EIB has shared the risk with another bank in the Czech Republic; previously, recipient banks assumed 100% of the risk.

July

Česká spořitelna expanded its offering of deposit products to in-clude Internet savings, a savings account with a preferential inter-est rate from which funds can be withdrawn at any time. There are no fees for opening or operating the account.

Česká spořitelna Ideal Mortgage bridge fi nancing facilitates the purchase of new housing by making available suffi cient time and money to move into a new home before the old home is sold. Bridge fi nancing is a loan for up to two years to cover the time lag between the new housing purchase and existing home sale.

Clients of Česká spořitelna and the public can “surf” the Bank’s website with its new design, simplifi ed structure and horizontal master menu. The change was designed to afford better orientation for the 68 thousand visitors to the site every day.

August

After dropping slightly, the mortgage loan portfolio saw a reversal, with portfolio volume growth resuming due in part to the favour-able Česká spořitelna Ideal Mortgage.

Česká spořitelna created a new employee benefi t programme called Free Time for Father. Every new father receives 5 days off to be taken any time in the fi rst 3 months after the baby is born.

On 1 August 2010, Česká spořitelna expanded its network of security measures with the launch of the new RSA FraudAction Antiphishing & Anti-trojan security system in collaboration with the company RSA Security. The aim is to step up protection from hackers for Česká spořitelna internet banking users. The system adds security measures that monitor dangerous web servers, block fraudulent e-mail and identify dangerous viruses in the client’s computer. This was just the latest in a series of steps the Bank has taken to combat computer crime.

September

As of 15 September 2010, more than 2 million clients were using the Česká spořitelna Private Account, which enables individual-ised product and service selection based on the client’s needs and wishes and is designed for clients 18 and older. The Bank has of-fered this account option since August 2007. Two new variations

have since been added: the Private Account Student for full time students between the ages of 15 and 30 and the Private Account Junior for clients aged 8 to 14. The Česká spořitelna Benefi ts Pro-gramme offering a preferential benefi t scheme has become an inte-gral part of the Private Account.

According to a rating compiled by the US magazine Global Fi-nance, Česká spořitelna is the most secure bank in the central and eastern European region. The Global Finance ranking com-pared fi ve hundred of the world’s banks based on ratings agencies Moody’s, Standard & Poor and Fitch, with an emphasis on fi nan-cial institutions’ capital adequacy and asset volumes.

The Česká spořitelna Corporate Account is a new product offering entrepreneurs and corporate clients custom services set up based on their needs and wishes. The Corporate Account is not only avail-able to entrepreneurs and companies, but also the self-employed, housing co-ops, apartment owners’ associations and freelancers. At the 2010 year-end, more than 50 thousand clients had opened a ČS Corporate Account.

Thanks to the Dreamcatcher project sponsored by Česká spořitelna, children and teenagers can fulfi l a dream they have identifi ed and developed, obtain public support for it and ultimately work off some of the funding they receive. The project’s originality lay in the fact that it demolishes myths about the young, their self-in-volvement, the slacker mentality and lack of initiative or engage-ment with the world around them.

October

After more than two years of existence, the Česká spořitelna Cool Card, a credit card-type payment card, is used by more than 300 thousand individuals. Every Cool Card holder gets two auto-matic guarantees – purchases for the lowest price and goods dam-age protection – and can choose as many of the seven optional benefi ts as he or she will actually use.

Česká spořitelna launched the new service PAYMENT 24, auto-matically enabling all SERVIS 24 internet banking users to pay for their online purchases quickly and easily. Česká spořitelna wants to make this new payment method available for purchases from those high-quality internet vendors that provide exceptional cus-tomer service.

ČS Premier offers a comprehensive suite of top-quality services to high-earning or high-net-worth clients through a dedicated branch network. All services are provided to the highest standards of qual-ity, discretion and professionalism.

The number of SERVIS 24 and BUSINESS 24 direct banking us-ers reached 1.3 million.

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Profi le of Česká spořitelna | The Year 2010 in Review | Foreword by the Chairman of the Board of Directors and CEO

November

Česká spořitelna defended its Bank of the Year title and, for the seventh consecutive year, was named Most Trustworthy Bank of the Year in the Fincentrum Bank of the Year 2010 competition. Česká spořitelna also won in the new Bank without Barriers cat-egory.

The building that formerly housed the Melantrich publishing house on Prague’s Wenceslas Square was purchased by the ČS real estate investment fund run by the investment company REICO, a mem-ber of the Česká spořitelna Financial Group. This represented the third largest transaction of its type on the Czech market in 2010.

December

Česká spořitelna expanded and upgraded its branch network in 2010, adding seven new branches, relocating 12 branches to more attractive premises and renovating 81 branches. The Bank had a total of 667 branches at year-end. Six branches added weekend opening hours, bringing the total to 25, and branch opening hours were increased by a total of 145 hours a week. Another 58 ATMs were added, of which 13 were deposit machines and 34 were pay-ment machines. Česká spořitelna has a total of 1,312 ATMs, 36 of them payment machines.

Česká spořitelna successfully completed implementation of the ONE IT standardized IT management concept, with all Bank IT services being concentrated in one department and all subsidiary IT services being concentrated in another with the aim of ensur-ing a clear delineation of roles and responsibilities, simplifying IT management, increasing effi ciency and achieving cost savings.

Česká spořitelna again won fi rst place for the Czech Republic in the international competition Bank of the Year organised annually by the British monthly The Banker, a member of the Financial Times media group. Česká spořitelna has won the competition every year since 2008, and before that in the years 2003 and 2005. The title is awarded by an expert judging panel of CEOs and top managers of British companies and magazine editors. The Banker, in print since 1926, has readers in more than 150 countries worldwide.

At 31 December 2010, Gernot Mittendorfer resigned as Board of Directors chairman and CEO of Česká spořitelna and joined the Board of Directors of Erste Group Bank. Pavel Kysilka became the new Board of Directors chairman and CEO.

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Foreword by the Chairman of the Board of Directors and CEO

Pavel KysilkaChairman of the Board of Directors and CEO

The Year 2010 in Review | Foreword by the Chairman of the Board of Directors and CEO | Board of Directors

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Dear Ladies and Gentlemen, Clients, Colleagues and Shareholders,We have behind us a year in which most sectors started to rebound from the economic crisis while the economic development num-bers began slowly to reverse their negative trend. Economic growth last year was slight, with the household and corporate sectors con-tinuing to suffer from “post injury” shock. We are all the more delighted, then, that during this diffi cult time Česká spořitelna in-creased its operating profi t and reported an infl ux of client deposits supported by an increase in client satisfaction.

For the Czech banking market, the recent crisis was above all a crisis of confi dence. Individuals and companies were far more circumspect when considering their long-term projects and plans. Among other things, this impacted interest in loan products. Thus, rigorous control yielding reduced operating expenses as well as ongoing development of client products and services were key fac-tors in sustaining profi tability at Česká spořitelna in this past year.

Client deposits grew in 2010 by 3.5% and the number of users of our key products increased. More than 1.3 million clients made active use of our direct banking services SERVIS 24 and BUSI-NESS 24; the number of transactions conducted via these services increased by 10%. Česká spořitelna launched a new service called PAYMENT 24, a simple payment method for internet purchases. The number of clients with a Česká spořitelna Private Account grew to exceed 2 million in September 2010, and continued to grow by more than 100 thousand by year’s end. Nor do we neglect our clients who prefer to visit a branch – for them we opened seven new branches and renovated 81 older branches in 2010.

In October 2010, we introduced our new ČS Premier service for high-net-worth clients to provide them with discrete service in the pleasant surroundings of a dedicated branch network.

Clients trust Česká spořitelna. Proof of this is the longstanding growth in client (including individuals) deposits. The numer-ous awards that Česká spořitelna won in 2010 is testament to our market position. US magazine Global Finance rated us the most secure bank in central and eastern Europe, and we were named the Most Trustworthy Bank for the seventh year run-ning in the Fincentrum Bank of the Year competition. British monthly The Banker named Česká spořitelna the best bank on the Czech market.

We are highly appreciative of these successes, and the impetus they give us for continued success. We are entering 2011 with a good starting position and a business model that assures healthy growth. Managing risk responsibly, controlling operating expenses, and providing quality services to clients while offering them a wide range of products underpinned by professional advisory continue to be our key tasks. We look forward to your being able to read here in one year that our Česká spořitelna team successfully per-formed these tasks.

April 2011Pavel Kysilka

The Year 2010 in Review | Foreword by the Chairman of the Board of Directors and CEO | Board of Directors

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Board of Directors as of 31 December 2010

Gernot MittendorferBorn on 2 July 1964Chairman of the Board of Directors and CEOReference Address: Olbrachtova 62, Prague 4, Czech Republic

Mr. Mittendorfer studied law at the University of Linz and is a graduate of Webster University in Vienna (Master of Business Administration, specialization in fi nance). He joined Erste Österre-ichische Spar-Casse Bank AG in 1990. In 1997, he was appointed to the Board of Directors of Sparkasse Mühlviertel West Bank AG. In 1999 he was appointed as a member of the Board of Directors of Erste Bank Sparkassen (CR), where he was responsible for retail banking. From July 2000 he has been the member of the Board of Directors of Česká spořitelna, responsible for corporate banking. He resigned from all his functions in Financial Group of Česká spořitelna as of 31 July 2004 after accepting the offer to become the CEO of Salzburger Sparkasse, a member of the Erste Bank Group family. He resigned from this function and as of 31 May 2007 he became the Chairman of the Board of Directors and CEO of Česká spořitelna.

Membership in other companies: Vice president of Czech banking association.

Mr. Mittendorfer resigned from his function of the Chairman of the Board of Directors and CEO as of 31 December 2010.

Dušan BaranBorn on 6 April 1965Vice Chairman of the Board of Directors and First Deputy CEOReference Address: Olbrachtova 62, Prague 4, Czech Republic

Mr. Baran is a graduate of the Mathematics and Physics Fac-ulty of Charles University in Prague; an International Executive MBA program at Katz Graduate School of Business, University of Pittsburgh together with CMC Graduate School of Business in Čelákovice and a banking course at the Graduate School of Bank-ing, University of Colorado, Colorado, USA. From 1991 to 1993 he worked for Agrobanka, a. s., in the treasury function. He joined Česká spořitelna in November 1993, where he held various mana-gerial positions in the Treasury and Risk Management divisions. He was appointed a member of the Board of Directors and Dep-uty CEO of Česká spořitelna in May 1998 and was promoted to

Chairman of the Board of Directors and CEO in March 1999. On 4 July 2000 he was elected Vice Chairman of the Board of Direc-tors of Česká spořitelna and appointed the First Deputy CEO. He is also the Chief Financial Offi cer of Česká spořitelna. Mr. Baran is a member of the Czech Institute of Directors and a member of the Board of Directors of the European Savings Banks Group (ESBG) in Brussels.

Membership in other companies: none.

Daniel HelerBorn on 12 December 1960Member of the Board of Directors and Deputy CEOReference Address: Evropská 2690, Prague 6, Czech Republic

Mr. Heler is a graduate of the Prague University of Economics, Faculty of International Trade. He held internships with J. P. Mor-gan, Goldman Sachs, S. Montagu, UBS, N. M. Rothschild, Shear-son and Bayerische Hypobank. He has also attended a number of courses focused on global banking, profi tability in banking, retail banking strategy, treasury and risk management. He has worked in the banking sector since 1983. First he held various positions in the Department of Foreign Exchange and Money Markets and then, in 1990, he became the Director of the Financial Markets Division of Československá obchodní banka Praha. In 1992 he was appointed as Treasurer and member of the Board of Directors of Crédit Lyon-nais Bank Praha. In 1998, he was appointed as a member of the Board of Directors of Erste Bank Sparkassen (CR) and assumed responsibility for the Financial Markets. In 1999, he became the Vice Chairman of the Board of Directors of Erste Bank Sparkassen (CR) and since 1 July 2000 he has been the member of the Board of Directors of Česká spořitelna responsible for asset management and retail investment products, corporate fi nance and investment banking, treasury sales and trading, capital markets, balance sheet management, fi nancial institutions and corresponding banking. Since 1 January 2011 Mr. Heler is also responsible for corporate clients, real estate business, municipalities fi nancing and trade fi -nancing.

Membership in other companies: Burza cenných papírů Praha, a. s., Erste Corporate Finance, a. s., Investiční společnost České spořitelny, a. s., REICO investiční společnost České spořitelny, a. s., GRANTIKA České spořitelny, a. s.

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Heinz KnotzerBorn on 8 April 1960Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, Czech Republic

Mr. Heinz Knotzer is a graduate of the University of Vienna (JUDr. Doctor of Jurisprudence). He started his career in banking after one year practicing at courts in Austria. He worked in Investkredit and later joined Girozentrale und Bank der Österreichischen Spar-kassen AG which, after a merger in 1997, became a part of Erste Bank. In 1995 he joined Creditanstalt and was seconded in 1996 to Creditanstalt, a. s., Prague, where he assumed the position of Manager of the Corporate Customers Division. In 1998, within the framework of the merged Bank Austria Creditanstalt Czech Re-public, a. s., he became the director of the Division for Corporate Customers II. In June 1999 he joined Erste Bank Sparkassen (CR), a. s., and was appointed as a Member of the Board of Directors and Executive Director. After the privatization of Česká spořitelna by Erste Bank Group AG, he worked for ČS where he became a Member of the Senior Management Team. In August 2004 he was appointed as member of the Board of Directors and a Deputy CEO of Česká spořitelna, since July 2007 he is responsible for Risk Management.

Membership in other companies: Factoring České spořitelny, a. s., s Autoleasing, a. s., REICO investiční společnost České spořitelny, a. s., Stavební spořitelna České spořitelny, a. s.

Pavel KysilkaBorn 5 September 1958Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, Czech Republic

Mr. Kysilka is a graduate of Faculty of Economics of the Univer-sity of Economics in Prague; in 1986 he passed internal postgradu-ate research there. In 1986–1990 he worked at the Institute of Eco-nomics of the Czechoslovak Academy of Sciences.

In 1990–1991 Mr. Kysilka worked in the Ministry for Economic Policy as the Chief economic advisor to the Minister for economic policy. In the 1990s he held various positions up to the post of Executive Governor in the Czech National Bank, where he also managed the splitting of the Czechoslovak currency in 1993. At

the same time in 1994–1997 he acted as an expert of the Interna-tional Monetary Fund and he participated in the implementation of national currencies in several East European countries. In the 90’s he was President of Česká ekonomická společnost. Before joining Česká spořitelna Mr. Kysilka worked in Erste Bank Sparkassen (CR) in Prague as Executive Director responsible for IT, Organi-zation, Human Resources, and Services. He started to work for Česká spořitelna in 2000 as Chief Economist and Member of the Senior Management Team. On October 5, 2004, the Supervisory Board of Česká spořitelna appointed him a Member of the Board of Directors. Until 31 December 2010 Mr. Kysilka was responsible for Operations, Financial Market Analyses, EU Offi ce, for IT and projects area.

As of 1 January 2011 Mr. Kysilka was appointed Chairman of the Board of Directors and CEO of Česká spořitelna, a. s.

Among others he is member of the Managing Board of the Univer-sity of Economics in Prague.

Membership in other companies: none

Jiří ŠkorvagaBorn on 26 April 1963Member of the Board of Directors and Deputy CEOReference Address: Olbrachtova 62, Prague 4, Czech Republic

Mr. Jiří Škorvaga is a graduate from the Institute of Chemical Technology in Prague and from post-graduate studies at the Czech-oslovak Academy of Sciences. He joined the Česká spořitelna Fi-nancial Group in 1998. He took over the position of Card Center Head and in 1999 he was appointed as Head Manager of retail banking. Since 2000 he was responsible for business management of retail business and was a member of Senior Management Team. In November 2006 Mr. Škorvaga became a member of the Board of Directors and a Deputy CEO of Česká spořitelna. He is respon-sible for retail banking.

Membership in other companies: Stavební spořitelna České spořitelny, a. s., Investiční společnost České spořitelny, a. s., Pražské jaro, o. p. s.

Foreword by the Chairman of the Board of Directors and CEO | Board of Directors | Česká spořitelna’s Supervisory Board and Audit Committee

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Manfred WimmerBorn on 31 January 1956Chairman of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Wimmer graduated from the Law Faculty of the University of Innsbruck, where he was awarded a Doctor of Law degree. From 1978 to 1982, he worked as an Academic Assistant in Private Law. From 1982 to 1998, he worked in the International Division of Cred-itanstalt. In 1998, he joined the International Division of Erste Bank der österreichischen Sparkassen AG. In February 2002, Mr. Wim-mer was appointed Head of the Strategic Group Development Divi-sion in Erste Bank. In August 2005, Mr. Wimmer became Executive Director of Group Architecture and Group Program Management. Between 2007 and 2008 Mr. Wimmer took over the position as CEO of Banca Comerciala Romana, having been previously a member of the Bank’s Management Board. In September 2008, Mr. Wimmer was appointed to the Management Board of Erste Group Bank, tak-ing over the role of Chief Financial Offi cer.

He has been a member of the Supervisory Board of Česká spořitelna since 2000.

Membership in other companies: Erste Group Bank AG, Erste Bank Hungary Nyrt, Banca Commerciala Romana SA, EGB Ceps Holding GmbH, EGB Beteiligungen GmbH.

Bernhard SpaltBorn on 25 June 1968Vice Chairman of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Spalt graduated from the Law Faculty of Vienna University where he specialised in European law. During his studies in 1991, he joined DIE ERSTE österreichische Spar-Casse Bank AG, where he started to work in the Legal Department. From September 1994 to June 1997, he performed various roles in the Work Out Depart-ment. Following the sale of Erste Bank Sparkassen (CR), a. s., to Česká spořitelna, a. s., Mr. Spalt took over the responsibility of the Work Out Department in Česká spořitelna, a. s. In June 2002,

he returned to Erste Bank, Vienna where he was responsible for Strategic Risk Management until Oct. 2006. In November 2006 he was appointed to the Managing Board of Erste Bank der ös-terreichischen Sparkassen AG with responsibility for Group Risk Management.

Mr. Spalt has been a member of the Supervisory Board of Česká spořitelna, a. s., since 2003.

Membership in other companies: Erste Reinsurance S. A., Joint Stock Company Erste Bank, Banca Commerciala Romana SA, s Haftungs- und Kundenabsicherungs GmbH., Erste Group Bank AG, Österreichische Clearingbank AG, Erste Group Bank AG, Er-ste Bank der österreichischen Sparkassen AG.

Eliška Bramborová,Born on 4 December 1953Member of the Supervisory BoardReference Address: Olbrachtova 62, Prague 4, Czech Republic

Ms. Bramborová is a graduate of the Law Faculty of Charles Uni-versity. She started her professional career in ČKD; in 1992 she joined Česká spořitelna as a lawyer. Presently, she is a head of the Corporate Banking Legal Support Department. She represents ČS in the Legal Commission of the Czech Banking Association. She is also a FCB ambassador and a member of the Internal Committee of the Ladies Investment Club of Česká spořitelna, a. s.

Ms. Bramborová was elected to the ČS Supervisory Board by em-ployees as of October 2008.

Jolana DykováBorn on 23 July 1966Member of the Supervisory BoardReference Address: Malé nám. 219, Rokycany, Czech Republic

Mrs. Dyková is a graduate from the secondary technical college for machinery in Kladno and completed a term at the Czech Tech-nical University in Prague. She started her professional career in 1985 at Czech Radio where she worked as an assistant to the

Česká spořitelna’s Supervisory Board and Audit Committee as of 31 December, 2010

11

editor-in-chief. Then she held the position of a deputy manager in the company Západočeské kamenolomy (West Czech Stone Quarries) for two years. In 1991 she joined Česká spořitelna as a bank offi cer, later she became the head of the branch in Zbi-roh. Since 2002 she has been a manager at the advisory branch in Rokycany and since October 2007 a manager of the Rokycany micro-region.

Mrs. Dyková was elected to the Supervisory Board by ČS employ-ees as of November 2007.

Maximilian HardeggBorn on 26 February 1966Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Hardegg graduated from Agricultural Sciences in Weihen-stephan, Germany. In the period 1991–1993, he worked at AWT Trade and Finance Corp, which is part of the Creditanstalt Group. He also worked as an advisor to the Czech Ministry of Agriculture in respect of the privatisation of agriculture. Since 1993, he has been engaged in agriculture management. He has participated in the Phare, Sapard and Leader + titles projects, which are designed to support cooperation among agricultural systems within the EU. He is also a member of lobbyist groups in Austria and the EU, which are focused on supporting sustainable development in land use and agriculture.

He has been a member of Česká spořitelna’s Supervisory Board since May 2002.

Membership in other companies: DIE ERSTE österreichische Spar-Casse Privatstiftung and Erste Foundation.

Claudia HöllerBorn on 4 February 1968Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mrs. Höller is a graduate of the Federal College for Tourism and a Master of Business Administration, Carlson School of Manage-ment, University of Minnesota and WU Executive Academy in Vienna. During her professional career she participated in various courses in the area of banking and fi nance. Her professional ca-reer started in 1991 in Creditanstalt-Bankverein and in 1998 she joined Erste Group Bank AG (former Erste Bank der österreich-ischen Sparkassen AG) where she participated in various interna-tional projects. During 2002–2009 Mrs. Höller was responsible for Acquisition Projects (Rijecka Banka, Novosadska Banka, Banca Commercial Romana) and since January 2010 Mrs. Höller leads the Chairman’s Offi ce.

She has been a member of the Česká spořitelna’s Supervisory Board since 24 April 2010.

Zdeněk JirásekBorn on 31 July 1950Member of the Supervisory BoardReference Address: Masarykova 645, Kutná Hora, Czech Republic

Mr. Jirásek is a graduate of the Czech Technical University in Prague and a post-graduate of the School of Economy in Prague. He started his professional career in 1974 at ČKD Kutná Hora, where he worked in several interesting positions in distribution, sales and fi nally as a foundry manager. He joined Česká spořitelna in 1994 where he held management positions until 2000; when Spořitelna joined Erste Bank Group he moved to a non-manager position as a sales skills trainer. At the end of 2007 he was elected Chairman of the Bank’s Trade Union Committee.

Mr. Jirásek was elected to ČS Supervisory Board by employees as of October 2008.

Board of Directors | Česká spořitelna’s Supervisory Board and Audit Committee | Macroeconomic Development in the Czech Republic in 2010

12

Herbert JuranekBorn on 13 November 1966Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Juranek graduated from the Commercial College in Austria – Bruck / Leitha. He began his banking career in 1990 in Girozentrale der österreichischen Sparkassen in the area of securities business. From 1994 to 1996 he headed the department “Derivative Clearing & Technical Support” at GiroCredit. During the years 1996–1998 in Reuters Ges. m. b. H., he led all sales and risk management activities of Reuters Austria. In 1999 he assumed the position of Executive Director of Treasury & Securities Operations in Erste Bank der österreichischen Sparkassen AG. As the CEO of “ecetra Central European e-Finance” and “ecetra Internet Services AG” he had overall responsibility for the online broker and internet bank-ing business of Erste Bank Group.

From March 2003 he assumed the assignment as Executive Di-rector of Group Organization & IT of Erste Group. In July 2007 he was promoted to Chief Operating Offi cer and Member of the Executive Board of Erste Group responsible for Organisation, IT, Property Management, Operations and Processing within the en-tire group. Since 2008 the Group-wide responsibility also includes Procurement.

Mr. Juranek has been a member of the Supervisory Board of Česká spořitelna, a. s., since April 2005.

Membership in other companies: Banca Comerciala Romana SA, ecetra Central European e-Finance, s IT Solutions AT Spardat G. m. b. H., s IT Solutions SK, spol. s r. o., s IT Solutions CZ s. r. o., Slovenská sporiteľňa, a. s., Informations-Technologie Austria SK, spol. s r. o., Erste Group Bank AG, Erste Steiermaerkische bank d. d. Rijeka.

Heinz KesslerBorn on 19 August 1938Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Immediately after fi nishing his studies in 1964 Dr. Kessler became employed by Nettingsdorfer Papierfabrik AG, became a member of the Board from 1974 and Chairman of the Board from 1982.

Mr. Kessler was elected by the General Meeting into the function of Supervisory Board Member on April 2007.

Membership in other companies: Erste Group Bank AG, Erste Bank AG, Die Erste österreichische Spar-Casse Privatstifung AG, Nettingsdorfer Papierfabrik AG & Co KG, Bauer& Co. Gessels-chaft m. b. H., Rath AG, Austria Privatstiftung.

Andreas Klingen Born on 18 August 1964Member of the Supervisory BoardReference Address: Am Graben 21, Vienna, Austria

Mr. Klingen is a graduate of the Technische Universität in Berlin with specialization in physics and philosophy and a graduate of Rotterdam School of Management. His professional career started as a researcher in Festkörper-Laser-Institut in Germany. During the years 1993–1998 he worked as an analyst and associate in La-zard Freres, and following which until 2005 as senior Associate and senior Vice President of JP Morgan in London. He joined Er-ste Bank der österreichischen Sparkassen AG in 2005 as a General Manager for Strategic Group Development.

Mr. Klingen was elected by the General Meeting into the function of Supervisory Board Member in April 2007.

Membership in other companies: Open Joint Stock Company Erste Bank, Erste Bank Hungary Nyrt, Erste Bank AD Novi Sad, Public Company Erste Bank.

Mr. Klingen resigned from his function as of 23rd April 2010.

Members of the Managing and Supervisory Boards declare not to be aware of any possible confl icts of business, private and other interests or duties.

Audit Committee

Maximilian HardeggBorn on 26 February 1966Chairman

Mr. Hardegg studied agricultural sciences in Weihenstephan, Ger-many. From 1991 to 1993, he worked at AWT Trade and Finance Corp., part of the Creditanstalt Group. He also served as an advisor to the Czech Ministry of Agriculture during the agriculture priva-tisation process. Since 1993, he has worked in agricultural man-agement and participated in the Phare, Sapard and Leader + titles projects designed to foster cooperation among agricultural systems within the European Union. He belongs to lobby groups in Austria and the EU whose focus is the support of sustainable land use and agricultural development.

He has been a member of the Česká spořitelna Supervisory Board since May 2002.

He has been a member of the Česká spořitelna Audit Committee since 7 October 2009.


13

Heinz KesslerBorn on 19 August 1938Vice Chairman

After completing his studies at Vienna University, where he majored in political science, Mr. Kessler joined Nettingsdorfer Papierfabrik AG in 1964. In 1974, he was appointed to the Board of Directors of this paper company and has served as its Board of Directors chairman since 1982.

Mr. Kessler has been a member of the Česká spořitelna Supervi-sory Board since 2007.

Mr. Kessler has been a member of the Česká spořitelna Audit Committee since 7 October 2009.

Mario CatastaBorn on 6 September 1954

Mr. Catasta completed his studies at the University of Economics in Vienna in 1980. After his dissertation work was accepted in 1982, he joined an audit fi rm affi liated with the Austrian National Bank as an independent auditor. He has worked at Erste Bank since 1987, fi rst as an internal auditor and then, from 1993, as head of compliance. In 1994, he assumed the position of internal audit department head. Af-ter the merger of Erste Österreichischen Sparkassen and GiroCredit, he became head of the corporate client department. He has been the internal audit director at Erste Group Bank since 2003.

Mr. Catasta has been a member of the Česká spořitelna Audit Com-mittee since 7 October 2009.

Zlata GröningerováBorn on 4 July 1957

Mrs. Gröningerová completed her studies at the University of Eco-nomics in Prague, where she assumed the role of academic assist-ant in the Faculty of Finance and Credit after graduating in 1982. In the years 1991–1993, she was deputy CEO of the company SUEZ INVESTIČNÍ, a. s., specialising in advisory and consult-ing in enterprise search and acquisition. In 1995–2004, she held several senior positions (director of the equity investment fi nanc-ing department, acting director of the department of credit trans-actions and business specialists) and was a member of the Board of Directors and Banking Counsel of the Czech Consolidation Agency. From 2005 to 2007, she was the CEO and Board of Di-rectors chair of Technometra Radotín, a. s. During 2007–2009 she was a fi nancial and administrative consultant and then held an of-fi ce of Section Director of the Ministry of Finance. Since 2011 she has worked in the International Division of ČEZ. Her professional residencies and courses include a Management Development Pro-gramme, a corporate fi nance residency at universities in Paris and Lyon and a corporate fi nancial management residency at a faculty of fi nance and accounting.

Mrs. Gröningerová has been a member of the Česká spořitelna Au-dit Committee since 7 October 2009.

Andreas KlingenBorn on 18 August 1964

Mr. Klingen is a graduate of Technische Universität in Berlin, where he majored in physics and philosophy. He is also a graduate of the Rotterdam School of Management. He began his profes-sional career as a researcher at the Festkörper-Laser-Institut in Germany. In the years 1993–1998, he worked as an analyst at La-zard Freres. He then served as senior associate and senior VP at JP Morgan in London until 2005, at which time he assumed the posi-tion of strategic development manager at Erste Group.

Mr. Klingen has been a member of the Česká spořitelna Audit Committee since 7 October 2009 and he resigned from his func-tion as of April 2010.

Claudia HöllerBorn on 4 February 1968

Mrs. Höller is a graduate of the Federal College for Tourism and Master of Business Administration, Carlson School of Manage-ment, University of Minnesota and WU Executive Academy in Vienna. During her professional she career participated in various courses in the area of banking and fi nance. Her professional ca-reer started in 1991 in Creditanstalt-Bankverein and in 1998 she joined Erste Group Bank AG (former Erste Bank der österreich-ischen Sparkassen AG) where she participated in various interna-tional projects. During 2002–2009 Mrs. Höller was responsible for Acquisition Projects (Rijecka Banka, Novosadska Banka, Banca Commercial Romana).

Since January 2010 Mrs. Höller leads the Chairman’s Offi ce. Since 27 April 2010 she has been a member of the Česká spořitelna Su-pervisory board and Česká spořitelna Audit Committee.


14

The Czech Republic saw GDP grow 2.3% in 2010 after dropping by 4.1% in 2009. The engine driving this growth on the supply side was industry and on the demand side was export and the renewal of inventories, which represented a major part of the drop in 2009.

The chief impulse for recovery came to the Czech Republic from Germany, which grew thanks to its openness and ties to the fast de-veloping markets of Asia and South America. These markets, ow-ing to their lack of debt, small number of structural imbalances and limited fi nancial crisis impacts, managed to quickly generate and then lead global growth. The German economy grew a signifi cant 3.6% in 2010 to its pre-crisis level. This was inevitably refl ected in the economy of the Czech Republic, to which Germany sends some one third of its exports.

In the Czech economy, there was a surprisingly rapid recovery in consumer demand, especially as of Q2 2010, as a result of: a gener-al rise in confi dence in the economic recovery, which grew for six successive quarters; a drop in the savings rate; and a labour market that improved over the course of the year. In the summer of 2010, the unemployment rate dropped to 8.5%. However, this improving situation ground to a halt at the end of 2010. A combination of leg-islative changes, a tougher winter and, most signifi cantly, public sector redundancies caused year-on-year unemployment to have dropped by a mere 0.1 of a percentage point in January 2011.

Still, infl ation turned out to be the biggest surprise in 2010. Despite the recovery, it remained insistently low, surprising the majority of analysts, even at the Czech National Bank (CNB). Average infl a-tion was 1.5% due solely to indirect taxes (contributing 1.1 per-centage points) and fuel and food prices (together contributing 0.6 of a percentage point). Demand infl ation as a measure of infl a-tionary pressures from the domestic economy was negative for all of 2010 and overall infl ation dropped 0.6 of a percentage point for the year. Infl ation and the existing interbank market risk premium were the main reasons the CNB not only avoided an interest rate hike in 2010, but actually reduced the rates once more in May. We thus fi nd the CNB two-week repo rate at a historic low of 0.75%.

Czech currency developments were another key reason for the CNB’s lack of action. The koruna defi nitively returned to its dy-namic convergence trajectory. While it began 2010 at a level just

below CZK 26 to the euro, in the course of the year it dropped to 24.50. Indeed, the koruna grew stronger despite several nerve-racking episodes that weakened the currency, e. g. the Greek debt crisis in May, autumn’s second round of the debt crisis, this time in Ireland, and, at year’s end, the misconduct of Hungary’s leaders. The currency also profi ted from a solid cyclical outlook, the ties of the Czech economy to the healthy eurozone core, the negligible exposure to the southern part of the eurozone, the small number of macroeconomic imbalances and, no less importantly, the new government and its promise to reform the public fi nances. Feel-ing the effects of the European debt crisis, the markets are highly sensitive to public fi nance reforms, and the relative attractiveness of the Czech Republic continued to grow.

For these reasons, the koruna dropped to just below CZK 24 to the euro in early 2011, its strongest level in more than 2 years and a value that was slightly higher than fundamentally warranted. The koruna is thus one of the region’s currencies that are now stronger than in the period before the Lehman Brothers collapse and re-mains an anti-infl ationary factor.

Macroeconomic Development in the Czech Republic in 2010

15

Report on Performance and Business ActivitiesConsolidated Results of Operation

The economic crisis of 2008 and 2009 signifi cantly changed the be-haviour of households and enterprises in their fi nancial management and partnerships with banks. The Česká spořitelna strategy rep-resents a targeted response to this situation by taking a proactive approach, offering top quality advisory-based services and strengthening the second pillar of its business, corporate bank-ing. During the crisis, Česká spořitelna proved to its clients that it can provide perfect advisory and reliable services and saw that the Bank’s clients will stand by it in good times and bad. Clients’ interest in staying with Česká spořitelna as their main banking service provider grew signifi cantly and Česká spořitelna is moving forward on this foundation of trust.

In 2010, Česká spořitelna changed its accounting policy for valuation of real estate investments held through real estate funds in its consoli-dated fi nancial statements from the fair value valuation model to the cost valuation model as used by Erste Group Bank. Thus, comparables for 2009 have been adjusted in accordance with this new accounting policy. Comparables for other years have not been adjusted.

Profi t and Loss Account

For the year ended 31 December 2010, Česká spořitelna re-ported consolidated net profi t of CZK 12.1 billion attributable

to the parent bank’s shareholders in accordance with Interna-tional Financial Reporting Standards. This represents a 5% decrease year-on-year, as net profi t was CZK 12.6 billion in 2009. However, operating profi t, which expresses the Bank’s ability to generate profi t, increased year-on-year.

The key return on equity (“ROE”) indicator reached 18.2%. In 2009, the ROE indicator was 20.3%. The return on assets (“ROA”) indicator for 2010 and 2009 is 1.3% and 1.4%, respectively.

The Banks’ results for 2010 are impacted by the low economic growth resulting from a tough economic climate in which the household and corporate sectors experienced a post-injury shock. Nev-ertheless, Česká spořitelna was able to increase its operating profi t, aided by cost-cutting measures, on one hand, while step-ping up loan risk provisioning, on the other.

Operating profi t, the difference between operating income and ex-penses, again reported growth in 2010, by 1% to CZK 26.7 billion. Total operating income comprising net interest income, net fee and commission income and net trading profi t declined slightly to CZK 45.4 billion, though ongoing rigorous cost-control measures and effi ciency improvements were refl ected in a drop in operat-ing expenses. Operating expenses comprising staff costs, other administrative expenses and depreciation / amortisation charges on tangible / intangible assets were thus curtailed by 3% to CZK 18.7 billion.

Net and operating profi t (CZK billion)

30

10.4

15.2

12.1

18.4

15.8

23.2

12.6

26.4

24

18

12

6

02006 2007 2008 2009 2010

Net profi t Operating profi t

12.1

26.7

Cost / Income (%)

125

53.350.9 45.8

42.2

100

75

50

25

02006 2007 2008 2009 2010

41.1

16

Thanks to high operating income and a drop in operating ex-penses, the Bank managed to successfully reduce the impor-tant cost / income ratio indicator to 41.1%, a 1.1% improvement year-on-year.

Net interest income traditionally comprises the largest share of operat-ing income. Net interest income for 2010 was CZK 30.3 billion. Year-on-year, net interest income dropped by 2% due to persisting low market interest rates and lower loan activity. The Czech National Bank base interest rate has been at a historic low of 0.75% since May 2010.

The most signifi cant interest income item comprises net interest in-come from client transactions, which, at CZK 23.9 billion, re-mained stable year-on-year. Client transactions accounted for 79% of net interest income. A higher average volume of loans advanced to fi nancial institutions meant an increase in net interest income from interbank transactions. Interest income on bond offerings increased markedly owing to low interest rates, while dividend income de-creased signifi cantly.

The drop in interest rates was also refl ected in the size of net interest margin tied to interest-earning assets, which dropped to 4.0% from 4.3% at the 2009 year-end.

Net fee and commission income, another substantial part of operat-ing income, totalled CZK 12.2 billion for a year-to-year increase of 7%. Net fee and commission income growth was particularly impacted by net loan and related product income, and increased year-on-year by 13% to CZK 3.4 billion. This successful result can be especially attributed to ever-increasing loan insurance sales and the higher distribution volume via the Bank’s own branches, which re-duces external agent commissions.

Net payment transaction fee and commission income also re-ported positive growth, refl ecting the impact of ongoing payment and bank card transaction growth. For example, the volume of card transactions within the Česká spořitelna sales network grew 16%, the volume of card transactions with Česká spořitelna issued cards

10% and the number of payment transactions performed through the SERVIS 24 and BUSINESS 24 services 10% year-on-year. At CZK 6.9 billion, net payment transaction fee and commission income is the primary source of fee income, accounting for a share of 56% of the total.

Life insurance and other supplementary insurance services have con-tinued to increase in popularity, which is refl ected in growing net in-come from insurance sales. However, net income from security trans-action fees has decreased, in part as a result of the sale of Investiční společnost ČS in Q4 2009. Although there have been signifi cant leg-islative changes in the area of construction savings, net construction savings fee income remained stable.

Net trading result declined 11% year-on-year to CZK 3.0 bil-lion, chiefl y as a result of lower security transaction fees. However, income from transactions was extraordinarily high due to non-recurring circumstances as compared to 2009. Foreign cur-rency transaction income increased year-on-year driven by the higher number of client transactions and also due in large part to interest derivatives transactions. The share of client transac-tions in trading result is on the rise, accounting for 60% of total net trading result.

Thanks to rigorous expense management, general administra-tive expenses (operating expenses), including staff costs, purchased outputs and depreciation / amortisation of tangible / intangible assets, decreased 3% year-on-year. General administrative expenses to-talled CZK 18.7 billion.

Staff costs fell 2% to CZK 8.3 billion due to lower compensations tied to the Bank’s results, a slight reduction in staff headcount and a limited base pay increase.

Other administrative expenses (purchased outputs) dropped 3% mainly due to signifi cantly lower information technology costs resulting from effi ciencies in IT development costs and the termination of parallel operation caused by data centre relocation to Vienna. Data processing expenses nevertheless remained the single largest item in administrative expenses, accounting for 34%. These

Macroeconomic Development in the Czech Republic in 2010 | Report on Performance and Business Activities | Strategic Plans for the Future

Operating income composition (CZK billion)

35

28

21

14

7

02006 2007 2008 2009 2010

21.2

9.0

24.7

9.6

30.2

11.0

30.9

11.4

Net interest income Other non-interest operating income

Net fee and commission income

2.31.5

3.4

1.7

30.3

12.2

3.0

Structure of operating income (CZK billion)

Net trading result3.06%

Net fee and commission income12.2

27%

Net interest income30.367%

17


are followed by expenses for offi ce space, at 23%, and trading ex-penses, primarily including material consumption, monetary circula-tion and chip cards, at 17%. All in all, other administrative expenses totalled CZK 7.8 billion.

Depreciation / amortisation of tangible / intangible assets reported the greatest relative decrease, dropping 5% to CZK 2.6 billion as a conse-quence of lower license and software amortisation charges.

The net charge for provisions and reserves for credit risk reported a negative balance of CZK 9.8 billion, representing a 13% increase year-on-year. This year-on-year growth was attributable to the higher creation of reserves for loans (especially in retail banking) due to the delayed impact of the recession on households. Although the net crea-tion of provisions and reserves for loan risk increased year-on-year, reserve creation has declined for three successive quarters since Q2 2010.

The balance of other operating expenses, which was CZK 2.3 billion at the 2010 year-end, reported a 15% drop year-on-year. This was at-tributable to a number of factors having both positive and negative impacts.

On one hand are higher Insurance Deposit Fund contribution expenses resulting from the increased contribution fee, the elimination of the clients’ share of Penzijní fond ČS profi t due to the higher net profi t of Penzijní fond ČS and profi t realised in 2009 from the sale of Investiční společnost ČS. On the other hand is higher in-come from the revaluation of securities associated with the continuing fi nancial markets recovery.

The Česká spořitelna Financial Group tax liability for 2010 was CZK 2.6 billion, representing an effective tax rate of 17.8%. This amount comprises tax payable of CZK 2.7 billion less quantifi ed changes in deferred tax in an aggregate amount of CZK 0.1 billion.

Statement of Financial Position

The total of consolidated balance sheet assets at 31 December 2010 was CZK 881.6 billion, representing a 3% year-on-year increase by

CZK 26.5 billion. In balance sheet liabilities, there was an in-crease in customer deposits, equity and the volume of interbank liabilities, and a reduction in liabilities from subordinated debt and other liabilities. Balance sheet assets showed growth in the volume of interbank receivables and held-to-maturity receiva-bles and a drop in other portfolios of securities and receivables from clients.

Liabilities

Traditionally, client (primary) deposits have been the key source of funding for Česká spořitelna’s lending; these comprise 75% of all liabilities, meaning that Česká spořitelna is considerably free from interbank funding. Client deposits totalled CZK 661.1 billion and, in-clusive of client deposits, reached a fair value of CZK 670.3 billion for 4% growth year-on-year by an absolute value of CZK 22.8 billion. The high volume of client deposits contri-butes to the Bank’s strong liquidity position.

The year-on-year growth in the volume of customer deposits tes-tifi es to longstanding client confi dence in the Bank. Customer de-posits, including deposits with fair value options, recorded further growth of 3% to a total of CZK 516.6 billion. Term placements experienced the greatest growth, whether in the form of con-struction savings, supplementary pension insurance or the ever more popular Clever savings. Deposits with fair value op-tions, i. e. premium placements that bear interest partly contingent on how the underlying investment instrument develops, more than doubled in size. In contrast, volumes of passbook and Giro account deposits declined.

Deposits from corporate clients increased by 9% to CZK 107.8 billion, primarily on current accounts. Public sector client deposits remained stable at CZK 45.8 billion. The structure of corporate and public sec-tor client deposits changed: term placements decreased while current account deposits increased.

Foreign currency deposits account for a stable 3% of the total volume of client deposits; the euro is the currency of choice, followed by the US dollar.

Structure of operating expenses (CZK billion)

Depreciation / amortisation of tangible and intangible assets2.6

14%

Staff costs8.3

44%

Administrative expenses7.842%

Balance sheet total (CZK billion)

1,000

800

600

400

200

02006 2007 2008 2009 2010

728.4

814.1862.2 855.1 881.6

18

The balance of payables to fi nancial institutions compris-ing loans, term deposits and current account balances decreased 10% year-on-year to CZK 52.2 billion at 31 December 2010. Of this amount, loans extended as part of repo operations totalled CZK 11.8 billion. The proportion of interbank transactions with the parent bank increased.

The total volume of issued bonds reported in the consolidated balance sheet increased 7% year-on-year to CZK 46.1 billion excluding issued structured bonds at fair value. The increase is due to mortgage bonds issued in connection with mortgage loan portfolio growth. The total volume of mortgage bonds, as a stable and long-term source of funding for mortgage transactions in the consolidated balance sheet, is CZK 35.1 billion. Issued bonds total CZK 8.4 billion and depository bills CZK 1.5 billion.

Česká spořitelna had a new subordinated bond offering in 2010 to shore up its capital base. At the same time, the Bank exercised its right of early repayment in compliance with the offer conditions of the fi rst subordinated bond offering. At 31 December 2010, subordinated debt thus totalled CZK 11.0 billion, an 18% reduction.

The Bank’s equity attributable to shareholders, comprising basic capi-tal, share premium, the legal reserve fund, valuation gain or loss (par-ticularly with respect to the portfolio of available-for-sale securities

and derivatives for hedging), retained earnings of previous years and current year profi t, increased 12% year-on-year to CZK 70.8 billion primarily due to the impact of increased retaining earnings. Česká spořitelna thus has suffi cient equity for future growth and to meet new regulatory requirements.

Consolidated and standalone capital adequacy calculated in compliance with the Basel II Directive improved signifi cant-ly – consolidated by 190 base points to 14.1% and standalone by 160 base points to 13.9%.

Assets

Loans and advances to clients represent the lending transactions that generate the largest portion of operating income. Loan portfolio growth refl ects the current economic climate: loans and advances to clients decreased 2% year-on-year to CZK 460.0 billion. Loan port-folio growth always follows economic recovery with a slight delay; nonetheless, clear growth tendencies are evident in the loan portfolio. Year-on-year, some loan types, e. g. loans to entrepreneurs and micro-businesses, mortgage loans, credit card and current ac-count overdraft loans and factoring loans, have already posted growth, chiefl y due to positive developments in Q4 2010, when the corporate client and small and medium-sized enterprise segments reported the fi rst signs of growth.

Given deposit growth, the proportion of client loans and advanc-es relative to client deposits declined and held at a conserva-tive 69.6%. Net loans and advances to clients account for 50% of all lending transactions, while at the 2003 year-end their share was only 32%.

Loans to private individuals – households, including mortgage loans, totalled CZK 250.4 billion, a slight decrease of just under 1% year-on-year. This excellent result was mainly attributable to mortgage loans, which dropped slightly to CZK 117.5 billion compared to the 2009 year-end, but reported a turnaround and clear growth in Q4 2010 thanks to the Ideal Mortgage product. Growth


100

80

60

40

20

02006 2007 2008 2009 2010

61.2

71.1 71.872.9

69.6

Proportion of client loans and advances relative to client deposits (%)

Client deposits (CZK billion)

800

640

480

320

160

02006 2007 2008 2009 2010

537.5588.5

642.5 643.4661.1

Structure of liabilities (CZK billion)

Issued bonds and subordinated debt59.3

7%

Amounts owed to fi nancial institutions52.2

6%

Amounts owed to clients, including payables at fair value670.3

76%

3%

8%

Other liabilities29.0

Equity attributable to Bank shareholders70.8

19

compared to 2009 can be attributed to credit card and bank overdraft loans, both of which reported a double-digit increase to CZK 5.4 billion and 7.2 billion, respectively. Stavební spořitelna ČS also did well, its extended loans decreasing by only 1% and thus holding at the CZK 45.1 billion level. Consumer loans and leasing, however, lagged behind. The proportion of loans to private individu-als – households continues to grow, increasing relative to total client loans from 49% in 2006 to 54% in 2010.

Loans extended to private individuals – entrepreneurs, micro-businesses and small community clients recorded growth. Loans advanced to this segment (including mortgage loans) increased 1% year-on-year to CZK 59.8 billion.

Česká spořitelna reported a 5% decrease in loans to small and me-dium-sized enterprises, corporate entities and the public sector to CZK 149.7 billion, which was impacted to a signifi cant extent by lower de-mand, especially from the corporate segment, and the repayment of previously extended loans. Nevertheless, corporate mortgages and factoring receivables reported year-to-year growth. In total, howev-er, Q4 development is already showing signs of growth.

The consolidated portfolio of mortgage loans to private indi-viduals, corporate bodies and the public sector increased 1% in ag-gregate to CZK 172.4 billion; mortgage loans account for 37% of all loans in the portfolio.

Compared to the 2009 year end, the quality of the loan portfolio wors-ened as expected due to the fading fi nancial crisis, though the propor-tion of loans more than 90 days overdue peaked in Q3 2010. The quality of the loan portfolio improved in Q4 2010 owing to the favourable impact of the quality of loans and advances to corporate clients and to realised impairment charges. Risky loans have reported a similar development trend, their Q2 and Q3 2010 improvement fur-ther accelerating in the year’s fourth quarter.

Loans and advances to fi nancial institutions increased a signifi cant 38% year-on-year to CZK 174.9 billion, with the greatest increase


Total amounts due from clients (CZK billion)

500

400

300

200

100

02006 2007 2008 2009 2010

329.1

160.4

418.4

213.2

461.4

243.4

469.2

252.8

Total amounts due from clients of which: amounts due from private individuals

460.0

250.4

seen in the volume of reverse repo transactions with the Czech National Bank and, to a lesser degree, with other banks – these transactions totalled CZK 114.1 billion. Placements with fi nancial institutions comprise CZK 56.4 billion of total interbank receivables. The increase in interbank receivables is tied to the need to manage the Bank’s balance sheet, maintain higher liquidity and allocate new placements.

The aggregate balance of the portfolio of securities at fair value, avail-able-for-sale securities and held-to-maturity securities held steady year-to-year at CZK 177.1 billion. The portfolio was only subject to redistribution during the year, with the volume of held-to-maturity se-curities increasing greatly in proportion to the other portfolios.

The proportion of bonds to the total securities portfolio is 98%. The portfolio structure has changed considerably as Česká spořitelna prefers to purchase bonds issued by Czech govern-ment institutions. Their total percentage has increased from 57% to 77% since 2007. The proportion of bonds issued by foreign fi nancial institutions decreased to 11% of the portfolio. Bonds issued by Czech fi nancial institutions comprise 6%. Other bonds are issued by promi-nent Czech or foreign corporate enterprises. Securities and investment certifi cates comprise 2%, or CZK 4.0 billion, of the portfolio.

The volume of property investment, including assets under construc-tion, fell by 8% year-on-year to CZK 15.4 billion. Real estate fi nanc-ing is a key area of interest for Česká spořitelna. The Bank also in-vests in real estate investment funds (operating as part of the Financial Group) for institutional investors focused on the Czech and Slovak markets. Property investment is aimed at achieving rental income or capital appreciation.

The aggregate balance of tangible and intangible assets increased 3% year-on-year to CZK 19.1 billion, of which land and buildings comprise 70%. The value of intangible assets decreased 4% to CZK 3.1 billion; amortisation of software is chiefl y responsible for this de-cline. The value of tangible assets increased 4% to CZK 16.0 billion. The aggregate proportion of tangible and intangible assets relative to total assets is 2%.

Structure of assets (CZK billion)

Securities portfolio177.120%

Net loans and advances to clients440.8

50%

Other assets69.7

8%

20%

2%

Loans and advances to fi nancial institutions174.9

Tangible and intangible assets19.1

20


Business Activities And OperationsIn recognition of its activities, Česká spořitelna received a number of domestic and international awards. The Bank has retained the “Bank of the Year” title and, for the seventh consecutive year, became the “Most Reliable Bank of the Year” and the winner of a brand new category, “Bank without Barriers”, both in the Fincentrum Bank of the Year 2010 contest. According to the US magazine Global Finance, Česká spořitelna is the “Safest Bank in Central & Eastern Europe”. Global Finance assessed fi ve hundred world banks with an emphasis on their capital adequacy and the size of total assets.

Česká spořitelna is also perceived as a safe and reliable bank by its clients. The number of loyal clients, i. e. clients who are satisfi ed with the Bank’s services and are willing to buy another product and recommend the Bank to their friends, grew by more than 3%.

Client loyalty depends on the Bank’s safety and reliability and, to a large extent, on the Bank’s ability to offer its clients new alternative products and services. Major technological advances over the last 10 years have obviously impacted the banking business. Česká spořitelna accelerated its operations as well as the creation of new products and product combinations based on client needs. New technologies allow us to understand our clients as unique entities with very specifi c expectations and to tailor the banking solutions we offer. Česká spořitelna treats its clients as consultants and partners and offers customised solutions to each one.

Every client has different preferences, and Česká spořitelna, as the bank with the largest number of clients in the Czech Republic, must understandably be able to offer its clients the products and services that suit them best and that can be easily combined and customised. The Česká spořitelna Private Account is the most successful example of such an offering; in September 2010, the number of clients using this product passed the 2 million mark. Other optimally fl exible and successful products include the ČS Ideal Mortgage and ČS Cool Card. Since 2010, the family of successful products has had a new member, the Current Account for Commercial Clients, intended for small and medium-sized enterprises. The Current Account for Commercial Clients allows services and products to be set up according to the needs and preferences of each client.

Private Clientele

Česká spořitelna is a universal bank serving all client segments, though the most important client group – and not just in terms of service scope – is represented by the citizens of the Czech Republic, students, entrepreneurs, sole traders, the self-employed and foreign clients residing in the Czech Republic.

Financing Housing NeedsThe year 2010 was a turning point for Česká spořitelna on the mortgage market. The market recovery in Q4 2010 was due to a combination of low interest rates, low property prices and the Bank’s pro-active approach. During the year, the Bank created

specialist new mortgage positions focusing on the sale and processing of loans for housing needs.

The volume of new loans provided to clients was CZK 16 billion in 2010, i. e. 8% higher than in 2008; in terms of the number of new mortgages, growth reached 13%. The dynamics of mortgage market growth was particularly obvious in the last months of 2010. In the last quarter, the Bank’s share in the new mortgage market grew steadily to 24% in December 2010. The average maturity of a new mortgage loan has dropped slightly to 22.6 years; the average amount remained stable at CZK 1.6 million. Considering the purpose of mortgages, the purchase of real estate prevails over the fi nancing of real estate construction or reconstruction. The important average loan value to real estate value indicator was 66.2% for new mortgages.

The Česká spořitelna Ideal Mortgage was very successful thanks to a special reduced interest rate offer; interest rates starting at 3.59% were provided to clients subject to the satisfaction of the following conditions: active use of a Česká spořitelna Private Account, a fi ve-year fi xed interest rate, a minimum maturity of 20 years and repayment insurance. This offer helped increase mortgage portfolio stability. Under the Ideal Mortgage, clients can select from a number of optional services and tailor the product to suit their needs and wishes. The most frequently selected services include repayment insurance, extra instalments and express drawdown.

The Bank introduced a new service related to the Ideal Mortgage: Bridge Financing. The service comprises a short-term loan for up to two years to bridge the time between the need for new home fi nancing resources and the sale of the client’s existing property. Bridge Financing allows for an easy move into a larger home without having to sell the original real estate under duress or unfavourable conditions.

Ideal Mortgage supplementary services remain very popular. Two thirds of the Bank’s clients order repayment insurance, while the extended insurance option, e. g. repayment insurance in case of job loss, is becoming more and more popular.

Portfolio of mortgage loans (CZK billion)

125

100

75

50

25

02006 2007 2008 2009 2010

80.2

24.2

111.6

33.4

116.1

42.8

117.8

45.5

Portfolio of mortgage loans to individuals Portfolio of Stavební spořitelna ČS loans

117.5

45.1

21


The total portfolio of mortgages to private individuals – households was CZK 117.5 billion at the end of 2010. Year-on-year, the size remained stable with a change in Q4 2010 as the mortgage portfolio started to grow slightly.

Within the Česká spořitelna Financial Group, clients make extensive use of Stavební spořitelna České spořitelny services to fi nance their housing needs. The total bridging loan and construction savings loan portfolio recorded a slight decrease year-on-year by less than 1% to CZK 45.1 billion; the volume of bridging loans fell slightly, while the volume of construction savings loans increased, representing now more than 30% of the Stavební spořitelna České spořitelny loan portfolio. The total number of loans at the 2010 year end was nearly 200 thousand.

Financing the Needs of Private Individuals As a result of lower demand, the balance of the consumer loan port-folio, including credit cards and overdraft loans on Giro accounts, fell by almost 2% year-on-year to CZK 82.7 billion and comprised nearly 2.5 million loans. Throughout 2010, the Bank nevertheless strength-ened its leading market position by advancing a total of CZK 21.1 bil-lion in new consumer loans (exclusive of credit cards). The average new consumer loan exceeded CZK 90 thousand.

In consumer loans, the Bank focused on easy access to loans and simplifi ed processes. Since February 2010, Česká spořitelna clients have been able to increase their existing overdraft facility or get a new overdraft facility on Private Accounts at ATMs. As a result, clients can borrow money when they actually need it, i. e. when the balance on their Private Account is temporarily insuffi cient. The service was used by more than 60 thousand clients. The number of overdraft facilities on Giro accounts exceeded 1 million. Total overdraft loan use at the 2010 year end showed an increase of more than 12% to CZK 7.2 billion.

Of the consumer loans advanced to clients, the greatest interest has always been shown in traditional cash loans, which fell in total volume by 4% in 2010 to CZK 59.2 billion. Cash and consumer loans collateralised by real estate, known as American mortgages, also fell

slightly by 1% to CZK 8.8 billion, while the total number of American mortgages advanced grew.

The Bank launched a new credit card product, VISA Infi nite, for its most sophisticated clients. In addition to higher limits, the card offers above-standard services such as entry to exclusive airport lounges and assistance services. The Bank also tested the sale of a credit card with a 2% CS Pension Fund contribution. As a result of all the above activities, the volume of credit card loans increased by 15%, i. e. to CZK 5.4 billion, compared to 2009.

Private AccountIn 2007 Česká spořitelna started to offer fl exible and variable products and services allowing clients the option of freely choosing services according to their needs. The Česká spořitelna Private Account is the cornerstone of this portfolio of fl exible products and services.

The Private Account is offered to clients aged 18 and over and since its introduction in the summer of 2007, the Bank has continued to develop and improve it. Thanks to a wide portfolio of products and services to choose from, clients can freely set up their own customised Private Account using the tool on the Bank’s website www.csas.cz or the services of the Bank’s consultants, who will only recommend the services and products to be actually used by the client.

On 15 September 2010, the number of clients using the Česká spořitelna Private Account hit the 2 million mark. At the 2010 year end, the Private Account was being used by more than 2.1 million clients, a year-on-year increase by nearly 400 thousand clients, i. e. 23%. The volume of cash deposits increased by 28% year-on-year to a total of CZK 121.3 billion.

The Bank has introduced two more Private Account types, i. e. the Česká spořitelna Private Account Student for full-time students aged 15 to 30 and the Česká spořitelna Private Account Junior for children between the ages of 8 and 14. The concept of a private account with the option of freely choosing services met with success among students, too, and the Private Account Student was in use by more than 163 thousand students at the 2010 year end, i. e. the number increased by more than one third over the last 12 months.

Total volume of consumer loan portfolio in CZK billion

100

80

60

40

20

02006 2007 2008 2009 2010

50.2

61.9

76.783.9 82.7

Number of Private Accounts in CZK thousand

2,500

2,000

1,500

1,000

500

02006 2007 2008 2009 2010

0

426

1,081

1,715

2,102

22


The Private Account Junior launched in December 2009 was in use by nearly 5 thousand clients.

Both types of Private Account for students and children are based on the standard offering of Private Account services and allow three services chosen by the client to be offered with no monthly fee. Thanks to the Private Account, students can receive a CZK 200 annual contribution to their ISIC card “International student identity card” and an overdraft facility.

The Bank has launched a new type of Private Account with special parameters for high net worth or higher income clients included in the Česká spořitelna Premier category: the Private Account Premier.

At the 2010 year end, the Bank launched the sale of another type of Private Account, the Private Account Graduate, as a pilot project at selected branches; the Private Account Graduate is for young people starting their fi rst job, including graduates of all types of schools from apprentice training to secondary schools and universities, and will allow young clients who meet the qualifying criteria to use, in addition to free account administration, six more services free of charge for a period of two years: an international payment card, internet and phone banking, free-of-charge Česká spořitelna ATM withdrawals and more.

The Česká spořitelna Benefi ts Programme is an inseparable part of the Private Account. The aim of the Programme is to reward clients who are active users of the Private Account and other Česká spořitelna Financial Group services by offering discounted Account administration. Private Account holders thus receive an account administration fee discount of up to 100% based on their overall deposit (i. e. incoming transactions) volume or total balance with the Česká spořitelna Financial Group. A basic 10% discount is provided starting with three Private Account transactions in a given month. By actively using the Private Account, clients may obtain a 0.5% interest rate discount, thus reducing their Ideal Mortgage interest rate.

At the 2010 year end, the Benefi ts Programme was in use by 380 thousand clients, with 25 thousand more clients taking advantage of this benefi t every month. The average Private Account monthly administration fee discount was around 40%.

A scaled down version of the Česká spořitelna Benefi ts Programme may be used with the Česká spořitelna Private Account Student and Private Account Junior, so that young clients may also enjoy the benefi t of having more than three standard free-of-charge services.

At the 2010 year end, the Bank recorded some 2.8 million Giro accounts (including Private Accounts) with a balance of CZK 187.4 billion. Giro accounts are the product with the highest volume of client deposits in the entire fi nancial group. An ever increasing number of clients are using products associated with the Giro account: 36% have an overdraft facility, 75% have a Private Account and 96% use payment cards tied to their Giro account.

Investment ProductsČeská spořitelna has adopted a long-term, customer-oriented strategy devoting maximum efforts to presenting investment solutions that would satisfy client requirements and expectations. New products are being developed with particular emphasis put on their simplicity and quality.

In the long term, the majority of Česká spořitelna clients prefer conservative investment products. These clients prefer hedged investments to maximum profi ts. Fixed yield bond sales exceeding CZK 7 billion corroborate this trend. As an alternative to fi xed yield bonds with various maturities from one to eight years, clients could also take advantage of another medium-term product, i. e. the Gold Deposit. The total volume of Gold Deposit funds at the 2010 year end was CZK 13.1 billion.

Conservative investors took advantage of improved conditions on dynamic markets to invest in premium deposits. The premium yield is derived from changes in equity, commodity or currency markets with a nominal value guarantee. At the 2010 year end, funds in premium deposits amounted to CZK 9.1 billion, i. e. more than double the amount invested in 2009. In 2010, the CZK denominated offer of equity and currency premium deposits was extended to include EUR and USD denominated offerings pursuant to client interest.

The stock market recovery offered an interesting investment opportunity in 2010; as a result, direct equity investments drew the attention of more dynamic investors. Those who do not want to submit their buy or sell orders electronically may submit their orders on the Prague Stock Exchange or a foreign stock exchange (including limit orders) at Česká spořitelna branch offi ces or by phone. The total turnover of shares transacted in this manner exceeded CZK 1.5 billion in 2010.

The positive fi nancial markets trend from the 2009 year end spilled over to 2010. Regular investments constituted a signifi cant element of the infl ow of cash to mutual funds. The total share of regular deposits was nearly 50% of retail funds’ net sales. The number of clients from the category of active “regular investors” exceeded 120 thousand and continues to grow.

Positive developments in bond markets in the fi rst half of 2010 resulted in revenues above the level of preferential term deposits; this made bond funds even more attractive for investors. Sporobond was the most successful fund, growing by more than CZK 2 billion in new investments by the end of the year. One reason for the infl ow of funds was the reinvesting of part of investors’ funds from Sporoinvest (a money market fund) to Sporobond, a logical step in view of slower yield growth from money market funds. After a short period of stagnation in mid 2010, caused in particular by the credit crisis in certain European countries, the market continued to grow swiftly through the end of October 2010. The ISČS High Yield bond fund with a 9.45% increase was the most successful domestic bond fund.

23

After excellent performance in 2009, equity funds attracted investors in 2010, too. Hundreds of millions of CZK fl owed into Investiční společnost České spořitelny equity funds in 2010. Equity markets continued to record double-digit performance throughout 2010. Securities drew on positive reports concerning business sector improvements. The growth of securities accelerated at the end of 2010 and attracted new investors. ISČS Top Securities with an increase of 39.27% was the best domestic equity fund.

Total assets in Investiční společnost ČS managed funds increased 14% in 2010 to CZK 59.1 billion.

In collaboration with its subsidiary REICO investiční společnost ČS, Česká spořitelna offers retail clients the possibility of investing in commercial real estate through the ČS real estate investment fund, an open-end mutual fund. The ČS real estate investment fund maintained its position as the largest real estate investment fund for retail clients in the Czech Republic in terms of both capital (CZK 1.7 billion at the 2010 year end) and the number of properties in the portfolio.

In November 2010, the fund’s portfolio grew as a result of a new acquisition: the Melantrich building at Wenceslas square in Prague, a prestigious commercial property primarily serving the retail and offi ce sectors. The number of properties in the fund’s portfolio thus increased to seven commercial buildings, six in the Czech Republic and one in Slovakia. In 2010, the fund recorded returns of 3.41% arising chiefl y from rental income and the stabilisation of property prices. The ČS real estate investment fund portfolio is fi nancially healthy; most properties report an occupancy rate above 95% and bring in stable rental income. In 2010, the fund collected more than CZK 120 million in rent. The current values of buildings in the portfolio are stable and have long-term future growth potential.

Savings ProductsIn light of previous years’ experience, clients continue to strongly prefer products with guaranteed returns and deposit insurance.

Clients emphasise not only a one-time return on their investments,

but also regular savings. Česká spořitelna Clever savings is an ideal product that meets clients’ requirements for an attractive return on regularly deposited amounts to help them fulfi l their future wishes. In the 1.5 years of its existence, Clever savings has attracted 265 thousand clients who deposited a total of CZK 29.7 billion, meaning an increase of more than 130% year-on-year. The success of Clever savings proved that regular savings, even in small amounts, is just as important to clients as one-time cash deposits.

Constructions savings deposits with Stavební spořitelna ČS constitute the most signifi cant savings product by volume. Notwithstanding the announced changes in government subsidies and tax imposed on interest, total client deposits on construction savings accounts with Stavební spořitelna grew 3% compared to the prior period, with CZK 97.5 billion being deposited by nearly 1.16 million clients. In 2010, clients entered into nearly 163 thousand new deposit contracts.

Supplementary pension insurance is among the most popular and steadily growing forms of long-term savings. In 2010, Penzijní fond České spořitelny (a pension fund) reported an 8% increase in supplementary pension insurance deposits to CZK 35.2 billion. The number of clients grew by more than 74 thousand. The number of clients at the 2010 year end was nearly 908 thousand. The clients’ interest in supplementary pension insurance refl ects their need to create a reserve fund in order to achieve fi nancial independence when they reach retirement age. Supplementary pension insurance with Penzijní fond ČS was recognised as the second best fi nancial product in the 2010 Zlatá Koruna competition.

Česká spořitelna Perfect Deposit is an attractive deposit product with a guaranteed interest rate; it is unique on the deposit products market in that half of the return is paid to clients up front, making it a sort of upside-down deposit.

Česká spořitelna has launched a new product for clients who prefer to contract their products online: Česká spořitelna Internet Savings. Clients may apply for the product online on the Bank’s website; in most cases they get the product without a trip to a branch. With an attractive return and immediate availability of deposited funds, Internet Savings is a product with a unique place in the Bank’s portfolio.


Volume of assets managed by fundsof Investiční společnost ČS in CZK billion

100

80

60

40

20

02006 2007 2008 2009 2010

74.1

81.8

51.3 51.759.1

Savings of individuals in CZK billion

Construction savings deposits97.519%

Savings deposits including passbook accounts100.3

19%

Supplementary pension insurance35.2

7%

11% Term deposits55.2

Current accounts25.5

5%

Giro accounts187.4

36%Other deposits15.5

3%

24

While the number of passbook accounts and the volume of deposits in them are consistently dropping (by 10% year-on-year), at the 2010 year end Česká spořitelna nevertheless recorded more than 1.7 million registered passbook accounts with an aggregate balance of CZK 70.6 billion.

Regular deposits and term deposits in foreign currencies total CZK 8.3 billion; preferred currencies are the EUR and US dollar.

Česká spořitelna PremierThe Bank offers above-standard banking services under the brand Česká spořitelna Premier to high net worth and higher income cli-ents. Česká spořitelna Premier represents comprehensive, superior banking provided at the Bank’s separate network of branches offering services of the highest degree of qual-ity and professionalism under strict privacy.

The offered services and products are customised to the needs and expectations of the given category of clients identifi ed by the Bank on the basis of the results of an extensive segmentation survey. According to the survey, the targeted clients appreciate a higher level of assistance with their fi nancial affairs. The category comprises wealthy and active clients who lack time, but expect fi rst rate services and need to trust their Bank. For such clients, the prestige of the brand is important as it represents their lifestyle and ambition. An individualised approach is a must. The Bank has created a brand that is separate from the regular network of branches and offers a special approach and products; thanks to private banking, Česká spořitelna has had experience with such an approach.

The Premier Personal Account is the cornerstone of the product portfolio, which also includes the Premier Savings Account, current accounts denominated in foreign currencies, investment products customised to the given client segment, SERVIS 24 internet banking and other services. In addition, clients receive the prestigious VISA Infi nite credit card; apart from standard services, VISA Infi nite card holders are entitled to above-standard travel insurance, Priority Pass for admission to more than 600 airport lounges around the world, emergency service (help when in need) and a concierge (the services of a personal assistant). In order to become members of the Česká spořitelna Premier programme and receive free products and services, clients have to meet certain qualifying criteria, particularly have a certain income and engage in required activities.

At the end of 2010, Česká spořitelna Premier had two branches in Prague, one in Brno and three separate departments at Česká spořitelna branches in Prague and Ostrava. The plan is to have 20 Premier branches within fi ve years.

Erste Private BankingIn the three years of its existence, Erste Private Banking České spořitelny (EPB) has successfully established its position on the private banking market and has been among the most signifi cant providers of private banking in the Czech Republic. Based on

the Bank’s internal analyses, EPB’s estimated market share in local assets, i. e. assets administered by local private banking institutions, is between 18% and 20%.

EPB services are used by thousands of satisfi ed clients of Česká spořitelna and the portfolio of EPB clients continues to grow. In 2010, more than 1,000 new clients joined the programme and decided to entrust the Bank with new funds totalling more than CZK 8 billion. From the client segmentation perspective, most clients are company owners and managers. Private banking clients perceive Česká spořitelna as a stable, reliable and accommodating bank that can – in a climate of slow economic recovery and low interest rates – offer its clients a wide variety of interesting investment opportunities, from the most conservative to the most dynamic.

In 2010, most EPB clients preferred conservative investment solutions based on investment instruments with a guaranteed principal and fi xed interest return. Nevertheless, investors with moderate or extensive experience already desired to invest in riskier instruments, particularly shares or commodities.

Client-preferred products included new bond offerings or special offerings of structured bonds and premium deposits whose return is derived from various underlying assets (agricultural commodities, industrial and rare metals, sector-focused security titles, currencies, etc.). Clients could also choose products issued within the Erste Group Bank, e. g. by Waldviertel Sparkasse. At the end of 2010, the Bank introduced a new solution within the Managed Portfolio: Variable Private Portfolio (VPP). Since the launch, both new and existing clients have shown extraordinary interest in the product.

In 2010, the Bank opened new centres for EPB clients in Prague (Budějovická), České Budějovice and Zlín. Private banking services are now available at twelve locations across the Czech Republic.

Card ProgrammeIn 2010, the total number of active payment cards dropped slightly by 1% to 3.2 million: 2.8 million debit cards and 0.4 million credit cards. Although the number of payment cards stagnated, Česká spořitelna has maintained its dominant position in this important market, which is illustrated by signifi cant growth in the number and volume of card transactions.

The offer of payment cards refl ects the fact that clients prefer products with the option of creating a product tailored to their needs. Such products include the Česká spořitelna Cool Card, i. e. a credit card to pay for purchases. In October 2010, after two years of the Cool Card’s existence, the number of active users exceeded 300 thousand.

Every Cool Card holder immediately gets two guarantees: purchase for the lowest price and protection against damaged goods. If a client makes a purchase using the Cool Card and, subsequently, fi nds the same goods for a lower price, he / she will be refunded the difference. Clients even receive compensation


25

if purchased goods are damaged or stolen. In addition, the card holder can select, from up to seven optional benefi ts, only those he / she will actually use and may change the benefi t selection at any time. Cool card holders have been most pleased with the card’s no fee use, the Sphere discount programme, the advantageous Bonus programme and the Penzijní fond České spořitelny bonus contribution. A popular extra benefi t is the option to choose the card’s appearance; more than half of Cool Card holders have selected their card’s design from the available design templates or made their own design. The Cool Card placed 2nd in the Zlatá Koruna best fi nancial product competition card category.

In November 2010, the insurance service portfolio was expanded to include a new type of insurance for cards and personal objects: P90, which covers card misuse of up to CZK 90 thousand and theft of a notebook together with the card and is provided to both private and business card holders.

The business card portfolio has been pared down to three types of cards under a single card association: Visa Business, Visa Business Plus and Visa Business Gold. All are embossed and carry new attractive designs with effects appropriate for each card type. The new basic Visa Business card has another advantage for Commercial Account clients, who may choose the card design from a gallery of templates. Some 40% of commercial card holders use this option.

Česká spořitelna offers Visa Classic and MasterCard Standard debit cards with a special design attached to the new Private Account Premier for Premier category clients. With Premier debit cards, clients can make free of charge withdrawals from Česká spořitelna ATMs and all foreign Erste Group Bank ATMs and free of charge PIN changes. Every client receives two Premier debit cards free of charge with his / her Private Account Premier.

Česká spořitelna payment card use for vendor payments is on the rise; in 2010, an average of 29.6 transactions were performed per card, i. e. 15% more than in 2009. Marketing campaigns and client education activities like the launch of a new website for card payments:

www.jakplatitkartou.cz support this tendency. The volume and number of internet transactions also refl ected major growth, i. e. by 35% and 48%, respectively. Česká spořitelna clients spent CZK 2.5 billion online in 2010, i. e. an average of CZK 773 per card.

Česká spořitelna has expanded its payment card acceptance services to include new locations in 2010 – there are now 17,158 partner establishments. Important new business partners added in 2010 are the C & A retail clothing chain, PPL, BlueStyle and SPARKY’S. Česká spořitelna also entered into co-operation with the Czech Police, which currently involves 20 terminals.

Interest in non-cash payments at vendors continues to grow. Since 2001, the number of transactions conducted at Česká spořitelna payment terminals has increased ten times. Compared to 2009, the number of transactions increased by 26% transactions to a total of nearly 89 million transactions. Transaction volume increased 16% to CZK 86.9 billion. Wednesday and Thursday, 22–23 December 2010, were record days for Česká spořitelna payment terminal transaction volume and number, respectively; on Wednesday, December 22, clients made card payments totalling CZK 560 million at the Bank’s terminals, i. e. 10% more year-on-year. On Thursday, December 23, clients made 553 thousand card payments


Number of active cards in thousands

3,500

2,800

2,100

1,400

700

02006 2007 2008 2009 2010

3,096

447

3,340

622

3,304

553

3,258

476

Number of active cards in thousands of which: number of credit cards in thousands

3,230

442

ČS card payment transactions

100

47.851.2

58.061.7

69.173.6 75.2

84.280

60

40

20

02006 2007 2008 2009 2010

Volume of ČS card payment transactions in CZK billion Number of ČS card payment transactions in million

82.4

95.9

Payment transaction in the ČS network

100

29.5

21.7

35.5

26.4

54.643.0

75.270.2

80

60

40

20

02006 2007 2008 2009 2010

Volume of ČS card payment transaction in CZK billion Volume of payment transactions in the ČS network in CZK billion

86.9 88.6

26

at the Bank’s terminals, thus increasing the number of payments on a single day by 19% and thereby achieving a new terminal payment record for the Bank.

Česká spořitelna has long been the market leader in ATM network size in the Czech Republic. The Bank increased the number of ATMs by 94 to a total of 1,312 in 2010 (including 36 transaction terminals), which represents a market share of more than one third. In the process of expanding its network, Česká spořitelna has been working with the prominent retail chains Tesco, Kaufl and, Interspar, Globus and Billa. There are 52 special ATMs equipped for use by the blind. The Bank is continuing to upgrade the functionality of its ATMs (e. g. bar code readers that allow for easier payment of postal money orders have already been installed at 300 ATMs) and gradually introducing new machines; in 2010, 118 ATMs were replaced with newer models.

All ATMs are equipped with chip technology and meet the maximum security requirements to eliminate the risk of skimming. The Bank has also introduced deposit ATMs that enable clients, in addition to standard services, to make cash deposits to accounts with Česká spořitelna and other banks in the Czech Republic. The Bank currently has 20 deposit ATMs. In 2010, a total of 155.5 million transactions were performed in the Česká spořitelna ATM network, of which 89.3 million were cash withdrawals. Cash withdrawals totalled CZK 302.6 billion. The average withdrawal amount was CZK 3,388. Most withdrawals were made before Christmas; on 10 December 2010, nearly CZK 1.6 billion was withdrawn from ATMs and the number of withdrawals was 382 thousand.

Additional Products and ServicesIt is because Česká spořitelna strongly emphasises comprehensive solutions to the fi nancial needs of clients that the Bank’s network is being expanded to include the sale of additional products and services, in particular by working with the Kooperativa and Pojišťovna ČS insurance companies to sell insurance products such as life insurance, property insurance, payment protection insurance for loan products, travel insurance, regular expense insurance, legal protection for the Private Account and more.

It became clear in 2010 that clients were interested in hedging their risks connected with the repayment of loans and liabilities. The insurance rate related to the concluded loans has been more than 70%. Job loss insurance has also remained a popular product. Insurance to cover job loss risk is regularly purchased with every other loan provided.

Commercial and Corporate Clientele, Public and Non-profi t Sector

Commercial and corporate clientele comprise yet another important market segment to which the Česká spořitelna Financial Group devotes careful attention. The Financial Group’s range of offerings includes traditional products for account administration and loan provision, special projects focussing on investment loans, export, capital participation, leasing, factoring, real estate fi nancing, fi nancing in co-operation with international institutions, syndicated loans, hedging transactions, fi nancing through capital markets, transaction insurance, fi nancial advisory services and more. The Bank is a great help to commercial clients wishing to use guarantee funds or subsidies from EU funds.

In the long term, Česká spořitelna has shown one of the highest rates of corporate client satisfaction with Bank services. The Bank has suffi cient capital to further increase its share in the given segment without adopting aggressive price policies or similar measures. Česká spořitelna endeavours to build long-term relationships with its clients, to be at the client’s side in good times and bad and to provide top quality advisory services. In addition to being number one in the retail market, Česká spořitelna strives to become number one in corporate fi nance. The growing number of Česká spořitelna clients from among SMEs as well as large business entities, already refl ected in the Bank’s increased share in the given market segment, is a positive signal on this journey the Bank has undertaken.

Real Estate FinancingDespite slowed real estate market activity throughout 2010, Česká spořitelna was among those banks that were most active in real estate fi nancing and mortgage transactions. The Bank ranked second in terms of overall individual, commercial and municipal mortgages provided on the Czech market in 2010.

The aggregate non-consolidated balance of Česká spořitelna mortgages comprising mortgages to individuals, business entities and municipalities was CZK 176.3 billion at year end, of which loans to business entities account for CZK 52.0 billion. In 2010, Česká spořitelna provided new mortgages totalling CZK 22.1 billion, of which CZK 7.5 billion was provided to business entities. The year-on-year trend was balanced with the ongoing high quality of the portfolio. Since 2001, Česká spořitelna has continuously maintained its position as the Czech Republic’s largest mortgage bank by total portfolio volume.

The main task in real estate project fi nancing was to sustain the quality of the residential and commercial real estate mortgage portfolio. This meant not only carefully selecting new projects for fi nancing, but also


ČS ATM network withdrawals

350

256.4

78.8

280.4

82.5

306.2

87.5

305.2

88.8

280

210

140

70

02006 2007 2008 2009 2010

Volume of ČS ATM network withdrawals in CZK billion Number of ČS ATM network withdrawals in millions

302.6

89.3

27

extending intensive support to clients in the administration of existing deals. The specialised Developer centre network providing comprehensive services to regional clients in eight cities throughout the Czech Republic (Praha, Plzeň, České Budějovice, Liberec, Pardubice, Brno, Olomouc, Ostrava) confi rmed that a concept based on local market knowledge and a personalised approach to clients was the right approach; the network as a whole greatly exceeded expectations.

The priority in real estate funds and investments has been to maintain the quality of assets placed in real estate investment funds. The Bank also held onto its share in real estate investment funds for the institutional investors CEE Property Development Portfolio and Czech & Slovak Property Fund. Both funds are concentrated in the Czech and Slovak markets and are closed-end funds. In 2010, two minor projects were sold. The funds’ investment cycle has been adjusted for the current situation on the real estate market. The Bank also invests in closed-end real estate investment funds – The Endurance Fund and Discovery Group Fund 3C L. P, which are in the second half of their investment cycle – and has partnered with the developer of the Offi ce Center Stodůlky; a major part of the project was successfully sold in 2010.

The Bank’s subsidiary REICO investiční společnost České spořitelny is the administrator of the Česká spořitelna real estate investment fund that allows small investors to invest in real estate. The Česká spořitelna real estate investment fund has maintained its position as the largest local open-end real estate investment fund operating on the Czech and Slovak real estate markets.

The Bank also supports the Real Estate Market Development Association – an organisation for real estate professionals – and continues to be a general partner of CEDEM – the most signifi cant central European real estate market conference, and the Best of Real Estate competition, which recognises and rewards the Czech Republic’s best development projects. The Bank is also a long-term

partner of the Czech Architecture year book. In 2010, another of the Bank’s activities was its fi nancial and professional involvement in the Building Forum focusing on current market issues.

Small Businesses and EntrepreneursFollowing the successful concept of the Private Account, Česká spořitelna launched the new Česká spořitelna Current Account for Commercial Clients intended for entrepreneurs and small businesses. The Current Account for Commercial Clients allows for an individualised, fl exible selection of services that suit the client’s needs and expectations. As a result, clients only pay for services they actually use. Special transaction packages offering benefi ts to active clients constitute an important element of the Current Account for Commercial Clients. The offer further includes insurance of key persons and business insurance. The Current Account for Commercial Clients was launched in September 2010 and was used by 52 thousand clients by the end of the year.

Česká spořitelna innovated the offering of unsecured corporate loans and overdrafts for small entrepreneurs and small enterprises and extended access to these services for small entrepreneurs. The above services are now provided in a fast and easy way; entrepreneurs can receive unsecured loans to fi nance their business activities at any Česká spořitelna branch within a couple of minutes. A new method of credit fi nancing was introduced for existing clients, i. e. a guaranteed and pre-approved credit limit facility provided to more than 60 thousand clients with a volume exceeding CZK 30 billion. Thanks to the above changes, the Bank has established a comprehensive loan portfolio for one million businesses across the Czech Republic.

Private entrepreneurs and freelance professionals are offered a number of special fi nancial products in addition to the Current Account for Commercial Clients, including special types of current accounts and professional consulting services.

Freelance professionals are served by expert consultants specialising in the corresponding client segment and adopting a personalised approach. Well trained specialists provide clients with comprehensive information concerning both private and corporate fi nance. Česká spořitelna continues to co-operate closely with professional chambers associated with freelance professional clients: the Czech Medical Chamber (general partner), the Czech Stomatology Chamber, the Czech Pharmacy Chamber, the Czech Bar Association, the Czech Chamber of Tax Advisors (partner), etc. Thanks to long-term partnerships, Česká spořitelna is able to respond to the individual fi nancial needs of freelance professional clients with specifi c product offerings.

Entrepreneurs and micro fi rms have a broad range of standard products and services available to them, including loans in the Mini Profi t series (the Mini Profi t overdraft account and Mini Profi t term loan) and 5 Plus series loans (the 5 Plus investment loan, 5 Plus operating loan, 5 Plus American mortgage), which are simple, fast and readily available. The 5 Plus Operating Loan ranked


Total non-consolidated mortgage loan portfolio (CZK billion)

200

160

120

80

40

02006 2007 2008 2009 2010

Total non-consolidated mortgage loan portfolio in CZK billion of which: mortgage loans to individuals households of which: mortgage loans to private entrepreneurs and small enterprises of which: mortgage loans to medium-sized and large enterprises

80,1

14,618,9

111,6

17,628,9

116,1

21,235,6

117,8

22,435,7

117,5

23,135,7

113,6

158,1

173,0 175,9 176,3

28


second in the commercial loans category in the 2010 Zlatá Koruna best fi nancial product contest.

In the client segment comprising commercial clientele with turnover of up to CZK 30 million, the total non-consolidated loan portfolio balance was CZK 56.7 billion as at 31 December 2010, representing a year-on-year increase of 2%. Of the above balance, mortgage loans, municipality loans and overdrafts accounted for CZK 23.1 billion, CZK 8.4 billion and CZK 2.6 billion, respectively.

Small and Medium-sized EnterprisesA sales network comprising 15 commercial centres is available to small and medium-sized enterprises (SMEs) with an annual turnover between CZK 30 million and CZK 1 billion in every region of the Czech Republic. Commercial centres provide these enterprises with the comprehensive services of the entire Česká spořitelna Financial Group.

At the 2010 year end, the total non-consolidated loan portfolio provided to SMEs (exclusive of mortgage loans) increased by 1% year-on-year to a total of CZK 58.2 billion.

Carrying on the tradition of offering advantageous investment loans, Česká spořitelna launched the TOP Podnik II programme, which provides investment loans with a 5 or 7 year maturity and an embedded option derivative, enabling an interest rate ceiling to be fi xed at a defi ned value. Loans totalling CZK 400 million were provided under the programme by the end of 2010.

Česká spořitelna is continuing its successful co-operation with the European Investment Bank (EIB), which is focused on supporting small and medium-sized enterprises and fi nancing the needs of the public and non-profi t sectors. Specifi c activities are the “global loan” and the involvement of Česká spořitelna in the associated European Commission Municipal Infrastructure Facility grant programme. By the end of 2010, Česká spořitelna allocated a total of EUR 700 million of the global loan. In all, the EIB confi rmed fi nancing for 486 projects for small and medium-sized enterprises and municipalities from the programme’s launch through the 2010 year end. In 2010, as a pilot programme, a global loan with shared risk for fi nancing the construction of power generation facilities from renewable sources was signed by Česká spořitelna and the EIB. Given the success and interest this type of fi nancing has garnered, preparations are underway for its continuation in the coming years.

Česká spořitelna funds energy projects through the TOP Energy programme, developed through successful co-operation with the International Finance Corporation (IFC). It also offers comprehensive advisory support for project preparation, subsidy application drafting and more. Česká spořitelna applies knowledge management principles when creating project know-how and concentrates this information in a single location accessible to all employees who need it. In 2010, a new guarantee facility totalling EUR 100 million was agreed with the IFC, where the IFC and Česká spořitelna share in project risk on a pari passu basis.

In 2010, Česká spořitelna continued its support of investment in the generation of power from renewable sources, fi nancing more than 100 projects for the construction of photovoltaic power plants, biogas stations, biomass burning projects, wind power plants and small hydro-electric power plants in an aggregate amount exceeding CZK 7.0 billion. Česká spořitelna is fi rst among Czech banks in this area.

Česká spořitelna is continuing to develop the product @ FAKTURA 24, and was the fi rst bank on the Czech market to offer invoice issuers the option of sending e-invoices via the SERVIS 24 online banking application. The billing process was connected to the payment process based on an automatically generated one-time payment order. At the 2010 year end, the Bank recorded more than 27 thousand users who had activated the e-invoice service. E-invoices can be received by ČEZ, E.ON and RWE clients and now also Kooperativa clients. Česká spořitelna is still the only bank that offers a solution based on the consolidation principle, and the only bank that additionally offers the possibility of exchanging documents, especially e-invoices, between enterprises. Electronic billing affords companies the benefi t of secure electronic invoice transmission and appreciable savings of time and expense.

As a result of the extended cross-border activities of the Bank’s corporate clients, Česká spořitelna deepened its co-operation with sister banks in other countries (the International Desk). Commercial clients can use a number of “remote” services, e. g. opening an account in a foreign country without being physically present in the given country or executing a cross-border loan contract within the Erste Bank Group. In addition to its sister banks, Česká spořitelna cooperates with savings institutions located in Germany (the German Desk) and can mediate banking products and services in Germany for its commercial clients.

Corporate ClienteleIn 2010, Česká spořitelna and its clients continued to face the after effects of the fi nancial crisis. Although the results of many corporate clients did not reach their pre-crisis level, most experienced obvious

Non-consolidated data, exclusive of mortgage loans (CZK billion)

75

60

45

30

15

02006 2007 2008 2009 2010

Portfolio of loans to entrepreneurs and small enterprises Portfolio of loans to SMEs Portfolio of loans to large enterprises

28.2

40.1

49.3

43.6

47.6

65.6

51.654.7

64.2

55.757.756.1 56.7 58.2

51.3

29


improvement in acquiring new projects and, consequently, in their fi nancial position. As a result, Česká spořitelna was able to recover or even increase fi nancing as compared to the pre-crisis level. Nevertheless, the non-consolidated loan portfolio (excluding mortgage loans) in the large corporate client segment recorded a 9% drop year-on-year to CZK 51.3 billion as at 31 December 2010.

In 2010, the syndicated and club loan market continued the recovery process that began in the second half of 2009. The market more frequently saw club loans or syndicated transactions on a “best effort” basis than transactions subscribed. Bank competition increased due to the desire for quality assets; this was, in turn, refl ected in the terms and conditions underlying each loan. In 2010, Česká spořitelna confi rmed its leading position in syndicated and club fi nancing among banks operating in the Czech Republic and took part in a majority of the large transactions fi nanced with syndicated or club loans. In a number of these transactions, Česká spořitelna served as the loan agent ensuring communication between the client and other banks – club or syndicate members. The volume of drawn syndicated and club loans did not refl ect a major increase year-on-year; the number of club transactions in the Česká spořitelna portfolio increased 10% and the number of transactions in which Česká spořitelna served as agent increased nearly 25% year-on-year.

The Bank strengthened its consulting activities and investment banking products and in co-operation with the parent bank, Erste Group Bank, acquired signifi cant mandates to arrange Czech currency and euro offerings and bonds issued by key corporate clients.

Services for the Public and Non-profi t SectorČeská spořitelna pays ongoing attention to business development in the public and non-profi t sectors. In 2010, the Bank recorded the best historical fi nancial result from banking transactions conducted in the given client segment, thus breaking the 2009 record. Česká spořitelna also confi rmed its leading position in state debt fi nancing as the largest broker and primary dealer on the government bond market. Česká spořitelna was, inter alia, lead manager of the primary offering of municipal bonds totalling CZK 2.0 billion for the chartered town of Liberec due in 2025.

The Bank continued to fi nance municipalities and towns in all regions and on all levels. Unfortunately, the Bank’s activities were badly affected after Act No. 179/2010 Coll., amending Act No. 137/2006 Coll. on public procurement, came into force on 15 September 2010. The legislative change disallowed joint stock companies with registered shares from participating in public procurement. Although the Česká spořitelna shareholder structure is absolutely transparent, the Bank was prevented from taking part in under- and above-limit public contracts announced on or after 15 September 2010. Following the initiative of certain MPs, the above-limit legislative restriction that had generally been perceived as objectionable and had affected a number of corporations was

amended by Act No. 423/2010 Coll., which came into force on 30 December 2010. As a result, Česká spořitelna can now tender for any public contracts announced after 30 December 2010.

In 2010, Česká spořitelna played a major role in fi nancing public projects co-funded by European funds, particularly in the area of infrastructure.

In the non-profi t sector, Česká spořitelna particularly focused on fi nancing housing co-operatives and apartment owner associations. The high demand for loans was further accelerated by state programmes supporting the modernisation, repair and improvement of apartment building energy effi ciency, e. g. the Green Savings (“Zelená úsporám”) and New Prefab Unit (“Nový panel”) programmes.

Česká spořitelna also provides services to other non-profi t sector clients, e. g. civic associations, foundations, endowment funds, semi-budgetary organisations and professional chambers.

Within the Česká spořitelna Financial Group, a Česká spořitelna subsidiary GRANTIKA ČS offers clients comprehensive subsidy and project advisory throughout the project implementation life cycle.

PPP Project Advisory Department specialists assist the government, regions and municipalities that prepare Public Private Partnership projects (PPP). As a founding member of the PPP Association, Česká spořitelna advocates for the increased use of public private partnerships in the Czech Republic. The team of PPP experts chiefl y prepares projects in healthcare, justice, public administration and transportation infrastructure.

Notwithstanding a slight increase in costs connected with risk in respect of assets allocated to credit transactions of municipalities, this client segment confi rmed its extraordinary stability and resistance to the current stage of the economic cycle. The volume of loans provided to large and small municipality clients totalled CZK 20.9 billion as at 31 December 2010, a 4% decrease year-on-year.

Financial Markets

Česká spořitelna is a key player on capital markets in the Czech Republic and the central and eastern European region. In investment banking, Česká spořitelna provides specialised and highly effective acquisition advisory services and advice for issuers preparing share and bond offerings, and will even handle the actual share or bond offering for the client. The Bank also offers and provides services and advice to small and institutional investors interested in investing in securities, open-end mutual funds or other capital market instruments in Czech or foreign currencies. Moreover, clients have access to information from Česká spořitelna’s EU Offi ce and other reports and analyses prepared by the Bank’s chief economist department.

30


Sale of Financial Markets Products to Corporate ClientsThe year 2010 was not an easy one due to fi scal problems encountered by the European Union, a major export territory for Czech industry. The situation had a signifi cant impact on the export and import opportunities of Česká spořitelna corporate clients and on the structure of fi nancial market products sold. The drop in client orders and uncertainty regarding the expected increase in the volume of orders from EU countries signifi cantly affected clients’ activities in medium- and long-term fi nancial risk hedging, particularly currency and commodity hedging products. On the other hand, historically low interest rates combined with increasing company debt led to a signifi cant increase in the demand for interest rate hedge instruments.

In 2010, there was an increased demand for electricity hedging, which led to several deals contracted by clients in order to optimise management of their energy costs. The volatile environment places stringent demands on hedging policy at many corporations, and Česká spořitelna, due to its high-quality analytical knowledge base, can provide not only reliable execution, but also the documentation and related advice necessary for responsible decision making when it comes to optimal hedging strategy and timing. Česká spořitelna’s long-term strategy, focussed on offering a wide range of well-priced, customised products, has proven itself over time and, despite diffi cult economic conditions, has generated a slight increase in transaction volume and assured customer satisfaction with the provided services.

Initial Securities OfferingsČeská spořitelna again defended its solid position on the market for initial bond offerings, participating in the prevailing majority of all signifi cant transactions in the Czech Republic, whether executed by Česká spořitelna directly or via transactions arranged by Erste Group Bank. Major achievements in 2010 included a head co-manager position responsible for international offerings of Czech Republic bonds of EUR 2.0 billion as well as a head co-manager position for three benchmark offerings of ČEZ Eurobonds totalling EUR 1.5 billion. Česká spořitelna also arranged domestic municipal offerings totalling CZK 2.0 billion for the statutory town of Liberec.

Initial public offering (IPO) markets in Europe and the Czech Republic have been recovering from the global fi nancial crisis; the total number of transactions is approaching its pre-crisis level. Česká spořitelna has confi rmed its leading IPO market position, having participated in the only transaction executed in the Czech Republic in 2010, i. e. the initial public offering of Fortuna Entertainment Group N. V. betting agency totalling CZK 1.7 billion.

Debt Securities TradingAfter a two year crisis, the bond market has been returning to normal; products in demand prior to 2008, e. g. structured products linked to share or commodity indexes, have begun to reappear. The volume of CZK denominated Eurobond transactions increased, as did the interest of fi nancial institutions in Czech government bonds. Bond trading trends in Q1 2010 were infl uenced by high market volatility,

particularly due to strong expectations for world economic recovery and related potential interest rate increases. However, after a series of bad fi nancial indicators, the fi nancial market situation turned and the Czech National Bank, under the threat of further economic decline, reduced the repo rate by 25 basis points. The price of all fi xed interest rate bonds increased signifi cantly in response to this unexpected development and, as an example, the yield of the ten year Czech government bond fell by approximately 1 percentage point over several months. Naturally, the drop in rates helped fi nancial institutions that had made investments in fi xed interest rate securities, e. g. pension funds, insurance companies and investment funds, to profi t.

Share Instrument TradingThe falling stock market transaction volumes observed in 2009 continued, to a lesser extent, in 2010. Share transaction volumes on the Prague Stock Exchange dropped by 16% year-on-year to CZK 390.0 billion. The Prague Stock Exchange remained off the radar of investors who were chiefl y concentrating on developed markets. Their emerging markets activities were primarily directed toward Turkey, Russia, Brazil or India. The PX index, the main index of the Prague Stock Exchange, recorded an annual yield of 9.62% and ended up at 1,224.8 points, thanks only to the generally optimistic tendencies on the capital markets at the 2010 year end. During the year, the index yield more or less remained around zero. Certifi cate and other derivative transaction volumes continue to fall below expectations.

Česká spořitelna has further confi rmed its dominant position as a key player on the regional capital market. The Bank’s exceptional trading model combining deep analytical know-how, transaction structuring and timing, distribution ability to institutional and retail customers and services pertaining to the period just after a product’s market introduction and during secondary market trading is highly appreciated by the Bank’s customers.

Notwithstanding the drop in total transaction volumes, Česká spořitelna was once again a key fi gure on the capital markets in 2010 with the largest share of total Prague Stock Exchange trading volume. The Bank executed transactions totalling CZK 299.4 billion in 2010.

Volume of Prague Stock Exchange transactions in 2010 in CZK billion

Bonds215.0

72%

28%Shares and participation certifi cates84.4

31


Financial InstitutionsIn 2010, Česká spořitelna strengthened its leading position as a provider of value added services to fi nancial institutions. Česká spořitelna understands clearing and cash management as the anchor for the more specialised products that banks, insurance companies, investment fi rms, pension funds and other fi nancial institutions require. The number of accounts maintained for clients – banks in 2010 grew by more than 10%. Compared to the 2009 year end, the Bank reported another signifi cant increase in the number of clients – non-bank fi nancial institutions. This is connected with growth in the volume of monies managed by and placed with Česká spořitelna.

In 2010, Česká spořitelna continued improving conditions with foreign banks in standard currencies, increasing the scope of less common currencies and strengthening custody services in order to afford a wider range of investment opportunities for clients. The volume of funds in the Bank’s custody in 2010 fell slightly, but grew again in the second half of the year to fi nally report a 12% year-on-year increase.

Asset Management for Institutional ClientsČeská spořitelna manages more than CZK 74.0 billion in assets for institutional investors, including fi nancial institutions (such as pension funds, life and non-life insurers and health insurers), the foundation sector, government organisations, municipalities and large enterprises. In terms of assets managed for non-group clients, Česká spořitelna is the clear market leader with a market share of about 50% according to the Capital Market Association. Assets in custody increased in volume by 15% in 2010.

In 2010, the Bank continued to offer innovations to institutional investors in the form of further improvement to the system for selecting medium-term investment strategies and new reporting system functions. In 2010, the Bank was also a mutual fund investment advisor for some mutual funds managed by fellow subsidiary, Erste Sparinvest in Austria. These funds, with a volume of approximately CZK 5 billion, are intended for foreign investments in Czech crowns and thus cater to the requirements of local Czech investors.

DepositaryČeská spořitelna has a strong position in the provision of depositary services to investment companies and their mutual funds, investment funds and pension funds. In the course of the year, 17 new funds were added and 1 fund lost its licence to create a mutual fund. At the end of 2010, the Bank was providing these services to a total of 56 funds, primarily the open-end mutual funds of Investiční společnost České spořitelny. These managed assets reached a volume of CZK 103.6 billion with 17% year-on-year growth.

Distribution Channels

Branch NetworkWith its 667 branches, Česká spořitelna is one of the Czech Republic’s largest banking networks, offering good regional coverage and easy accessibility for all its clients. The branch network continues to

be the basic executive component of the Bank’s multi-channel sales model.

The branch network provides a broad and comprehensive menu of Česká spořitelna Financial Group services and products to private clients, small and medium-sized enterprises and individual entrepreneurs. The Bank’s specialised advisory services respond to the needs of municipalities and offers solutions for both the corporate and private fi nancial needs of independent professional clients. Above-standard services are offered to the most sophisticated clients under the new Česká spořitelna Premier brand.

To optimise regional branch network coverage, 10 new branches were opened in 2010 (of which 3 were Česká spořitelna Premier branches) and another 12 were moved to locations that are more attractive to clients given their contemporary lifestyle, i. e. primarily to shopping malls or new residential districts. Around 80 branches throughout the Czech Republic, in large and small towns alike, have been modernised or extensively renovated. All new, relocated or modernised branches have been fi tted out with modern design elements.

A total of 14.6 million clients were serviced in 216 branches equipped with the Q-matic call system in 2010. Take-a-number ticket dispensers were modernised at 181 of the most high profi le branches with installed call systems for organising client service to now include a touch screen enabling priority service for the handicapped or those with children. The machines also give estimated wait times for individual services and their buttons now come in four language options.

Branch operating hours refl ected client needs at a given location. Operating hours have increased overall by some 145 hours weekly year-on-year to a total of 21,144 hours per week. During the period of Advent leading up to Christmas, Česká spořitelna extended its operating hours on business days and weekends by another 214 hours weekly.

Weekend hours have been introduced at 25 branches, mainly supermarket locations. The number of branches open on weekends increased by 6 in 2010 and will continue to rise.

The Bank equipped 26 of the largest branches with induction loop hearing systems that enable clients who use hearing aids to communicate more easily by directing speech into earphones and suppressing ambient noise.

Česká spořitelna has installed 34 transaction terminals, new self-service equipment for quick execution of payment orders and postal money order payments, in the self-service zones of its branches. The Bank now has a total of 36 transaction terminals, and their number will rise by the dozens in 2011. The popularity of these terminals is growing; 20% of all single payment orders executed at the Bank’s branches equipped with transaction terminals were placed using terminals just in December 2010. The equipment allows for fast and safe payment processing thanks to client identifi cation via

32


payment card. More than 300 ATMs equipped with bar code readers also allow for easier payment of postal money orders.

Česká spořitelna is further able to provide its clients with information concerning business or contractual terms & conditions on USB media; the relevant Bank employee will save all documents supporting the products purchased by a client on a USB device.

Direct BankingČeská spořitelna is continuing its rapid development of direct banking; the number of clients using online services grew by 5% to 1.35 million. The greatest interest has been shown in internet banking, which is already being used by more than a million clients. Direct banking has a dominant position in transaction orders; it is used for 85% of transactions, with the remaining 15% comprising traditional in-branch transactions. In absolute numbers, this represents nearly 80 million online fi nancial operations. The total number of SERVIS 24 and BUSINESS 24 internet banking users reached the 1.3 million mark in October 2010.

Client interest in telephone services continues: the Client Centre in Prostějov handled nearly 5 million client calls in 2010. Nearly 40% of clients obtained information or conducted transactions using the automatic call system and the remaining clients used the telephone banker service. The Česká spořitelna Client Centre was recognised in the Best in Customer Service category in the 2010 EMEA contact centre international contest in London organised by the Global Association ContactCenterWorld.com. Radek Bedřich, director of the Client Centre, and Jaroslav Flek, telephone banker for Česká spořitelna commercial clients, were recognised in the Best Leader and the Best Customer Service Agent categories, respectively. The Česká spořitelna Client Centre has proved to be the Czech Republic’s top contact centre and one that is fully on par with leading global contact centres.

Česká spořitelna introduced a new service, PLATBA 24 (“Payment 24”), that allows for automatic payments via bank transfers for online purchases using SERVIS 24 internet banking. PLATBA 24 is an easy way to pay for goods in online purchases. Česká spořitelna is planning to offer a new service with fi rst-rate online shopping sites providing above-standard customer services.

The two new services introduced in 2009, e-invoice and SMS information, continued to grow. Some 27 thousand clients activated electricity and gas e-bills that allow for easy payment via internet banking. Firms collaborating on e-invoicing include ČEZ, E.ON and RWE. SMS information, i. e. instant messaging about account changes such as when clients make or receive large payments, has become the most popular new service. Clients received approximately 123 million such messages in 2010.

The priorities of internet banking include online sales of products and services. In 2010, the Bank sold 487 thousand products or services. Clients were most interested in personal loans, taking out more than CZK 1.4 billion without ever visiting a branch.

Direct banking services are also provided to companies, towns, municipalities and other legal entities. At the end of 2010, MultiCash was used by more than 3 thousand clients who performed nearly 12.4 million domestic payments and 143 thousand foreign payments at a total volume of nearly CZK 900 billion. BUSINESS 24 Internetbanking is designed especially for small and medium-sized enterprises; in 2010, over 8.6 million domestic payments and 33 thousand foreign payments totalling CZK 560 billion were performed using the application. In 2010, BUSINESS 24 recorded a 10% increase in the number of clients year-on-year.

Česká spořitelna introduced a number of innovations and new functions to direct banking services in 2010. Clients can now use internet banking to send in receivables for pledge purposes in purely electronic form to allow for faster and more effective processing of the pledge on the part of both the client and the Bank. The BUSINESS 24 service offers a new option of using the same data format as the Multicash application, meaning better fl exibility for users of various direct banking systems. The BUSINESS 24 Databanking service development continued in 2010, including co-operation with fi nancial system producers. The Databanking interface has been successfully implemented in the following accounting or fi nance systems: Pohoda and Pamica, Money S3, Gordic and Ginis. New clients used the BUSINESS 24 Databanking interface to automatically download their transaction history and account statements. As a result, more than 200 thousand operations were performed using the interface.

In July 2010, Česká spořitelna launched a brand new look and content for its website, csas.cz. The Bank’s clear and modern presentation was appreciated by internet users and the professional public and ranked second in the prestigious WEB TOP 100 contest in the fi nance segment. In addition, Česká spořitelna has an active presence in social networks; the Bank answers its fans’ questions on Facebook, where it has the fastest growing profi le among domestic banks. Current advertising videos and useful instruction manuals are published on YouTube. The fi rst video instruction manual was viewed by more than 130 thousand users.

1,500

1,200

900

600

300

02006 2007 2008 2009 2010

1,0331,142

1,199

1,252

Note: Clients using multiple SERVIS 24 channels are only counted once.

1,319

Number of active SERVIS 24 and BUSINESS 24 clients in thousands

33


External Sales and Co-operationExternal sales play an important part in the fulfi lment of the Bank’s business goals. The external network accounted for 26%, 41% and 32% of total mortgage loans, construction saving loans and deposits, respectively.

In external sales, the Bank emphasises the quality and profi tability of sales through selected external partners. Co-operation with the Bank’s own exclusive Česká spořitelna network managed by the Bank’s subsidiary, Partner České spořitelny, with the Bank’s strategic partner, Kooperativa insurance company, and with selected prominent fi nancial advisory companies on the Czech market, remains a Bank priority.

Non-commercial Activities

PeopleThe Bank’s employees are its most important resource in determining the Bank’s healthy direction and ensuring its success in this highly competitive environment. Employees are in direct contact with clients and therefore have the greatest impact on client satisfaction. Česká spořitelna considers employees that are qualifi ed, high-quality, satisfi ed, professional and always motivated to perform to the best of their abilities as its competitive advantage. It thus offers its staff fair employment conditions, a friendly workplace and educational opportunities.

The foundation of Česká spořitelna employee education and development is a comprehensive education system comprising in-house and outsourced courses, workshops, seminars and a wide range of e-courses. Education focuses on employee development in compliance with the Česká spořitelna competency model, talent management, developing management and communication skills and increasing education effectiveness.

The catalogue of in-house courses offered more than 90 course topics and had 40 thousand participants. In-house training includes mentoring, with more experienced staff helping their new colleagues adapt socially and professionally. Owing to systematic work with new hires, their turnover within the fi rst year of employment has dropped.

Once again this year, Česká spořitelna provided its employees with language training in group and private lessons, as well as intensive resident language courses both at home and abroad.

The Bank continued the branch network effectiveness and effi ciency improvement project in 2010 and focused on upgrading management practices leading to the development of client consultants’ communication skills. Managers focused on providing effective feedback and fi eld coaching. Coaching at all management levels of the branch network has become a practical tool playing a signifi cant role in the long-term development of branch employees. In order to ensure a unifi ed client service

standard, a new sales process was implemented with the aim of ascertaining client needs and fi nding suitable solutions using a visualisation of the most common areas of need.

The Česká spořitelna banking and non-banking activities restructuring process continued in 2010. Management system optimisation and process improvement are necessary for further improvement of the quality of the service portfolio offered to clients of the Bank and its subsidiaries. Progressive centralisation of selected branch activities also contributed to better process effectiveness. The structure of the branch network changed without any negative impact on client service. Other organisational changes, particularly human resources management transformation and unifi ed IT management concept implementation (ONE IT), were required in order to enhance performance and improve processes.

There was no major change in the number of the Bank’s employees in 2010. The average number of employees was 10,744 as at 31 December 2010, refl ecting a 1% drop year-on-year. As a result of a lower number of new hires and increased number of departures, employee turnover remained stable at 15%. The general employee mobility rate (total new and terminated employments to the average recorded number of employees) showed a slight increase, rising to 28% compared to 2009. Of the total number of employees, 36% have been with the company for more than 15 years and another 20% for more than 10 years. The employee structure shifted in favour of university graduates in 2010; their number increased by one fi fth compared to 2009, i. e. to 29% of the total number of employees. The average employee age increased slightly to 39.3.

Basic pay increased by 1% as of 1 April 2010. The aggregate average pay per Česká spořitelna employee net of other personnel expenses totalled CZK 46,696 and CZK 44,451 in 2010 and 2009, respectively, which means a 5% increase year-on-year. The proportion of the variable component of employee remuneration increased. The fi nal percentage is affected by employee turnover.

Number of employes

12,500

10,000

7,500

5,000

2,500

02006 2007 2008 2009 2010

10,809 10,09710,897

10,09810,911

10,14510,843

10,219

Number of ČS Financial Group employees* Number of Česká spořitelna employees*

* Average adjusted fi gure including employees of other Erste Group companies (“expats”).

10,74410,163

34


Service QualityOne of Česká spořitelna’s key service quality goals in 2010 was to increase the number of loyal clients, i. e. those who are satisfi ed with the Bank’s services and are willing to buy another product and recommend the Bank to their friends. The Bank engages in regular monitoring of the number of loyal clients and, based on the results, takes the appropriate measures. Every “loyalty”-related activity involved a cross-section of the Bank’s strategic departments under the leadership of the quality control department, e. g. marketing experts, sales management, human resources, communication managers and professionals from other departments whose activities have a fundamental impact on clients. Owing to all of the above activities, the number of loyal clients increased by 3% compared to 2009. The Bank believes that this excellent trend will continue in the future as customer satisfaction and loyalty come fi rst.

How clients perceive Česká spořitelna services was ascertained, just as in previous years, by a measurement of client satisfaction expressed in a CSI (Customer Satisfaction Index). Overall, Česká spořitelna client satisfaction remained stable in 2010, irrespective of all the activities of other market participants. The Bank focused its efforts on improving its pro-active approach, process effectiveness and reliability and new systems implementation, particularly in retail banking and human resources management.

For the eleventh consecutive year, a team of ombudsmen was available to Česká spořitelna clients through various communication channels. Clients can call the “blue line” at 956 717 718 or e-mail [email protected], come in for a face-to-face conversation or send letters. Team members resolve client issues in Czech, English and German every business day from 8:30 to 17:00.

Client submissions can be an opinion or request for a change communicated to the Bank by the submitter in the form of a complaint, claim, suggestion, question or praise. A single submission may comprise a combination of forms and topics. It is in the Bank’s interest to record every one of these submissions, even those that are resolved immediately, in order to have a clear idea of specifi c client wishes. It is also in the Bank’s interest to resolve each submission in the best and fastest way, to record the submission

and learn from the client’s feedback. The Bank received and resolved some 5 thousand customer submissions in 2010. These included various topics from suggestions for improvement and complaints to questions and praise. The Bank made a number of service improvements and system changes in response to client submissions. Specifi c system changes implemented in 2010 based on client submissions include the correct billing of fees on account in the case of programme changes or added SERVIS 24 internet application help for better transparency and user friendliness.

Internal service quality remains key to the Bank’s ability to provide professional high-quality services to its external clients. The quality of the internal services that departments provide to one another is measured semi-annually. The goal of the 2010 satisfaction measurement, i. e. increased satisfaction, was successfully met. Česká spořitelna continued to improve the quality of its internal services using the SLI (Service Level Index); the index average for 2010 increased year-on-year from a value of 80.4 to 81.0. The Bank also monitors the KCI (Key Client Index) expressing the satisfaction level of selected key internal service customers with service-providing departments. The KCI average value for 2010 increased year-on-year from a value of 81.6 to 82.4.

Economic and Strategic AnalysisThe Economic and Strategic Analysis Team’s responsibilities are divided into three areas. The fi rst is strategic planning and banking sector analysis. These analyses and associated documentation become an integral part of the drafting and review of the Česká spořitelna Financial Group plan. The area of equities analyses was expanded to include three sectors rather than one: real estate, media and oil and gas. In all, some fi fteen companies are subject to analysis. The third area comprises macroeconomic analyses resulting in prognoses of foreign exchange and interest rate developments. The equities and macro groups also offer investment strategy advice to clients in addition to analyses and prognoses.

Analyses are, inter alia, published on the Bank’s website in the analytical reports section and online data service(www.csas.cz/analyza). The set of regular analytical reports issued with daily to quarterly frequency in Czech and English now comprises 20 different products. Analysts and strategists are available to a selected group of Česká spořitelna Financial Group clients via in-person or telephone consultation.

EU Offi ce of Česká spořitelnaIn 2010, the Česká spořitelna EU Offi ce, an analytical and information centre, celebrated 7 years of successful existence devoted to monitoring and analysing relevant information from the European Union.

In compliance with client demand, the ČS EU Offi ce focussed on two key aspects of the European integration process. The fi rst area of focus was the fading fi nancial crisis that turned into a fi scal crisis in Europe. The situation of Greece, unable to refi nance its debts on

Client satisfaction (CSI index in points)

100

80

60

40

20

0Autumn

2008Spring2009

Autumn2009

Spring2010

Autumn2010

73.8 75.4 76.5 76.3 76.8

35


the bond market, culminated in spring 2010 and continued into the autumn, when Ireland asked for a similar protection package. Clients sought answers to questions concerning the future of the affected countries within the European Monetary Union, worries about the fate of the Euro area as a whole, prospects of adopting the euro as the offi cial currency in the Czech Republic and in other countries and related consequences.

The second most frequently discussed area was the EU future cohesion policy for the 2014–2020 programme period, which is currently being drafted. Clients were most interested in the expected structure of fi nancial instruments of the future cohesion policy, estimated volumes of subsidies to be allocated to the Czech Republic and expected preferential areas for subsidy allocations.

The co-operation of the ČS EU Offi ce with a number of key domestic and EU public administration bodies successfully continued. Intensive co-operation with regional government bodies in the creation of their strategic priorities for the forthcoming 2014–2020 programme period is also worth mentioning. The EU Offi ce representative continued to actively work on the EuroTeam platform, an independent expert task force affi liated with the European Commission. Within Erste Group Bank, EU Offi ce experts were the key drivers of co-operation with other banks taking place particularly on the EU Affairs Working Group basis.

Project ManagementČeská spořitelna successfully implements its strategic goals through project management. Individual projects have as their primary goals to enhance services and increase client satisfaction, create greater process effi ciency and develop support activities within Erste Group Bank.

Saving and Investment Programme II, a Bank project focussing on immediate client benefi ts, introduced a new tool supporting personal advisors at branches when conducting business interviews with clients as part of comprehensive advisory services. The outcome of an interview is a proposal featuring methods of meeting the client’s goals including an offer of suitable products. Within the Legacy Enhancement project, new products were launched in October 2010 under the Česká spořitelna Premier brand: the Premier Saving Account and Premier Personal Account. Clients can run the above products through SERVIS 24 or may use above-standard services at Česká spořitelna Premier branches. In 2010, the project co-ordinated the implementation of a Mobile Box Branch in order to ensure non-stop operation of branches during their reconstruction and refurbishment. The fi rst mobile box branch was opened in Brandýs nad Labem on 24 January 2011.

In the second half of 2010, the comprehensive offer of products for private entrepreneurs and small enterprises was subject to major innovation. By introducing the Micros project, the product portfolio was expanded to include unsecured loans in the form of overdrafts and term deposits. The new loans are

available to current clients; within the new application, current clients are offered credit facilities in the form of guaranteed and pre-approved credit limits. The new confi gurable account introduced for the same client segment also met with success. The Consumer Lending Factory project came with several changes in retail banking loan products: new functions of the Platinum Card, instalment programs attached to the Cool Card, modifi cation of insurance attached to credit cards and the Co-branded Card for Penzijní fond ČS. Other changes included overdraft for ČS Premier clients, legislative changes imposed by the EU Directive on consumer loans or implementation of a non-bank client information register permit for Stavební spořitelna ČS. The CIC 2011 project implemented an e-commerce related requirement in 2010; this function will allow customers conducting electronic transactions to execute payments for goods in their shopping carts through SERVIS 24 Internet banking. Customers have an option to go to the SERVIS 24 website with pre-defi ned payment details.

A major project aimed at increasing process effi ciency that has, to a large extent, changed the Bank’s approach to client data administration is the Customer Data Hub (CDH). As a result of CDH implementation, client data are now collected, administered and maintained in a single system while other applications are provided with current data from that system. Unifi ed client data administration will improve the effi ciency of advisors’ work with clients and help advisors concentrate their energies on the business side of the interview. The Collections 2011 project introduced changes in receivable collection. The scope of loan products was extended to include overdrafts on Giro accounts and unsecured loans in the private entrepreneurs and small enterprises segment. In addition, collection enforcement in respect of receivables from Stavební spořitelna ČS loans was initiated. The implementation of automatic calls was among the successful improvements to operating processes; telephone numbers are dialled automatically by the system and only calls with a contacted client are transferred to operators.

Further development of co-operation with external sales partners was aimed at better and more effective risk management pertaining to the loan portfolio processed by the external sales network. Within the Partner 24 Platform Development II project, the current Partner 24 support tool was expanded to include the monitoring of partner sales representatives and support of the performance management programme in the subsidiary Partner ČS. The Credit Monitoring Tool 2 project improved loan process control in the corporate segment. A tool for monitoring client fulfi lment of contractual conditions was linked to the Bank’s other systems and automated selected types of controls. In addition, owing to the project the Bank has a comprehensive overview of each client throughout the course of their “loan relationship”, which has a positive impact on the approval process and on the Bank’s response time in the event of irregularities. In 2010, the Risk Development Project implemented basic functions that Česká spořitelna needs in order to manage client limits and application rating changes, particularly the drawing of

36


information concerning natural persons – entrepreneurs from the Czech Credit Bureau credit register in order to allow for better credit risk assessment.

No less importantly, the Bank is working on projects of benefi t to the entire Erste Group Bank. Within the long-term project for Data Centre Relocation to Vienna, the Symbols and DON applications were successfully transferred with a minimum of negative impact to the Bank’s operations in 2010. Simultaneously, the placement of CRM and DWH systems on Vienna servers was optimised. The Application Fraud System project launched the live operation of a central application focusing on protection against fraudulent behaviour in June 2010. The aim of the project was to unify credit fraud investigation activities under a single system, which allowed for consolidation of the given activities, fl exible analysis of potential fraud and thus a quicker response to changes in fraudulent behaviour on the credit market for individuals. The application is centralised in Vienna; as a result, the system’s administration on common IT architecture for the entire Erste Group is more effective. The Corona project co-participated in the centralisation of the Corona application used for accounting reconciliations in 2010. The aim of centralisation was to cut operating costs, reduce the number of and dependency on local suppliers and use current licences in a more effective manner. On 14 June 2010, Erste Group Shared Services (EGSS) was opened in Hodonín; the new company focuses on the processing of foreign payments and foreign cheques of Erste Group Bank members. The Shared Payment Services project involved the establishment of a payment sharing centre, which means a signifi cant contribution to the savings programme thanks to its synergistic effects within Erste Group Bank.

Security PolicyČeská spořitelna attaches a great deal of importance to its security policy. The Bank operates an independent security department charged with overseeing the investigation of operational risks and maintaining IT and physical security. Bank operations are chiefl y focussed on preventing all adverse events and inappropriate conduct that jeopardises the security of clients, employees or the assets of ČS Financial Group companies.

The Česká spořitelna security policy oversees the mitigation of operational risks. Any criminal activity of Bank clients or employees constitutes a priority reference point when evaluating and administering warnings in software applications, assessing methodological procedures and grading new Bank development projects.

Heightened attention was paid in 2010 to improving security monitoring. A series of effective technical and organisational measures was adopted with the aim of mitigating risks in connection with the latest security threats and risks that primarily arise in connection with the growing use of alternative distribution channels.

In 2010, the fi nancial crisis did not give rise to a surge in violent crime. The number of robberies overall has remained static or even dropped slightly in the medium term, though the reverse situation has developed in the banking sector. In co-operation with criminal and prosecuting authorities, the Bank has helped to shed light on cases of robbery and other crimes in general, and thus preventively protect its own assets and those of its clients. The Bank has been successful here primarily owing to its years of extensive investment in security technologies and its efforts to work closely with the police. Generally, the results achieved in the area of physical security rate very highly within the Czech banking sector.

Internal AuditInternal Audit is an independent and objective assurance and consulting activity designed to add value and improve Bank processes. Internal Audit helps the Bank achieve its goals by affording a systematic approach to evaluating and improving the effectiveness of the risk management system, management and control processes and Bank management and administration. Internal Audit is responsible for assurance and advisory services and identifi cation of areas for process improvements and methods for company goals achievement. Internal Audit monitors processes and activities in every department of the Bank and participates in the evaluation of the level of functionality and effectiveness of the management and control systems. Internal Audit verifi es that measures arising out of performed audits and reviews are carried out and irregularities corrected. In 2010, Internal Audit provided the Bank’s management, Board of Directors, Supervisory Board and Audit Committee with reports, information and assurances concerning the risks that the Bank faces.

37

Strategic Plans for the Future

Strategic ObjectivesČeská spořitelna’s strategy proved successful despite the diffi cult cir-cumstances of 2010, when the Czech economy faced persisting ad-verse effects of the worldwide economic downturn of 2008–2009.

The systematic fulfi lment of its strategic objectives allowed Česká spořitelna to minimise the negative impact of external conditions on its business and maintain the trust of its clients, the general public and the professional community. This was refl ected in the Bank’s numerous fi rst place showings in competitions for banks and fi nancial institutions.

Česká spořitelna thus enters 2011 with a good starting position and proven business model ensuring continued stable, long-term, sus-tainable growth in the years ahead.

For the above reasons, Česká spořitelna will continue to follow these strategic objectives:

From a fi nance perspective, continue to systematically manage business and other risks and further reduce operating expenses while making every effort to optimise profi t growth; For clients, continue to improve the quality and range of our services and foster continued growth in customer loyalty; As regards processes, focus on standardization and greater effi ciency, including completion of the ongoing information technology transformation programme; and For employees, work to maintain our status as an “Employer of fi rst choice” with a focus on targeted staff and manage-ment development to better utilise their potential for profes-sional and personal growth.

Macroeconomic ForecastThe effects of government savings measures designed to revitalise the public fi nances will have a great impact in 2011. This, together with the anticipated enactment of further reforms affecting social security, pension schemes, healthcare, education and public con-tracts, will have a fundamental impact on the fi nancial standing of individuals and businesses in the Czech Republic.

Česká spořitelna’s 2011 budget is based on the following macr-oeconomic projections:

Continued sluggish Czech economic growth estimated as roughly 2% GDP growth year-on-year;

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Accelerated infl ation growth to 3% year-on-year; A stabilized unemployment rate with an increase expected early in the year; Interest rate stagnation; and A slight gain of the Czech crown against major currencies.

Outline of Business Policy and the Projected Economic and Financial Position in 2011 and Outlook for Later YearsIn 2011, the Bank’s business divisions will have the following business priorities:

Retail BankingThe retail banking strategy refl ects projected medium-term trends on the retail market and covers three key areas:

A segmented offering of products and services to foster ongoing growth in customer satisfaction; The differentiated approach to customers included in the new customer care concept; The broad distribution of products and services with ever greater use of alternative distribution channels.

In the high-net-worth client segment, the Bank will continue to develop the ČS Premier concept following its successful launch in 2010. The opening of new customer locations will support the Bank’s efforts in this area.

Further simplifi cation and acceleration of processes will support all retail banking activities.

Corporate BankingThe strategic aim in corporate banking is to continue developing services for SMEs and large corporate customers based on compre-hensive servicing of these clients, familiarity with their needs and the offering of tailored solutions. In the SME segment, the Bank will continue developing a comprehensive client service strategy and differentiated approach based on knowledge of each sub-seg-ment’s needs. The Bank will not only sell traditional products, but will also offer other fi nancial and non-fi nancial services while em-phasising service quality and client service process improvements. The Bank will continue to develop its pre-packaged solutions for corporate clients, helping them fi nance, among other things, en-ergy, innovation and other growth schemes. In the corporate bank-

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38

ing segment, the Bank will continue to broaden its menu of cash management and comprehensive fi nancial solutions for clients on Erste Group Bank markets. The Bank will be heavily involved in advisory services, mergers and acquisitions and long-term com-modity, foreign exchange and interest rate risk hedging.

In real estate, the Bank, together with its sister company Erste Group Immorent ČR, will expand its offering of products and serv-ices for real estate developers and investors commensurate with current market conditions, including in situ support for regional clients via the Developer Centre Network. We project a renewal of interest in real estate funds for the general public and for quali-fi ed and institutional investors. In providing services to the public and non-profi t sector, the Bank’s aim is to increase cooperation with strategic clients. Česká spořitelna will take an active approach to funding projects, providing advisory and offering products and services with higher added value.

Financial MarketsThe goal of fi nancial markets trading is to maintain a leading position in all key fi nancial market areas. Česká spořitelna will continue to focus on developing services for corporations and fi -nancial institutions and will enhance its position as a signifi cant re-gional fi nancing partner through bond and equity placements. The Bank will also continue to be guided by its philosophy of offering a broad range of fi nancial market products with an emphasis on comprehensive client solutions and automated product selection.

Interest rate risk hedging products and commodity and electricity price hedging are developing areas alongside traditional foreign exchange. The Bank will continue to focus investment product sales to retail clients through regular investment in the form of pension products, strengthen its market share in open-end mutual funds and increase the volume of investment products in custody while emphasising the quality and comprehensibility of presented solutions and the benefi ts for the client while fully adhering to all regulatory requirements.

In 2010, Česká spořitelna expanded its service offering in the area of premium (top affl uent) banking, introducing a new exclusive service – ČS Premier. This service is designed for selected clients with exacting banking service demands and requirements. Erste Private Banking clients are automatically enrolled in this service, and are thus given the opportunity to take advantage of exceptional service, even for their everyday banking needs.

Projected Economic and Financial PositionNeither the banking industry, in general, nor Česká spořitelna, in particular, will have an easy time in 2011, primarily for these rea-sons:

The implementation of adopted government measures to revitalise public fi nances will have a negative economic impact on individuals and businesses, meaning a decrease both in surplus fi nancial resources and demand for banking services;

–

The enactment of more reforms could elicit a number of protest actions that negatively impact all areas of the Czech economy; Stagnating interest rates, limited resources and a lesser demand for loans and the limited opportunities to allocate fi nancial resources into assets with an acceptable risk level will adversely affect the development of net interest income, a key component of operating income; and Efforts to minimise operating expenses will be infl uenced by the need to complete the information technology transfor-mation and ensure the basis for the further development of client services.

The planned development of key Česká spořitelna profi t and loss account items and fi nancial indicators must be assessed in light of the high degree of uncertainty and the marked volatility of exter-nal conditions. Net profi t growth in 2011 could reach the double digits and is likely to be tied, among other factors, to a drop in impairment costs. Return on equity (ROE) should remain around its current levels and the cost / income ratio is likely to hold steady at just above 40%. Low interest rates and limited resources and op-portunities for quality, low-risk investment will result in only sin-gle-digit net interest income growth. Fee and commission income will map this same slow growth curve. We can expect stagnation or a slight drop year-on-year in the net trading result. This situation creates additional pressure to keep operating expenses down; these should remain at the same level year-on-year. However, given their reduction in previous years, this will be an extremely demanding task calling for further effi ciencies not only in other administra-tive expenses but also in personnel expenses, including headcount optimisation.

In 2011, consolidated balance sheet profi t / loss should remain at roughly its 2010 level. Only single-digit growth is projected in client loans and client deposits, though loans should increase at a faster pace than deposits. This will cause a slight uptick in the client loan / deposit ratio, which should hover at around 70%.

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Report on Performance and Business Activities | Strategic Plans for the Future | Risk Management

39

Risk Management

Risk management processes are a key element of the Bank’s inter-nal management and control system. As a result of its business and other activities, Česká spořitelna is inevitably exposed to a variety of credit, market, operational and liquidity risks. The Bank’s at-tention to risk management is commensurate with its size and the complexity and volume of its products, business activities and oth-er operations. Česká spořitelna has a Board of Directors-approved risk management strategy in place comprising risk management principles that include risk identifi cation, monitoring and meas-urement processes, and the setting of limits and restrictions. By adopting these principles, the Bank has kept its risk exposure at an acceptable level, enabling it to maintain effective management processes.

The following departments play a role in managing risk: Central Risk Management Department: primarily responsible for market and operational risks and for consolidated risk management for the entire Česká spořitelna Financial Group; Credit Risk Management Department, Credit Risk Control-ling Department and Portfolio Management Department: assumes responsibility for credit risk management on a Group-wide basis; and Balance Sheet Management Department: manages net ban-king book (investment portfolio) interest risk and liquidity risk based on decisions of the Assets and Liabilities Manage-ment Committee.

The activities of these risk management departments are comple-mented by the work of the:

Security Department: responsible for risk management in respect of physical security, IT security and early warning system management; Legal Services and Compliance Department: responsible for managing compliance risk and anti-money laundering measures; and Card Centre Department: responsible for risk management in respect of payment cards transactions.

The Board of Directors shares risk management-related approval authority with the following committees:

Assets and Liabilities Management Committee; Česká spořitelna Board of Directors Credit Committee; Financial Markets and Risk Management Committee; and

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Compliance, Operational Risk and Security Committee (“CORB”) – a body of the Bank’s Board of Directors that makes decisions concerning the management of operational risk, compliance risk and security.

Credit Risk

Česká spořitelna is exposed to credit risk, i. e. the risk that a coun-terparty will be unable to pay amounts in full when due. In man-aging credit risk, Česká spořitelna applies a standardised meth-odology adopted on a Group-wide basis that sets out applicable procedures, roles and authorities. The lending policy includes:

Prudent lending process guidelines, including rules for the prevention of fraud and money laundering; General client segment acceptability guidelines based on principal activities, geographical location, maximum maturi-ty period, the product and the purpose of the respective loan; Basic framework for the rating system and the determination and review of debtor ratings; Basic principles of the system of limits and structure of approval levels; Loan collateral management rules; Structure of basic product categories; and Methodology for provisioning and risk-weighted asset calculations.

Collection of Key Risk Management InformationIn managing credit risk, the Bank draws not only on its own port-folio information, but also on the portfolio information of other members of the Česká spořitelna Financial Group. The Bank ad-ditionally uses information obtained from external sources such as the Credit Bureau and Central Loan Registry or ratings provided by reputable ratings agencies. The extensive database available for credit risk management purposes serves to model credit risk and support debt recovery, value receivables and calculate losses.

Internal Rating ToolsRating is considered to be a key risk management tool. The Bank uses a client’s rating to measure its counterparty risk profi le. The cli-ent rating refl ects the likelihood of debtor default in the subsequent 12-month period. The debtor evaluation and internal rating determi-nation are part of every loan approval or of signifi cant changes in lending terms and conditions. Debtor evaluation refl ects the client’s fi -

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40

nancial position and non-fi nancial characteristics. For corporate debt-ors, this primarily involves an analysis of strengths and weaknesses such as management quality and competitiveness. For retail debtors, the analysis chiefl y entails demographic and behavioural indicators. As a part of risk management, the Bank categorises its clients as “non-performing” and “performing”. The Bank uses an 8-grade rating scale for “performing” clients / private individuals (i. e. non-entrepre-neurs) and a 13-grade rating scale for other clients. For all “non-per-forming” clients, the Bank uses a single rating grade – “R” – which is further broken down based on the reason for the default.

All information essential for the above mentioned assessments is gath-ered and stored centrally. The Bank performs regular internal rating reviews (no less than once a year). The internal rating methodology is validated based on historical data using statistical models. In accord-ance with regulatory requirements, the Bank ensures independent en-tity oversight of the internal rating methodology validation process.

Exposure LimitsExposure limits are defi ned as the maximum exposure accept-able for the Bank in respect of an individual client or group of economically-related persons. The system is set up to protect the Bank’s income and capital from concentration risk.

Structure of Approval AuthoritiesThe structure of approval authorities for loans provided is based on the principle of the materiality of the impact of any loss on the Bank’s fi nancial performance and the risk profi le of the respective loan transaction. The Supervisory Board Credit Committee and Board of Directors Credit Committee have the highest approval authorities. Lesser approval authorities are scaled according to Credit Risk Management Department staff seniority.

Risk Parameter DeterminationČeská spořitelna uses its own internal models to determine risk pa-rameters such as probability of default (“PD”), loss given default (“LGD”) and credit conversion factors (“CCF”), i. e. coeffi cients used to transfer off-balance sheet items to the balance sheet. All models comply with the Basel II requirements. Monitoring and predicting historical risk parameters forms the basis for quantita-tive portfolio management. Česká spořitelna currently uses risk parameters to monitor credit risk, manage the non-performing loan portfolio and assess risks. The active use of risk parameters in managing the Bank makes it possible to obtain detailed informa-tion about the possible sensitivity of basic portfolio segments to both internal and external changes.

Provisions for Loan LossesČeská spořitelna uses a provisioning methodology that com-plies with International Financial Reporting Standards (“IFRS”). Portfolio provisions are determined for portfolios of receivables in which no individual impairment has been identifi ed. The level of portfolio provisions is established using models based on the Bank’s historic experience. The PD and LGD risk parameters are a signifi cant component of these models. Receivables where impairment has been identifi ed are provided for individually. The discounted cash fl ow method is used to measure impairment of non-retail and retail receiva-bles with a value exceeding CZK 5 million. The degree of impairment of other retail receivables is determined statistically on the basis of ex-perience with the recovery of a similar type of receivable. Provisions against all receivables are re-assessed on a monthly basis.

Concentration Risk and Risk-weighted AssetsČeská spořitelna manages loan portfolio concentration risk through a system of large exposure limits. Large exposure limits are estab-lished as the maximum exposure that the Bank may accept in re-spect of an individual client or economically-related group of clients with a given rating and underlying collateral. The system is set up to avoid excessive risk concentration in a portfolio owing to a small number of clients. The system is based on the maximum level of economic capital that may be allocated to one group of clients.

Česká spořitelna complied with the conditions for the use of the IRB approach when calculating the credit risk capital requirement, and since July 2007 risk-weighted assets and the capital require-ment have been based on the internal rating and the Bank’s own estimates of the PD, LGD and CCF parameters. Risk-weighted as-sets are calculated monthly. The standard calculation is regularly supplemented by stress testing, i. e. modelling of the (chiefl y mac-roeconomic) impacts of sudden changes in the market.

Improving the Process of Timely RecoveryIn 2010, the Bank continued to develop and upgrade the process of timely recovery and detection of problematic clients. In the area of cor-porate banking, a department was created to assume responsibility for monitoring performance of the non-fi nancial terms of loan contracts with corporate clients. The aims of this project are to improve the moni-toring of the Bank’s loan portfolio and reduce its loan risk exposure.

In retail banking, the call centre for timely recovery of delinquent receivables continued to evolve, with new technology being in-stalled to increase call centre effi ciency. Call centre services are also utilised by other Česká spořitelna Financial Group entities.

Strategic Plans for the Future | Risk Management | Other Information for Shareholders

Consolidated Loans and Advances to Financial Institutions and Clients 90 Days Past Due (CZK million)2010 2009

90 days past due

Total Proportion 90 days past due

Total Proportion

Loans and advances to fi nancial institutions 0 174,947 0.0% 0 126,506 0.0%Loans and advances to clients 20,562 459,975 4.5% 15,884 469,192 3.4%Total 20,562 634,922 3.2% 15,884 595,698 2.7%

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Market Risks

Market risks assumed by Česká spořitelna relate principally to fi -nancial market transactions that are traded in both the trading and banking (investment) books, and interest rate risk associated with banking (investment) book assets and liabilities. Trading book transactions on the capital, money and derivative markets can be broken down into the following areas:

Client quotations and transactions and the execution of client orders; Interbank market quotations; Active trading on the interbank market; and Distribution of fi nancial market products to small clients.

Erste Group Bank uses a “holding” business model for fi nancial markets trading called “Group Capital Markets”. Risks from ex-ecuted client transactions are transferred through identical transac-tions to portfolios of Erste Group Bank and quotations on the bond, derivative and foreign currency markets are transferred to the Group. Annually, Erste Group Bank redistributes the proportionate share in the Group result arising from trading in accordance with the approved model. Česká spořitelna retained recently executed transactions and quotations on the money and equity markets.

Derivative transactions are also used to hedge banking (invest-ment) book interest rate risk and to refi nance the difference be-tween foreign currency assets and liabilities.

The Central Risk Management Department monitors and measures trading and banking (investment) book market risk. This depart-ment is entirely independent of the Financial Markets Division to avoid confl icts of interest and to ensure that reports submitted on the Bank’s risks are sound and free of bias.

The Central Risk Management Department ensures that an inde-pendent evaluation of all fi nancial market transactions for both the Group and client portfolios administered by the Group is conducted. The department is also responsible for managing operational risks associated with fi nancial markets trading and managing market risks. It carefully focuses on control activities and reconciliations to ensure that complete and accurate records of instruments in the Bank’s portfolios exist.

Limits for market risks are determined separately for the trading book and the banking (investment) book. All trading book lim-its (specifi cally, VaR limits for intra-day holding and sensitivity limits) are proposed in collaboration with the Central Risk Man-agement Department and competent business departments and approved by the Financial Markets and Risk Management Com-mittee. All banking book risk limits (specifi cally, VaR limits for in-tra-month holdings) are proposed in collaboration with the Central Risk Management Department and the Group Balance Sheet Man-agement Department and approved by the Assets and Liabilities Management Committee. The set of market limits must comply with the maximum risk exposure (measured using the VaR meth-

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od) as approved by the Bank’s Board of Directors and must also be confi rmed by the parent company, Erste Group Bank.

While the VaR for the trading book may be determined using standard verifi able methods, the banking book of the Bank and certain subsidiaries includes assets and liabilities that cannot be represented using standard techniques. Hence, the VaR for these portfolios is calculated based on special procedures that endeavour to refl ect as faithfully as possible the actual behaviour of the assets and liabilities in these portfolios.

The Bank uses what is known as the PVBP gap, a matrix of interest rate sensitivity factors of individual currencies for individual portfo-lios of interest rate products, in order to measure the interest rate risk exposure of fi nancial markets transactions. These factors measure portfolio market sensitivity with a parallel shift of the yield curve of the respective currency within the predefi ned period to maturity. The system of PVBP limits is set for each interest rate product trading portfolio by currency. The limits are compared to the value that rep-resents the greater of the sum of the positive PVBP values or the sum of the negative PVBP values in absolute terms for each period to maturity. This results in managing not only the risk of a parallel shift in the yield curve, but also any possible yield curve rotation. A limit for the simple sum of PVBP values is set for major currencies such as the CZK, EUR and USD. Česká spořitelna additionally monitors other special limits for interest rate option contracts, e. g. the gamma and vega limits for interest rates and their volatility.

The sensitivity of foreign currency derivatives to foreign exchange rate movements is measured in the form of delta equivalents and is re-fl ected in the Bank’s foreign currency position. Česká spořitelna mon-itors special limits for foreign currency option contracts, e. g. limits for delta equivalent sensitivity to the exchange rate change in the form of the gamma equivalent and limits for option contract value sensi-tivity to exchange rate volatility in the form of the vega equivalent. The Bank also monitors the sensitivity of the value to the period to maturity (Theta) and interest rate sensitivity (Rho), which is measured together with other interest rate instruments in the form of PVBP.

Trading book equity risk is monitored using the delta sensitivities of portfolio market values to equity price movements both by eq-uity issue and in the aggregate for each of the markets and for the portfolio as a whole.

Trading book commodity risk is monitored using the delta sensi-tivities of portfolio market values to commodity price movements for individual commodities.

The Central Risk Management Department uses other sophisticat-ed procedures to assess the value and risks of structured products including credit investment instruments whose explicit valuation is not feasible. The Monte Carlo method is most frequently used to simulate the probability distribution for the price and future de-velopment of complex transactions, including price sensitivities, to changes in market factors.


42

The VaR method is used to measure aggregated trading and bank-ing book market risk. VaR values are calculated with a confi dence level of 99% for the holding period of one trading day. The calcu-lation is performed using the KVaR+ system and historical simu-lations based on historical data over the most recent 520 trading days. Under conditions of normal loss distribution, VaR is deter-mined for a holding period of one month or one year and for higher probability levels (99.9%, 99.98%).

VaR limits are determined for individual trading desks or portfo-lios. The VaR method is augmented with what is known as back testing, which is designed to verify model correctness. This meth-od compares daily VaR estimates to hypothetical portfolio results on the assumption that the positions within the portfolio remain unchanged for one trading day. To date, back testing results have shown that the VaR calculation model has been set correctly.

Based on Czech National Bank (“CNB”) approval, the market VaR method is also used to calculate the capital requirement in respect of general foreign currency risk, general and specifi c eq-uity risk and risk associated with trading book option transactions. This method is also used to calculate Economic Capital for trading (investment) book and banking book market risks. VaR calcula-tions are also used when assessing risks associated with the asset portfolios of Česká spořitelna subsidiaries (for funds of Investiční společnost ČS, Penzijní fond ČS and Pojišťovna ČS) and when as-sessing market risks in the banking book of Stavební spořitelna ČS using special models to map the Bank’s balance sheet.

The Bank’s trading book and the part of the investment book re-valued at market prices undergo monthly stress testing. The fol-lowing scenarios are used:

Scenario based on 10–15 year historic data (80-year historic average return for equities) using maximum positive and negative changes (one-day and ten-day) for interest rates, equity prices, exchange rates and volatilities separately; VaR value at a 99.8% confi dence level (the worst historical sce-nario from among the most recent 500 observed scenarios); and Stress scenarios on the basis of monthly Economic Analysis Department forecasts.

Stress scenario results are compared to the capital requirement from market risks. In addition to the sensitivity limits and VaR, stop-loss limits are established and monitored on a daily basis for individual trading desks. The monthly stop-loss limit is compared to the actual monthly result of the respective trading desk; the annual stop-loss limit is compared to the difference between the best result (realised and unrealised profi t) of the year and the worst trading desk result. The Risk Management Department also monitors the market con-formity of trades concluded on fi nancial markets with the aim of revealing market manipulations and avoiding operational risks.

Sensitivity limits, VaR and stop-loss limits, including the manner of their determination and measures to be applied when a limit is breached, are stipulated in an internal Bank directive – the Risk

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Management Manual, a component of risk management strategy. Česká spořitelna performs stress testing, detailed in another sec-tion, as a complement to the VaR method.

Banking (investment) book investments in bonds are monitored by the Central Risk Management Department using a system of indicators evaluating the quality of the security issuer, country of origin and per-formance of the respective economic sector. Should these indicators worsen appreciably, each investment is re-evaluated from the perspec-tive of its future development, potential sale or continued holding.

Information on the Bank’s exposure to market risks and on com-pliance with the established limits is reported on a daily basis to the Bank’s responsible managers and on a monthly basis to the members of the Board of Directors via the Assets and Liabilities Management Committee and Financial Markets and Risk Manage-ment Committee.

Interest Rate Risk

Česká spořitelna uses the following methods to manage banking book interest rate risk: net interest income simulation, simulation of net interest income sensitivity to market interest rate changes (parallel / non-parallel discrete shift in market yield curves, sto-chastic simulation of the yield curve), and the simulation of change in the theoretical market value of the banking book when a market yield curve shifts by +100 / +200 / −200 basis points (including key rate duration), and duration and gap analyses. The Bank’s current interest rate risk exposure is assessed monthly by the Assets and Liabilities Management Committee within the context of overall fi nancial markets developments, the Czech banking sector and the structural changes in the Bank’s balance sheet.

The key parameter monitored in respect of Česká spořitelna’s in-terest rate sensitivity is the relative change in the Bank’s projected net interest income should market interest rates show an imme-diate parallel decrease / increase of +100 / −100 basis points over a 36 month horizon on the assumption of a stable balance sheet structure (i. e. product structure of assets and liabilities).

Liquidity Risk

Liquidity risk is defi ned as the risk that the Bank will not be able to meet its fi nancial commitments as they fall due or to fi nance its as-sets. Liquidity is monitored and managed based on expected cash fl ows and the subsequent adjustment of the liability structure.

In 2010, the volume of clients’ assets from the parent bank de-creased by 1% year-on-year. The volume of loans to individuals and corporate clients decreased, while there was an increase in the volume of loans to entrepreneurs and microenterprises. The volume of mortgage loans from the parent bank remained stable. Government bonds in the held-to-maturity portfolio (including treasury bonds) increased 35% year-on-year. On the liability side, the volume of client deposits, including deposits at fair value, grew


43

3%, primarily due to the impact of current account deposit growth, which increased 4% in volume year-on-year, while the volume of term and savings deposits increased 2%.

The internal limit set for the current liquidity ratio value was met

throughout 2010. The current liquidity ratio is defi ned as the pro-portion of highly liquid assets and highly liquid liabilities. To illus-trate, the highly liquid assets of the parent bank amounted to CZK 137.0 billion at 31 December 2010 and the denominator used to cal-culate current liquidity included CZK 550.2 billion in liabilities.


Current Liquidity Ratio in 2009 and 201031 March 30 June 30 September 31 December

Actual 2009 17.06% 16.08% 19.63% 20.50%Actual 2010 26.63% 26.32% 26.25% 24.90%

Medium- and long-term liquidity was bolstered in 2010 by mort-gage certifi cate issues totalling CZK 5.3 billion and bonds issues in an amount of CZK 6.5 billion. The Bank bought back a portion of mortgage certifi cate and bond issues for the purpose of their further sale.

Operational Risks

In accordance with CNB Regulation No. 123/2007 stipulating the prudential rules for banks, credit unions and investment fi rms, the Bank defi ned operational risk as the risk of loss arising from the inadequacy or failure of internal processes, human error, system failure or the risk of loss resulting from external events, including legal risk. The Bank’s management is regularly informed of opera-tional risk developments and levels.

Česká spořitelna uses a Risk Book developed by the Risk Man-agement and Internal Audit departments as a tool to standardise the identifi cation of risks for the needs of the entire ČS Finan-cial Group and to standardise risk categorisation with the aim of achieving consistency in risk monitoring and assessment.

Česká spořitelna manages operational risk in compliance with the requirements of the new regulatory concept of capital adequacy – Basel II. The CNB approved the use of advanced measurement ap-proaches (“AMA”) for the management of operational risk and cal-culation of the capital requirement for operational risk effective from 1 July 2009. This concept was approved at the level of Erste Group Bank and applies for all group entities using advanced measurement approaches for operational risk. The Bank is currently working on the further harmonisation of local and group principles in the areas of data collection and operational risk management.

The Bank uses a special software application to collect data on op-erational risk for the purpose of quantifying such risk and to calculate the capital requirement, but also as a database of valuable information serving to manage risk, prevent recurrences of operational risks and simplify processes for recording harmful events, including insurance claims. The collection and assessment of data regarding improper conduct of Bank clients and the risk of human error (inappropriate employee behaviour) is of key importance to loss prevention.

Česká spořitelna does not only rely on data obtained from actual operational risk incidents to assess and manage operational risks. Expert opinions of management regarding risks in the areas for which they are responsible constitute another valuable resource. These data are aggregated into a risk map and rendered in a stand-ardized form for Erste Group Bank. Risk scenario estimates are applied to calculations of the capital requirement for operational risk pursuant to Basel II principles.

An important tool for mitigating losses arising from operational risks is the insurance programme that Česká spořitelna has used since 2002. The programme involves not only insurance of prop-erty damage, but also of risks arising from banking activities and liability risks. Česká spořitelna has been a part of the Erste Group Bank joint insurance programme since 1 March 2004, which has greatly expanded the Bank’s insurance coverage, in particular for damage that may have a material impact on Česká spořitelna’s profi t or loss.

With regard to managing business continuity, Česká spořitelna has introduced a methodology and procedures based on internationally recognised standards and best practice. The Bank systematically analyses key processes and threats with respect to the risk of proc-ess failure, including an evaluation of the effi ciency of adopted measures and testing of existing emergency plans. Česká spořitelna also participates in the activities of the Financial Markets Critical Infrastructure Committee (“KIFT”) that involves key banks and is overseen by the CNB.

Careful attention is given to fraud prevention as a specifi c category of operational risk. The Bank focuses on the prevention of exter-nal client or third party fraud as well as the risk of internal fraud. Serious incidents are subjected to detailed investigation followed by individual measures and system changes in the Bank’s IT and business processes.

Stress Testing

Česká spořitelna greatly expanded its stress testing of risk factors based on its experience from the crisis of 2008–2009 and regula-tory requirements.

44

Market risk of the trading book and the part of the investment book re-valued at market prices undergo monthly stress testing. The fol-lowing scenarios are used:

Scenario based on 10–15 year historic data (80-year historic average return for equities) using maximum positive and negative changes (one-day and ten-day) for interest rates, equity prices, exchange rates and volatilities separately; VaR value at a 99.8% confi dence level (the worst historical scenario from among the most recent 520 observed scenari-os); and Stress scenarios on the basis of monthly Economic Analysis Department forecasts.

Stress scenario results are compared to the capital requirement from market risks.

The Bank’s Board of Directors is submitted with a quarterly sum-mary of all risk exposures. The report quantifi es the impacts of 4 types of negative scenarios for individual risks (only the relevant scenario for each risk):

Great Depression scenario: projecting a 3-year economic depression in western Europe and the USA; Debt crisis scenario: projecting an escalation of problems in the monetary policies of EMU countries; Scenario based on 10–15 year historic data (80-year historic average return for equities) using maximum positive and negative changes (one-day and ten-day) for interest rates, equity prices, exchange rates and volatilities separately; and Expert scenario.

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The report includes a summary of stress tests for market risk [chiefl y for marked-to-market (re-valued) positions and in partic-ular for impacts of tests of the Bank’s net interest income], the risk of widened credit spreads, credit risk, country risk, concentration risk and liquidity risk. Of equal importance are the impacts of identifi ed reverse scenario risks, i. e. scenarios selected for their threat to the Bank’s viability, specifi cally involving, for example, extraordinarily strong revenue curve shifts, a marked increase in the likelihood of insolvency (or what is known as a run on the bank) in combination with a widened Česká spořitelna credit spread.

Capital Adequacy

The unconsolidated capital adequacy of Česká spořitelna ex-ceeded 8.00% in 2010 as required by the CNB. Several events occurred in 2010 that signifi cantly impacted both capital and capital adequacy: in March 2010, subordinated debt totalling CZK 1.0 billion maturing in 2020 was issued (call option in 2015) and sold to small clients in the course of the year; CZK 354 million had been sold by year end. In April, retained earn-ings brought forward in an amount of CZK 6.7 billion were in-cluded in capital adequacy, leading to increased capital and cap-ital adequacy. In May 2010, dividends totalling CZK 4.6 billion were paid and subordinated debt issued in 2005 in an amount of CZK 3.0 billion was repaid, leading to a capital reduction. Capital increased in total by CZK 5.3 billion. At the 2010 year end, individual capital adequacy pursuant to the CNB method-ology was 13.92%.


2010 2009 2008 2007 2006

Capital adequacy* 13.92% 12.30% 10.31% 9.55% 9.26%* data according to CNB methodology

Information on Capital and Ratio Indicators pursuant to Regulation 123/2007 Coll.The share capital of Česká spořitelna consists of 11,211,213 prior-ity registered shares each with a nominal value of CZK 100 and 140,788,787 ordinary bearer shares each with a nominal value of

CZK 100. The shares are in book-entry form and are not traded on public markets. To enhance its capital base, the Bank issued subordinated bonds that are added to the additional Tier 2 capital in an aggregate amount of CZK 11,035,855 thousand. The Bank determines capital on an unconsolidated and consolidated basis.

45

Consolidated and Unconsolidated Information on Capital and Ratio Indicators:

Data on CapitalIn CZK thousand Consolidated data Unconsolidated data

31 Dec 2010 31 Dec 2009 31 Dec 2010 31 Dec 2009Capital 63,687,277 55,894,154 56,460,978 51,112,377Aggregate amount of original capital (Tier 1) 57,070,589 48,428,730 50,423,957 43,613,840Paid up share capital recorded in the Commercial Register 15,200,000 15,200,000 15,200,000 15,200,000Share premium 1,688 1,688 1,688 1,688Obligatory reserve funds 3,301,844 3,292,749 3,040,462 3,040,462Other funds from the allocation of profi t 205,700 205,700 0 0Retained earnings brought forward 41,778,168 33,064,301 35,157,431 28,462,617Minority shares 131,900 262,619 0 0Other than consolidation goodwill (9,649) (9,649) 0 0Financial foreign exchange differences arising from consolidation (430,187) (181,360) 0 0Intangible assets other than goodwill (3,108,875) (3,407,317) (2,947,801) (3,090,928)Negative valuation difference from changes in FV of available-for-sale capital instruments 0 0 (612) 0Participation securities issued by a person with a qualifi ed investment in the Bank (27,212) 0 (27,212) 0Additional capital (Tier 2) 11,338,148 13,403,794 11,035,855 13,403,794Subordinated debt A 11,035,855 13,403,794 11,035,855 13,403,794Positive valuation difference from changes in FV of available-for-sale equities and participation certifi cates 302,293 0 0 0Capital to cover market risk (Tier 3) 0 0 0 0Deductible items from original and additional capital (Tier 1 + Tier 2) (4,721,461) (5,938,370) (4,998,834) (5,905,257)Capital investments over 10% in banks and other fi nancial institutions (867,105) (820,000) (865,000) (820,000)Lack in coverage of anticipated loan losses in IRB (3,854,356) (5,118,370) (4,133,834) (5,085,257)

Data on Capital RequirementsIn CZK thousand Consolidated data Unconsolidated data

31 Dec 2010 31 Dec 2009 31 Dec 2010 31 Dec 2009Total capital requirements 36,035,154 36,540,867 32,458,081 33,243,673Total capital requirement for credit risk 30,136,233 30,911,678 27,841,580 28,566,087Total capital requirement for credit risk in STA 4,625,037 4,676,633 2,294,695 2,273,268Total capital requirement for credit risk with STA in IRB to exposures 4,625,037 4,676,633 2,294,695 2,273,268Total capital requirement for credit risk with IRB 25,511,196 26,235,044 25,546,885 26,292,820Total capital requirement for credit risk with IRB to selected exposures 25,441,632 26,092,011 25,361,382 26,149,763Capital requirement for credit risk with IRB to equity exposures 21,457 2,085 137,396 2,109Total capital requirement for credit risk with IRB to securitised exposures 48,107 140,948 48,107 140,948Capital requirement for settlement risk 215 1,294 215 1,294Capital requirement for position, currency and commodity risk 542,388 408,693 387,929 320,815Total capital requirement for operational risk 5,356,318 5,219,202 4,228,357 4,355,476Capital requirement for risk of trading book exposure 0 0 0 0

Ratio IndicatorsConsolidated data Unconsolidated data

31 Dec 2010 31 Dec 2009 31 Dec 2010 31 Dec 2009Capital adequacy (%) 14.14 12.24 13.92 12.30Return on average assets (“ROAA”) (%) 1.3 1.4 1.6 1.5Return on average equity Tier 1 (“ROAE”) (%) 21.9 24.8 26.5 26.3Assets per employee in CZK thousand 82,663 80,016 74,241 70,510Administrative expenses per employee in CZK thousand 1,573 1,622 1,447 1,488After tax profi t or loss per employee in CZK thousand 1,094 1,124 1,195 1,079


46

Česká spořitelna, a. s., with its registered offi ce at Prague 4, Ol-brachtova 1929/62, 140 00, Company ID: 45244782, is the legal successor of the Czech State Savings Bank and was registered as a joint stock company in the Czech Republic on 30 December 1991 in the Commercial Register maintained by the Municipal Court in Prague, Section B, Entry No. 1171.

§ 118, Par. 4 Letters d) and Par. 5 a) through d)The structure of the consolidated and individual equity of Česká spořitelna is presented in the consolidated or standalone annual fi nancial statements on page 66–67 of the annual report or on page 152 of the annual report, respectively.

Česká spořitelna, a. s., Shares

Class: Ordinary and preference shares Type: 140,788,787 ordinary bearer shares, i. e. 92.62% of basic capital, 11,211,213 preference registered shares, i. e. 7.38% of basic capitalForm: Book entryNumber of shares: 152,000,000Total issue volume: CZK 15,200,000,000Nominal value per share: CZK 100 Share marketability: Shares are not traded on any public market

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The transferability of preference shares is restricted to towns and municipalities of the Czech Republic; transfers of registered pref-erence shares to other entities are subject to Česká spořitelna Board of Directors approval. A preference right to receive dividends is attached to preference shares. Holders of preference shares are entitled to preference dividends every year that the General Meet-ing adopts a decision to distribute profi t, even if other shareholders will not be paid dividends in the given year based on the General Meeting’s decision. A right to vote at General Meetings is not at-tached to the Company’s preference shares. Holders of preference shares have all other rights attached to shares. Additional infor-mation on shareholders’ rights is presented in Item B. Company Relationships with Shareholders in the Česká spořitelna, a. s., Dec-laration on the Compliance of its Governance with the Code based on OECD Principles (see page 52 of the annual report).

§ 118, Par. 5 Letters g) and h)The election and recall of Board of Directors members lies within the remit of the Supervisory Board. Board of Directors members are elected and recalled by acclamation (a show of hands) at Supervi-sory Board meetings; in this case, any agreement to take a vote in writing or via remote means of communication outside of the Su-pervisory Board meeting is unacceptable. The Supervisory Board has a quorum if an absolute majority of its members is present. The Supervisory Board decides by resolution; adopting a resolution re-

* EGB Ceps Holding GmbH is a wholly-owned subsidiary of EGB Ceps Beteiligungen GmbH, itself a wholly-owned subsidiary of Erste Group Bank AG.

Česká spořitelna shareholder structure at 31 December 2010, share in basic capital

EGB Ceps Holding GmbH, Graben 21 Vienna, Austria*

97.987

Towns and municipalities of the Czech Republic

1.566 Other legal persons and individuals0.447

Česká spořitelna shareholder structure at 31 December 2010, share in voting rights

EGB Ceps Holding GmbH, Graben 21 Vienna, Austria*

99.517

Towns and municipalities of the Czech Republic

0.000 Other legal persons and individuals0.483

Other Information for ShareholdersPursuant to § 118 of Act No. 256/2004 Coll. on Doing Business on the Capital Market, Par. 4, Letters b) through k) and Par. 5 Letters a) through k)

47

quires a majority vote of the Supervisory Board’s members. In the event of a tie, the chair shall cast the deciding vote. The General Meeting decides on any changes to the Company’s Statutes in com-pliance with the relevant Commercial Code provisions.

The Board of Directors is a statutory body that manages the activi-ties of Česká spořitelna and acts on its behalf. The standard powers and responsibilities are set out in Article 12, sections 6 and 7 of the Česká spořitelna Statutes. Members of the Board of Directors have no special powers in the meaning of par. 5 letter h).

§ 118, Par. 5 Letter i)Česká spořitelna has executed ISDA Master Agreements, which include the condition that if the ownership of either party changes, the other party shall have the right to terminate the agreement. The foregoing applies to agreements entered into with these counterpar-ties: BNP Paribas, Paris; CALYON, Paris; ING Bank, Amsterdam; JP Morgan Chase Bank, New York; Morgan Stanley & Co. (Inter-national); Royal Bank of Canada, Toronto; and UBS, London.

Information arising from § 118 of Act No. 256/2004 Coll. on do-ing business on the capital market, par. 4 letters b), c), e) and j), is included in the Česká spořitelna, a. s., Declaration on the Compli-ance of its Governance with the Code based on OECD Principles (see page 52 of the annual report).

Information arising from § 118 of Act No. 256/2004 Coll. on do-ing business on the capital market, par. 5 letters f), j), and k), is not applicable as the Company does not have any shares traded on an open market.

Controlling Entity

Erste Group Bank AG is the controlling entity of Česká spořitelna, a. s., via EGB Ceps Holding GmbH and EGB Ceps Beteiligungen GmbH. Measures designed to prevent the controlling entity from misusing its control arise from the Commercial Code and primarily include a ban on the misuse of a voting majority in a company (§ 56a par. 1 of the Commercial Code), a ban on the abuse of a controlling entity’s infl u-ence by forcing the adoption of a measure or execution of a contract that could cause damage to the property of a controlled entity, unless

such damage is compensated by the end of the accounting period in which the damage was incurred, at the latest, or a contract is signed stipulating a reasonable period and method for the compensation to be paid by the controlling entity (§ 66a par. 8 of the Commercial Code), the obligation of the Company to prepare a Related Parties Report in compliance with § 66a par. 9 et seq. of the Commercial Code (see page 223 of the annual report), the obligation of the controlling entity to pay damages to the controlled entity in compliance with § 66a par. 14 of the Commercial Code and guarantees provided by members of the statutory body of the controlling entity and controlled entity in compliance with § 66a par. 15 of the Commercial Code.

Česká spořitelna is a universal bank and is not dependent on other Česká spořitelna Financial Group or Erste Group Bank entities.

Information on the Acquisition of Treasury Shares and Erste Group Bank Shares

In 2010, Česká spořitelna neither traded nor held any treasury shares. It acted as a market maker in respect of the shares of its controlling entity, Erste Group Bank, on the Prague Stock Exchange. To this year end, Česká spořitelna purchased, under standard market conditions, 5,872 thousand shares at an aggregate purchase price of CZK 3,539 million and sold 5,870 thousand shares at an aggregate selling price of CZK 3,448 million. The minimum price for the purchase and sale of one share in 2010 was CZK 648.00 and CZK 649.46, respectively. The maximum price for the purchase and sale of one share in 2010 was CZK 900.00 and 900.00, respectively. In early 2010, Česká spořitelna held −1,300 shares; at the 2010 year-end, there were 75 shares in the Česká spořitelna portfolio. The average nominal value of one share of Erste Group Bank was EUR 2 at the 2010 year-end.

Information on the Guarantee Fund Contribution

As a securities trader, Česká spořitelna contributes to the Guaran-tee Fund, which safeguards the guarantee system from which com-pensation is paid to clients of securities traders unable to meet their client obligations. The calculation base for the Česká spořitelna Guarantee Fund contribution for 2010 was CZK 526 million. The contribution itself amounted to CZK 11 million.

Risk Management | Other Information for Shareholders | Česká spořitelna – Corporate Social Responsibility

48

Fees Invoiced by the Audit Company Ernst & Young Audit for 2010

§ 118, Par. 4 Letter k)CZK mil. Audit services Other services Total

Česká spořitelna 24 0 24Other consolidated companies 16 0 16Totals 40 0 40

Principles of Executive Manager and Supervisory Board Member Remuneration

§ 118, Par. 4 Letters f) g), h), i)

Executive ManagersAt Česká spořitelna, executive management includes the chairman of the Board of Directors, who is at the same time the Company’s CEO, and the members of the Board of Directors, who also serve as deputies to the CEO.

The Board of Directors is by law the statutory body managing the operations of the Company and acting on its behalf. Some mem-bers of the Česká spořitelna Board of Directors are key employ-ees of the company ÖCI-Unternehmensbeteiligungs-gesellschaft.m. b. H., a subsidiary of Erste Group Bank A. G. Members of the Česká spořitelna Board of Directors exercise their powers with due diligence and professional care and act in good faith and in the best interests of the Company and its shareholders. They are skilled in managing large corporations and have international experience and the ability to work in a team. Their position calls for the ongoing development of their industry knowledge and corporate govern-ance skills, a proactive approach to the discharging of their duties, the ability to participate in developing corporate strategy and, no less importantly, loyalty to the Company. Members of the Board of Directors adhere to high ethical standards and are responsible for ensuring that the Company complies with enacted laws. They are personally liable for damage arising from a breach of legal obliga-tions and, in their capacity as Board of Directors members, are responsible to the Company as represented by the shareholders.

Board of Directors members are remunerated based on a Contract for Performance of the Duties of a Board of Directors Member con-cluded in accordance with the valid provisions of Act No. 513/1991 Coll., The Commercial Code. The contract has been approved by the Company’s General Meeting. The amount of Board of Directors members’ remuneration is subject to General Meeting approval.

The fi xed component of the remuneration of the CEO and deputy CEOs is paid as a salary for work performed. In compliance with the Company’s Statutes, the amount of the salary is approved by the Supervisory Board and is based, inter alia, on qualifi ed benchmarking analyses of fi nancial sector remuneration. The compensation policy for Board of Directors members is set by the Board of Directors of Erste Group Bank A. G. and is approved

by the Česká spořitelna Supervisory Board. The variable compo-nent of the remuneration of the CEO and deputy CEOs is derived from their performance evaluation undertaken based on the fulfi l-ment of defi ned performance criteria. These criteria include the net profi t of Erste Group Bank and Česká spořitelna, the EVA1 of Česká spořitelna and the NPL (non-performing loan) index. Per-formance criteria are set for each calendar year and are approved and subsequently assessed by the Supervisory Board. Board of Directors members may receive an annual bonus of up to 100% of their annual base salary.

Based on their management and professional expertise, ex-perience and contribution to the Company, Board of Directors members are entitled to: monetary income arising from the posi-tions of CEO and deputy CEO in an aggregate amount of CZK 37.9 million, bonuses arising from the positions of CEO and deputy CEO (i. e. the variable salary component contingent on the fulfi lment of performance criteria) in an aggregate amount of CZK 20.4 million, income in kind arising from the positions of CEO and deputy CEO in an aggregate amount of CZK 3.8 mil-lion and monetary income arising from the position of statutory body member in an aggregate amount of CZK 0.7 million. No in kind income was provided to statutory body members. All the foregoing income is paid out by Česká spořitelna; Board of Di-rectors members receive no income from companies controlled by Česká spořitelna.

In 2010, the members of the Board of Directors subscribed for no shares of Erste Group Bank under the ESOP programme.

Neither Board of Directors members nor persons close to them own shares or call options to purchase shares of Česká spořitelna. Česká spořitelna shares have not been publicly tradable since August 2002.

No Compensation Committee has yet been established. In con-nection with the planned introduction of Basel III (CRD III), such a committee will be set up in compliance with the requirements of this directive.

Detailed professional biographies of the Executive Managers of Česká spořitelna attesting to their qualifi cations, professional abili-ties and practical experience and describing their work are pub-lished on page 8 of the Annual Report.

1 Economic Value Added – Net operating profi t after taxes less the money cost of capital


49


Supervisory BoardThe Supervisory Board is the Company’s controlling body, which oversees the Board of Directors’ exercising of its powers in per-forming the Company’s business activities. The Supervisory Board checks, in particular, whether the Board of Directors is performing its duties in compliance with the legislation and the Company Stat-utes and whether the Board of Directors members are acting with due professional care in the interests of the Company. Supervisory Board members perform their duties with due professional care and are required to possess professional skills, maintain allegiance to the Company and maintain the confi dentiality of all confi dential information and matters. Supervisory Board members are liable for damage arising from a breach of legal obligations and, in their capacity as members of the Company’s Supervisory Board, are re-sponsible to the Company as represented by the shareholders.

Supervisory Board members are remunerated in accordance with the provisions of Act No. 513/1991 Coll., The Commercial Code. The amount of Supervisory Board members’ remuneration is sub-ject to General Meeting approval.

Neither Supervisory Board members nor persons close to them own shares or call options to purchase shares of Česká spořitelna. Česká spořitelna shares have not been publicly tradable since August 2002.

Members of the Supervisory Board were entitled to remuneration, including income in kind, of CZK 3.6 million for their work on the

Česká spořitelna Supervisory Board in 2010; no in kind compen-sation was provided to Supervisory Board members. Supervisory Board members – Česká spořitelna employees obtained monetary income in an aggregate amount of CZK 2.6 million, bonuses in an aggregate amount of CZK 0.7 million and in kind income in an aggregate amount of 0.05 million. All the foregoing income is paid out by Česká spořitelna; Supervisory Board members receive no income from companies controlled by Česká spořitelna.

Affi davit

The undersigned represent that, to the best of their knowledge, the annual report and consolidated annual report provide a true and fair view of the fi nancial position, business activities and profi t of Česká spořitelna and its consolidation unit for the ac-counting period ended 31 December 2010 and of the outlook for the future development of its fi nancial position, business activi-ties and profi t.

Dušan Baran Jiří ŠkorvagaBoard of Directors Board of DirectorsVice Chairman and Member and1st Deputy CEO Deputy CEO

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Česká spořitelna – Corporate Social ResponsibilityCorporate Social Responsibility (“CSR”), an integral part of Česká spořitelna’s business, is refl ected in everything we do. As a compa-ny whose origins date back to 1825, we acknowledge and proudly endorse our corporate social responsibility.

Projects supported by Česká spořitelna and its foundation Nadace ČS are based on the Bank’s CSR strategy “Investing for the Fu-ture” and comprises three key areas of focus:

Education – with a primary, though not exclusive, focus on training in fi nance; Helping people in need – focusing on seniors and persons suffering from drug addiction; and Sustainable development and stewardship of the environ-ment in which we live.

Both our corporate and CSR strategies enable us to meet our so-cial obligations systematically and with the interests of all key groups – clients, employees, shareholders and society – in mind.

In 2010, Česká spořitelna and its foundation Nadace ČS donated CZK 68 million to charities and projects of benefi t to the general public.

PhilanthropyThe Bank’s philanthropy mirrors its general approach to CSR. In 2002, Česká spořitelna launched the foundation Nadace České spořitelny, which enables us to work on long-term strategic projects with partners like Charita ČR, Život 90, SANANIM, Na-dace VIA and Nadace Partnerství. Nadace ČS is a key tool in our social development-focused corporate philanthropy, an area other donors often overlook.

ClientsWe are open with our clients and honour the rules of fairness. In addition to standard feedback tools, clients can use the services of an independent ombudsman.

We have a longstanding policy of educating clients about their credit obligations through the Debt Advisory Centre whose es-tablishment we initiated. An Ostrava branch of this bureau exists as a complement to the headquarters in Prague.

In the area of education, we have added interesting projects to our

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longstanding co-operation with universities (Hradec Králové Uni-versity and the Economics University):

the MoneyMánie (www.moneymanie.cz) educational portal has been up and running since January and educates the young about fi nancial matters. A world of fi nancial and banking products has been created for students, parents and teachers at www.moneymanie.cz. Products can be examined from multiple angles, e. g. based on various needs at different stages of life. DreamCatcher (www.dreamcatcher.cz), designed for youth between the ages of 11 and 21, offers a unique opportunity to fulfi l some of their dreams. The project shows children and youth that it is through their own efforts that their dreams will be realised. The project also instructs the young in how to present themselves and their projects, and teaches them the importance of teamwork, accountability and public service. Bezpečný internet (www.bezpecnyinternet.cz) is a joint effort of Česká spořitelna, Microsoft and Seznam.cz sup-ported by the Czech Police. This internet portal provides useful information on safe internet practices, e. g. risks as-sociated with internet use and how to prevent and deal with risks in the form of fake offers, viruses or e-mails soliciting personal information.

Česká spořitelna now provides more information on the principles of safe internet use via e-learning in the form of comics published on the company’s website (www.csas.cz/bezpecnost).

Just one way our clients can play an active role in supporting charita-ble projects is through the Bonus Programme. Česká spořitelna pay-ment card holders receive special loyalty points when using the card, which can not only be exchanged for gifts (from magazine subscrip-tions to airline tickets), but can also be donated to specifi c charitable projects. In 2010, clients were able to support for example two regions affected by fl ooding in 2010, and contribute to the renovation of three cultural monuments. We have also managed to complete the second wave of point-collection for purchasing breast cancer diagnostic sets. More than CZK 990,000 was donated through that programme.

Last year, the “Credit an Account to Help At-Risk Children” cam-paign enabled our clients to help children facing the spectre of

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Other Information for Shareholders | Česká spořitelna – Corporate Social Responsibility | Česká spořitelna, a. s., Declaration on the Compliance of its Governance with the Code Based on OECD Principles

drugs and criminality. For every Private Account opened in 1Q 2010, Česká spořitelna donated CZK 60 to low-threshold clubs, providing total support of CZK 1.8 million.

We also take a socially responsible approach to business solutions. A special team of staff – the Energy Team – is dedicated to serving clients – investors, helping them prepare and implement renewable energy production projects. We fi nance energy savings and renew-able energy projects through the special TOP Energy product.

An ever increasing number of clients are using the unique product we call @FAKTURA 24, an electronic invoicing system enabling electronic invoices to be sent securely at a considerable saving of time, cost and paper consumption.

We also create special products and services for specifi c groups, such as ATMs for the visually impaired.

EmployeesWe offer employees a range of benefi ts including lifelong learn-ing and support for new mothers on maternity leave. We es-tablished the Diversitas programme to address issues such as the under-representation of women in management positions, com-pensation differences, personal development and career growth opportunities, conditions for returning from maternity or parental leave and achieving an effective work / life balance.

Business ethics play a fundamental role at Česká spořitelna, which is why the Bank has created the position of ethics manager to oversee this area throughout the ČS Financial Group. The ethics manager assumes an advisory role in matters pertaining to the em-ployee Code of Ethics and confl ict resolution, oversees adherence to Code provisions and, no less importantly, is there for any em-ployee who wishes to report a suspicion of an ethical breach or failure to adhere to the Code of Ethics.

Projects directly involving employees in implementing the Bank’s CSR strategy are of key importance. Through a unique project called Charity Day, employees are given an opportunity to de-vote 2 work days to a charitable activity. In 2010, 1,655 employ-ees (28% more than in 2009) took advantage of this opportunity, volunteering at more than 119 non-profi t organisations across

the Czech Republic. In addition to their charity work, employees may support the environmentally-friendly processing of discarded small electrical appliances, which they can collect and dispose of in special bins in Bank buildings. The Česká spořitelna Grant Pro-gramme provides ČS employees with fi nancial assistance for non-profi t organisations they work with in their spare time. Last year we supported 6 projects, donating a total of CZK 180 thousand.

Bearing in mind the importance of employee feedback, we intro-duced a system of open communication between employees and senior management to ensure that employees are kept well informed.

This is the fourth year that the Bank has published a standalone CSR Report, which provides a comprehensive overview of our CSR and philanthropic undertakings. This report is available on our website.

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In compliance with the statements made by Česká spořitelna, a. s., (the “Company”) in its previous annual reports, the members of the Company’s Board of Directors make every effort to improve the Company’s standards of corporate governance and ensure, to the ex-tent set out hereunder, compliance with the Corporate Governance Code based on the OECD principles of 2004 (the “Code”). The Com-pany systematically supports, develops and enhances its governance practices. No major changes adversely affecting the Company’s cor-porate governance standards were made in 2010. Česká spořitelna complies with all key provisions, principles and recommendations of the Code, which may be viewed on either the Česká spořitelna website www.csas.cz/kodex or the Czech Finance Ministry website (www.mfcr.cz/cps/rde/xbcr/mfcr/KODEX_KCP_2004_pdf).

The principles of Česká spořitelna’s governance standards are set out below.

A. Organisation of the Company

At 31 December 2010, the Company’s Board of Directors had six members. Mag. Gernot Mittendorfer resigned as both Board of Di-rectors chairman and member on the same date. Pavel Kysilka was elected the new chairman of the Board of Directors. With effect from 1 January 2011, the Bank has a fi ve-member Board of Directors.

The Board of Directors is the Company’s statutory body. It man-ages the Company and acts on its behalf while assuming responsi-bility for its long-term strategic direction and operational manage-ment. The scope of its powers is defi ned in the Company’s Statutes and internal rules as well as the Czech legal regulations. The Board of Directors exercises its powers with due care and diligence; in discharging its activities, it is accountable to the extent set out in the Czech legal regulations. All Board of Directors members are internationally experienced professionals, team players skilled in managing large corporations. Board members adhere to legal rules and ethical standards.

Pursuant to the Company’s Statutes, the Board of Directors must obtain a Supervisory Board opinion or approval before performing a number of acts and in cases determined in a Supervisory Board decision, the Board of Directors must solicit the prior opinion of a committee established by the Supervisory Board. The Board of Directors regularly presents reports on Company activities to the

Supervisory Board and its committees. In compliance with the Banking Act, the Board of Directors is responsible for establish-ing, maintaining and evaluating an effi cient and effective internal management and control system for the Company.

Board of Directors Decision-making ProceduresThe work of the Board of Directors is directed by an activity plan, which the Board of Directors drafts in advance for every calen-dar quarter. The Board of Directors meets as needed, but no less than twice a month. Regular weekly sessions have, however, be-come common practice. In 2010, the Board of Directors held 40 meetings. Board of Directors meetings are conducted in English or Czech, as required by the attending members. Board of Direc-tors meetings are chaired by the chairman and, in the chairman’s absence, by the Vice Chairman. Should both the chairman and Vice Chairman be absent, an authorised Board of Directors member shall chair the meeting. All Board of Directors members and the Company Secretary take part in meetings.

The Board of Directors only achieves a quorum if more than half of all its members are present at a meeting. The Board of Directors adopts decisions in the form of a resolution requiring a majority of votes of attending members. In the event of a tie, the chairman shall cast the deciding vote. If all the Board of Directors members are in agreement, the Board of Directors may pass a resolution by a written vote or a vote taken via remote means of communica-tion (e. g. all Board of Directors members per rollam or individual members in writing, via video- or teleconferencing); in such cases, voting members are deemed present. Material submitted in per rol-lam form is approved, if an unconditional majority of the votes of all members of the Board of Directors is in agreement. Voting on matters under discussion is conducted openly at Board of Directors meetings, i. e. by acclamation (a show of hands).

All Board of Directors members have the requisite character traits and professional experience to execute the Board of Directors member role. Members of the Board of Directors are elected and recalled by the Supervisory Board. In compliance with the Bank-ing Act, nominees for Board of Directors membership are dis-cussed in advance with the Czech National Bank, which assesses the professional qualifi cations, credibility and experience of the nominees. The term of offi ce of a member of the Board of Direc-tors is 4 years, and members may be re-elected.

Česká spořitelna Declaration on the Compliance of its Governance with the Code Based on OECD Principles

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Detailed professional biographies of the Board of Directors mem-bers attesting to their qualifi cations, professional abilities and practi-cal experience are published on page 8–9 of the Annual Report.

The Supervisory Board of the Company has nine members. Maximillian Hardegg serves as an independent member of the Supervisory Board pursuant to the requirements of the Code. In compliance with statutory requirements, the Supervisory Board includes representatives of the Company’s employees. They are Jolana Dyková, Eliška Bramborová and Zdeněk Jirásek. All Su-pervisory Board members are professionals, which guarantees the high quality of the Supervisory Board’s function, and possess the requisite personal and professional qualifi cations to serve as Super-visory Board members. Pursuant to the Company’s Statutes, two thirds of the members of the Supervisory Board are elected by the General Meeting, and one third by the Company’s employees. The term of offi ce of a Supervisory Board member is 4 years. A full list of Supervisory Board members, including their professional biog-raphies, is published on page 10–12 of the Annual Report.

The Supervisory Board oversees the execution of the Board of Di-rectors’ powers and the performance of the Company’s business activities. In addition to its statutory duties and authorisations, the Supervisory Board, in accordance with the Company Statutes, has the right to opine in advance on certain acts impacting the Compa-ny’s assets (including, inter alia, capital expenditures for building, plans to acquire tangible and intangible assets for the Company in excess of a designated limit, the transfer of title to Company assets, the Company’s equity investments and so on). The Super-visory Board also furnishes an advance opinion on the strategic plan for Company activities and development, planning tools and regular fi nancial information. Additionally, the Supervisory Board furnishes its advance opinion on the appointment and recall of the director of Internal Audit and on the selection of an external audi-tor. The Supervisory Board may establish committees to support its work. In 2010, the Supervisory Board met a total of 4 times.

Supervisory Board Decision-making ProceduresThe work of the Supervisory Board is directed by an activity plan, which the Supervisory Board drafts annually in advance. Supervi-sory Board meetings are held on an ad hoc basis, usually in com-pliance with the activity plan, but no fewer than 4 times a year. Supervisory Board meetings are conducted in Czech or English,

as required by the attending members. Supervisory Board meet-ings are chaired by the chairman, Vice Chairman or an authorised member of the Supervisory Board and, in their absence, the most senior member of the Supervisory Board in attendance.

The Supervisory Board only achieves a quorum if more than half of all its members are present at a meeting. The Supervisory Board adopts decisions in the form of a resolution requiring a majority of votes of attending members. In the event of a tie, the chairman shall cast the deciding vote. If all the Supervisory Board members are in agreement, the Supervisory Board may pass a resolution by a written vote or a vote taken via remote means of communica-tion (e. g. all Board of Directors members per rollam or individual members in writing, via video- or teleconferencing); in such cases, voting members are deemed present. Voting on matters under dis-cussion is conducted openly at Supervisory Board meetings, i. e. by a show of hands. The election and recall of a member of the Board of Directors is also conducted in an open vote at a Supervi-sory Board meeting; in this case, no written voting submissions or voting via remote means of communication are permitted.

The Audit Committee is a company body that shall perform the tasks assigned to an audit committee by law or the Company Stat-utes. The Audit Committee is chiefl y responsible for monitoring procedures used to prepare the standalone and consolidated fi nan-cial statements, evaluating the effectiveness of the Company’s in-ternal controls, Internal Audit function and any risk management systems in place, monitoring the process of performing the statu-tory audit of the standalone and consolidated fi nancial statements, assessing the independence of the statutory auditor and audit com-pany and, most importantly, providing ancillary services to the audited entity and recommending an auditor. A full list of Audit Committee members, including their professional biographies, is published on page 12–13 of the Annual Report.

Audit Committee Decision-making ProceduresThe work of the Audit Committee is governed by its Rules of Proce-dure and agenda of activities. The Audit Committee met 4 times in 2010. Meetings of the Audit Committee are chaired by its chairman, Vice Chairman or an authorised member or, in the event of their absence, by the senior member in attendance. At Audit Committee meetings, votes on matters under discussion are taken openly, i. e. by a show of hands. The Audit Committee only achieves a quorum if

Česká spořitelna – Corporate Social Responsibility | Česká spořitelna, a. s., Declaration on the Compliance of its Governance with the Code Based on OECD Principles | Organizational Structure of ČS

54

more than half of its members are present. It adopts decisions in the form of a resolution requiring a majority of votes of attending Audit Committee members. In the event of a tie, the chair shall cast the de-ciding vote. Where all Audit Committee members are in agreement, the Audit Committee may vote based on a written vote or a vote un-dertaken via remote means of communication, in which case those voting are deemed present at such meeting.

The Company consistently sees to it that the members of the Board of Directors and Supervisory Board are kept up to date at all times; the Company has in place a well administered and highly developed system supporting the execution of corporate govern-ance. Newly elected members of the bodies are given immediate access to all information regarding the Company’s principles and rules of corporate governance.

The Company’s highest bodies, i. e. the Board of Directors, Super-visory Board and Audit Committee, have adopted binding Rules of Procedure for the bodies. These deal in great detail with admin-istrative and procedural matters related to the activity of a given body. The Rules of Procedure of all three bodies regulate the tech-nical process of convening and voting at meetings, the preparation of meeting minutes, the activities of the body outside of meetings and procedures to address the potential bias of a body member. Both Supervisory Board members and Board of Directors mem-bers take part in Supervisory Board meetings. All Board of Direc-tors members take part in Board of Directors meetings, as do the authors of presented materials to be introduced to the Board of Di-rectors members. Representatives of the external auditor, members of the Board of Directors and Supervisory Board and, on occasion, other guests, are invited to attend meetings of the Audit Commit-tee. Members of the Board of Directors, Supervisory Board and Audit Committee may solicit a legal opinion on individual materi-als under discussion from the Company’s Legal Services Depart-ment or may seek the services of independent advisors. The Offi ce of the Company Secretary organises long-term training in corpo-rate governance and legislation for the members of administrative bodies so as to develop and enhance their knowledge and skills on an ongoing basis.

The position of Company Secretary has long existed within the Company. The Secretary of the Company’s bodies manages admin-istrative and organisational matters for the Board of Directors and Supervisory Board, including the organisation of General Meet-ings. The Secretary familiarises new members of administrative bodies with the activities of those bodies and with the Company’s corporate governance process.

The Company Secretary ensures mutual co-operation among the Company’s bodies. The Secretary is appointed by the Company’s Board of Directors and reports directly to the CEO and chairman of the Board of Directors. The Secretary is responsible for due and timely distribution of invitations and materials for meetings of the Company’s Board of Directors and Supervisory Board. The Company has instituted binding regulations for the submission of

materials to be discussed at meetings of the Supervisory Board and Board of Directors, which stipulate the basic rules for the prepa-ration and submission of materials, comment procedures prior to the submission of materials and conditions for the archiving of materials. The Secretary takes the minutes of all meetings of the Board of Directors and Supervisory Board in English and Czech. The Company maintains an electronic database of all minutes from meetings of its bodies; these are available to authorised persons on the Intranet – the Company’s internal internet portal. The Com-pany Secretary is, inter alia, a member of the Czech Institute of Corporate Secretaries (ČITOS) and of the organisation’s steering committee. ČITOS’s mission is to promote and support the profes-sional development of secretaries of administrative bodies.

B. Company Relationships with Shareholders

The Company diligently ensures compliance with all the legal rights of shareholders and with the principle of equitable treatment of all shareholders. The Company’s shares are held in book entry form. A list of all shareholders is maintained by the Securities Centre. In addition to ordinary shares, the Company has also issued registered priority shares. The transferability of these shares is restricted to Czech towns and municipalities; transfers to other entities are sub-ject to approval by the Board of Directors. A preference right to re-ceive dividends is attached to priority shares. Decisions regarding transfers of priority shares are made by the Board of Directors and are always based on detailed information about the assignee.

The Company complies with all duties to inform its shareholders and other entities to the extent imposed by law; the Company keeps shareholders updated throughout the year via the media and the Company website. The website, created mainly for the purposes of shareholders and investors (www.csas.cz/vztahy k investorům), provides information on the Company’s current operating results, shareholder structure, planned events, etc. Press releases covering material facts about the Company are issued on a regular basis; Board of Directors members organise regular road shows for inves-tors and shareholders. All material information that the Company publishes on its website is available in both Czech and English.

In compliance with the law, the Company convenes General Meetings by means of an announcement in the press; these are published in Hospodářské noviny and Obchodní věstník. The announcement always includes basic information for sharehold-ers about the conditions of participation in the General Meeting and the exercising of shareholders’ rights. The Company sends announcements of the General Meeting, including basic fi scal in-dicators, to all shareholders who have registered shares. General Meeting announcements are published on the Company website as a matter of course. Shareholders may familiarise themselves in ad-vance (within the statutory period) with the basic materials (fi nan-cial statements, Related Parties Report or proposed changes to the Statutes) that are to be subjected to General Meeting discussion. The Company always organises its General Meetings at venues


55

that are accessible to all shareholders. For several years now, Gen-eral Meetings have been held at the Company’s registered offi ce.

The powers of the General Meeting extend to decisions on matters that the law or Company Statutes assign to the powers of a General Meeting. The General Meeting is held no less than once a year and no less than four months after the end of the accounting period. General Meeting voting is performed by ballot; details are stipu-lated by the Rules of Procedure of the General Meeting approved by the General Meeting. General Meeting votes are fi rst taken on proposals presented by the individual who convened the General Meeting; if the General Meeting has been convened by request, then the proposals presented by the individual who requested that the General Meeting be convened are voted on fi rst. If this pro-posal is passed, no votes shall be taken on further counter-propos-als in the given matter. If the proposal is not passed, the proposals presented by attending shareholders are voted on in consecutive order according to the number of shareholder votes. The General Meeting adopts decisions in the form of a resolution requiring a majority of votes of attending shareholders, where the law does not stipulate a different majority.

Shareholders receive all supporting documents for a General Meet-ing at the time of their registration for the respective General Meet-ing. These materials always include the Rules of Procedure of the General Meeting, which the General Meeting approves. If Super-visory Board members are to be elected, shareholders are provided with detailed biographical data of all nominees attesting to their professional and personal qualifi cations to hold such offi ce. The bodies of the General Meeting are set up by the Board of Directors in a manner that ensures that all the bodies are able to perform their functions with due and professional care. In most cases, a notary is present at the Company’s General Meetings. In compliance with the Rules of Procedure, shareholders may exercise their share-holder rights in person or by proxy, i. e. vote on proposed items on the agenda, solicit and receive explanations on such items and put forward proposals and counter-proposals.

The members of the Board of Directors and Supervisory Board take part in General Meetings (there must be at least as many mem-bers as are required for a quorum) as do members of the Supervi-sory Board committees who answer shareholders’ questions. The Company provides suffi cient time for shareholders to raise their questions on agenda items prior to a vote being taken. All share-holder questions and answers are recorded in the General Meet-ing minutes. Each item on the General Meeting agenda is subject to a separate vote taken after debate on the given item is closed. All shareholders registered in the attendance list and present at the General Meeting when the vote is being taken are entitled to vote, with the exception of those shareholders who hold priority shares. The right to vote at General Meetings is not attached to the Com-pany’s priority shares. In addition, shares whose holders’ voting rights for General Meetings were suspended by a decision of the Czech National Bank are not considered voting shares; the share-holder is informed of such a suspension at the time of his / her reg-

istration in the attendance list and the Company indicates this fact (including the reasons for the suspension) in the attendance list.

C. Information Disclosure and Transparency

The Company rigorously endeavours to prevent the misuse of in-sider information that might allow persons who have special rela-tionships with the Company to enjoy unauthorised gains in dealing with the Company’s securities. Board of Directors members and parties close to them are obliged to promptly notify the Czech Na-tional Bank of transactions with securities issued by the Company or with investment instruments derived from such securities, which they perform on their own account. Erste Bank Group’s rules for se-curities trading are applied to ensure identical terms and conditions for all members of the Board of Directors of Erste Group Bank com-panies – members of the Company’s Board of Directors are obliged to inform the Company’s Compliance Department of dealings with Erste Group Bank’s shares or derivatives and to comply with an im-posed trading moratorium during a stipulated period.

The Company has established a Compliance Department whose principal activities include ensuring compliance of the Company’s internal regulations with valid legal and regulatory requirements and their observance and ensuring compliance of the employees’ conduct with the legal regulations, internal regulations, Code of Ethics and other adopted standards and rules governing employee conduct. Compliance is involved in all aspects of Company activi-ties and administration and forms a part of its corporate culture. The Compliance Department evaluates insider information included in the Watch List and Restricted List of investment instruments as well as any dealings with investment instruments recorded in these lists. The Compliance Department informs the Company’s Board of Di-rectors and Supervisory Board of its activities on a regular basis. A list of persons with access to insider information is available with the Company’s Secretary; the list is regularly updated.

The Company diligently fulfi ls and complies with all Czech legal regulations, principles of the Corporate Governance Code based on OECD principles and EU Commission recommendations re-garding corporate governance and, on an ongoing basis, provides shareholders and investors with all material information on its business activities and fi nancial and operating results, ownership structure and other signifi cant events. All information is prepared and disclosed in compliance with the highest standards of account-ing and the disclosure of fi nancial and non-fi nancial information. Moreover, the Company discloses a great deal more information than the statutory requirements so that shareholders and investors may make informed decisions concerning ownership of the Com-pany’s securities and voting at General Meetings. The Company uses various distribution channels to publish such information, e. g. the media or the Company website, where information is published in both Czech and English to enable equal participation of foreign investors and shareholders in decisions regarding the Company’s business and development.


56

The Company regularly publishes annual and semi-annual reports. The annual report principally includes the audited fi nancial state-ments and provides a picture of the Company’s fi nancial position, business activities and operating results. The report also provides information on the Board of Directors and Supervisory Board member remuneration policy in compliance with the legal regulations. The Company has no equity option scheme for remu-neration either for the members of the Board of Directors or the Supervisory Board.

In connection with the implementation of Act No. 93/2009 Coll. on auditors, an Extraordinary General Meeting appointed the com-pany Ernst & Young Audit, s. r. o., as the external auditor of the annual fi nancial statements for 2010.

D. Committees of the Company’s Administrative Bodies

The Company has established committees under the Board of Di-rectors and Supervisory Board to support the Company’s activities and to ensure the internal management and accountability of these bodies. The individual committees’ Rules of Procedure defi ne the scope of their powers and include a precise description of applica-ble rules, tasks and decision-making procedures.

Credit Committee of the Supervisory BoardThe Credit Committee is principally an advisory and confi rmation body for credit exposures beyond the limits of the approval author-ities of the Board of Directors’ Credit Committee. The members of the Credit Committee are: M. Wimmer, B. Spalt and C. Höller.

Committees of the Board of DirectorsBoard of Directors Committees are advisory bodies of the Board of Directors established by resolution of the Board of Directors. The purpose of the committees is to originate and present technical recommendations to the Board of Directors; committees comprise Board of Directors members and selected Company employees. All the committees are accountable to the Board of Directors and submit a report on their activities at least once a year.

Credit CommitteeThe Credit Committee is the highest body that assesses and ap-proves credit transactions and products as well as assessing and approving the business policy process, the credit risk measurement and management system and the level of the Company’s credit portfolio structure for the purpose of achieving the designated level of fi nancial objectives, i. e. profi tability, while adhering to the defi ned level of credit risk.

Assets and Liabilities Management CommitteeThe Assets and Liabilities Management Committee is the highest body that assesses and approves the process of planning, managing and controlling fi nancial fl ows and the structure of the Company’s assets and liabilities with the aim of achieving an optimal com-bination of profi tability and fi nancial risk. The Committee deter-

mines the Company strategy in this area and assigns tasks to the Company’s organisational units to fulfi l the strategy.

Financial Markets and Risk Management CommitteeThe Financial Markets and Risk Management Committee is the body that deals with decisions on operational issues of risk man-agement processes related to fi nancial markets.

Investment CommitteeThe Investment Committee is the body that assesses the expedi-ency and effectiveness of capital expenditure and purchased serv-ices.

ATM CommitteeThe ATM Committee is the body that assesses and makes decisions regarding ATM issues (strategies, investments, locations, servic-ing, income, etc.) with the aim of ensuring a standardised and com-prehensive approach to ATM network development.

Customer Satisfaction CommitteeThe Customer Satisfaction Committee is a body designed to im-prove service quality and the satisfaction and loyalty of internal and external clients and to support measures that make the Bank’s processes more effective.

Česká spořitelna Financial Group Marketing and Sponsorship CommitteeThe Česká spořitelna Financial Group Marketing and Sponsor-ship Committee is an advisory body of the Board of Directors, which discusses proposed marketing and sponsorship strategies and strategic communication concepts and campaigns and deals with the brand and support of sales channels including branch merchandising.

Retail CommitteeThe Retail Committee is the body that assesses and approves in-novations and the launch or discontinuation of retail banking prod-ucts and services.

Compliance, Operational Risk and Security CommitteeThe Compliance, Operational Risk and Security Committee is a body of the Board of Directors whose role is to decide on issues regarding the management of operational risk, compliance risk and security in relation to compliance in the Bank.

Capital Investments CommitteeThe Capital Investments Committee is a body of the Board of Di-rectors that assesses and makes decisions on capital investments of the Bank in real estate funds / venture capital companies.

Pricing CommitteeThe Pricing Committee is a body whose role is to manage and im-plement Česká spořitelna’s retail banking pricing policy and strategy and to assess and approve product and service prices in this area.


57

E. Company Policy with respect to Stakeholders

Information on this topic is available in the section Corporate Re-sponsibility of Česká spořitelna (see page 50–51).

F. Principles of Internal Control and Rules for Accepting Risk in the Financial Reporting Process

The Company processes its fi nancial accounts in the SAP system, which complies with exacting requirements for the security and quality of account preparation. System inputs are entered both manually and automatically from other ancillary systems.

The accounting unit complies with all statutory and legislative re-quirements. Procedures pertaining to accounting documents and their circulation have been put in place as required by the Ac-counting Act and in a manner that serves the needs of the control function and internal company requirements. The accounting unit has established separate regulations for accounting documents and their circulation and these are subject to regular review, par-ticularly accounting document circulation, which adheres to the “four-eyes” control principle and eliminates the possibility of un-authorised accounting transactions by defi ning persons authorised to approve and perform accounting entries, i. e. who may be in-volved in the accounting process. The editing of accounting en-tries is subject to the same controls. Manual and automatic controls of the completeness and correctness of SAP system outputs are performed in respect of automatic accounting between SAP and ancillary accounting systems. Accounting documents are archived systematically and manually and the archiving system has been set up to comply with statutory requirements (the Accounting Act and Archiving and Records Service Act).

The accounting unit fulfi ls asset valuation requirements pursu-ant to Part IV of the Accounting Act (in accordance with the gen-eral principle of prudence) and International Financial Reporting Standards. The accounting unit has instituted several separate in-ternal regulations for this area that comply with these statutory re-quirements and principally address the setting of asset input prices, i. e. their valuation under Accounting Act requirements, changes in their valuation (in particular, provisioning), asset amortisation, de-preciation, disposal and stock taking and related tax requirements.

The area of interdepartmental bookkeeping is not separately ad-dressed by statutory or legislative regulations, with the exception of the defi nition of basic features required, inter alia, for trans-parency. The accounting unit established interdepartmental book-keeping based on historical developments while respecting current requirements for bookkeeping and for controlling accounting unit costs. Interdepartmental bookkeeping is primarily kept in the form of sub-ledger accounts whose contents are subject to regular re-view. Bookkeeping operations on sub-ledger accounts are control-led for accuracy on an ongoing basis.

The accounting unit primarily recognises provisions and reserves pursuant to the basic principles stipulated by the statutory account-ing and tax regulations. The accounting procedures are addition-ally regulated by internal rules that, in addition to the foregoing, refl ect the needs of key departments in relation to the accounting system in this area (audit, reporting, controlling, etc.). The meth-odology and accounting for the creation and release of provisions in the Company is concentrated in a single location and carried out by a small group of staff, which is advantageous, inter alia, from the perspective of logic, operational and reconciliation controls. The controls are performed on an ongoing basis both before and after operations. Given the impact on operating results, the general creation of provisions is not monitored by individual accounting item, but in a broader context.

Aggregated consolidated and standalone fi nancial statements are submitted to the Company’s statutory body on a monthly basis. The Company’s Supervisory Board has the aggregated consolidat-ed and standalone fi nancial statements on hand at every one of its meetings. The consolidated and standalone fi nancial statements of the Company are subject to Internal Audit testing at irregular inter-vals. The Audit Committee monitors the process of compiling the consolidated and standalone fi nancial statements while also evalu-ating the effectiveness of internal controls. The Audit Committee additionally monitors the process of the statutory audit of the con-solidated and standalone fi nancial statements, which are subject to a standard external audit once a year; the pre-audit work is done fi rst and this is followed by the audit work on the consolidated and standalone fi nancial statements and the annual report.


58

Organizational Structureof ČS as of 31 December 2010

Offi ce of the Board and the Supervisory Board Section

1001

Chairman of the Boardand C. E. O.

Gernot Mittendorfer

Group Large Corporates Department

4050

Trade Finance Department

4010

Municipalities Section

4400

Real Estate Business Section

4300

Commercial Centres Section

4200

Corporate Customers Section

4100

Quality Management of Service Department

1310

Marketing Section

1700

Human Resources Section

1600

Internal Audit Section

1400

Corporate Communication Section

1100

Deputy Chairman of the Board of Directors and 1st DeputyC. E. O.

Accounting and Taxes Section

Capital Participation & Real Estate Investment Department

Investors Relationships Department

Property Management Section

Controlling and Planning Section

2200

2300

2010

2030

2100

Dušan Baran

Member of the Boardand Deputy C. E. O.

Group Balance Sheet Management Section

Business Support Sub-department

Financial Markets – Retail Distribution Section

Financial Markets – Wholesale and Trading Section

Investment Banking Section

3600

3700

3800

3001

3100

Daniel Heler

Business Development Section

Member of the Board of Directors and Deputy C. E. O.

Card Centre Section

Remote Delivery Section

5300

5400

East Region Section+11 District Branches

5700

External Sales Forceand Co-operation Section

5800

Support Sub-department

5001

Jiří Škorvaga

5100

5600West Region Section+11 District Branches

Premium Centre Section

5900

Retail banking Business Architecture Sub-department

5002

59

Legal Services and Compliance Section

6100


Heinz Knotzer

Support Sub-department

6001

Credit Risk Controlling and PortfolioManagement Section

6400

Credit Risk Managementand Credit Services Section

6300

Central Risk Management Section

6200

Org-IT Section


IT Decentralized Systems Section

IT Development Section

7500

7600

Pavel Kysilka

7300

Česká spořitelna, a. s., Declaration on the Compliance of its Governance with the Code Based on OECD Principles | Organizational Structure of Česká spořitelna | Report of the Supervisory Board and Audit Committee

Security Section

6500

Transactions Processing Section

8100

Economic and Strategic ResearchDepartment

8010

Financial Markets Back Offi ceSection

8400

Clients Account Administration Section

8300

Business Processing Section

8500

Economic and Strategic ResearchOperation Development

8020

60

Report of the Supervisory Board and Audit Committee During 2010 the Supervisory Board of Česká spořitelna, a. s., regu-larly discharged its duties in accordance with the law and the com-pany’s Articles of Association. As the company’s oversight body, the Supervisory Board monitored the Board of Directors’ exercise of its powers as well as the Bank’s operations, fi nances and the re-alization of its strategic plans. The Supervisory Board was kept up to date on the Bank’s operations, its fi nancial situation, and other material and important Bank matters.

In accordance with the legal provision, the Supervisory Board at its meetings reviewed the individual and consolidated fi nancial state-ments as at 31 December 2010 and came to the conclusion that the books and accounting records were kept in a transparent manner in accordance with accounting regulations and that the accounts and year end individual and consolidated fi nancial statements fairly and faithfully refl ect the fi nancial situation of Česká spořitelna, a. s., and its consolidated unit as at 31 December 2010. The audit of the year end fi nancial statements was performed by Ernst & Young Audit, s. r. o., who confi rmed that according to their opinion the fi nancial statements present fairly, in all material respects, the fi -nancial position of Česká spořitelna, a. s., as at 31 December 2010, and of its fi nancial performance and its cash fl ows for the year then ended in accordance with International Financial Reporting Stand-ards as adopted by the European Union. The Supervisory Board with agreement took account of the auditor’s statement.

The Supervisory Board also reviewed the Report on Relations be-tween connected persons and in accordance with the provision 66a para 10 of the Commercial Code states that it took account of this Report without comments.

In view of all above facts, the Supervisory Board recommends that the General Meeting approves the fi nancial statements of Česká spořitelna, a. s., for the year ended 31 December 2010 and the pro-posed profi t allocation as submitted by the Board of Directors.

Manfred WimmerChairman of the Supervisory Board

In 2010, the Česká spořitelna, a. s., Audit Committee operated as an independent company body.

In compliance with Act No. 93/2009 Coll. on auditors and with the Česká spořitelna Statutes, the Audit Committee oversaw the procedure used to compile the standalone and consolidated fi nan-cial statements, evaluated the effectiveness of the Bank’s internal controls, Internal Audit and the risk management system, moni-tored the process of the statutory audit of the standalone and con-solidated fi nancial statements, assessed the auditor’s independence and recommended that the company Ernst & Young Audit, s. r. o., perform the audit of the annual fi nancial statements for 2010.

In compliance with Czech National Bank requirements, the Audit Committee performed an evaluation of the functionality and ef-fectiveness of the management and control system in the Bank. At its regularly held meetings in 2010, the Committee discussed planned Internal Audit activities and strategies, reports on Inter-nal Audit plans and activities and information on the fulfi lment of measures developed by audits and controls adopted by the Bank’s top management. The Audit Committee focused its attention on the management of operational, lending and market risks, including fraud management.

Maximilian HardeggChairman, Audit Committee

61

Consolidated Financial Statementsfor the Year Ended 31 December 2010

Independent Auditor’s Report to the Board of Directors of Česká spořitelna, a. s. 62Consolidated Statement of Financial Position as at 31 December 2010 63Consolidated Income Statement for the Year Ended 31 December 2010 64Consolidated Statement of Comprehensive Income for the Year Ended 31 December 2010 65Consolidated Statement of Changes in Shareholders’ Capital for the Year Ended 31 December 2010 66Consolidated Statement of Cash Flows for the Year Ended 31 December 2010 68Notes to the Consolidated Financial Statements for the Year Ended 31 December 2010 70

Prepared in Accordance with International FinancialReporting Standards as Adopted by the European Union

62

Independent Auditor’s Report to the Board of Directors of Česká spořitelna, a. s.

We have audited the accompanying consolidated fi nancial statements of Česká spořitelna, a. s., and its subsidiaries („the Group“), which comprise the consolidated statement of fi nancial position as at 31 December 2010, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated cash fl ows statement for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes. For details of the Group, see Notes 1 and 4 to the consolidated fi nancial statements.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated fi nancial statements in accordance with Interna-tional Financial Reporting Standards as adopted by the European Union, and for such internal control as management determines is neces-sary to enable the preparation of consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated fi nancial statements based on our audit. We conducted our audit in accord-ance with the Act on Auditors and International Standards on Auditing as amended by implementation guidance of the Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reason-able assurance whether the consolidated fi nancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated fi nancial state-ments. The procedures selected depend on the auditor’s judgment, including an assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements.

We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of the Group as at 31 De-cember 2010, and its fi nancial performance and its cash fl ows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

Ernst & Young Audit, s. r. o.License No. 401

Represented by

Martin Zuba Magdalena SoucekPartner Auditor, License No. 1291

8 March 2011Prague, Czech Republic

A member fi rm of Ernst & Young Global Limited, Ernst & Young Audit, s. r. o., with its registred offi ce at Karlovo náměstí 10, 120 00 Prague 2, has been incorporated in the Commercial Register administered by the Municipal court in Prague, Section C, entry No. 88504, under identifi cation No. 26704153.

63

Consolidated Statement of Financial Positionas at 31 December 2010

CZK mil. Note 2010 2009 restated

1. Jan 2009 restated

Assets1. Cash and balances with the CNB 5 25,767 29,371 24,2852. Loans and advances to fi nancial institutions 6 174,947 126,506 93,3063. Loans and advances to customers 7 459,975 469,192 461,4334. Provisions for losses on loans and advances to customers 8 (19,225) (14,713) (8,929)

Provisions for loans and advances to customers, net 440,750 454,479 452,5045. Securities at fair value through profi t or loss 28,075 37,011 55,935 (a) Securities held for trading 9 18,488 29,644 36,709

(b) Securities designated upon initial recognition as at fair value

through profi t or loss 10 9,587 7,367 19,2266. Positive fair value of derivative transactions 11 16,021 17,675 27,1387. Securities available-for-sale 12 20,029 28,388 35,0158. Securities held-to-maturity 13 128,977 111,977 118,9389. Investments in associates and joint ventures 84 211 235

10. Investment property 14 11,733 12,013 12,75211. Property under construction 15 3,632 4,921 5,86212. Property and equipment 16 16,015 15,390 15,40113. Intangible assets 17 3,117 3,251 3,75114. Deferred tax assets 26 688 663 62915. Income tax receivable 578 80 46816. Other assets 18 11,216 13,194 15,264

Total assets 881,629 855,130 861,483

Liabilities and shareholders’ equity1. Amounts owed to fi nancial institutions 19 52,214 47,434 57,5612. Amounts owed to customers 20 661,074 643,420 642,5043. Financial liabilities at fair value 21 12,058 8,129 7,6964. Negative fair value of derivative transactions 22 14,674 16,412 25,5955. Bonds in issue 23 46,058 43,119 39,2046. Provisions 24 2,145 2,040 2,2197. Deferred tax liability 26 197 221 1,5778. Income tax liability 23 184 44 9. Other liabilities 25 11,203 17,221 15,050

10. Subordinated debt 27 11,036 13,404 5,197Total liabilities 810,682 791,584 796,647

11. Shareholders’ capital 70,947 63,546 64,836 a) Equity attributable to owners of the parent 29, 30 70,780 63,279 64,298 b) Non-controlling interests 28 167 267 537

Total liabilities and shareholders’ equity 881,629 855,130 861,483

The accompanying notes are an integral part of these consolidated fi nancial statements.

These consolidated fi nancial statements were prepared by the Bank and approved by the Board of Directors on 8th March 2011.

Pavel Kysilka Dušan BaranChairman of the Board and Vice Chairman of the Board of Directors andChief Executive Offi cer 1st Deputy CEO

Independent Auditor’s Report | Consolidated Statement of Financial Position | Consolidated Income Statement

64

Consolidated Income Statementfor the Year Ended 31 December 2010


Continuing operations 1. Interest income and similar income 31 39,001 40,3682. Interest expense and similar expense 32 (8,738) (9,476) Net interest income 30,263 30,8923. Provisions for credit risks 33 (9,777) (8,624) Net interest income after provisions for credit risks 20,486 22,2684. Fee and commission income 34 14,799 13,7915. Fee and commission expense 35 (2,632) (2,389) Net fee and commission income 12,167 11,4026. Net trading income 36 2,991 3,3647. Staff costs (8,300) (8,496)8. Other administrative expenses (7,772) (8,031)9. Depreciation and amortization (2,605) (2,741)

Total general administrative expenses 37 (18,677) (19,268)8. Other operating expenses, net 38 (2,308) (2,006) Profi t before taxes 14,659 15,7609. Income tax expense 40 (2,611) (3,324) Profi t after taxes 12,048 12,436

Profi t for the year 12,048 12,436Attributable to

12. Owners of the parent 12,052 12,64013. Non-controlling interests (4) (204)

12,048 12,436


Consolidated Statement of Financial Position | Consolidated Income Statement | Consolidated Statement of Comprehensive Income

65

Consolidated Statement of Comprehensive Income for the Year Ended 31 December 2010


1. Profi t for the year 12,048 12,436 Other comprehensive gains and losses Hedges of net investments in foreign operations 30 157 84 Deferred tax 26, 30 (29) (17)

2. Net gain on hedges of net investments in foreign operations 30 128 673. Translation reserve 30 (342) (33) Gains and losses on revaluation of fi nancial assets available-for-sale 39 225 1,825 Deferred tax 26, 30 (25) (140)

4. Net gains and losses on revaluation of fi nancial assets available-for-sale 30 200 1,685 Cash fl ow hedges 39 (1) 110 Deferred tax 26,30 – (5)

5. Net gain / (loss) on cash fl ow hedges 30 (1) 105 Total other comprehensive gains and losses after taxes 30 (15) 1,824 Comprehensive gains and losses for the year after taxes 12,033 14,260 attributable to Owners of the parent 12,061 14,497 Non-controlling interests (28) (237) 12,033 14,260


Consolidated Income Statement | Consolidated Statement of Comprehensive Income | Consolidated Statement of Changes in Shareholders’ Capital

66

Consolidated Statement of Changes in Shareholders’ Capitalfor the Year Ended 31 December 2010

CZK mil.

Retained earnings

Revaluation of available-for-

sale securities

Revaluation of hedging derivatives

At 1 January 2009 as originally reported 48,203 (1,963) (200)Change in accounting regulations (refer to Note 3.3) (706)Correction of error (refer to Note 3.4 (dd)) 199 At 1 January 2009 restated 47,696 (1,963) (200)Profi t for the year 12,640 – –Total other comprehensive gains and losses after taxes – 1,683 171Comprehensive income for the year after taxes 12,640 1,683 171Dividends (15,504) – –Non-controlling interests in newly consolidated entities, capital increase – – –Sale of subsidiaries – – –Transfer to reserve funds (76) – –Use of funds – – –At 31 December 2009 restated 44 756 (280) (29)

At 1 January 2010 44,756 (280) (29)Net profi t for the year 12,052 – –Other comprehensive gains and losses after taxes – 202 126Comprehensive income for the year after taxes 12,052 202 126Dividends (4,560) – –Non-controlling interests in newly consolidated entities, capital increase – – –Sale of subsidiaries – – –Transfer to reserve funds (146) – –Use of funds – – –Non-paid dividends from prior years 12 – –At 31 December 2010 52,114 (78) 97


Consolidated Statement of Comprehensive Income | Consolidated Statement of Changes in Shareholders’ Capital | Consolidated Statement of Cash Flows

67

Equity attributable to owners of the parent Non-controlling interests

Total equity

Translation reserve

Statutory reserve fund

Share premium

Share capital

Total

(115) 3,669 11 15,200 64,805 564 65,369(706) (26) (732)

199 – 199(115) 3,669 11 15,200 64,298 538 64,836

– – – – 12,640 (204) 12,4363 – – – 1,857 (33) 1,8243 – – – 14,497 (237) 14,260– – – – (15,504) (50) (15,554)– – – – – 16 16– (7) – – (7) – (7)– 76 – – – – –– (5) – – (5) – (5)

(112) 3,733 11 15,200 63,279 267 63,546

(112) 3,733 11 15,200 63,279 267 63,546– – – – 12,052 (4) 12,048

(319) – – – 9 (24) (15)(319) – – – 12,061 (28) 12,033

– – – – (4,560) (75) (4,635)– – – – – 3 3– (7) – – (7) – (7)– 146 – – – – –– (5) – – (5) – (5)– – – – 12 – 12

(431) 3,867 11 15,200 70,780 167 70,947

Consolidated Statement of Comprehensive Income | Consolidated Statement of Changes in Shareholders’ Capital | Consolidated Statement of Cash Flows

68

Consolidated Statement of Cash Flowsfor the Year Ended 31 December 2010


Profi t before taxes 14,659 15,759Adjustments for non-cash transactionsCreation of provisions for losses on loans, advances and other assets 33 9,770 8,624Depreciation and amortization of assets 37 2,605 2,741Depreciation of investment property 14 243 236Impairment of investment property 14 413 780Impairment of assets under construction 15 390 618Unrealized loss / (profi t) on securities at fair value through profi t or loss and liabilities at fair value 212 332Gain on disposal / revaluation of ownership interests (343) (424)Impairment of available for sale securities 38 – 644Creation / (release) of other provisions 66 33Change in fair values of derivatives 72 474Accrued interest, amortization of discount and premium (692) 2,418Other adjustments 2 (207)Operating profi t before chase in operating assets and liabilities 27,397 32,028

Cash fl ow from operating activities(Increase) / decrease in operating assetsMinimum reserve deposits with the CNB 2,727 (2,610)Loans and advances to fi nancial institutions (48,406) (34,902)Loans and advances to customers 4,037 (10,476)Securities at fair value through profi t or loss 4,736 17,317Securities available-for-sale 8,569 7,093Other assets 2,121 371Increase / (decrease) in operating liabilities Amounts due to fi nancial institutions 1,743 (10,525)Amounts due to customers 17,658 916Liabilities at fair value 3,909 359Other liabilities (5,593) 1,533Net cash fl ow from operating activities before taxes and movement in non-controlling interests 18,898 1,104Increase / decrease in non-controlling interests (21) (17)Income taxes paid (3,370) (2,623)Net cash fl ow from operating activities 15,507 (1,536)

Consolidated Statement of Changes in Shareholders’ Capital | Consolidated Statement of Cash Flows | Notes to the Consolidated Financial Statements

69


Cash fl ows from investing activities Increase in securities held-to-maturity (39,863) (22,355)Decrease in securities held-to-maturity 22,950 24,704Investment property (97) (275)Assets under construction 892 (1,475)Proceeds from the sale of interest in subsidiary and associate undertakings 128 323Purchase of tangible and intangible assets (3,309) (2,386)Proceeds from the sale of tangible and intangible assets 340 358Net cash fl ow from investing activities (18,957) (1,106)

Cash fl ows from fi nancing activitiesDividends paid (4,560) (15,504)Dividends paid to minority shareholders (75) (50)Unpaid dividends from prior years 9 –Bonds in issue – sale 15,084 5,054Bonds in issue – repurchase (12,240) (1,300)Receipt / (pay-off) of subordinated debt (2,368) 8,207Use of funds (5) –Net cash fl ow from fi nancing activities (4,155) (3,593)

Net increase / (decrease) in cash and cash equivalents (7,605) (6,235)Cash and cash equivalents at beginning of year 25,816 32,051Cash and cash equivalents at end of year 18,211 25,816

Cash Flow from Interest and DividendsCZK mil. 2010 2009

Dividends received 138 173Dividends paid (4,560) (15,554)Interest received 38,620 42,208Interest paid (9,231) (8,956)


Consolidated Statement of Changes in Shareholders’ Capital | Consolidated Statement of Cash Flows | Notes to the Consolidated Financial Statements

70

1. Introduction

Česká spořitelna, a. s., (henceforth the “Bank”), having its reg-istered offi ce address at Olbrachtova 1929/62, Prague 4, 140 00, Corporate ID 45244782, is the legal successor of the Czech State Savings Bank and was founded as a joint stock company in the Czech Republic on 30 December 1991. The Bank is a universal savings bank offering retail, corporate and investment banking services within the Czech Republic.

The Bank’s majority shareholder is EGB Ceps Holding GmbH, which is a 100% subsidiary of EGB Ceps Beteiligungen GmbH, a wholly-owned subsidiary of Erste Group Bank AG (“Erste Group Bank”). The change in ownership structure was adopted as part of the technical optimization of the Erste Group Bank shareholders’ structure; the optimization took place in 2009 and was duly ap-proved by the Czech National Bank (“CNB”).

The principal activities of the Bank are as follows: Acceptance of deposits from the general public; Extension of credit; Investing in securities on its own account; Payments and clearing; Issuance of payment facilities, e. g. payment cards, traveler’s cheques; Issuance of guarantees; Opening of letters of credit; Collection services; Proprietary or client-oriented trading with foreign curren-cy assets, forward and option contracts, including foreign currency and interest rate transactions, and transferable securities; Management of client securities on account and provision of advisory services; Participation in the issuance of shares and provision of related services; Safety-keeping and administration of securities or other assets; Rental of safety-deposit boxes; Provision of business advisory services; Issuance of mortgage bonds under special legislation; Financial brokerage; Depositary activities; Foreign exchange services (foreign currency purchases); Provision of banking information; and Maintenance of a separate part of the Securities Centre’s records.

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The Bank provides the following additional services through its subsidiaries (together the “Group”):

Funds management; Building society savings and loans; Pension insurance; Finance leasing; Factoring; Consulting services; Provision of investment services; Real estate activities; Lease of information technology, installation and repair of electronic equipment; Provision of software and advisory services in relation to hardware and software; and Corporate management and fi nance.

The Group is subject to the regulatory requirements of the CNB. These regulations include those pertaining to minimum capital adequacy re-quirements, categorization of exposures and off-balance sheet com-mitments, credit risk connected with clients of the Group, liquidity, interest rate risk, foreign currency positions and operating risk.

In addition to the banking entities, other Group companies are sub-ject to regulatory requirements, specifi cally in relation to retire-ment and collective investment.

2. Basis of Preparation

These consolidated fi nancial statements consist of the accounts of the Bank and its subsidiaries and have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and in-terpretations approved by the International Accounting Standards Board (“IASB”) as adopted by the European Union.

The fi nancial statements have been prepared and approved by the Board of Directors of the Bank. In addition, the fi nancial statements are subject to the approval by the General Meeting. All fi gures are in mil.s of Czech crowns (CZK mil.), unless stated otherwise.

These consolidated fi nancial statements have been prepared under the historical cost convention as modifi ed by the remeasurement to fair value of available-for-sale securities, fi nancial assets and liabilities at fair value through profi t or loss and all derivatives and assets held for sale. The carrying values of recognized assets and liabilities that are hedged items in fair value hedges, and oth-erwise carried at amortized cost, are adjusted to record changes in fair value attributable to the risks that are being hedged. Assets held for sale are measured at fair value less cost to sell if this value

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Notes to the Consolidated Financial Statementsfor the Year Ended 31 December 2010

Consolidated Statement of Cash Flows | Notes to the Consolidated Financial Statement | Separate fi nancial statements

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is lower than their carrying amount (i. e., cost less accumulated depreciation and impairment losses).

The accounting policies have been consistently applied by the enti-ties in the Group, except for changes in investment property (refer to Note 3.3).

The presentation of consolidated fi nancial statements in conform-ity with IFRS requires management of the Group to make esti-mates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the reporting date and their reported amounts of revenues and expenses during the reporting period (refer to Note 3.2 (cc)). Ac-tual results may differ from those estimates.

Comparative information has been reclassifi ed, where necessary, on a basis consistent with the current year presentation.

3. Signifi cant Accounting Policies

3.1 Basis of Consolidation

The consolidated fi nancial statements present the accounts and results of the Bank together with its subsidiaries, associates and joint ventures. The fi nancial statements of the Bank and of all companies included in the consolidation are prepared for the same period, using consistent accounting policies. All intercompany bal-ances and transactions, including intercompany profi ts, are elimi-nated on consolidation.

Subsidiary UndertakingsThe Group accounts for all business combinations using the ac-quisition method. The Group, as the acquirer, measures the cost of a business combination as the aggregate of the fair values, as at the date of exchange, of assets given in exchange for control of the acquiree, and, until the effective date of IFRS 3 Business Com-binations amended, any costs directly attributable to the business combination; these costs are recorded in the income statement.

At the acquisition date, the Group allocates the cost of a business combination by recognizing the acquiree’s identifi able assets, lia-bilities and contingent liabilities that satisfy the recognition criteria at the fair values at that date. Any excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifi able assets, liabilities and contingent liabilities is accounted for as goodwill. Non controlling interest is at the date of each ac-quisition measured at the non-controlling interest’s proportionate share of the acquiree’s identifi able net assets.

If the initial accounting for a business combination can be deter-mined only provisionally by the end of the period in which the combination is effected because either the fair values to be as-signed to the acquiree’s identifi able assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the Group accounts for the combination using those provisional values. The Group recognizes any adjustments to those provisional values within twelve months of the acquisition date, with effect from the acquisition date, i. e. retrospectively.

An investment in a subsidiary is one in which the Group holds, di-rectly or indirectly, more than 50% of its share capital or in which the Group can exercise more than 50% of the voting rights or where the Group can appoint or dismiss a majority of the Board of Directors or Supervisory Board members. An investment in a sub-sidiary is also one in which the Group holds, directly or indirectly, less than 50% of its share capital but has the power to govern the fi nancial and operating policies of the company.

Where an entity either began or ceased to be controlled during the year, the results are included only from the date control com-menced or until the date control ceased.

A subsidiary is deconsolidated when a parent company loses its control over it. The results until the deconsolidation date are in-cluded in the consolidated results of the Group and, at the same time, the subsidiary’s equity is deconsolidated, inclusive, in the case of foreign entities, of cumulative currency translation differ-ences recorded in the translation reserve, through the income state-ment (refer to Note 3.4 (cc)).

The Group also acquires subsidiaries that own real estate. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for an acquisition as a business combination where an integrated set of activities and assets that is capable of being conducted and man-aged for the purpose of providing a return in the form of dividends, lower costs or other economic benefi ts directly to investors or other owners, members or participants.

When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and li-abilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognized.

Investments in AssociatesAn associate is an entity over which the Group has signifi cant


72


infl uence and that is neither a subsidiary nor an interest in a joint venture. Signifi cant infl uence is the power to participate in the fi -nancial and operating policy decisions of the investee but is not control or joint control over those policies.

The results and assets and liabilities of associates are incorpo-rated in these fi nancial statements using the equity method of ac-counting. Under the equity method, investments in associates are carried in the consolidated statement of fi nancial position at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group’s interest in that associate (which includes any long term interests that, in substance, form part of the Group’s net investment in the associate) are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifi able assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the car-rying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifi able assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recog-nized immediately in the income statement.

After application of the equity method, an investment in an associ-ate is tested for impairment. If the Group determines that the in-vestment in the associate is impaired, the impairment is recognized in the income statement.

Joint Ventures A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint con-trol. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic fi nancial and operating decisions relating to the activity require the unani-mous consent of the parties sharing control (the venturers). Joint ventures are consolidated using the equity method of accounting. The equity method is a method of accounting whereby an interest in a jointly controlled entity is initially recorded at cost and ad-justed thereafter for the post-acquisition change in the venturer’s share of net assets of the jointly controlled entity. The profi t or loss of the venturer includes the venturer’s share of the profi t or loss of the jointly controlled entity. The rules described in the previous section Investments in Associates are used similarly.

Non-controlling InterestsNon-controlling interests represent the portion of profi t or loss and net assets not held by the Bank’s owners and are presented separately from the amounts attributable to the Bank’s owners in the consolidated income statement and within equity in the con-solidated statement of fi nancial position. In certain cases (devel-

opment companies), the Group enjoys a preferential right to seek payment of its share of the reported profi ts of these subsidiaries. Therefore no non-controlling interests are recognized in respect of these companies until the Group’s claim is fully satisfi ed.

3.2 Signifi cant Accounting Judgements, Estimates and Assumptions in the Application of Accounting Policies

The Group’s management decided to use the following critical es-timates in applying accounting policies.

(a) Impairment of Loans and AdvancesThe Group regularly assesses its loan portfolio for possible impair-ment based on individual assessments for individually signifi cant loans and collective assessment for individually insignifi cant loans and loans where no impairment was identifi ed based on individual assessment.

As part of this analysis, the Group further splits all loans into two categories: defaulted (non-performing) loans (according to Basel II criteria) and non-defaulted (performing) loans. In respect of the fi rst category of loans, impairment is identifi ed based on loss making events that can be individually ascertained. All receivables are assessed by the Group on a monthly basis to determine whether a loss making event or other changes occurred. If a loss event is identifi ed the loan is considered impaired on an individual basis. For these loans the Group makes an estimate of realized losses on an individual basis for individually signifi cant loans, and on a portfolio basis for individually insignifi cant loans based on past experience adjusted for current observations. Loans that are indi-vidually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

The Group also splits performing loans into collectively impaired where an indication of impairment on a portfolio basis exists, and unimpaired. With regard to all loans with objective evidence of impairment on a portfolio basis, the Group assesses the decrease in the estimated future cash fl ows from the portfolio even though the decrease cannot yet be identifi ed with individual loans. Man-agement uses estimates based on historical experience of losses on loans that have similar risk characteristics. This historical experi-ence is adjusted for the affects of current observations.

The methods and assumptions adopted in estimating amounts and the timing of future cash fl ows are regularly reviewed to reduce differences between the estimated and actual data.

A similar approach is used for off-balance sheet credit exposures namely committed credit lines and guarantees issued.

Provisions for losses on loans and receivables are recorded when there are reasonable doubts over the recoverability of the loan bal-ance. Provisions for losses on loans and advances represent man-

73


agement’s assessment of realized losses in relation to the Group’s on and off-balance sheet activities.

The level of provisions against impaired receivables is established by comparing the carrying amount of the loan and the present val-ue of future expected cash fl ows using the effective interest rate (“EIR”) method. The estimated loss on the impairment of individ-ually signifi cant exposures is reviewed at least quarterly for each exposure. The provisioning percentage in respect of individually signifi cant loans which are collectively impaired is established on a portfolio basis. Subsidiaries that do not use internal ratings ap-ply portfolio approaches derived from the duration of default and historical experience with portfolio losses.

(b) Debt Securities Held-to-MaturityBased on the future cash fl ow model and the structure of its state-ment of fi nancial position, the Group invests in securities and cat-egorizes a portion of purchased securities in the held-to-maturity portfolio. The key criterion driving this decision is the Group’s ability to hold the security to maturity assuming suffi cient fi nan-cial coverage throughout the whole term of the investment. The ability to hold such a debt security to maturity is a pre-condition for using the debt security as a banking book interest rate risk management tool. Should the sale of more than an insignifi cant portion of the held-to-maturity debt securities take place before their maturity, pursuant to IAS 39, the Group would be required to reclassify the held-to-maturity securities into one of the re-maining portfolios.

(c) Impairment of SecuritiesOn a quarterly basis, the Group makes an assessment of the avail-able-for-sale and held-to-maturity portfolios to determine if events occurred indicating that an investment has suffered impairment.

The criteria indicating impairment of a security include, but are not limited to: signifi cant changes with an adverse effect on the investment that have taken place in the market, economic or leg-islative environment, or such changes that are expected to occur in the near future (e. g., absence of an active market), signifi cant fi nancial diffi culties of the issuer or the committed party, or con-tractual breach such as the non-payment of the principal, interest or delayed payments.

For equity securities classifi ed as available-for-sale, a signifi cant or prolonged decline in their fair value below their cost is also objective evidence of impairment. The Group generally treats “sig-nifi cant” as 30% and “prolonged” as greater than 18 months.

The impairment of held-to-maturity securities is determined as the difference between the present value of newly estimated future cash fl ows calculated using the original EIR and the securities’ carrying amount.

For available-for-sale securities the impairment corresponds to the difference between the fair value and the amortized cost.

(d) Valuation of Traded Financial Instruments For debt and equity securities or other fi nancial instruments traded on the Prague Stock Exchange (“PSE”) and other stock exchanges, fair values are derived from quoted prices. In respect of fi nancial instru-ments which are publicly traded but where the volumes or frequency are small, management assesses the identifi ed market prices on an in-dividual basis to determine if they provide an actual indication of the fair value. In exceptional cases, management uses its own estimates to make adjustments or uses the Group’s own valuation models.

(e) Valuation of Financial Instruments without Direct QuotationsFinancial instruments without direct quotations in an active market are valued using the mark to model technique. Each model is cali-brated for the most recent available market data. While the models are only built on available data, their use is subject to certain as-sumptions and estimates (e. g. for correlations, volatilities, credit risk of the issuer, etc.). Changes in the model’s assumptions may affect the reported fair value of the relevant fi nancial instruments.

The valuation of structured bonds, the yields of which are linked to the underlying assets (asset backed securities) is performed month-ly on the basis of quotations requested from listing agents. With assistance from Erste Group Bank, the Group analyses the quoted prices by reference to the results of internal valuation models and other facts. Based on this analysis, the Group can value its bonds at other than the quoted price. Where multiple quotations are avail-able, the Group uses the lowest quotation.

(f) Legal ProvisionsThe Group is involved in a number of ongoing legal disputes, the resolution of which may have an adverse fi nancial impact on the Group. Based upon historical experience and expert reports, the Group assesses the developments in these cases, and the likelihood and the amount of potential fi nancial losses which are appropri-ately provided for. Nevertheless the actual results may differ from the estimated losses at the reporting date.

(g) Investment PropertyThe fair value of investment property is determined for reporting purposes and for the purposes of asset impairment testing (refer to Note (h)) and is estimated as an amount for which the asset could be exchanged between knowledgeable, willing and non-related parties as at the measurement date. The expected yield is deter-mined using the comparison method (similar realized transactions on the same market).

The fair value of investment property is determined once a year by an independent real estate appraiser who has appropriate and re-spected professional qualifi cations and prior experience in valuing similar properties in similar locations. In determining fair value of property investments the independent appraiser proceeds from es-timated annual net income using the expected yield method whilst the rent yield parameter is determined on the basis of real estate location and varies between 7.00 percent and 9.30 percent.

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(h) Impairment of AssetsThe Group tests its assets for impairment at least annually to de-termine whether there is any indication that they have suffered im-pairment. If any such indication exists, the Group compares the carrying amount of the assets with their recoverable amount de-fi ned as the higher of fair value less costs to sell and value in use.

For inventory (property under construction) the Group determines the net realizable value on the basis of the estimated, discounted future cash fl ows generated from the sale of the property after deducting the costs incurred on the sale and construction of this property.

With regard to impaired tangible assets within the scope of IAS 16, the Group determines the fair value less costs to sell. The fair value is arrived at on the basis of expert appraisals prepared by certifi ed appraisers.

The Group determines the value in use of intangible assets by esti-mating discounted future cash infl ows and outfl ows to be derived from continuing use of the asset and from its ultimate disposal.

For investment properties the Group determines the impairment mainly using the fair value (see section (g)) less cost to sell.

(i) Fair Value of CollateralIn the course of its lending business, the Group accepts mov-able and immovable assets and securities pledged as collateral. The Group also uses various forms of guarantee statements to collateralize its loan receivables. Movable and immovable assets pledged as collateral are carried off-balance sheet and are initially valued on the basis of an expert appraisal (nominal value of col-lateral) which is reduced, based on the Group’s experience, to the realizable value using the collateral discount coeffi cient which is derived from the type of collateral. All coeffi cients are described in the Group’s internal policy. Guarantees are valued at the nomi-nal value reduced by the collateral coeffi cient which is derived from the guarantor’s solvency. Subsequently, the Group regularly

assesses the realizable value of collateral for impairment. This assessment is mostly conducted as part of the regular (at least annual) monitoring of loan receivables. With respect to a large amount of collateral of the same type, the Group uses portfolio models to determine if the realizable value of the collateral de-creased. The Group takes into account the realizable value of col-lateral in calculating provisions for loans and advances. Details about the determination of the realizable value of collateral are provided in Note 43.1.

3.3 Changes in Accounting Policies

Historically the Group measured its investment property using the fair value model per IAS 40 Investment Property (“IAS 40”).

In 2010 the Group changed its accounting policy for investment property from the fair value model to the cost model as alterna-tively allowed under IAS 40. As a result investment property will be stated at cost less accumulated depreciation and impairment. Furthermore, the Group will continue to disclose the fair values of investment property as determined by independent appraisers in accordance with IAS 40.79.

Given current real estate market volatility and the fact that the policy is now in line with that applied by Erste Group Bank, man-agement of the Group believe this treatment provides more reliable and relevant information about the effects of transactions related to investment property and their impact on the Group’s fi nancial position and fi nancial performance and that the information pre-sented to shareholders and other fi nancial statement users will re-main fully transparent and refl ect market conditions.

The change was applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and resulted in the following prior year adjustments to the state-ments of fi nancial position and comprehensive income:

Summary of changes in the fi nancial statements:

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(a) Statement of Financial PositionCZK mil. 2010 2009

restated1. Jan 2009

restated

Investment property (836) (505) (948)in which – depreciation (1,074) (831) (595)– impairment (1,574) (1,161) (381)– reversal of fair value revaluation 1,812 1,487 28Deferred tax receivable 341 161 2Total assets (495) (344) (946)Deferred tax liability (1) (93) (214)Equity (494) (251) (732)(a) Equity attributable to owners of the parent (453) (226) (706)in which: – retained earnings (226) (706) (706)– profi t for the year (227) 480 –(b) Non-controlling interests (41) (25) (26)In which – retained earnings (25) (26) (26)– profi t for the year (16) 1 –Total liabilities and equity (495) (344) (946)

The adjustment for 2010 in the row investment property amounting to CZK 836 mil. does not refl ect technical improvements of CZK 216 mil. Thus the net diference between the fair value of investment properties and the cost less accumulated depreciation and impairment is CZK 620 mil. in 2010.

(b) Statement of Comprehensive IncomeCZK mil. 2010 2009

Restated

Interest income and similar income (243) (236)Other net operating expenses (89) 679Profi t before taxes (332) 443Income taxes 89 39Profi t for the year (243) 482Profi t for the year attributable to Owners of the parent (227) 480Non-controlling interests (16) 2

(243) 482

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Applicable accounting policies are used consistently with account-ing policies applied in previous years, while refl ecting the changes in International Financial Reporting Standards adopted during the period.

The Group has adopted the following standards and interpretations which they believe have an immaterial affect on the fi nancial state-ments:

Amendments to IFRS 2: Share-based Payments regarding group cash-settled share-based payment transactions (effective 1 January 2010) Revised IFRS 3 Business Combinations and amendments to IAS 27: Consolidated and separate fi nancial statements (effective 1 July 2009) Amendments to IAS 39 Financial Instruments: Recognition and Measurement (effective 1 July 2009) IFRIC 17 Distributions of Non-cash Assets to Owners (effective 1 July 2009) Amendments to IAS 27: Consolidated and separate fi nancial statements (effective 3 June 2009).

At the date of authorization of these fi nancial statements, the fol-lowing standards were in issue but not yet effective, which the Group is planning to adopt from 2011:

Amendments to IAS 24 Related Party Disclosures Amendments to IAS 32 Financial Instruments: Presentation: Classifi cation of Rights Issues IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2010 Improvements to IFRSs

The adoption of these standards is not expected to have a material impact on the Group’s reporting.

3.4 Summary of Signifi cant Accounting Policies

(a) Loans and Advances, Other Off-balance Sheet Credit Exposures and Provisions for Losses on Loans and AdvancesLoans and advances are initially measured at fair value includ-ing any directly attributable transaction costs. After initial rec-ognition loans and advances are measured at amortised cost using the EIR, less provision for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition as well as fees and costs that are an integral part of the EIR. All loans and advances are recognised when cash is advanced to borrowers.

In terms of accounting and provisioning, receivables are segmented into individually impaired, collectively impaired and unimpaired loans with no indication of impairment (Refer to Note 3.2 (a)).

The amount of impairment loss is charged to the income statement line “Provisions for credit risks”.

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Restructuring of doubtful loan receivables refl ects the Group’s business decisions. Any receivable whose terms and conditions have been renegotiated because of the debtor’s distress is con-sidered restructured. Renegotiations of loan terms and conditions include payment schedule changes (deferrals and reductions of regular payments, extended maturities), interest rate reductions, penalty interest waivers, or the provision of a new loan specifi cally for the repayment of the doubtful receivable.

Restructuring is only possible on the basis of a new loan agree-ment. Restructured debt initially receives an internal rating of R. Rating improvement is possible six months from the restructuring date at the earliest. Restructured loans continue to be tested for im-pairment, either individually or on a collective basis. As part of the half-year reviews of restructured receivables, the Group decides whether to improve the internal rating or to extend the monitoring period by another six months.

Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of fur-ther recovery is considered remote. The loan is written off against the related account “Provisions for credit risks” in the income state-ment. If the reason for provisioning is no longer deemed appropri-ate, the redundant provisioning charge is released into income. The relevant amount and recoveries of loans and advances previously written off are refl ected in the income statement through “Provi-sions for credit risks”.

(b) LeasesThe determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfi lment of the arrangement is dependent on the use of a specifi c asset or assets or the arrangement conveys a right to use the asset.

The Group as a LesseeLeases of property and equipment under which the Group assumes substantially all the risks and rewards incidental to ownership (fi -nance leases) are recognised in the statement of fi nancial position by recording an asset at cost and a liability equal to the present value of all future lease payments. Leasehold improvements on leased assets are depreciated in accordance with the depreciation policy described in Note 3.4 (h). The depreciation period is the estimated useful life of the asset, or the lease term if shorter. Lease payments are appor-tioned between repayments of principal, which reduce the lease lia-bilities, and interest expense so as to achieve a constant rate of inter-est on the remaining balance of the lease liability. The fi nance charge component of the lease payment is charged directly to income.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another sys-tematic basis is more representative of the time pattern in which economic benefi ts from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

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The Group as a LessorWith respect to assets held under fi nance leases, the Group transfers substantially all the risks and rewards incidental to ownership of the leased asset to a lessee and the assets are recognised as “Loans and advances to customers” in the statement of fi nancial position caption “Finance leases”. A receivable is presented at an amount equal to the net investment in the lease over the lease term. This amount equals the present value of the minimum lease payments (including both guaranteed and unguaranteed residual values attributable to the les-sor) and the initial direct costs where the present value is calculated using the interest rate implicit in the lease. Finance lease income arising from a lease payment receivable is recognised in the income statement as interest income based on the interest rate implicit in the lease refl ecting a constant periodic rate of return on the net invest-ment outstanding in respect of the fi nance lease.

Leases in which the Group does not transfer substantially all the risks and benefi ts of ownership of the asset are classifi ed as oper-ating leases. For operating leases the Group as a Lessor includes lease payments received as revenue on a straight-line basis. Oper-ating lease payments are recognized in “Interest income and simi-lar income”.

(c) Debt and Equity Securities Securities held by the Group are categorized into portfolios in ac-cordance with the Group’s intent on the acquisition of the securi-ties and pursuant to the Group’s security investment strategy. In accordance with IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), the Group categorizes its securities into the “Securities at fair value through profi t or loss” portfo-lio, the “Securities available-for-sale” portfolio or the “Securities held-to-maturity” portfolio. The principal difference among the portfolios relates to the measurement and presentation of the se-curities in the fi nancial statements.

Securities held by the Group are initially recorded at their fair val-ues including transaction costs, the only exception being “Securi-ties at fair value through profi t or loss” which are recognized at fair value net of transaction costs. Securities and liabilities arising from securities measured at fair value are recognized using trade date accounting. Securities purchased and issued measured at am-ortized cost are recognized using settlement date accounting.

Securities at Fair Value through Profi t or LossThe portfolio includes debt and equity securities held for trading, including short sale liabilities, that is, securities held by the Group with the intention of reselling them, thereby generating profi ts on price fl uctuations in the short term, and debt and equity securi-ties that were designated, upon initial recognition, as at fair value through profi t or loss. Changes in the fair values of assets held for trading and related interest are recognized in the income statement as “Net trading result”. Changes in the fair values of securities not held for trading are reported as “Other operating expenses, net” in the income statement; interest income is presented within “Interest income and similar income”.

Fair Value OptionIn addition to securities held for trading, the portfolio of instru-ments at fair value through profi t or loss includes, upon origination or acquisition, other fi nancial assets and liabilities if such designa-tion reduces the mismatch in reporting fi nancial expenses or in-come, that would otherwise arise from measurement on a different basis or if it is a group of fi nancial assets and liabilities which are typically managed and assessed according to fair value changes and such a management and presentation treatment complies with the investment strategy and / or the assets and liabilities management strategy or the fi nancial assets and liabilities contain an embedded derivative other than those which do not modify signifi cantly their cash fl ows or are inseparable.

Securities Available-for-saleSecurities available-for-sale are securities held by the Group for an indefi nite period of time that are available-for-sale as liquidity requirements arise or market conditions change.

Changes in the fair values of available-for-sale securities are recog-nized in equity as “Gain or loss from revaluation of available-for-sale securities”, with the exception of their impairment and interest income and foreign exchange differences on debt securities. When realized, the relevant revaluation gains or losses are taken to the income state-ment as “Other operating expenses, net”. When realized, the relevant revaluation gains or losses are taken to the income statement as “Other operating income / (expenses), net”. Interest income on coupons, am-ortization of discounts or premiums, and dividends are included in “Interest income and similar income”.

Securities Held-to-MaturitySecurities held-to-maturity are fi nancial assets with a fi xed matu-rity that the Group has the positive intention and ability to hold to maturity.

Securities held-to-maturity are initially measured at fair value, net of transaction costs incurred. Securities held-to-maturity are sub-sequently reported at amortized cost using the EIR method. The amortization of premiums or discounts and interest income on cou-pons are included in “Interest income and similar income”.

Impairment of Debt and Equity SecuritiesWhen a decline in the fair value of an available-for-sale fi nancial asset has been recognized in other comprehensive income and if there is objective evidence that an available-for-sale security is permanently impaired, the cumulative loss is removed from equity and recognized in the income statement within “Other operating expenses, net”. The amount of the cumulative loss that is removed from equity and recognized in the income statement are the dif-ference between the acquisition cost of the security (plus / (minus) accrued premium, discount and interest, if any, in the case of debt securities) and its current fair value, less any impairment loss on that security previously recognized in the income statement.

If, after the impairment loss was recognized in the income statement,

78


the fair value of debt securities classifi ed as available-for-sale in-creases and the fair value increase is verifi able, it is recognized in the income statement within “Other operating expenses, net”; however, the fair value increase may not exceed the amount of the previously recognized impairment loss. Impairment losses on debt securities can be reversed when, following the impairment recognition in ex-penses, the fair value increases for objective reasons as determined by the Group. The increase in the fair value of equity securities is recognized in equity; previously recognized impairment losses are irreversible.

If there is objective evidence that an impairment loss on bonds classifi ed as held-to-maturity securities has been incurred, the amount of the loss is measured as the difference between their am-ortized cost and the present value of estimated future cash fl ows discounted at the bonds’ original EIR. The impairment loss is rec-ognized through a provision in the income statement within “Other operating expenses, net”.

Derecognition of Financial AssetsThe Group derecognizes a fi nancial asset only when the contrac-tual rights to the cash fl ows from the asset expire; or it transfers the rights to receive cash fl ows from the fi nancial asset and sub-stantially all the risks and rewards of ownership of the asset or control of the fi nancial asset to another entity. If the Group nei-ther transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its continuing involvement in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred fi nancial asset, the Group continues to recognize the fi nancial asset and also recognizes a collateralized borrow-ing for the proceeds received.

(d) Assets Held for SaleThe category of “assets held for sale” includes non-current assets that are taken out of active use at the date on which criteria for sale are met, that is, the sale is approved by an authorized person, steps to locate a buyer have been initiated, and a draft of a purchase contract and other documentation is being prepared. At the same date, the assets held for sale are measured at the lower of carrying amount and fair value less selling costs. At the same time, depre-ciation on such assets ceases. The fair value less selling costs is determined based on an expert appraisal.

In circumstances where the fair value less selling costs is lower than the carrying amount, the difference is accounted for through the recognition of an extraordinary write-off in the income state-ment line “Other operating expenses, net”. Any subsequent revalu-ation of assets arising from a change in the fair value less selling costs is presented in the same income statement line.

(e) Investment Property, Property Held for Sale (Inventory) and Assets under Construction

Investment PropertyInvestment property is property (land, a building or part of a build-ing or both) held to earn rentals, for capital appreciation or both. Investments in land and buildings under construction, where the future use is expected to be the same as for investment property, are valued as investment property. Investment property is meas-ured initially at cost, including transaction costs.

Subsequent to initial recognition, the Group states investment property at cost net of accumulated depreciation and impairment. Investment property is depreciated through the statement of income within “Interest income and similar income” using the straight-line method over an estimated useful life of 50 years. Assets start to be depreciated from the moment they are prepared for their intended use. Any gains or losses arising from impairment are included in the income statement through “Other operating expenses, net”.

For the purposes of disclosure under IAS 40.79 fair values of in-vestment property are determined by independent appraisers and are based upon the calculation of expected annual net income by using the expected yield method.

Investment in land and buildings under construction where the ex-pected use is the same as in case of investment property are classi-fi ed as “Assets under construction” until their completion.

Property Held for Sale (Inventory)The Group also invests in property that is held for sale in the ordi-nary course of business or property in the process of construction or development for such sale. Until construction or development is complete, this property is classifi ed as “Assets under construction” and is measured at the lower of cost and net realizable value in ac-cordance with IAS 2 Inventories.

The cost of acquiring inventory not only includes the purchase price but also all other directly attributable expenses, such as trans-portation costs, customs duties, other taxes and costs of conversion of inventories, etc. Borrowing costs are capitalized only to the ex-tent to which they directly relate to the acquisition of real estate.

Sales of these assets / apartments are recognized as revenues through “Other operating expenses, net” when a statement is re-ceived from the Cadastral Offi ce regarding the registration of the apartments in the name of a new owner. The same income state-ment line refl ects the costs incurred in selling the apartments, that is, the value of the asset and other expenses associated with the sale of the apartments (which are not capitalized).

Property under construction is classifi ed as inventory after its com-pletion provided that it was not sold as at the balance sheet date and its sale can be expected during the next twelve months.

(f) Intangible AssetsIntangible assets include identifi able assets without physical sub-stance which have an estimated useful life exceeding one year. The

79


Group has determined that, in addition to fulfi lling these criteria, intangible fi xed assets must include assets with a cost greater than CZK 60,000. Intangible assets are carried at cost less accumulated amortization and impairment and are amortized on a straight-line basis through “General administrative expenses – amortization of intangible assets” over an estimated useful life not exceeding four years. Software acquired, valuable rights and other intangible as-sets are treated as intangible assets. Items with a cost less than CZK 60,000 are recognized in expenses in the income statement as part of “General administrative expenses – other administrative ex-penses” during the period in which they are acquired. Costs associat-ed with the maintenance of intangible assets (software) are expensed through “General administrative expenses – other administrative expenses” as incurred whilst costs of technical improvements, pro-vided they exceed CZK 40,000 per asset upon completion, are capi-talized and increase the acquisition cost of the intangible asset.

(g) GoodwillGoodwill arising on the acquisition of a subsidiary or a jointly controlled entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifi able as-sets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently meas-ured at cost less any accumulated impairment losses. Goodwill is reported in the statement of fi nancial position as a component of “Intangible assets”.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefi t from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated fi rst to reduce the carrying amount of any goodwill al-located to the unit and then pro-rata to the other assets of the unit on the basis of the carrying amount of each asset in the unit. The Group recognizes the impairment in the income statement through “Other operating expenses, net.” Any impairment loss recognized for goodwill is not reversed in subsequent periods.

On disposal of a subsidiary or jointly controlled entity, the attribut-able amount of goodwill is included in the determination of the profi t or loss on disposal.

(h) Property and EquipmentProperty and equipment includes identifi able tangible assets with physical substance which have an estimated useful life exceeding one year and a cost greater than CZK 13,000. Selected small tangi-bles are also classifi ed in this category. Property and equipment is stated at historical cost less accumulated depreciation and impair-ment provisions and is depreciated when ready for use through the income statement line “General administrative expenses – depre-ciation of property and equipment” on a straight-line basis over

their estimated useful lives. Depreciation periods for individual categories of assets are as follows:

Land and buildingsLand Not depreciatedBuildings and structures 20–50 yearsEquipment, fi xtures and fi ttingsElectronic machines and equipment 6–12 yearsTools and other equipment 4–12 yearsEquipment, Fixtures and fi ttings 4–6 yearsSelected low value machines and equipment 2 yearsWorks of art Not depreciated

Leasehold improvements are depreciated over the lease term and based on their classifi cation in the relevant asset category. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost also includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy (refer to Note 3.4 (v)). Deprecia-tion of these assets, on the same basis as other property assets, com-mences when the assets are ready for their intended use.

The gain and loss arising on the disposal of property and equip-ment is determined based on its carrying value and is recognised in the income statement line “Other operating expenses, net” in the year of disposal.

Property and equipment costing less than CZK 13,000 and techni-cal improvements costing less than CZK 40,000 are charged to the income statement line “General administrative expenses – other administrative expenses” in the period of acquisition.

Repairs and maintenance of property and equipment are charged to the income statement line “General administrative expenses – oth-er administrative expenses” in the year in which the expenditure is incurred. Completed technical improvements exceeding CZK 40,000 for the taxation period are capitalised and increase the ac-quisition cost of tangible assets.

(i) Impairment of Non-fi nancial AssetsWhere the carrying amount of an asset stated at net book value is greater than its estimated recoverable amount, it is written down to its recoverable amount. The recoverable amount is the greater of the following amounts: the market value which can be recovered from the sale of an asset under normal conditions, net of selling costs, and the estimated future economic benefi ts arising from the use of the asset and its disposal at the end of its useful life.

The largest components of the Group’s assets are periodically test-ed for impairment. Provisions for impairment losses are recognised in the income statement line “Other operating expenses, net”.

Signifi cant accounting estimates and decisions in the application of accounting policies are disclosed in Note 3.2.

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(j) Shareholder’s EquityThe statutory reserve fund is accumulated in compliance with leg-islation up to 20% of share capital depending on the legal form of the company in the Group. Use of the statutory reserve fund is limited by legislation and the articles of individual companies. The fund is not available for distribution to shareholders.

Where the Bank or its subsidiaries purchase shares it issued (“treasury shares”) or obtain rights to purchase treasury shares, the consideration paid including any attributable transaction costs net of income taxes, is shown as a deduction from total shareholders’ equity. In selling treasury shares, the Bank recognises the differ-ence between their selling price and cost as share premium.

Dividends reduce retained earnings in the period in which they are declared by the Annual General Meeting.

(k) Cash and Cash EquivalentsThe Group considers cash and deposits with the CNB, treas-ury bills and treasury bonds with a residual maturity of three months or less and nostro and loro accounts with fi nancial insti-tutions to be cash equivalents. For the purposes of determining cash and cash equivalents, the minimum reserve deposit with the CNB is not included as a cash equivalent due to restrictions on its availability.

(l) Financial Liabilities at Fair ValueThe Group classifi es as fi nancial liabilities at fair value liabilities held for trading and liabilities for which it uses the fair value op-tion as set out in IAS 39 (for example some issued securities or deposits with embedded derivatives).

Securities borrowed are not recognised in these fi nancial state-ments, unless they are sold to third parties, in which case the group records an obligation to return them which is recognised at fair value as a trading liability and is presented in the statement of fi nancial position line “Financial liabilities at fair value”. Upon the repurchase of securities, the difference between the carrying amount of the obligation and the contracted purchase price is rec-ognised in “Net trading result”.

(m) Bonds PayableOwn issues of debt securities are recognised in the statement of fi nancial position within “Bonds in issue”, the only exceptions being subordinated bonds, which are recognised within “Subor-dinated debt”, and issued debt securities measured at fair value, which are recognised within “Financial liabilities at fair value”. Bonds in issue and subordinated debt are initially measured at issue price plus any direct costs of issue. The issue price is grad-ually increased to refl ect accrued interest expense, determined using the EIR method, incurred in issued bonds from the issue settlement date to the maturity date. When issued bonds are re-purchased, the difference between the agreed price and carrying amount is recognised in the income statement within “Net trad-ing result”.

(n) Reserves Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of past events and it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the report-ing date, taking into account the risks and uncertainties surround-ing the obligation. Where a provision is measured using the cash fl ows estimated to settle the present obligation, its carrying amount is the present value of those cash fl ows.

When some or all of the economic benefi ts required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received by the Group and the amount of the receivable can be measured reliably.

(o) Sale and Repurchase AgreementsWhere debt or equity securities are sold under a concurrent com-mitment to repurchase them at a pre-determined price (“repo trans-actions”), they remain at fair value or amortised cost (refer to Note 3.4 (c)) within the relevant portfolio on the statement of fi nancial position and the consideration received is recorded in “Amounts due to fi nancial institutions” or “Amounts due to customers”. Con-versely, debt or equity securities purchased under a concurrent commitment to resell them (“reverse repo transactions”) are not recognised in the statement of fi nancial position and the considera-tion paid is recorded in “Loans and advances to fi nancial institu-tions” or “Loans and advances to customers”. Interest is accrued over the life of the agreement.

(p) Factoring

Recourse FactoringThe Group recognises funding / prepayments made to factoring clients as loans. Receivables received as part of factoring trans-actions are maintained off-balance sheet as received collateral of loans granted.

Non-recourse FactoringThe Group recognises receivables received as part of factoring transactions in “Other assets” and, at the same time, recognises a corresponding liability to factoring client in “Other liabilities”.

(q) DerivativesDerivatives include foreign currency and interest rate swaps, cur-rency forwards, FRA1 foreign currency and interest rate options (both purchased and sold), futures and other derivative fi nancial instruments. The group uses various types of derivative instru-ments in both its trading and hedging activities.

1 Forward Rate Agreement

81


Derivative instruments entered into for trading or hedging purpos-es are recognised at fair value as “Positive fair value of derivative transactions” and “Negative fair value of derivative transactions”. Realised and unrealised gains and losses are recognised in the in-come statement line “Net trading result”, except for the specifi c cases of hedging derivatives described below.

Certain derivatives embedded in other fi nancial instruments are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with gains and losses reported in the income statement.

Hedging derivatives are defi ned as derivatives that comply with the Group’s risk management strategy, the hedging relationship is for-mally documented and the hedge is effective, that is, at inception and throughout the period, changes in the fair value or cash fl ows of the hedged and hedging items are almost fully offset and the results are within a range of 80% to 125%.

If the group uses a fair value hedge, the hedged item is remea-sured at fair value to the extent of the hedged risk and the gain or loss from the remeasurement (in respect of an interest rate risk exposure hedge) is recognised as an expense or income in “Interest income and similar income” or “Interest expense and similar ex-pense” as appropriate. The same accounts of expense and income that refl ect the gain or loss from remeasuring the hedged item at fair value are also used in accounting for changes in fair values of hedging derivatives that are attributable to the hedged risk. Fair value hedges are used to hedge interest and foreign currency risk exposures. Bonds, issued bond liabilities and granted loans are hedged items while interest rate and foreign currency derivatives serve as hedging instruments.

If the Group uses a cash fl ow hedge, the gains or losses from changes in fair values of hedging derivatives that are attribut-able to the hedged risk are retained in equity in the statement of fi nancial position and are recognised as an expense or income in the periods in which hedged cash fl ows effect profi t or loss. Cash fl ow hedges are used to secure cash fl ows from sales of shares and share certifi cates denominated in foreign currencies classi-fi ed as available-for-sale. Foreign currency derivatives serve as hedging instruments.

Certain derivative transactions do not qualify for hedge account-ing under the specifi c rules in IAS 39 and are therefore treated as derivatives held for trading with subsequent fair value gains and losses reported in “Net trading result”.

If the Group uses a hedge of a net investment in foreign opera-tions, the changes in fair values of hedging instruments that are attributable to the fl uctuation of foreign currency rates are recog-nised as “Foreign exchange differences arising upon consolidation (Translation reserve)” in equity. Foreign currency derivatives and foreign currency fi nancial liabilities serve as hedging instruments.

(r) Accrued InterestAccrued not yet created interest on outstanding loan balances, debt securities, deposit products, bonds in issue and subordinated debt is recognised under accrual accounting and reported within “Other assets” and “Other liabilities”, respectively.

(s) Offsetting of Financial InstrumentsFinancial assets and liabilities are not offset, except when the off-set refl ects the substance of the transaction (i. e., the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously) and is legally enforceable.

(t) Guarantees and Other Off-balance Sheet Credit Related CommitmentsIn the normal course of business, the Group enters into credit relat-ed commitments which are recorded in off-balance sheet accounts and primarily include guarantees, loan commitments, undrawn loan facilities and letters of credit. The off-balance sheet loan com-mitments are initially recognised at fair value, which equals the fee charged by the group, and are subsequently reported at the higher of the accrued fee or the best estimate of losses incurred in the performance of off-balance sheet commitments.

If a committed guarantee is provided, the amount paid out is recog-nised within “Loans and advances to customers”.

Provisions are made for estimated losses on these commitments on the same basis as set out in Note 3.4 (a) in respect of on balance sheet loan exposures. For these purposes, off-balance sheet items are treated similarly to on-balance sheet exposures. Once a com-mitted guarantee or credit line is drawn the general provision is reversed and a new impairment provision is created against an on-balance sheet receivable, which is tested for impairment.

Any increase in liabilities from guarantees is presented in the in-come statement within “Provisions for credit risks”. Fees received are recognised on a straight-line basis over the term of the guaran-tee and are presented in the income statement line “Fee and com-mission income”.

(u) Transactions with Securities Undertaken on Behalf of ClientsSecurities received by the Group into custody, administration, management or safe-keeping are typically recorded at market or nominal values if the market value is not available and maintained off-balance sheet. “Other liabilities” include the Group’s payables to clients arising from cash received to purchase securities or cash to be refunded to the client.

(x) Interest Income and Interest ExpenseInterest income and expense are recognised on an accrual basis, using the EIR method. Outstanding penalties, contractual sanc-tions and penalty interest on impaired loans, which are those loans that have overdue interest and / or principal, or for which manage-ment of the Group otherwise believes the contractual interest or

82


principal due may not be received, are only recognised on their collection.

The Group also recognises interest income on impaired loans. This interest income represents interest income using the EIR method in respect of the assets less a provision.

The Group uses the capitalisation model for borrowing costs in respect of inventories (property under construction). Borrowing costs directly attributable to the acquisition, construction or pro-duction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the as-sets are substantially ready for their intended use or sale.

(w) Dividend RevenueDividend revenue from investments is recognised when the share-holder’s right to receive payment has been established.

(x) Fees and CommissionsFees and commissions are recognised on the accrual basis, with the exception of fees that are considered to be an integral part of the EIR.

The EIR includes the fees directly associated with the provision of the loan, such as loan origination fees, loan application processing fees, etc. The Group’s direct external transaction costs involved in issuing loans are offset against these capitalised fees.

(y) Share-based PaymentsWith a view to increasing the relationship of staff to the Bank, fos-tering loyalty of the Bank’s key employees and attracting new key managers, the Supervisory Board of Erste Group Bank, resolved, based upon authorisation given by the General Meeting of Share-holders dated 8 May 2001, to implement an Employee Erste Bank Stock Ownership Programme (“ESOP”) and a Management Erste Bank Stock Option Programme (“MSOP”) within the Group. Dis-counts to the market price of Erste Group Bank shares to which employees and management are entitled are presented within “General administrative expenses – Other personnel expenses”. Additional details can be found in Note 37 (c).

(z) Customer Loyalty ProgrammesCustomer loyalty programmes consist of the Bonus Programme. Commissions from traders for transactions via payment cards are deferred to the statement of fi nancial position and amortised to the income statement depending on the maturity and fair value of the bonus points allocated to clients. The fair value of bonus points is determined based on the costs actually incurred by the Group in the Bonus Programme. At the reporting date, the level of deferred income is adjusted to refl ect the current balance of unused points.

In 2009 the group modifi ed the accounting treatment of the loyalty programme as follows: It ceased establishing a provision for esti-mated costs to be incurred in the future use of bonus points and ad-justed the recognition of the related revenues as described above.

(aa) TaxationTax on the profi t or loss for the year consists of the current year tax charge, adjusted for deferred taxation. Current tax comprises the tax payable calculated on the basis of the taxable income for the year, using the tax rate enacted by the reporting date, and any adjustment to the tax payable for previous years.

Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts for fi nan-cial reporting purposes and the amounts used for taxation purposes. However, this does not apply to temporary differences arising from the initial recognition of an asset / liability other than in a business combination which, at the time of the transaction, does not affect either the accounting or the taxable profi t (tax loss). The principal temporary differences arise from certain non-tax deductible reserves and provisions, tax and accounting depreciation on tangible and in-tangible fi xed assets and revaluation of other assets.

The estimated value of tax losses expected to be available for utili-sation against future taxable income and tax deductible temporary differences are offset against the deferred tax liability within the same legal tax unit to the extent that the Group has a legally en-forceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Deferred tax assets are recognised only to the extent that it is prob-able that suffi cient taxable profi t will be available to allow the asset to be recovered.

Deferred tax is calculated on the basis of the tax rates that are ex-pected to apply to the period when the asset is realised or the li-ability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity.

Current and deferred tax are recognised as an expense or income in the income statement, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or in de-termining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifi able assets, liabilities and contingent li-abilities over the cost of the business combination.

(bb) Segment ReportingSegment information is based on two segment formats. The prima-ry format represents business segments – retail banking (includ-ing construction savings products), corporate banking, investment banking and other operations. The secondary format represents the Group’s geographical markets – the Czech Republic, EU coun-tries, other European countries and other regions.

Segment results include revenue and expenses directly attributable

83


to a segment and the relevant portion of revenue and expenses that can be allocated to a segment, whether from external transactions or from transactions with other segments of the Group. Inter-seg-ment transfer pricing is based on cost plus an appropriate mar-gin, as specifi ed by the Group’s policy. Unallocated items mainly comprise administrative expenses. Segment results are determined before any adjustments for non-controlling interests.

Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment or can be allo-cated to the segment on a reasonable basis. Segment assets are deter-mined after deducting related adjustments that are reported as direct offsets in the Group’s consolidated statement of fi nancial position. Segment assets and liabilities do not include income tax items.

(cc) Foreign CurrencyThe reporting currency is Czech crown, which is also the Bank’s functional currency. Items included in the fi nancial statements of the Group members are initially measured using the currency of primary economic environment in which the Group members op-erate (“functional currency”). Each of the Group members selects its own functional currency and items included in the fi nancial statements of each Group member are valued using this functional currency.

Transactions denominated in functional currency are initially rec-ognised in the functional currency, using exchange rates applicable on the date of transaction. Monetary assets and liabilities denomi-nated in foreign currencies are translated into the functional cur-rency at the respective exchange rate prevailing at the reporting date. Realised and unrealised gains and losses on foreign exchange are recognised in the income statement in “Net trading result”, with the exception of foreign exchange rate differences on equity

securities included in the available-for-sale portfolio which are re-ported as a component of a change in the fair value and foreign exchange rate differences on derivatives entered into with a view to hedging currency risk associated with expected foreign currency cash fl ows from assets or liabilities or net investment investment hedges whose foreign exchange rate differences are not reported in the income statement.

Upon consolidation, the statement of fi nancial position items of entities that report in other than Czech crowns are translated into Czech crowns at the offi cial exchange rate announced by the CNB at the reporting date. Income statement items are translated using an average annual exchange rate announced by the CNB. Exchange differences arising from the use of the statement of fi -nancial position and average exchange rates are recognised in eq-uity as “translation reserve”. On disposal of a foreign operation, cumulative currency translation differences, which were recorded in the translation reserve, relating to that particular foreign opera-tion are recognised in the income statement in the same period in which the gain or loss on disposal is recorded.

(dd) Adjustments of Material ErrorsItems from prior periods that do not relate to current period in terms of time and substance (adjustments of prior year costs or revenues) are charged or credited, as appropriate to the current period income statements if the adjustments are not material. If the prior year ad-justments are material these items are taken to retained earnings or accumulated losses of prior years.

In 2009 the Group corrected a prior period error by adjusting opening retained earnings for interest capitalized into the value of investment property and investment property under construction totalling CZK 199 mil.

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4. Companies Included in Consolidation

The tables below list the most signifi cant companies included in the consolidation of the Group.

Companies providing fi nancial services: Name Registered

offi cePrincipal activities Group share on

shareholders’ equity2010 2009

Companies held through Česká spořitelna, a. s.Factoring České spořitelny, a. s. Prague Factoring 100.0% 100.0%Penzijní fond České spořitelny, a. s. Prague Pension insurance 100.0% 100.0%s Autoleasing, a. s. Prague Leases 100.0% 100.0%

Stavební spořitelna České spořitelny, a. s. PragueConstruction savings bank 95.0% 95.0%

Companies held through s Autoleasing, a. s.s Autoúvěr, a. s.x) Prague Lending – 100.0%x) As at 1 July 2010, s Autoúvěr, a. s. merged with Autoleasing, a. s., which became its sole legal successor.

Investment and management companies:Name Registered

offi cePrincipal activities Group interest on


Companies held through Česká spořitelna, a. s.brokerjet České spořitelny, a. s. Prague Investment services 51.0% 51.0%CEE Property Development Portfolio B. V. (“CPDP B. V.”) The Netherlands Real estate investment 100.0%xx) 100.0%xx)

CS Investment Limited GuernseyInvestments and equity holdings 100.0%x) 100.0%x)

CS Property Investment Limited (“CSPIL”) CyprusInvestments and equity holdings 100.0% 100.0%

Czech and Slovak Property Fund B. V. (“CSPF B. V.”) The Netherlands

Investments and equity holdings 66.7%xx) 66.7%xx)

Czech TOP Venture Fund B. V. The NetherlandsManagement and corporate fi nance 84.3% 84.3%

REICO investiční společnost České spořitelny, a. s. PragueInvestment management 100.0% 100.0%

Companies held through CSPF B. V.

CSPF Residential B. V. The NetherlandsInvestments and equity holdings 66.7% 66.7%

85


Real estate companies: Name Registered

offi cePrincipal activities Group share on


Companies held through Česká spořitelna, a. s.IT Centrum s. r. o. Prague Real estate investment 100.0% –Companies held through CSPF B. V.Atrium Center s. r. o. Slovakia Real estate investment 66.7% 66.7%BECON s. r. o. Prague Real estate investment 66.7% 66.7%BELBAKA a. s. Prague Real estate investment 66.7% –BGA Czech, s. r. o. Prague Real estate investment 66.7% 66.7%CASIOPEA VISION, a. s. Prague Real estate investment 66.7% –Jegeho Residential s. r. o. Slovakia Real estate investment 66.7% 66.7%Nové Butovice Development s. r. o. Prague Real estate investment 66.7% 66.7%Smíchov Real Estate a. s. Prague Real estate investment 66.7% 66.7%Solitaire Real Estate a. s. Prague Real estate investment 66.7% 66.7%Stodůlky Real Estate s. r. o. Prague Real estate investment – 66.7%Trenčín Property a. s. Slovakia Real estate investment 66.7% 66.7%SATPO Jeseniova s. r. o. Prague Real estate investment 33.3% 33.3%SATPO Královská vyhlídka, s. r. o. Prague Real estate investment 33.3% 33.3%SATPO Na Malvazinkách, a. s. Prague Real estate investment 33.3% 33.3%SATPO Sacre Coeur s. r. o. Prague Real estate investment 33.3% 33.3%SATPO Sacre Coeur II, s. r. o. Prague Real estate investment 33.3% 33.3%SATPO Švédská s. r. o. Prague Real estate investment 33.3% 33.3%NHS CZECH s. r. o. Prague Real estate investment – 66.7%Companies held through Jegeho Residential s. r. o.Finep Jégeho Alej, a. s. Slovakia Real estate investment 66.7% –Companies held through Trenčín Property a. s.Trenčín Retail Park a. s. Slovakia Real estate investment 60.0% 60.0%Companies held through CPDP B. V.CPP Lux S.’ ar. l. Prague Real estate investment 99.9% 99.9%CPDP 2003 s. r. o. Prague Real estate investment 100.0% 100.0%CPDP IT Centrum s. r. o. Prague Real estate investment – 100.0%CPDP Jungmannova s. r. o. Prague Real estate investment 100.0% 100.0%CPDP Logistics Park Kladno I a. s. Prague Real estate investment 100.0% 100.0%CPDP Logistics Park Kladno II a. s. Prague Real estate investment 100.0% 100.0%CPDP Polygon, s. r. o. Prague Real estate investment 100.0% 100.0%CPDP Prievozska, a. s. Slovakia Real estate investment 100.0% 100.0%CPDP Shopping Mall Kladno, a. s. Prague Real estate investment 100.0% 100.0%Gallery MYŠÁK a. s. Prague Real estate investment 100.0% 100.0%TAVARESA a. s. Prague Real estate investment 100.0% 100.0%Companies held through CPP Lux S.’ ar. l.CP Praha s. r. o. Prague Real estate investment 100.0% 100.0%Companies held through CSPILOffi ce Center Stodůlky DELTA a. s. Prague Real estate investment – 40.0%Offi ce Center Stodůlky GAMA a. s. Prague Real estate investment 40.0% 40.0%x) Only the share in voting rights is stated. The share in capital is 99.9%.xx) In the real estate funds CPDP B. V. and CSPF B. V. the Group’s share of basic capital is 20% and 10% respectively; as the Group invests signifi cant other amounts for investment purpo-ses into the funds it is entitled to the majority of the risks and rewards from the investment.

In November 2010 there was the bank acquired 100% share in CPDP IT Centrum s. r. o. and subsequently the name was changed to IT Cen-trum s. r. o. and the share capital was increased to CZK 179 mil.

86


Companies providing other services: Name Registered

offi cePrincipal activities Group interest

2010 2009Companies held through Česká spořitelna, a. s.GRANTIKA České spořitelny, a. s. Brno Business consulting 100.0% 100.0%Informatika České spořitelny, a. s. Prague IT services 100.0% 100.0%

Partner České spořitelny, a. s. PragueIndependent dealers network management 100.0% 100.0%

Companies held through GRANTIKA České spořitelny, a. s.Euro Dotácie, s. r. o. Slovakia Education 66.7% 66.7%Companies held through Penzijní fond České spořitelny, a. s.Investiční společnost České spořitelny, a. s., PF1 – otevřený podílový fond Prague Collective investing 100.0% 100.0%Investiční společnost České spořitelny, a. s., PF2 – otevřený podílový fond Prague Collective investing 100.0% –

The Group fully consolidates the investments in the real estate funds CPDP B. V. and CSPF B. V. in its consolidated fi nancial statements. While the Bank holds 20 percent and 10 percent of the issued share capital of the funds, respectively, and does not have a majority of voting rights or Board representation, it has provided signifi cant additional funding to the funds for investment purposes which results in the Group receiving substantially all of the rewards and bearing substantially all of the risks of the investment. The second shareholder bears minimal risks and receives minimal returns from its investment in the funds.

The Group owns less than 50 percent of the share capital of SATPO Jeseniova s. r. o., SATPO Královská vyhlídka, s. r. o. and SATPO Sacre Coeur II, but has the ability to control the fi nancial and operating policies of these entities. As such, these entities are treated as subsidiaries and are consolidated in full.

Investments in SATPO Na Malvazinkách, a. s., SATPO Sacre Coeur s. r. o. and SATPO Švédská s. r. o., Offi ce Center Stodůlky GAMA a. s. and Finep Jégeho Alej a. s. are classifi ed as joint ventures and are consolidated using the equity method.

Key indicators of companies consolidated using the equity method:

CZK mil. 2010 2009

Total assets 1,873 3,543Total liabilities 1,919 3,466Total Equity (46) 77Total revenues 341 761Total expenses 420 759Current-year profi t (79) 2

During the year ended 31 December 2010, the portfolio of equity investments underwent the following changes: In June 2010, the Bank was repaid a portion of the share premium of CZK 1,000 mil. provided to Penzijní fond České spořitelny, a. s.; At 1 July 2010, the merger of s Autoleasing, a. s., and its subsidiary, s Autoúvěr, a. s., became effective. Due to the legal terms of the merger, s Autoúvěr, a. s., was wound up without liquidation and s Autoleasing, a. s., became its sole legal successor; In October 2010, the share capital of s Autoleasing a. s., was increased to CZK 500 mil.; capital contribution was CZK 128 mil., share premium to new shares issued was CZK 256 mil.; In October 2010, the share capital of Factoring České spořitelny, a. s., was increased to CZK 114 mil.; capital contribution was CZK 30 mil., share premium to new shares issued was CZK 80 mil.; In November 2010, the Bank acquired a 100% ownership interest in CPDP IT Centrum s. r. o. In December the company name was changed to IT Centrum s. r. o. and its share capital increased to CZK 179 mil.; By way of issuing shares with share premium, the Bank increased its equity investment in CS Property Investment Limited in relati-on to the expansion of its business activities; and By way of increasing the share premium on already held shares, the equity investment in Czech TOP Venture Fund B. V. was increa-sed in relation to the expansion of its business activities; By way of paying additional share premium on already owned shares, the Bank increased the carrying amount of its equity invest-ment in Czech and Slovak Property Fund B. V. in relation to business activities in May and July 2010; in June 2010, the investment was decreased by way of releasing a portion of the share premium.

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–

–

–

–

–

–

87


With a view to managing foreign currency risk exposures associated with the Bank’s investments in foreign subsidiaries and associates CS Investment Limited, CS Property Investment Limited, Czech TOP Venture Fund B. V., CEE Property Development Portfolio B. V., and Czech and Slovak Property Fund B. V. denominated in EUR, the Bank has defi ned these investments as a hedged item within the net invest-ment hedge. Hedging instruments include foreign currency interest rate swaps. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income.

(a) Penzijní fond České spořitelny, a. s.Up to 10 percent of the profi ts from the pension fund can be distributed to the shareholders and no less than 5 percent of the profi ts is allo-cated to the reserve fund. The shareholders incur the entire loss, if any. All other profi t is available for distribution to participants (clients).

(b) Companies Consolidated Since 2010The following newly established subsidiary companies were fi rst consolidated in 2010:

CZK mil.

Name of the entity

Acquisi-tion date

Owner Voting power

in %

Fair value of the consi-

deration transferred

Assets acquired as at the

acquisition date

Liabilities acquired as at the

acquisition date

Profi t / (loss) since

the acqui-sition

date

Profi t / (loss)

for 2010

Investiční společnost České spořitelny, a. s., PF2 – otevřený podílový fond 07/2010

Penzijní fond České spořitelny, a. s. 100% 1,200 1,200 – 184 188

BELBAKA a. s. 05/2010 CSPF B. V. 66.7% – 712 723 (33) (22)CASIOPEA VISION, a. s. 05/2010 CSPF B. V. 66.7% – 6 6 – (2)

The acquisition cost of the entities above was equal to the fair value of net assets at the acquisition date.

Regarding the PF2 – otevřený podílový fond, its only investor after cash investment is Penzijní fond České Spořitelny, a. s., and therefore it is included in the consolidation. The Group owns 66.7 percent of the BELBAKA a. s. and CASIOPEA VISION, a. s., voting rights and therefore it has a majority interest. The acquisition cost for each company was CZK 20 thousand. The acquisitions were done by means of cash contribution for investment purposes with a mid-term investment horizon.

(c) Companies Removed from the Consolidation Stodůlky Real Estate s. r. o. NHS CZECH s. r. o. Offi ce Center Stodůlky DELTA a. s.

The companies Stodůlky Real Estate s. r. o., NHS CZECH s. r. o. and Offi ce Center Stodůlky DELTA a. s. were sold.

(d) Other InvestmentsThe Group has following other investments in its portfolio:

Genesis Private Equity Fund B L. P., Realitní společnost České spořitelny, a. s., Erste Corporate Finance, a. s., Karasita s. r. o. v likvidácii, RVG Czech s. r. o., FNE B. V., NewsTin a. s., CBCB-Czech Banking Credit Bureau, a. s., První certifi kační autorita, a. s., s IT Solutions SK, spol. s r. o., s IT Solutions CZ, s. r. o.; Procurement Services CZ, s. r. o., ÖCI-Unternehmensbeteiligungs GmbH, Erste Group Shared Services (EGSS), s. r. o., DINESIA a. s.

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–––––––––––––––

88


During the year ended 31 December 2010, the portfolio of equity investments underwent the following changes: In May 2010, Erste Group Shared Services (EGSS), s. r. o., was established as a new equity investment with 40% held by the Bank; At 1 December 2010, Informations-Technologie Austria CZ, s. r. o., ceased to exist as a result of the merger with s IT Solutions CZ, s. r. o.

5. Cash and Balances with the Czech National Bank

CZK mil. 2010 2009

Cash (refer to Note 41) 20,362 20,651Nostro accounts with the CNB (refer to Note 41) 491 1,079Minimum reserve deposits with the CNB 4,914 7,641Total 25,767 29,371

Minimum reserve deposits represent mandatory deposits calculated in accordance with CNB regulations and whose withdrawal is restricted. Minimum reserve deposits accrue interest at the CNB’s two week repo rate. The Group is authorised to make withdrawals of minimum reserve deposits in an amount that exceeds the actual average level of minimum reserve deposits for the relevant holding period calculated pursuant to the CNB’s regulation. The nostro balances represent balances with the CNB relating to settlement activities and were available for withdrawal at the year end.

6. Receivables from Banks

CZK mil. 2010 2009

Nostro accounts with fi nancial institutions (refer to Note 41) 563 528Loans and advances to fi nancial institutions 117,282 75,219Placements with fi nancial institutions 56,374 49,849Other 728 910Total 174,947 126,506

As at 31 December 2010, the Group provided certain fi nancial institutions with loans of CZK 114,168 mil. (2009: CZK 69,652 mil.) under reverse repurchase transactions which were collateralised by securities amounting to CZK 112,434 mil. (2009: CZK 62 999 mil.), out of these CZK 436 mil. (2009: CZK 2,010 mil.) were further sold / pledged.

7. Loans and Advances to Customers

(a) Analysis of Loans and Advances to Customers by Type of LoanCZK mil. 2010 2009

Corporate loans 119,409 124,105Mortgage loans (both retail and corporate customers) 176,108 176,250Retail loans 97,617 99,459Public sector loans 16,425 17,197Construction savings loans 45,098 45,512Factoring 1,740 1,535Financial Leases 3,570 5,127Cumulative change in carrying value due to application of fair value hedging 8 7Total 459,975 469,192

As at 31 December 2010, the Group provided certain clients with loans of CZK 100 mil. (2009: CZK 345 mil.) under reverse repurchase transactions which were collateralised by securities amounting to CZK 116 mil. (2009: CZK 506 mil.).

––

89


(b) Analysis of Loans and Advances to Customers by Credit Risk Assessment PoliciesAt 31 December 2010CZK mil.

Individually signifi cant loans

Individually insignifi cant loans

Total

Individually impaired 16,111 15,163 31,274Collectively impaired 20,934 15,088 36,022Unimpaired 146,316 246,363 392,679Total 183,361 276,614 459,975

At 31 December 2009CZK mil.



Total


Individually signifi cant loans represent corporate loans or retail loans where the Group’s exposure exceeds CZK 5 mil. Individually im-paired loans are those loans where objective evidence demonstrates that the associated cash fl ow is at risk (incurred loss event). The Group defi nes the loss event in accordance with Basel II criteria. This classifi cation corresponds to the “R” internal rating (default). Collectively impaired loans are loans that show an indication of impairment on a collective basis, which corresponds to a 7–8 internal rating. Unimpaired loans are loans with an internal rating of 1–6.

The Group uses various types of collateral in order to mitigate credit risk exposure. The list of collateral instruments is set out in an internal regulation which also outlines the guidance to be followed in determining the values of individual types of collateral. The Group establishes the nominal value of collateral based upon a market valuation which is subsequently used as a basis for arriving at the realisable value by applying a discount factor set for each type of collateral. Collateral that is valued at the realisable value is taken into account in provision-ing (refer to Note 3.4 (a)). Collateral valuation rules also set out when and how often the valuations of individual collateral instruments are updated.

(c) Financial LeasesLoans and advances to customers also include net investments in fi nance leases.

CZK mil. 2010 2009

Gross investment in fi nance leases 3,854 5,502of which:Less than 1 year 1,592 2,432From 1 year to 5 years 2,218 3,047Over 5 years 44 23Unrealised fi nancial income (284) (375)Subtotal 3,570 5,127Provision (615) (479)Net investment in fi nance leases 2,955 4,648of which:Less than 1 year 1,222 2,056From 1 year to 5 years 1,700 2,572Over 5 years 33 20

The principal assets held under lease arrangements include cars and other technical equipment.

90


8. Provisions for Losses on Loans and Advances

(a) Creation and Use of Provisions for Losses on Loans and AdvancesCZK mil. 2010 2009

At 1 January 14 ,713 8,929Charge for provisions (refer to Note 33) 11,075 9,226Release of provisions (refer to Note 33) (1,468) (731)Net charge / (release) of provisions 9,607 8,495Unwinding of impaired receivables (refer to Note 31) (912) (620)Use of provisions for loans written off and assigned (4,065) (2,074)FX differences from provisions in foreign currency (118) (17)At 31 December 19,225 14,713Net change in amount of provisions 4,512 5,784

The use of provisions for loans written off and assigned of CZK 4,065 mil. (2009: CZK 2 074 mil.) has no impact on the Group’s profi t.

The unwinding of discount represents interest income on impaired loans on the basis of the EIR in respect of the discounted value of loans.

(b) Provisions for Losses on Loans and Advances by CategoryAt 31 December 2010CZK mil.



Total

Individually impaired 7,668 8,241 15,909Collectively impaired 1,721 1,595 3,316Total 9,389 9,836 19,225




Total


91


(c) Losses from Impairment by individual Categories of Financial Assets 2010 CZK mil.

At 1 Jan Provisioning Write-off of loans

Amounts recovered during the

year

Unwinding of discountsx)

Foreign exchange

rate gains or losses

At 31 Dec

Change in the balance

Retail loans / loans to householdsOverdraft loans 346 336 (173) (156) (21) – 332 (14)Credit cards 205 251 (152) (74) (19) – 211 6Other loans 3,687 3,555 (1,919) (653) (273) – 4,397 710Mortgage loans 1,248 1,049 (180) (282) (161) – 1,674 426Construction savings loans 525 362 (31) (1) – – 855 330Financial Leases 26 8 (14) – – (2) 17 (9)Subtotal 6,037 5,560 (2,469) (1,166) (474) (2) 7,486 1,449MSExx)

Overdraft loans 206 56 (9) (156) (3) – 94 (112)Other loans 1,459 2,078 (265) (254) (68) – 2,950 1,491Mortgage loans 491 442 (39) (105) (53) – 736 245Municipal loans 23 42 (17) (27) (2) – 19 (4)Financial Leases 292 41 (95) – – (67) 171 (121)Subtotal 2,471 2,659 (425) (542) (126) (67) 3,969 1,498Corporate loans Corporate customers 2,602 1,334 (824) (438) (109) (42) 2,523 (79)Small and medium sized enterprises (SMEs)xxx) 2,768 1,965 (331) (836) (99) (7) 3,460 692Corporate mortgage loans 813 1,241 (15) (173) (104) – 1,762 949Municipalities 22 5 – (3) – – 24 2Subtotal 6,205 4,545 (1,170) (1,450) (312) (49) 7,769 1,564Total 14,713 12,764 (4,065) (3,158) (912) (118) 19,225 4,512x) Unwinding of discounts – interest income from individually impaired loans and advances.xx) MSE – individuals – businessmen and small companies with annual turnover of less than CZK 30 mil.xxx) SME – small and medium sized enterprises with annual turnover between CZK 30 mil. and CZK 1,000 mil.

92


2009 CZK mil.

At 1 Jan Provisioning Write-off of loans


year

Unwinding of discounts x)

Foreign exchange


At 31 Dec


Retail loans / loans to householdsOverdraft loans 313 263 (114) (98) (18) – 346 33Credit cards 188 170 (90) (47) (16) – 205 17Other loans 2,603 2,819 (1,256) (295) (184) – 3,687 1,084Mortgage loans 984 627 (14) (236) (113) – 1,248 264Construction savings loans 309 322 (28) (78) – – 525 216Financial Leases 26 2 (1) (1) – – 26 –Subtotal 4,423 4,203 (1,503) (755) (331) – 6,037 1,614MSExx) Overdraft loans 220 95 (46) (60) (3) – 206 (14)Other loans 667 1,025 (130) (55) (48) – 1,459 792Mortgage loans 291 290 (26) (28) (36) – 491 200Municipal loans 31 31 (32) (6) (1) – 23 (8)Financial Leases 216 132 (30) (26) – – 292 76Subtotal 1,425 1,573 (264) (175) (88) – 2,471 1,046Corporate loans Corporate customers 836 1,836 26 (2) (77) (17) 2,602 1,766Small and medium sized enterprises (SMEs)xxx) 1,938 1,585 (298) (376) (81) – 2,768 830Corporate mortgage loans 291 589 (35) 11 (43) – 813 522Municipalities 16 8 – (2) – – 22 6Subtotal 3,081 4,018 (307) (369) (201) (17) 6,205 3,124Total 8,929 9,794 (2,074) (1,299) (620) (17) 14,713 5,784x) Unwinding of discounts – interest income from impaired loans and advances.xx) MSE – individuals – businessmen and small companies with annual turnover of less than CZK 30 mil.xxx) SME – small and medium sized enterprises with annual turnover between CZK 30 mil. and CZK 1,000 mil.

9. Securities Held for Trading

CZK mil. 2010 2009

Listed debt securities 16,673 29,577Listed equity securities and other variable yield securities 1,815 67Total 18,488 29,644

Of the held for trading portfolio, securities of CZK 1,057 mil. (2009: CZK 1,916 mil.) were transferred as collateral for loans received under repurchase transactions.

Debt securities comprise:

CZK mil. 2010 2009

Variable yield debt securities Issued in CZK 2,765 896Issued in other currencies – –Total 2,765 896Fixed income debt securitiesIssued in CZK 13,559 28,548Issued in other currencies 349 133Total 13,908 28,681Total debt securities 16,673 29,577

93


Equity securities and other variable yield securities comprise:

CZK mil. 2010 2009

Shares and share certifi cates Issued in CZK 653 16Issued in other currencies 1,162 51Total 1,815 67

Debt securities were issued by the following issuers:

CZK mil. 2010 2009

Debt securities issued by State institutions in the Czech Republic 16,309 28,463Foreign state institutions 289 40Financial institutions in the Czech Republic – 21Foreign fi nancial institutions 60 93Other entities in the Czech Republic – 824Other foreign entities 15 136Total 16,673 29,577

Equity securities and other variable yield securities held for trading were issued by the following issuers:

CZK mil. 2010 2009

Shares and share certifi cates issued by Financial institutions in the Czech Republic 2 1Foreign fi nancial institutions 953 4Other entities in the Czech Republic 420 6Other foreign entities 440 56Total 1,815 67

10. Securities Designated upon Initial Recognition as at Fair Value Through Profi t or Loss

CZK mil. 2010 2009

Debt securities Listed 6,643 4,375Unlisted 1,389 1,761Equity securities and other variable yield securitiesUnlisted 1,555 1,231Total 9,587 7,367

This portfolio includes asset-backed securities (“ABS”) of CZK 1,389 mil. (2009: 1,761 CZK mil.). Given the current economic and fi nan-cial market environment, an increase in the value of these securities was recognised and generated a gain of CZK 131 mil. on the revaluation of the CDO / CLO (2009: profi t of CZK 369 mil.), which is reported in the income statement line “Other net operating expenses, net” (refer to Note 38).

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating interests with controlling or signifi cant infl uence or jointly controlled entities. The fair value of these equity investments is not derived from the market price as these securities are not on an active market. The fair value was determined as the present value of estimated future cash fl ows.

94



CZK mil. 2010 2009

Variable yield debt securities Issued in CZK 777 108Issued in other currencies 3,136 1,761Total 3,913 1,869Fixed income debt securitiesIssued in CZK 417 399Issued in other currencies 3,702 3,868Total 4,119 4,267Total debt securities 8,032 6,136


CZK mil. 2010 2009

Shares and share certifi cates Issued in CZK 1,365 821Issued in other currencies 190 410Total 1,555 1,231


CZK mil. 2010 2009

Debt securities issued by State institutions in the Czech Republic 1,057 201Financial institutions in the Czech Republic 1,991 –Foreign fi nancial institutions 4,893 5,750Other foreign entities 91 185Total 8,032 6,136

Equity securities and other variable yield securities were issued by the following issuers:

CZK mil. 2010 2009

Shares and share certifi cates issued by Financial institutions in the Czech Republic 1,365 821Foreign fi nancial institutions 190 410Total 1,555 1,231

11. Positive Fair Value of Derivative Transactions

CZK mil. 2010 2009

HedgingForeign currency – –Interest rate 723 605Total hedging 723 605Non-hedgingForeign currency 3,073 5,122Interest rate 11,789 11,674Other 436 274Total non-hedging 15,298 17,070Total 16,021 17,675

As at 31 December 2010, the gain on hedging derivatives was CZK 294 mil. (2009: CZK 10 mil.), the loss due to changes in the fair value of hedged items was CZK 313 mil. (2009: CZK 10 mil.).

95


12. Securities Available-for-sale

CZK mil. 2010 2009

Debt securities Listed 19,425 25,938Unlisted – –Equity securities and other variable yield securitiesListed 375 2,287Unlisted 229 163Total 20,029 28,388

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating interests with controlling or signifi cant infl uence or jointly controlled entities.


CZK mil. 2010 2009

Variable yield debt securities Issued in CZK 6,564 13,986Issued in other currencies 1,702 1,824Total 8,266 15,810Fixed income debt securitiesIssued in CZK 8,924 8,749Issued in other currencies 2,235 1,379Total 11,159 10,128Total debt securities 19,425 25,938


CZK mil. 2010 2009

Shares and share certifi catesIssued in CZK 536 915Issued in other currencies 68 1,535Total 604 2,450


CZK mil. 2010 2009

Debt securities issued byState institutions in the Czech Republic 12,905 19,710Foreign state institutions 661 228Financial institutions in the Czech Republic 2,550 2,605Foreign fi nancial institutions 1,974 2,370Other entities in the Czech Republic 1,136 876Other foreign entities 199 149Total 19,425 25,938

96



CZK mil. 2010 2009

Shares and share certifi cates issued byFinancial institutions in the Czech Republic 433 375Foreign fi nancial institutions 149 1,258Other entities in the Czech Republic 13 403Other foreign entities 9 414Total 604 2,450

13. Securities Held-to-maturity

CZK mil. 2010 2009

Bonds and other fi xed income securitiesListed 128,977 111,977Unlisted – –Total 128,977 111,977

The held-to-maturity portfolio includes securities of CZK 22 821 mil. (2009: CZK 19,231 mil.) which were transferred as collateral for loans received under repurchase transactions.


CZK mil. 2010 2009

Variable yield debt securities Issued in CZK 7,626 11,579Issued in other currencies 1,677 2,672Total 9,303 14,251Fixed income debt securitiesIssued in CZK 113,831 97,435Issued in other currencies 5,843 291Total 119,674 97,726Total debt securities 128,977 111,977


CZK mil. 2010 2009

Debt securities issued by State institutions in the Czech Republic 105,743 80,226Foreign state institutions 2,106 –Financial institutions in the Czech Republic 6,944 8,411Foreign fi nancial institutions 12,762 21,540Other entities in the Czech Republic 795 1,300Other foreign entities 627 500Total 128,977 111,977

97


14. Investment Property

CZK mil. 2010 2009 restated

Cost valueAt 1 January 14,005 13,727Reclassifi cation from property under construction (refer to Note 15) 1 1,690Additions 743 214of which: – from business combinations 683 –– other 60 214Disposals (281) (1,658)Foreign exchange rate gains or losses (100) 32At 31 December 14,368 14,005Accumulated depreciation including impairmentAt 1 January (1,992) (976)Depreciation (refer to Note 31) (243) (236)Impairment (refer to Note 38) (413) (780)Disposals 19 –Foreign exchange rate gains or losses (6) –At 31 December (2,635) (1,992)Net book valueAt 31 December 11,733 12,013

Rental income arising from investment property amounted to CZK 863 mil. (2009: CZK 857 mil.). Operating expenses related to investment property amounted to CZK 251 mil. (2009: CZK 271 mil.).

“Disposals” in 2009 include the decrease in the value of investment property caused by removing of the gross up for deferred taxes of CZK 1 726 mil. (refer to Note 26). This is in line with management’s intention to sell the legal entities rather than the properties themselves in the future.

The Group’s obligation to provide maintenance, if any, lasts until the date of sale.

At 31 December 2010, the fair value of investment property amounted to CZK 12,353 mil. (2009: CZK 12,513 mil.). Collaterals held for investment property fi nancing amounted to CZK 4 767 mil. in 2010 (2009: CZK 4 589 mil.).

15. Property under Construction

CZK mil. 2010 2009

At 1 January 4,921 5,862of which:– inventories 4,735 3,827– investment property 186 2,035Construction 46 1,775Of that capitalized interest 24 463Impairment loss (refer to Note 38) (390) (618)Sale of completed buildings (944) (408)Reclassifi cation to investment property (refer to Note 4) (1) (1,690)At 31 December 3,632 4,921of which:– inventories 3,526 4,735– investment property 106 186

Assets under construction include both property under construction measured at cost value less any impairment, and buildings under con-struction classifi ed as inventory.

The Group’s own assets pledged to CZK 1 898 mil. in 2010 (2009: CZK 1 846 mil.).

98


16. Property and Equipment

CZK mil. Land and buildings

Equipment, fi xtures and

fi ttings

Total

Cost value At 1 January 2009 18,765 11,086 29,851Additions 852 743 1,595Disposals (101) (1,810) (1,911)At 31 December 2009 19,516 10,019 29,535Additions 841 1,116 1,957Disposals (98) (1,617) (1,715)At 31 December 2010 20,259 9,518 29,777Accumulated depreciation including impairment At 1 January 2009 (5,795) (8,655) (14,450)Amortization (refer to Note 7) (630) (824) (1,454)Impairment (refer to Note 38) (19) (10) (29)Disposals 7 1,782 1,789At 31 December 2009 (6,437) (7,707) (14,144)Amortization (refer to Note 37) (711) (799) (1,510)Impairment (refer to Note 38) (12) (2) (14)Disposals 306 1,600 1,906At 31 December 2010 (6,854) (6,908) (13,762)Net book value At 31 December 2009 13,079 2,312 15,391At 31 December 2010 13,405 2,610 16,015

The balances as at 31 December 2010 shown above include CZK 1,005 mil. (2009: CZK 1,169 mil.) in property under construction.

The acquisition cost of fully depreciated tangible assets was CZK 5,620 mil. as at 31 December 2010 (2009: CZK 6,361 mil.).

17. Intangible Assets

CZK mil. Goodwill Software Other Total

Cost value At 1 January 2009 43 6,052 6,853 12,948Additions – 45 744 789Disposals – (125) (430) (555)Transfers – 279 (279) –At 31 December 2009 43 6,251 6,888 13,182Additions – 41 926 967Disposals – (152) (65) (217)Transfers – 546 (546) –At 31 December 2010 43 6,686 7,203 13,932Accumulated amortisation including impairment and provisions At 1 January 2009 (9) (3,593) (5,595) (9,197)Amortisation (refer to Note 37) – (891) (396) (1,287)Impairment (refer to Note 38) – (1) – (1)Disposals – 346 208 554At 31 December 2009 (9) (4,139) (5,783) (9,931)Amortisation (refer to Note 37) – (844) (251) (1,095)Impairment (refer to Note 38) – – (6) (6)Disposals – 152 65 217At 31 December 2010 (9) (4,831) (5,975) (10,815)Net book value At 31 December 2009 34 2,112 1,105 3,251At 31 December 2010 34 1,855 1,228 3,117

99


Other intangible assets include licenses and know-how. In addition, the item includes CZK 973 mil. in assets under construction as at 31 December 2010 (2009: CZK 705 mil.).

The acquisition cost of fully amortised intangible assets was CZK 6,210 mil. as at 31 December 2010 (2009: CZK 5,309 mil.).

18. Other Assets

CZK mil. 2010 2009

Accrued income 3,546 3,276of which:– interest on loans and advances to fi nancial institutions 99 177– coupons on bonds 3,271 2,951– fees 176 148Deferred expenses 1,867 1,896Various receivables 1,207 1,709Estimated receivables 647 701State subsidy 1,203 2,556Sundry assets 1,027 1,517Receivables from factoring transactions 1,284 1,225Receivables from securities trading 435 314Total 11,216 13,194

The state subsidy receivable involves claims in respect of the participants of the building savings scheme offered by Stavební spořitelna České spořitelny, a. s. The state subsidy is provided to the participants from the Finance Ministry of the Czech Republic based on the amount of customer deposits at the year end with a limit of CZK 4,500 / CZK 3,000 (for contracts entered into after / before to 1 January 2005, re-spectively) per participant (refer to Note 20).

19. Amounts Owed to Financial Institutions

CZK mil. 2010 2009

Loro accounts (refer to Note 41) 4,682 1,922Term deposits 30,481 16,906Loans received 17,051 28,606Total 52,214 47,434

As at 31 December 2010, the Group received loans from fi nancial institutions of CZK 11 807 mil. (2009: CZK 13,895 mil.) under repur-chase transactions which were collateralised by securities amounting to CZK 11,582 mil. (2009: CZK 13,734 mil.).

100


20. Amounts Owed to Customers

CZK mil. 2010 2009

Public sector 45,824 46,254– Current accounts 44,315 43,811– Term deposits 1,509 2,443Corporate clients 107,804 98,991– Current accounts 92,635 78,633– Term deposits 13,556 20,358– Other amounts due to customers 1,613 –Resident individuals 507,446 498,176– Current accounts 213,112 218,123– Term deposits 55,198 61,304– Savings deposits 198,703 183,282– Other amounts due to customers 40,433 35,467Total 661,074 643,420

“Other amounts due to customers” include in particular supplementary pension insurance deposits, deposits relating to anonymous savings books and loans received from customers under repurchase transactions.

As at 31 December 2010, the Group received loans from customers of CZK 789 mil. (2009: CZK 693 mil.) under repurchase transactions which were collateralised by securities amounting to CZK 779 mil. (2009: CZK 667 mil.).

21. Financial Liabilities at Fair Value

CZK mil. 2010 2009

Customer deposits 9,212 4,109Liabilities arising from issued securities 2,228 1,947Payables arising from short sales – debt securities 591 2,072Payables arising from short sales – shares 27 1Total 12,058 8,129

The Group issued the following bonds which are presented within “Liabilities arising from issued securities”:

ISIN Date of issue Maturity Interest rate

2010CZK mil.

2009CZK mil.

Bonds CZ0003701237 February 2007 April 2011 x) 287 289Bonds CZ0003701278 March 2007 March 2010 xx) – 740Bonds CZ0003701351 September 2007 September 2011 x) 284 285Bonds CZ0003701518 April 2008 May 2011 x) 294 291Bonds CZ0003701690 July 2008 January 2012 x) 229 237Bonds CZ0003701955 May 2009 June 2012 xxx) 61 54Bonds CZ0003701963 May 2009 June 2012 xxx) 51 51Bonds CZ0003702284 February 2010 February 2014 xxx) 149 –Bonds CZ0003702474 October 2010 November 2014 xxx) 873Total 2,228 1,947x) Bonds bear no interest, the yield of bonds increases on a one-off basis as at the fi nal maturity date.xx) The yield depends on the development of the EUR / PLN spot exchange rate.xxx) Bonds bear no interest, yield is determined as a difference between the rate of issue and the bond value payable at its fi nal maturity date.

101


The ISIN CZ0003701237, CZ0003701351, CZ0003701518, CZ0003701690, CZ0003701955, CZ0003701963, CZ0003702284 a CZ0003702474 issues were placed as structured bonds, the yield of which is determined as equal to the difference between the issue rate and so-called “another value” in accordance with the issue terms and conditions. The amount of the “another value” will be based on a set of indexes and an equity bucket and will be payable as of the fi nal maturity of the bonds. Similarly, the ISIN CZ0003701278 were issued as structured bonds as a structured bond, the yield of which is derived from the development of the EUR / PLN spot exchange rate.

The ISIN CZ0003701278 is traded on the offi cial regulated market of the PSE; other issues are not yet traded.

Change in the fair value of debt securities:

CZK mil. 2010 2009Change in the fair value of debt securities arising from changes in the issuer’s credit profi le Customer deposits (1) 24Liabilities arising from issued securities at fair value 8 39Total 7 63Difference between the carrying amount and the contractually agreed nominal value due at maturityCustomer deposits 118 78Liabilities arising from issued securities at fair value (12) (8)Total 106 70

Short sales are short-term trading liabilities which mature between one and three months. Changes in the fair value of these trading liabilities are not analysed since the liabilities are different at each reporting date.

The change in the fair value arising from the changes in the credit profi le of the issuer (the Bank) is determined as equal to the difference between the fair values of the liabilities as at the previous and current reporting dates, net of the effect of the change in fair value due to the change in the risk-free interest rate.

22. Negative Fair Value of Derivative Transactions

CZK mil. 2010 2009

Hedging Foreign currency 128 290Interest rate 47 66Total hedging 175 356Non-hedgingForeign currency 1,896 3,440Interest rate 12,124 12,242Other 479 374Total non-hedging 14,499 16,056Total 14,674 16,412

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23. Bonds in Issue


2010CZK mil.

2009CZK mil.

Mortgage bonds CZ0002000524 May 2005 May 2010 4,50% – 1,909Mortgage bonds CZ0002000573 June 2005 June 2010 4,05% – 1,801Mortgage bonds CZ0002000623 October 2005 October 2015 4,75% 5,015 5,075Mortgage bonds CZ0002000755 February 2006 February 2016 4,80% 4,565 4,615Mortgage bonds CZ0002000896 October 2006 October 2011 Floating 1,112 1,129Mortgage bonds CZ0002000904 October 2006 October 2014 3,65% 1,020 1,026Mortgage bonds CZ0002000920 October 2006 October 2011 3,00% 796 796Mortgage bonds CZ0002000995 May 2007 May 2012 5,90% 1,025 1,044Mortgage bonds CZ0002001068 June 2007 October 2015 4,50% 757 759Mortgage bonds CZ0002001084 July 2007 July 2014 Floating 1,569 1,596Mortgage bonds CZ0002001126 August 2007 August 2012 3,70% 1,496 1,504Mortgage bonds CZ0002001274 November 2007 November 2014 Floating 571 280Mortgage bonds CZ0002001282 November 2007 November 2017 5,90% 2,048 2,071Mortgage bonds CZ0002001415 November 2007 November 2023 6,15% 455 460Mortgage bonds CZ0002001423 December 2007 December 2017 5,85% 5,255 5,312Mortgage bonds CZ0002001613 December 2007 December 2022 Floating – –Mortgage bonds CZ0002001639 December 2007 December 2012 3,70% 2,514 2,522Mortgage bonds CZ0002001647 December 2007 December 2017 3,90% 808 308Mortgage bonds CZ0002001654 December 2007 December 2022 Floating 1,496 1,401Mortgage bonds CZ0002002132 October 2009 October 2012 3,20% 806 354Mortgage bonds CZ0002002157 November 2009 May 2011 0,25% 996 133Mortgage bonds CZ0002002165 November 2009 November 2014 3,55% 471 61Mortgage bonds CZ0002002173 November 2009 May 2013 3,20% 1,335 193Bonds CZ0003700767 February 2004 February 2014 Floating 1,252 1,253Bonds CZ0003701047 July 2005 July 2012 3,55% 555 557Bonds CZ0003701054 September 2005 September 2017 x) 235 227Bonds CZ0003701062 October 2005 October 2013 x) 276 267Bonds CZ0003701286 March 2007 March 2012 3,49% 931 820Bond CZ0003701781 December 2008 December 2010 0,50% – 982Bond CZ0003701948 April 2009 October 2010 xx) – 489Bond CZ0003702011 July 2009 January 2014 xxx) 530 512Bond CZ0003702037 October 2009 October 2016 xxx) 440 424Bond CZ0003702078 November 2009 November 2016 xxx) 488 473Bond CZ0003702268 December 2009 December 2012 3,50% 1,746 444

Mortgage bonds CZ0002002215 April 2010 October 2013 0,25% 1,039 –Bond CZ0003702359 April 2010 April 2013 3,00% 602 –

Bond CZ0003702367 April 2010 April 2013

Floating interest rate 1,298 –

Depository bills of exchange 1,531 1,453Cumulative change in carrying amount due to fair value hedging

1,025 869

Total 46,058 43,119x) Bonds were issued with a combined yield.xx) Bonds bear no interest, yield is determined as a difference between the rate of issue and the bond’s nominal value.xxx) Bonds bear no interest, yield is determined as a difference between the rate of issue and the bond value payable at its fi nal maturity date.

Of the aggregate carrying value of the mortgage bonds, CZK 9,925 mil. (2009: CZK 11,676 mil.) was hedged against interest rate risk through interest rate swaps linked to a market fl oating rate. In accordance with applicable accounting policies, these mortgage bonds are remeasured at fair value.

103


In 2009, the ISIN CZ0003700767 and CZ0003701047 issues were remeasured at fair value as they are hedged against interest rate risk through interest rate swaps linked to a market fl oating rate. In 2010, the interest rate risk hedges were terminated. Of the aggregate carrying value, CZK 63 mil. (2009: CZK 88 mil.) relate to the terminated hedging relationship.

The ISIN CZ0003701054 and CZ0003701062 issues were placed with a share index option which is recorded separately and is remeasured at fair value.

The ISIN CZ0002001126, CZ0002001613, CZ0002001639, CZ0002001647, CZ0002001654, CZ0002002132, CZ0002002157, CZ0002002165, CZ0002002173 mortgage bond issues and the ISIN CZ0003701781, CZ0003702011, CZ0003702037, CZ0003702078 bond issues are not traded on any regulated market. Other issues of mortgage bonds and bonds are traded on the offi cial regulated market of the PSE. The differ-ence between the nominal values of the issued mortgage bonds and the carrying amounts of the relevant issues in the above table arises from the difference in valuation and from the elimination of bonds held by Group companies.

24. Provisions

CZK mil. Provision for legal disputes

relating to credit

transactions

Provisions for

off-balance sheet credit

risks

Total provisions for

credit risks

Other reserves

Total

At 1 January 2009 1,457 187 1,644 575 2,219Charge for provisions 33 95 128 53 181Release of provisions (10) (13) (23) (20) (43)Net charge for / (release of) provisions (refer to Note 33) 23 82 105 33 138Use of provisions (6) – (6) (1) (7)Reclassifi cation – – – (310) (310)At 31 December 2009 1,474 269 1,743 297 2,040Charge for provisions 47 192 239 127 366Release of provisions (37) (39) (76) (61) (137)Net charge for / (release of) provisions (refer to Note 33) 10 153 163 66 229Use of provisions – (77) (77) (47) (124)At 31 December 2010 1,484 345 1,829 316 2,145

Provisions for legal disputes connected to loans granted and off-balance sheet credit exposures are recorded to cover specifi c risks arising from pending legal disputes relating to loan transactions and to cover losses that result from off-balance sheet and other exposures.

Other provisions include the provisions for legal disputes, onerous contracts and other risks.

The provision for the customer loyalty programme settlement established in prior periods was reclassifi ed as deferred income in 2009.

104


25. Other Liabilities

CZK mil. 2010 2009

Accrued expenses 1,304 1,800of which:– interest on amounts owed to fi nancial institutions 120 46– interest on amounts owed customers 422 816– interest on bonds in issue 621 585– fees 13 20– other 128 333Deferred income 977 789Payables from the loyalty programme 406 599Various creditors 2,253 3,323Payables from factoring transactions 447 359Payables from securities trading 484 3,537Payables from payment transactions 1,083 1,784Estimated payables 3,520 4,403Other payables 729 627Total 11,203 17,221

Estimated payables largely comprise payables for staff and management bonuses, unbilled supplies and contributions to the Deposit Insurance Fund. Deferred income principally includes deferred commissions and fees related to amounts due from customers in respect of the EIR.

26. Deferred Taxes

Deferred tax is calculated on all temporary differences under the liability method using a principal tax rate of 19 percent, depending on the year in which the relevant asset / liability will be realised / settled (2009: 20%), 5% for Penzijní fond České spořitelny, a. s. (2009: 5%).

The Group records claimable tax losses totalling CZK 2,243 mil. (2009: CZK 2,380 mil.) which were not included in the calculation of the deferred tax as it is not probable that future taxable profi t will be available against which the unused tax losses can be utilised.

Net deferred income tax assets / (liabilities) are as follows:


Restated at 1 January 442 (948)Movements arising from acquisitions and changes in non-controlling interests 26 (17)Other movements (refer to Note 14) – 1,726Movement for the year – equity (refer to Note 40 (b)) (54) (162)Movement for the year – income / (expense) (refer to Note 40 (a)) 77 (157)Net balance at 31 December – asset / (liability) 491 442

105


Deferred income tax assets and liabilities are attributable to the following items:


Deferred tax assetsTax losses carried forward 95 89Non-tax deductible reserves and provisions 463 235Change in the fair value of securities available-for-sale and hedging derivatives (refer to Note 30) 25 79Impairment of investment property 125 193Estimated social and health insurance 87 108Other temporary differences 283 312 1,077 1,016Deferred tax asset adjustment (net of liabilities) (389) (353)Total deferred tax asset (refer to Note 17) 688 663Deferred tax liabilitiesAccelerated depreciation for tax purposes (271) (173)Other temporary differences (316) (401)

(586) (574)Deferred tax liability adjustment (net of assets) 389 353Total deferred tax liability (refer to Note 25) (197) (221)Net deferred tax asset (liability) 491 442

Deferred tax items are included to the extent possible as allowed by local jurisdictions (see deferred tax adjustment above).

The impact of deferred tax liabilities on equity arises from changes in the fair value of securities available-for-sale and hedging derivatives. The deferred tax (charge) / credit in the income statement consists of the following temporary differences:


Tax losses carried forward 6 (153)Reserves and provisions 228 (86)Accelerated depreciation for tax purposes (98) 7Impairment of investment property (69) (146)Other temporary differences 10 221Total 77 (157)of which: impact of the change of rate – (61)

27. Subordinated Debt

ISIN Date of issue Maturity of the issue

Interest rate Nominal value in

CZK mil.

Carrying amount

at 31 December

2010 CZK mil.

Carrying amount

at 31 December

2009 CZK mil.

CZ0003701005 16 May 2005 16 May 2015 6M PRIBOR +0.46% 3,000 – 2,724CZ0003701187 2 October 2006 2 October 2016 6M PRIBOR +0.45% 3,000 2,210 2,214CZ0003701906 12 March 2009 12 March 2019 5% p. a. 2,000 1,972 1,966CZ0003701930 23 April 2009 23 April 2019 6M PRIBOR +1.50% 6,500 6,500 6,500CZ0003702342 24 March 2010 24 March 2020 6M PRIBOR +0.40% 1,000 354 –Total 11,036 13,404

ISIN CZ0003701005 and CZ0003701187 issues of subordinated debt were made in certifi cate form and placed on the regulated market of the PSE. If the Bank does not exercise its option for premature repayment of the loan after a lapse of fi ve years, the interest rates attached to each issue shall increase to 6M PRIBOR + margin + 1.40% p. a. In compliance with the terms and conditions of these issues, the margins have been set at 0.46% and 0.45%, respectively. Interest is payable semi-annually in arrears. The debt is unsecured and unconditional.

106


Issues CZ0003701906 and CZ0003701930 of the Bank’s subordinated debt were made in certifi cate form. The bonds are not placed on a regulated market. The debt is unsecured and unconditional. For issue CZ0003701906, interest income is payable once a year retroac-tively, and for the CZ0003701930 issue twice a year retroactively. Upon its discretion, the Bank is entitled to repay the bonds prematurely on 12 March 2014 (CZ0003701906) and 23 April 2014 (CZ0003701930) at 100% of the bonds’ nominal value together with any unpaid interest to date (if relevant). If the Bank’s bonds are not prematurely repaid, the fi xed interest rate will be increased by 1.50% p. a. for issue CZ0003701906, and interest income will be set as the total of 6M PRIBOR + margin + 1.5% p. a. for issue CZ0003701930.

On 5 May 2005 (issue CZ0003701005), 13 September 2006 (issue CZ0003701187), 6 March 2009 (issue CZ0003701906), 21 April 2009 (issue CZ0003701930) and 18 March 2010 (issue CZ0003702342) the CNB issued certifi cates confi rming that these issues of subordinated debt are compliant with all regulatory requirements and may be included in the additional capital of the Bank for the purposes of calculating the capital adequacy ratio (refer to Note 41.5). In compliance with the issue terms and conditions, issue CZ0003701005 was prematurely repaid as at 16 May 2010.

28. Non-controlling Interests


Restated balance at 1 January 267 537Non-controlling interests in the current year’s profi t (4) (204)Non-controlling interests in the other comprehensive income (24) (33)Sale of subsidiaries – –Dividends paid to minority shareholders (75) (50)Non-controlling interests in newly consolidated entities, capital increase 3 17At 31 December 167 267

29. Share Capital

Authorised, issued and fully paid share capital was as follows: 2010 2009

Number of shares CZK mil. Number of

shares CZK mil.

Ordinary shares of CZK 100 each 140,788,787 14,079 140,788,787 14,079Priority shares of CZK 100 each 11,211,213 1,121 11,211,213 1,121Total 152,000,000 15,200 152,000,000 15,200

Priority shareholders are not entitled to vote at the annual shareholders’ meeting. They have a right to receive dividends each year if the Bank is profi table. The amount of the dividend is proposed by the Board of Directors and subject to approval at the annual shareholders’ meeting. In the case of liquidation, priority shareholders have a right to the assets of the Bank before ordinary shareholders but after other creditors. Priority shareholders have a right to purchase shares offered by the Bank when it increases its share capital in the same proportion as the current holding. Priority registered shares can only be issued y to municipalities and local governments in the Czech Republic. The priority registered shares can only be transferred to entities other than municipalities and local governments of the Czech Republic subject to the approval of the Board of Directors.

The Group manages its capital with the objective of maintaining a strong capital base to support its business activities, focusing on maxi-mum return for shareholders and compliance with all capital regulatory requirements.

The Group’s capital principally consists of share capital, reserve funds, retained earnings, revaluation gains or losses and additional capital in the form of subordinated debt.

107


30. Valuation Differences

In the table bellow there is a summary of valuaiton diferences including any non-controlling interest.

CZK mil. Securities available-for-sale

Hedging derivatives

Translation reserve Total

2010 2009 2010 2009 2010 2009 2010 2009

At 1 January Loss on fair value changes (352) (2,177) – – – – (352) (2,177)Deferred tax (liability) / asset 72 212 7 29 – – 79 241Foreign exchange differences arising upon consolidation (Translation reserve) – – – – (114) (81) (114) (81)Hedges of net investments in foreign operations – – (37) (121) – – (37) (121)Cash fl ow hedges – – 1 (109) – – 1 (109)Total at 1 January (280) (1,965) (29) (201) (114) (81) (423) (2,247)Changes during the year Gain / (loss) on fair value changes 225 1,825 – – 225 1,825Deferred tax (liability) / asset (25) (140) (29) (22) – (54) (162)Foreign exchange differences arising upon consolidation (Translation reserve) – – (342) (33) (342) (33)Hedges of net investments in foreign operations – 157 84 – 157 84Cash fl ow hedges – (1) 110 – (1) 110Total changes during the year 200 1,685 127 172 (342) (33) (15) 1,824At 31 December Loss on fair value changes (127) (352) – – – – (127) (352)Deferred tax (liability) / asset 47 72 (22) 7 – – 25 79Foreign exchange differences arising upon consolidation (Translation reserve) – – – – (456) (114) (456) (114)Hedges of net investments in foreign operations – – 120 (37) – – 120 (37)Cash fl ow hedges – – – 1 – – – 1Total at 31 December (80) (280) 98 (29) (456) (114) (438) (423)

Unrealised gains and losses from Available-for-sale fi nancial assets recognised in equity of pension funds in the amount of CZK 362 m as at 31 December 2010 (31 December 2009 CZK 244 mil.) were included within Available-for-sale reserve. In accordance with the Czech law, when an available-for-sale fi nancial asset is disposed the gain or loss on the disposal is posted to the income statement. 85% of the total pension fund profi t for the year is distributed to pension plan holdem.

108


31. Interest Income and Similar Income


Loans and advances to fi nancial institutions 1,974 2,206Loans and advances to customers 30,117 30,429of which: Unwinding of impaired receivables (refer to Note 8) 912 620Debt securities 6,093 6,865of which: – securities designated upon initial recognition as at fair value through profi t or loss 231 473– securities available-for-sale 701 1,219– securities held-to-maturity 5,161 5,173Proceeds from shares and other variable yield securities 231 473of which: – securities designated upon initial recognition as at fair value through profi t or loss 87 94– securities available-for-sale 52 79Net profi t from investment properties 620 621of which: – revenue from rent 863 857– repreciation (refer to Note 14) (243) (236)Other 58 74Total 39,001 40,368

32. Interest Expense and Similar Expense

CZK mil. 2010 2009

Amounts owed to fi nancial institutions 838 1,195Amounts owed to customers 6,194 6,487of which: remeasured at fair value 116 129Bonds in issue 1,312 1,393of which: remeasured at fair value – 14Subordinated debt 394 401Total 8,738 9,476

33. Provisions for Credit Risks

CZK mil. 2010 2009

Charge for reserves for the year (refer to Note 24) (239) (128)Release of reserves for the year (refer to Note 24) 76 23Net (charge) / release of reserves for the year (163) (105)Charge for provisions for the year (refer to Note 8) (11,075) (9,226)Release of provisions for the year (refer to Note 8) 1,468 731Net release / (charge) for provisions and reserves (9,607) (8,495)Net release / (charge) for provisions for the year (9,770) (8,600)Write offs of loans not covered by provisions (76) (93)Recoveries 69 69Total (9,777) (8,624)

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34. Fee and Commission Income

CZK mil. 2010 2009

Lending activities 4,481 3,912Payment transactions 7,822 7,352Custody, trustee and administration of assets 201 568Other securities transactions 762 408Construction savings activities 635 752Foreign exchange transactions 36 37Other fi nancial activities 862 762Total 14,799 13,791

35. Fee and Commission Expense

CZK mil. 2010 2009

Lending activities 1,087 916Payment transactions 953 816Securities transactions 132 124Construction savings activities 143 268Foreign exchange transactions – 1Other fi nancial activities 317 264Total 2,632 2,389

36. Net Trading Result

CZK mil. 2010 2009

Realised and unrealised gains on securities held for trading 539 1,218Derivative instruments 228 (315)Foreign exchange trading 2,117 2,022Other 107 439Total 2,991 3,364

With effect from 4 February 2008, Česká spořitelna transferred its fi nancial markets trading to Erste Group Bank’s business model. The market risk arising from the sales activities of the Financial Markets Division (i. e., transactions with retail and corporate clientele), with the exception of equity risk and transactions for the Group’s liquidity management purposes (money market), was transferred to Erste Group Bank using back-to-back transactions. Trading gains (i. e. from Erste Group Bank’s market positions) are distributed according to approved rules to the relevant banks within the Group and reported in the “Net trading result”.

The basic principle underlying these rules involves Erste Group Bank absorbing potential losses in individual classes of assets in exchange for the risk premium derived from the VaR indicator. The remaining positive result after deducting expenses (calculated using the Cost In-come Ratio) is reallocated to individual participants in the model based on the results from the sale of assets in individual asset groups.

The net trading result includes the income from the market positions of Erste Group Bank structured as follows:

CZK mil. 2010 2009

Gain from foreign exchange transactions 308 413Gain from fi xed income securities 382 492Gain from commodity derivatives 3 1Total 693 906

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37 General Administrative Expenses

(a) Composition of General Administrative ExpensesCZK mil. 2010 2009

Staff costs Wages and salaries 5,991 6,169Social security costs 1,881 1,887Other staff costs 428 440Total staff costs 8,300 8,496Other administrative expenses Data processing expenses 2,664 3,159Building maintenance and rent 1,803 1,736Costs of business transactions 1,359 1,369Advertising and marketing 966 903Advisory and legal services 473 288Other administrative expenses 507 576Total other administrative expenses 7,772 8,031DepreciationAmortisation of intangible assets (refer to Note 17) 1,095 1,287Depreciation of property and equipment (refer to Note 16) 1,510 1,454Total depreciation and amortisation 2,605 2,741Total 18,677 19,268

(b) Board of Directors and Supervisory Board RemunerationCZK mil. 2010 2009

Remuneration 150 170Total 150 170

The total amount includes the remuneration of the management and supervisory bodies of the Bank and other companies included in the consolidation.

(c) Average Number of Employees and Board MembersCZK mil. 2010 2009

Board of Directors 6 7Supervisory Board 9 9Staff 10,744 10,843

Average number of Board members relates to the Bank only.

The Employee Erste Bank Stock Ownership Programme (“ESOP”) commences annually in May and allows Bank employees to subscribe for Erste Group Bank shares at a preferential price. In 2010, all employees of the Bank and its subsidiaries were entitled to subscribe for shares under the ESOP.

Each employee was entitled to subscribe for a maximum of 200 Erste Group Bank shares (2009: 200 shares). The price of one share was established on the basis of the average rate in April 2010 decreased by a 20 percent discount. The 20 percent discount is conditional upon the shares being held for a period of one year. A total of 238 employees (2009: 922) participated in the programme and subscribed for 36,928 shares (2009: 144,832 shares).

The aggregate discount was CZK 3 mil. (2009: CZK 20 mil.).

111


38. Other Operating Expenses, Net


Release of other reserves (refer to Note 24) 61 20Gain on the sale of real estate 147 208Income from other services 79 82Received compensation for defi cits and damage 66 80Release of provisions against non-credit receivables 60 70Income from the sale of goods 136 113Tangible and intangible assets write-up 16 33Other operating income 196 377Total other operating income 761 983Charges for other reserves (refer to Note 24) (127) (53)Contribution to the Deposit Insurance Fund (729) (536)Profi t sharing by Penzijní fond České spořitelny, a. s., clients (686) (390)Loss on the sale of real estate (4) (6)Impairment of investment property (refer to Note 14) (413) (780)Impairment of property under construction (refer to Note 15) (390) (618)Defi cits and damage, fi nes and penalties (111) (90)Charge for provisions against non-credit receivables (153) (226)Costs of goods sold (140) (110)Impairment of tangible and intangible fi xed assets (36) (63)Other operating charges (412) (64)Other taxes (79) (77)Total other operating expense (3,280) (3,013)Gains / (losses) on the sale of securities held-to-maturity 114 –Gains / (losses) on the revaluation / sale of securities at fair value through profi t or loss that are not held for trading (83) 97Gains on the sale of securities available-for-sale 194 406Impairment of securities available-for-sale – (644)Gain / (loss) on the revaluation / sale of equity investments (14) 165Total other operating income / (expenses), net (2,308) (2,006)

“Gains / (Losses) from the revaluation / sale of securities at fair value through profi t or loss that are not designated trading” includes a gain from the revaluation of securitised notes of CZK 131 mil. (2009: CZK 369 mil. (refer to Note (7)).

39. Other Comprehensive Income Statement

CZK mil. 2010 2009

Available for sale fi nancial assets Profi ts / (losses) during the year 461 2,171Reclassifi cation adjustments to the income statement (236) (346)out of that impairment – (644)Total 225 1,825Cash fl ow hedgingProfi ts / (losses) during the year 81 125Reclassifi cation adjustments to the income statement (82) (15)Total (1) 110

112


40. Income Tax

(a) Income StatementCZK mil. 2010 2009

restated

Current tax expense (2,688) (3,167)– Continuing operations (2,688) (3,167)– Discontinued operations – –Deferred tax income / (expense) (refer to Note 25) 77 (157)– Continuing operations 77 (157)– Discontinued operations – –Total (2,611) (3,324)

(b) Other Comprehensive Income StatementCZK mil. 2010 2009

Income / (expense) as a result of deferred tax on items charged into equity Hedge of net investment in foreign currency equity investments (29) (17)Gains / (losses) on revaluation of available-for-sale fi nancial assets (24) (140)Effective portion of gains and losses on hedge instruments in cash fl ow hedges (1) (5)Total (54) (162)

The tax on the Group’s profi t before tax differs from the theoretical amount that would arise using the basic tax rate of the Czech Republic as follows:


Profi t before tax 14,659 15,760 – Continuing operations 14,659 15,760 – Discontinued operations – –Tax calculated at a tax rate of 19% (2009: 20%) 2,785,0 3,152,0Income not subject to tax (754) (608)Expenses not deductible for tax purposes 516 724Tax allowances and credits, including the utilisation of tax losses 102 (4)Income tax as per the fi nal tax returns for prior period (39) 60Income tax expense 2 611 3 324Effective tax rate 17.81% 21.09%

Further information about deferred income tax is presented in Note 26.

41. Cash and Cash Equivalents

Cash and cash equivalents at the end of the year as shown in the consolidated statement of cash fl ows consists of the following balances:

CZK mil. 2010 2009

Cash (refer to Note 5) 20,362 20,651Nostro accounts with the CNB (refer to Note 5) 491 1,079Treasury bills and treasury bonds with maturity of less than three months 1,477 5,480Nostro accounts with fi nancial institutions (refer to Note 6) 563 528Loro accounts with fi nancial institutions (refer to Note 19) (4,682) (1,922)Total cash and cash equivalents 18,211 25,816

113


42. Financial Instruments

The Group classifi es fi nancial instruments into the trading and banking (investment) portfolios in accordance with Basel II rules as per CNB Regulation No. 123/2007 as amended by Regulation 282/2008 Coll., on the rules of prudent business of banks, savings and lending associ-ates and securities traders (henceforth “Regulation 123/2007”). The Group uses various risk management techniques for the banking and trading books (refer to Note 43).

The table below shows the comparison between categories of fi nancial assets and liabilities reported according to IFRS 7 and categories of fi nancial assets and liabilities reported according to IAS 39.

The balances of fi nancial instruments in the individual categories are as follows:

At 31 December 2010 Loans and advances

not held for trading

Investments held-to-

-maturity

Financial assets at fair value

through profi t or loss

Available-for--sale

fi nancial assets

Financial liabilities

measured at amortised

cost

Financial liabilities at

fair value through

profi t or loss

Financial assets Cash and balances with CNB 25,767 Loans and advances to fi nancial institutions 174,947 Loans and advances to customers 440,750 Securities held for trading 18,488 Securities designated upon initial recognition as at fair value through profi t or loss 9,587 Derivative instruments 16,021 – trading 15,298 – hedging 723 Securities available-for-sale 20,029 Securities held-to-maturity 128,977 Other assets 7,675 Financial liabilities Amounts owed to fi nancial institutions 52,214 Amounts owed to customers 661,074 Negative nominal value of fi nancial derivatives 12,058Derivative instruments 14,674– trading 14,499– hedging 175Bonds in issue 46,058 Other liabilities 5,571 Subordinated debt 11,036

114



not held for trading


maturity



Available-for-sale fi nancial

assets



cost


fair value through

profi t or loss

Financial assets Cash and balances with CNB 29,371 Loans and advances to fi nancial institutions 126,506 Loans and advances to customers 454,479 Securities held for trading 29,644 Securities designated upon initial recognition as at fair value through profi t or loss 7,367 Derivative instruments 17,675 – trading 17,070 – hedging 605 Securities available-for-sale 28,388 Securities held-to-maturity 111,977 Other assets 9,080 Financial liabilities Amounts owed to fi nancial institutions 47,434 Amounts owed to customers 643,420 Financial liabilities at fair value 8,129Derivative instruments 16,412– trading 16,056– hedging 356Bonds in issue 43,119 Other liabilities 10,803 Subordinated debt 13,404

43. Risk Management

Financial instruments may result in certain risks to the Group. The most signifi cant risk is credit risk. In addition, the investment portfolio of the Group is exposed to interest rate risk and liquid-ity risk. The risks attached to the trading portfolio include market risks, specifi cally foreign exchange, interest rate and equity risks and other risks relating to trading with complex instruments. All transactions with fi nancial instruments also carry operational risk.

Risk management in the Bank is performed by a division managed by a member of the Board of Directors exclusively responsible for risk management – the Chief Risk Offi cer. This division, which is completely independent of the business divisions of the Bank, centralises all departments tasked with risk management:

Legal and Compliance; Central Risk Management; Credit Risk Management and Credit Service; Credit Risk Controlling and Credit Portfolio Management; and Security.

Central Risk Management is further divided into Financial Mar-kets Risk Management, Operational Risks and Economic Capital.

––––

–

Risk management activities in the Bank’s subsidiaries are under-taken by persons independent of the business units. The Credit Risk Controlling and Loan Portfolio Management Department of the Bank provides specialist guidance to and oversees the staff in-volved in managing credit risk in the subsidiaries and is responsi-ble for monitoring the subsidiaries portfolio. Market risks within the Group are managed by the Bank.

Internal management and control systems are reviewed by the In-ternal Audit function on an annual basis.

43.1. Credit risk

In the course of its business, the Group is exposed to credit risk which is the risk that a counterparty will be unable to pay amounts owing in full when due.

Credit Risk Management MethodologyIn managing credit risk, the Group applies a unifi ed methodol-ogy which sets out applicable procedures, roles and authorities. The lending policy defi nes a comprehensive policy of the Group’s credit risk management. It defi nes the basic principles related to identifi cation, measurement, monitoring, controlling and credit risk management. It contains the basic lending rules including lim-itations for loan granting and describes individual credit risk man-

115


agement tools, such as rating system, collateral management, limit setting, setting of approval policy, monitoring, provision making policy, reporting, controlling and portfolio management. In addi-tion it defi nes credit risk management organization and discloses the lending process.

Breakdown of the Portfolio for Credit Risk Management PurposesFor the purpose of determining impairment allowances the loans and advances are segmented into non-default (performing) loans where the principal and interest is not past due for more than 90 days or there are no other indications that would suggest that the repayment of the receivable is unlikely (bankruptcy proceedings, forced restructurings, etc.) and default (non-performing) loans. There are two large sub-portfolios within these receivables, i. e. receivables which are individually signifi cant comprising receiva-bles from corporate entities or receivables where the Group’s credit exposure is higher than CZK 5 mil. and receivables which are in-dividually insignifi cant. Within these two sub-portfolios the Group also monitors fi ve customer portfolios for individually signifi cant receivables and 15 product portfolios for individually insignifi -cant receivables. The Group monitors risk parameters within these portfolios (PD – probability of default, LGD – loss given default, CCF – credit conversion factors). PD is further monitored at vari-ous internal rating levels.

All non-performing loans are classifi ed as individually impaired receivables (rating R). Performing loans with internal ratings of 1–6 are considered unimpaired loans; loans with internal ratings of 7–8 are considered collectively impaired.

For credit risk management purposes, the Group’s loan portfolio is broken down as follows:

Retail receivables are receivables from individuals / hou-seholds and small enterprises with an annual turnover of up to CZK 30 mil. and small municipalities – the so called MSE, receivables from construction saving loans, hire-purchase, receivables from loans provided for the purchase of securities and lease receivables. The methods of managing the credit risk of retail receivables are based on statistical models calibrated using historical data. Receivables from corporate counterparties include recei-vables from small and medium sized enterprises with an annual turnover between CZK 30 to 1,000 mil., the so called SME and receivables from large businesses (with an annual turnover exceeding CZK 1,000 mil.) and public sector receivables, factoring receivables and lease receivables. The methods of managing the credit risk of corporate receivables are based on statistical models (namely for the portfolio of receivables from mid-size enterprises), great emphasis is also put on regular individual analysis of individual customers. Receivables arising from specifi c products provided by the subsidiaries represent specialised fi nancial products that require their own risk management techniques refl ecting their specifi cs. These largely include factoring receivables,

–

–

–

leasing receivables, instalment sales, loans issued to fi nance the acquisition of securities and construction savings loans. The portfolios of these products are regularly monitored both on an individual basis (for individually signifi cant exposures) and a portfolio basis.

With the exception of a limited number of borderline cases, the implemented breakdown of the portfolio corresponds to the asset classes defi ned in CNB Regulation No. 123/2007 which imple-ments the Basel II rules.

For the purpose of provisioning, monitoring and predicting losses, the Group differentiates between individually signifi cant and indi-vidually insignifi cant exposures when managing credit risk. The credit risk attached to individually signifi cant exposures is man-aged on an individual basis with the minor use of portfolio models. The Group aggregates individually insignifi cant exposures into portfolios and manages the risk on a portfolio basis.

Individually signifi cant loans predominantly include loans from the Group’s corporate portfolio. These loans are additionally split into the following sub-portfolios:

Large corporate clients with annual turnover exceeding CZK 1,000 mil. (the exposure of which is managed using a unifi ed method within the Erste Group or at the Bank level); Project funding and corporate mortgages; Small and medium sized enterprises (turnover from CZK 30 to 1,000 mil.); Municipality loans; and Loans from the Workout Department.

Corporate loans additionally match the corporate class (segment) of assets under Basel II or special funding.

Individually insignifi cant loans, including MSE loans, principally encompass the Group’s retail loans. These loans are additionally split into 15 product portfolios. The key portfolios include mortgage retail loans, credit card loans, overdraft loans and consumer loans. The Group’s retail loans additionally match the “individuals / house-holds” assets class (segment) under Basel II.

Collection of Key Risk Management InformationThe Group uses information obtained from external sources such as the Credit Bureaus or ratings provided by reputable rating agen-cies. This data provides a basis for modelling credit risk and as a support during debt recovery, valuation of receivables and cal-culation of losses.

Internal Rating ToolsThe internal ratings of the Group refl ect the ability of counterpar-ties to meet their fi nancial liabilities. The degree of the risk is re-fl ected in the internal rating as a probability of default of the debtor in the following twelve months. This degree of risk complies with the defi nition of new capital requirements set out in CNB Regula-tion No. 123/2007 (Basel II).

–

––

––

116


The Group allocates internal ratings to all loan receivables from customers and other fi nancial instruments. In addition to the rating of individuals and households, the Group uses the 13 degree rating scale of non-default categories and one group for “R” default cus-tomers. The scale for individuals and households is 8 + R.

Individual customer segments (classes) are, under Basel II, subject to various rating instruments and all of them are currently the Erste Group-wide standard:

Segment Rating tool

Government (sovereign) and bankingUnifi ed model for the whole Erste Group. The model places great emphasis on independent external ratings combined with other information

Specialized fi nancing Unifi ed model for the whole Group, which is primarily based on projected cash fl owsCorporate customers Rating based on fi nancial information and so called soft factors

MSESimilarly to corporate clients, the solvency of the enterprise owner or the entrepreneur himself is taken into account

Individuals Behavioral and application scoringMunicipal clients Model based on budget analysis

The Group reviews ratings in respect of all segments on a regular basis. The rating of the banking, corporate and sovereign segments is analyzed at least annually. The Group has developed “behav-ioural rating” for retail customers where the Group updates the rating of a customer based on its activities and its delinquency on a monthly basis.

In addition to the internal ratings outlined above, the Group allo-cates risk profi le groups to individual assets arising from the loan arrangement according to CNB Regulation 123/2007. In accord-ance with this Regulation, the Group maintains fi ve groups of risk profi les, ranging from standard, watch, substandard, doubtful to loss receivables.

The Group also uses independent external ratings provided by reputable rating agencies. Based upon its historical experience, the Group has determined a transfer bridge between its own internal ratings and external ratings (refer to Note 43.1).

In compliance with the regulatory requirements arising from Ba-sel II, rating instruments are subject to annual validation by the Credit Risk Controlling and Portfolio Management Department and Internal Audit. In addition, the rating instruments are peri-odically adjusted to refl ect changing economic conditions and the Group’s plans, based on validations (results consistency testing) and performance testing undertaken by the Credit Risk Controlling and Portfolio Management Department.

The application of internal rating tools is limited for certain spe-cialised products provided by the subsidiaries, hence the internal rating tools are not used by all of the entities included in the Group, specifi cally s Autoleasing, a. s., Factoring České spořitelny, a. s., and brokerjet České spořitelny, a. s. The principal reason relates to the lack of appropriate input data used in arriving at the internal rating and monitoring receivables which the clients are obliged to provide to the Group. As such, these products require an increased level of loan collateral.

Exposure LimitsExposure limits are defi ned as the maximum exposure that the Group may accept in respect of a client with a given rating and underlying collateral. In setting the system of limits, the Group strives to protect its revenues and capital from risk concentration. Risk concentration is measured through the amount of the loss of twenty groups (the Value at Risk measured using Creditmetrics methodology with a one-year horizon and a reliability correspond-ing to a one-sided 95% quintile of loss distribution), to which the Group records the highest exposure and several other indicators for which limits have been established. The VaR of twenty groups to which the Group records the highest exposure decreased signifi -cantly from 5.6% to 4.5% in 2010 in comparison to 2009. In addi-tion, the amount of the expected loss decreased from 3.8% to 2.1% based on the portfolio being more diversifi ed between individual customer groups and industries.

Structure of Approval AuthoritiesThe structure of approval authorities is derived from the principle of the materiality of the impact of a potential loss from a provid-ed loan on the Group’s fi nancial performance and the risk profi le of the relevant loan transaction. The highest approval authorities rest with the Credit Committee of the Board of Directors, with the Credit Committee of the Supervisory Board only having an advisory role. Lower approval authorities are categorised taking account of the seniority of the staff of the Credit Risk Management Department and Credit Service Department.

Risk ParametersThe Group currently uses risk parameters in monitoring portfo-lio risks, non-performing loans portfolio management, portfolio protection measurement and risk valuation. The active use of risk parameters in managing the Group makes it possible to obtain de-tailed information about the possible sensitivity of basic portfolio segments to both internal and external changes. The Group uses its own internal models in determining the PD, LGD and CCF risk parameters. All of the models are developed according to Basel II

117


requirements and were subject to review by the regulator. The monitoring of historical risk parameters and their prediction serve as a basis for quantitative management of portfolio credit risk.

All models are back tested at least annually and validated by the Bank’s specialists who are independent of the Risk Management Department.

Provisions for Loan LossesThe Group recognises provisions for incurred losses. These losses are determined and recognised in accordance with IAS 39. In deter-mining the amount of the loss, the Group uses adjusted risk param-eters estimated as part of the implementation of Basel II rules.

Loan loss provisions are determined for all impaired loans. The provisioning methodology is regularly reviewed and adjusted if necessary.

Management of Credit Risk in the Trading PortfolioThe credit risk inherent in the trading portfolio is managed through the imposition of limits approved for individual counterparties.

CollateralThe Group defi nes collateral as assets that can be realized in case the primary source of repayment fails. Collateralisation of the Group’s receivables arising from lending transactions is governed by the following principles: Collateralisation of the Group’s re-ceivables represents the Group’s prevention and protection as a creditor and an additional source of repayment. The selection and composition of individual collateral instruments depends on the Group’s loan products, requirements and professional assess-ment by the Group’s responsible employee and takes into account the ease of realisation.

The value of collateral is determined by reference to the market price valuation (nominal value of collateral) based on valid regu-lations. If more market prices of the collateral determined using various valuation techniques are available in a particular business transaction, the lowest market price is used.

If the collateral instrument involves real estate, movable assets, a business or its branch, trade marks, an asset declared as a his-torical monument, antiquities, paintings, jewels, manuscripts, etc., the price has to be determined on the basis of an appraisal made by an expert appraiser contracted by the Group or an internal ap-praiser for the purpose of evaluating the loan application. The ex-pert appraisal or price estimate must not be older than six months at the date on which the loan contract is entered into. For real estate valuation purposes, a detailed inhouse “Methodology of Valuation of Real Estate for the Purpose of Advancing of a Loan, Including Mortgage Loans, at Česká spořitelna” is used.

The realisable value of collateral is determined using the collateral coeffi cient according to the Collateral Catalogue. In determining the collateral coeffi cient, it is necessary to assess individual instru-

ments by their specifi c features, e. g. real estate by the character of its construction, etc. and always following a physical inspection. The expert appraiser / price estimate always has to be reviewed. Other conditions taken into account in determining the realisable value of the collateral are, among others, as follows:

Comprehensive assessment of all available and, for the particular case, signifi cant circumstances and background documentation; Insurance and pledge of a receivable arising from the insu-rance proceeds in favour of the Group; Possibilities of the realisation of collateral at a particular time and place and the amount of the costs of the realisation which, in most cases, needs to be viewed as a sale in distress; and Comparison to market trends.

The Collateral Catalogue also includes requirements for the peri-odic revaluation of collateral. Typically, the collateral value is ana-lysed and updated upon the regular monitoring / credit review of clients.2 With respect to credit product portfolios with a signifi cant amount of collateral, the Group uses portfolio models of updating realisable collateral values.

In addition, the Group regularly monitors the loan-to-value ratio, mainly in respect of mortgage loans and project fi nancing loans.

Credit Risk PricingIn determining risk mark-ups for individual types of counterparties and deals the Group uses monitored values of risk parameters PD, LGD and CCF. In addition, in calculating the mark-ups the Group also takes into consideration changes in macroeconomic environ-ment and changes in the credit process of the Group, which may have an impact on risk level within the credit portfolio.

Stress TestingThe Group regularly performs stress testing of the sensitivity of its portfolio to the deterioration of the credit quality of receivables. In addition to the sensitivity of the portfolio to stress changes in the PD and LGD risk factors, the Group performs scenario analy-ses modelling the impact of the adverse development of the mac-roeconomic factors (such as changes in the economic growth rate, changes in interest rates and changes in infl ation). The breakdown of credit risk by industries is shown in Note 43.1 (b).

2 credit review

–

–

–

–

118


(a) Structure of Credit Risk by On-balance Sheet and Off-balance Sheet ItemsThe Group is exposed to credit risk arising from the following items:

CZK mil. 2010 2009

Credit risk exposures relating to on-balance sheet items Cash and balances with CNB 5,404 8,720Loans and advances to fi nancial institutions 174,947 126,506Loans and advances to customers, net of provisions 440,750 454,479a) Retail loans 240,825 246,263– Overdraft loans 6,875 6,072– Credit cards 5,224 4,530– Other loans 68,064 73,852– Mortgage loans 115,780 116,539– Construction savings loans 44,213 44,952– Finance leases 165 318– Loans to purchase securities 504 –b) Retail loans – businessmen and small companies (MSE) 53,117 55,051– Overdraft loans 2,506 2,728– Other loans 19,800 21,434– Mortgage loans 22,406 21,924– Municipal loans 8,393 8,949– Construction savings loans 12 16c) Corporate loans 146,808 153,165– Large enterprises 44,954 43,839– Small and medium sized enterprises (SMEs) 54,686 54,933– Corporate mortgages 28,879 34,919– Municipalities 12,484 12,795– Factoring 1,740 1,535– Finance leases 4,065 5,144Positive fair value of derivative transactions 16,021 17,675Financial assets at fair value through profi t and loss– Debt securities held for trading 16,673 29,577– Debt securities designated upon initial recognition as at fair value through profi t or loss 8,032 6,136Debt securities available-for-sale 19,425 25,938Debt securities held-to-maturity 128,977 111,977Accrued interest included in other assets 3,546 3,276Various receivables included in other assets 1,207 1,709Receivables from factoring transactions included in other assets 1,284 1,225Receivables from securities trading included in other assets 435 314State subsidy included in other assets 1,203 2,556Credit risk exposure relating to off-balance sheet itemsAmounts owed from guarantees and letters of credit 16,688 17,618Undrawn loan commitments 66,505 75,740Total 901,097 883,446

The resulting credit exposure as at 31 December 2010 and 2009 represents a worst case scenario, without taking into account any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the statement of fi nancial position.

As shown above, 68% of the total exposure is derived from loans and advances to fi nancial institutions and customers (2009: 66 %); 19% represents investments in debt securities (2009: 20%).

119


Collateral securing the above receivables is as follows:

CZK mil. 2010 2009

Loans and advances to fi nancial institutions 124,453 78,392Loans and advances to customers, net of provisions 273,781 251,363– Retail loans 143,917 133,676– Retail loans – businessmen and small companies (MSE) 28,586 27,938– Corporate loans 101,278 89,749Total 398,234 329,755

The value of collateral is the lower of the collateral’s nominal value multiplied by a collateral coeffi cient and the receivable balance. The saleability of collateral is not always certain. For details of the determination of collateral fair values, refer to Note 3.2.

(b) Credit Risk by Individual SectorsSet out below is a summary of loans and advances to customers and fi nancial institutions and debt securities by individual sectors in the distribution of the credit exposure of the Group:

CZK mil. 2010 2009Financial institutions 256,547 28% 213,925 24%Resident individuals 276,694 30% 277,408 31%Trade 39,333 4% 40,368 5%Energy sector 9,059 1% 12,658 1%State institutions 151,156 16% 138,025 15%Public sector 16,050 2% 16,747 2%Construction industry 21,412 2% 18,637 2%Hotels, public catering services 3,811 1% 3,887 1%Real estate and other business activities 85,230 9% 61,185 7%Manufacturing industry 52,461 6% 56,186 6%Other 4,437 1% 53,329 6%Total 916,193 100% 892,355 100%

Given the allocation of credit risk of on- and off-balance sheet items presented in Table 43.1 (a), this does not include “Various receivables in other assets”, “Receivables from factoring transactions included in other assets”, “Receivables from securities trading included in other assets” and “State subsidy included in other assets”. In addition, loans and advances to customers are not decreased by provisions.

The geographical concentration of assets and liabilities is detailed in Note 46 (b).

120


(c) Assessment of Asset Quality Using Risk Profi leAt 31 December 2010CZK mil.

Investment grade(1–4c)

Standard monitoring

(5–6)

Special monitoring

(7–8)

Non--standard

(R)

Total

Equal to the S & P external rating AAA to BB+ BB to B B− to CC C and lowerRetail loans / loans to households− Overdraft loans 5,758 718 391 340 7,207− Credit cards 4,513 491 272 159 5,435− Other loans 59,600 6,733 4,247 3,965 74,545− Mortgage loans 104,875 6,771 2,675 3,132 117,453− Construction savings loans 39,771 3,085 974 1,252 45,083− Leases 156 13 5 13 187− Loans to purchase securities 504 – – – 504MSE − Overdraft loans 2,012 495 24 69 2,600− Mortgage loans 17,968 3,657 137 1,380 23,142− Other loans 22,613 6,651 421 3,362 33,047− Construction savings loans 14 1 – – 16− Leases 380 415 36 180 1,010Corporate loans− Large enterprises 25,715 11,719 2,072 3,063 42,569− SME 21,662 30,620 3,182 5,538 61,002− Mortgage loans 21,724 3,364 1,417 5,298 31,802− Factoring 179 569 652 340 1,740− Other 9,180 3,346 63 43 12,632Total loans and advances to customers 336,624 78,647 16,569 28,135 459,975Total loans and advances to fi nancial institutions 174,356 591 – – 174,947Securities with external rating − Securities held for trading 16,837 246 – – 17,083− Securities designated upon initial recognition as at

fair value through profi t or loss 7,286 53 1 – 7,340− Securities available-for-sale 16,516 316 – – 16,832− Securities held-to-maturity 123,005 627 – – 123,632Securities with no external rating − Securities held for trading 1,391 – – 15 1,406− Securities designated upon initial recognition as at

fair value through profi t or loss 1,509 738 – – 2,247− Securities available-for-sale 3,195 – – 2 3,197− Securities held-to-maturity 4,344 1,000 – – 5,344Total securities 174,083 2,980 1 17 177,081Positive fair value of derivative transactions 14,727 1,051 175 68 16,021

121



Investment grade(1–4c)

Standard monitoring

(5–6)

Special monitoring

(7–8)

Non--standard

(R)

Total

Equal to the S & P external rating AAA to BB+ BB to B B− to CC C and lowerRetail loans / loans to households− Overdraft loans 4,994 672 495 257 6,418− Credit cards 3,868 412 255 200 4,735− Other loans 63,423 6,202 4,315 3,607 77,547− Mortgage loans 106,396 6,027 3,048 2,316 117,787− Construction savings loans 40,567 3,141 520 1,265 45,493− Leases 282 20 6 40 349− Loans to purchase securities 475 – – – 475MSE − Overdraft loans 2,033 686 31 184 2,934− Mortgage loans 18,400 2,764 119 1,132 22,415− Other loans 23,574 5,855 334 2,084 31,847− Construction savings loans 17 1 – – 18− Leases 1,278 221 64 426 1,989Corporate loans− Large enterprises 33,071 10,205 1,470 4,687 49,434− SME 24,078 29,496 4,768 4,053 62,395− Mortgage loans 20,825 5,661 1,457 2,805 30,748− Factoring 111 893 237 293 1,534− Other 9,965 3,021 69 19 13,074Total loans and advances to customers 353,357 75,277 17,189 23,369 469,192Total loans and advances to fi nancial institutions 124,267 2,239 – – 126,506Securities with external rating − Securities held for trading 28,930 – 5 – 28,935− Securities designated upon initial recognition as at

fair value through profi t or loss 6,811 22 110 – 6,943− Securities available-for-sale 24,401 31 157 – 24,589− Securities held-to-maturity 106,898 – – – 106,898Securities with no external rating − Securities held for trading 572 137 – – 709− Securities designated upon initial recognition as at

fair value through profi t or loss 349 75 – – 424− Securities available-for-sale 3,782 15 – 2 3,799− Securities held-to-maturity 5,079 – – – 5,079Total securities 176,822 280 272 2 177,376Positive fair value of derivative transactions 15,962 1,134 299 280 17,675

122


(d) Loans Past their Due Dates As at 31 December 2010 and 2009, the Group reports the following loans which are past their due dates, but not individually impaired:


Past due date by less than

30 days

Past due date by

30–60 days

Past due date by

60–90 days

Total Value of collateral

Retail loans / loans to households Overdraft loans 81 61 32 174 –Credit cards 557 55 32 644 –Other loans 3,612 926 441 4,979 523Mortgage loans 581 1,009 433 2,023 1,527Construction savings loans 1,666 510 208 2,384 787Finance leases 9 2 – 12 11Subtotal 6,506 2,563 1,146 10,215 2,848MSEOverdraft loans 23 15 8 46 5Other loans 638 426 343 1,407 551Mortgage loans 62 202 185 449 361Construction savings loans 16 – – 16 7Municipal loans – – – – –Finance leases 85 19 4 108 105Subtotal 824 662 540 2,027 1,029Total retail loans 7,330 3,226 1,686 12,242 3,877Corporate loansCorporate customers 419 – – 419 271SME 1,060 369 124 1,553 1,111Corporate mortgage loans 35 409 40 484 398Municipalities 10 – – 10 10Total corporate loans 1,524 778 164 2,466 1,790Total 8,855 4,004 1,850 14,708 5,667

At 31 December 2009 CZK mil.


30 days

Past due date by

30–60 days

Past due date by

60–90 days

Total Value of collateral

Retail loans / loans to households Overdraft loans 81 63 36 180 –Credit cards 560 56 24 640 –Other loans 4,196 967 464 5,627 573Mortgage loans 495 1,214 511 2,220 1,804Construction savings loans 865 269 115 1,249 406Finance leases 20 3 1 24 23Subtotal 6,217 2,572 1,151 9,940 2,806MSE Overdraft loans 12 23 17 52 4Other loans 589 395 212 1,196 499Mortgage loans 149 253 153 555 469Municipal loans – – – – –Construction savings loans 7 – 6 13 1Finance leases 233 45 13 291 279Subtotal 990 716 401 2,107 1,252Total retail loans 7,207 3,288 1,552 12,047 4,058Corporate loans Corporate customers 388 19 48 455 243SME 1,820 300 164 2,284 1,519Corporate mortgage loans 35 204 23 262 242Municipalities 32 – – 32 –Total corporate loans 2,275 523 235 3,033 2,004Total 9,482 3,811 1,787 15,080 6,062

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(e) Restructuring of Loans The Group has restructured the loans that would otherwise be in default or impaired in the aggregate amount of CZK 8,889 mil. (2009: CZK 5,969 mil.).

CZK mil. 2010 2009

Retail loans / loans to households Overdraft loans 39 13Credit cards 28 7Construction saving loans 254 228Financial leasing 9 Other loans 1,610 1,099Mortgage loans 2,141 1,490Subtotal 4,081 2,837MSE Overdraft loans – –Other loans 164 172Financial leasing 91 Mortgage loans 337 243Municipal loans 17 28Subtotal 609 443Total retail loans 4,690 3,280Corporate loans Corporate customers 1,530 882SME 763 426Financial leasing 526 Corporate mortgage loans 1,359 1,362Municipalities 21 19Total corporate loans 4,199 2,689Total 8,889 5,969

(f) Analysis of Individually Impaired LoansCZK mil. Individually impaired Collateral value 2010 2009 2010 2009Retail loans / loans to households Overdraft loans 391 405 – –Credit cards 233 265 – –Other loans 5,647 5,342 526 460Mortgage loans 4,656 4,180 3,009 2,937Construction savings loans 1,699 1,296 373 306Finance leases 17 44 17 20Subtotal 12,643 11,532 3,925 3,723MSE Overdraft loans 85 202 12 25Other loans 3,534 2,201 1,201 907Mortgage loans 1,471 1,229 844 817Municipal loans – 22 – 7Finance leases 222 440 203 207Subtotal 5,312 4,094 2,260 1,963Total retail loans 17,955 15,626 6,185 5,686Corporate loans Corporate customers 3,050 4,687 1,409 1,106SME 4,928 4,108 2,851 2,385Corporate mortgage loans 5,298 2,805 3,993 2,185Municipalities 43 19 31 7Total corporate loans 13,319 11,619 8,284 5,683Total 31,274 27,245 14,469 11,369

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The value of collateral is the lower of the collateral’s nominal val-ue multiplied by a collateral coeffi cient and the receivable balance. The saleability of collateral is not always certain. For details of the determination of collateral fair values, refer to Note 3.2 (i).

43.2 Total Market Risk

The Group is exposed to the impacts of market risks. Market risks arise from open positions in interest rate, currency, equity and commodity fi nancial instruments, the value of which changes subject to general and specifi c fi nancial market movements. The Group is exposed to the market risk arising from open positions in the trading book. However, a signifi cant component of the market risk is also the interest rate risk associated with assets and liabili-ties included in the investment banking book.

Trading book transactions in the capital, money, interbank and de-rivative markets can be segmented as follows:

Client quotations and client transactions, execution of client orders; Interbank and derivative market quotations (market making); and Proprietary trading in the interbank, derivative and capital markets.

The Group trades with the following derivative fi nancial instru-ments through the over the counter (“OTC”) market:

Foreign currency forwards (including non-delivery forwards) and swaps; Foreign currency options; Interest rate swaps; Asset swaps; Forward rate agreements; Cross-currency swaps; Interest rate options such as swaptions, caps and fl oors; Commodity derivatives (for gold, copper, silver, crude oil, oil, rape and zinc); and Credit derivatives.

In the area of exchange traded derivatives, the Group trades the following instruments:

Bond futures; Equity and equity indices futures; Interest rate futures; Commodity derivatives (gold and crude oil futures); and Options in respect of bond futures.

The Group also trades, on behalf of its clients, with other less com-mon currency options, such as digital, barrier or windowed op-tions. Certain option contracts or options on various underlying equity baskets or equity indices form part of other fi nancial instru-ments as embedded derivatives.

Derivative fi nancial instruments are also entered into to hedge against interest rate risk inherent in the investment book (interest

–

–

–

–

–––––––

–

–––––

rate swaps, FRA, swaptions) and to refi nance the mismatch be-tween foreign currency assets and liabilities (FX swaps and cross currency swaps).

The majority of open positions arising from client transactions in the Group’s trading book are transferred to the Group portfo-lio through “back to back” transactions. As such, the market risk arising from the Group’s OTC transactions is managed within the Erste Group Bank portfolio. The Group retains in the trading port-folio the money market risk due to liquidity management (money market), equity risk and partially a residual risk from previously closed transactions. This residual risk is dynamically hedged at a macro level in line with the Group’s limits set for market risk.

In addition to the calculation of sensitivities to individual risk fac-tors, the Group uses the “value at risk” methodology (“VaR”) to estimate and manage the market risk of open positions held and to determine the maximum losses expected on these positions. The VaR values are calculated on a confi dence level of 99 percent for a period of one trading day. To calculate the values, the KvaR+ system is used along with historical simulations based on the last 520 trading days. Assuming a normal distribution of losses, VaR is also determined for a period of one month, or possibly one year and for higher probability levels (99.9%, 99.98%). The Board of Directors establishes VaR limits for the trading and investment portfolio as the Group’s maximum acceptable exposure to mar-ket risk. For the trading portfolio VaR sub-limits (1 day, 99%) in respect of individual trading desks are established and limits for sensitivity values of the trading portfolio to individual risk fac-tors such as foreign exchange rates, equity prices, interest rates, volatility and other risk parameters of option contracts facilitate the maintenance of the overall market risk profi le. These limits are approved by the Financial Market and Risk Management Commit-tee and are monitored on a daily basis.

The market risk VaR indicator is also calculated for the investment (banking) book using special models for current accounts and oth-er liabilities without specifi ed maturity. The VaR (1 month, 99%) of the investment book is reported to the Assets and Liabilities Committee (“ALCO”) on a monthly basis while compliance with the limit is monitored by Risk Management on a daily basis. The acceptable level of risk is based on the assessment of the capital available to cover risks based on the Internal Capital Adequacy Assessment Process (“ICAAP”) methodology. The overall VaR is subsequently allocated to individual sub-portfolios of the invest-ment book, taking into account both the perspective of strategic portfolio management and the accounting measurement of securi-ties portfolios.

125


The table below summarizes the VaR values as at 31 December 2010 and 2009 on the confi dence level of 99 percent:

2010CZK mil.

Total Market Risk

Correlation Effect

Interest Rate Risk

Foreign Currency Risk

Equity Risk

Trading bookDaily value 20 (7) 22 5 –Monthly value 94 (33) 103 23 1Average of daily values per year 24 (10) 17 17 –Average of monthly values per year 111 (51) 80 80 2Banking bookDaily value 231 (42) 234 25 14Monthly value 1,085 (195) 1,098 117 65Average of daily values per year 370 (13) 365 11 7Average of monthly values per year 1,736 (57) 1,710 50 33

2009CZK mil.

Total Market Risk

Correlation Effect

Interest Rate Risk

Foreign Currency Risk

Equity Risk

Trading bookDaily value 30 (7) 25 12 –Monthly value 138 (33) 114 56 1Average of daily values per year 22 (12) 17 17 –Average of monthly values per year 101 (60) 80 80 1Banking bookDaily value 366 4 355 2 5Monthly value 1,676 23 1,625 7 21Average of daily values per year 389 (6) 388 4 3Average of monthly values per year 1,783 (29) 1,779 18 15

In addition, the Group uses stress testing or an analysis of impacts of adverse developments in market risk factors on the market value of the trading book and on the parts of the investment book revalued to market values. Scenarios are developed on the basis of historical experi-ence and expert opinions of the Macroeconomic Analyses Department. The stress testing is undertaken on a monthly basis and its results are reported to ALCO. In addition, the Group monitors fi nancial news, analyzes market movements and prepares for different scenarios with respect to the position of the economy.

43.2.1 Interest Rate Risk

Interest rate risk is the risk that the value of fi nancial instruments will fl uctuate due to changes in market interest rates. The Group manages the interest rate risk of the banking investment book by monitoring the repricing dates of the Group’s assets and liabilities and using models which show the potential impact that changes in interest rates may have on the Group’s net interest income.

For monitoring and measuring the banking book interest rate exposures, the Group uses a simulation model focused on monitoring poten-tial impacts of market interest rate movements on the net interest income. Simulations are performed over a period of 36 months. A basic analysis focuses on the sensitivity of the net interest income to one-off changes of market interest rates (“rate shock”). In addition, the Group performs probability modelling of its net interest income (“stochastic simulation”) and the traditional gap analysis.

In order to measure the interest rate risk exposure within the trading portfolio, the Group uses the present value of a basis point gap (“PVBP”) defi ned as a matrix of sensitivity factors to interest rates by currency for individual portfolios of interest rate products. These factors measure the portfolio market value sensitivity with a parallel shift of the yield curve of the relevant currency within the predefi ned period to maturity. The system of PVBP gap limits is set in respect of each interest rate product portfolio by currency.

The analyses noted above are undertaken on a monthly basis. The current level of the interest rate risk exposure is assessed by ALCO on a monthly basis in the context of the overall development of fi nancial markets and the Czech banking sector, as well as the structural changes in the Group’s statement of fi nancial position.

The following table is based on the exposure of the Bank to interest rates for derivative and non-derivative instruments as of the reporting

126


date and the determined changes which occurred at the beginning of the year and are constant during the reported period for the instruments with a variable interest rate, i. e., the model is based on the assumption that the funds released as a result of the payment or sale of interest rate assets and liabilities will be re-invested in assets and liabilities with the same interest rate sensitivity. As such, the model assumes a fi xed structure of the statement of fi nancial position according to interest rate sensitivity. The table shows impacts on the income statement and equity Group, if the CZK or EUR interest rates sharply increased / decreased by 100 points at the beginning of the respective year and other variable interest rates remained unchanged:

CZK mil. 2011 2010Interest rate

increaseInterest rate

decreaseInterest rate


decreasea) CZKIncome statement 1,540 (1,360) 1,100 (1,320)Shareholders’ capital (35) 35 (15) 15b) EURIncome statement 180 (210) 280 (220)Shareholders’ capital (29) 29 (33) 33

The Bank additionally monitors interest rate exposures and simulates the impact of changes in interest rates on the profi t / (loss) of selected subsidiaries, principally Stavební spořitelna České spořitelny, a. s., and Penzijní fond České spořitelny, a. s.

Other subsidiaries exposed to interest rate risk such as Factoring České spořitelny, a. s., and s Autoleasing, a. s., principally use “inherent” hedg-ing by opting for the appropriate refi nancing of the active portfolios and regularly adjusting this refi nancing (at least on an annual basis)

The following tables present the distribution of assets and liabilities according to the interest rate repricing dates. They include signifi cant fi nancial assets and liabilities in CZK, EUR and USD as at 31 December 2010 and 2009. Variable yield assets and liabilities have been reported according to their next rate repricing date. Fixed income assets and liabilities have been reported according to their remaining maturity.


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

Selected assets Cash and balances with the CNB 5,360 – – – – 5,360Loans and advances to fi nancial institutions 136,150 35,698 2,172 2 62 174,083Loans and advances to customers, net of provisions 93,326 67,595 66,302 163,588 48,304 439,115Securities at fair value through profi t or loss 18,495 343 2,756 3,086 713 25,394Securities available-for-sale 2 1,855 1,479 8,337 7,752 19,424Securities held-to-maturity 3,076 880 26,110 32,963 65,949 128,977Total selected assets 256,409 106,371 98,819 207,976 122,779 792,354Selected liabilities Amounts owed to fi nancial institutionsx) 16,569 1,909 11,414 18,619 3,181 51,691Amounts owed to customersx) 61,921 168,682 137,227 295,405 2,383 665,619Bonds in issuex) 6,711 4,609 7,936 22,708 5,296 47,259Subordinated debt – 354 8,710 1,973 – 11,037Total selected liabilities 85,200 175,554 165,288 338,705 10,860 775,607Current gap 171,209 (69,183) (66,469) (130,729) 111,919 16,747Cumulative gap 171,209 102,026 35,557 (95,172) 16,747 x) Including liabilities at fair value.

127



Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

Selected assets Cash and balances with the CNB 8,700 – – – – 8,700Loans and advances to fi nancial institutions 101,015 24,032 503 – 1 125,551Loans and advances to customers, net of provisions 63,836 102,515 74,815 159,429 51,924 452,519Securities at fair value through profi t or loss 30,214 888 859 3,514 652 36,127Securities available-for-sale 2 2,842 6,409 6,966 9,719 25,938Securities held-to-maturity 2,614 6,576 15,593 41,316 45,878 111,977Total selected assets 206,381 136,853 98,179 211,225 108,174 760,812Selected liabilities Amounts owed to fi nancial institutionsx) 13,963 17,165 6,419 8,888 2,138 48,573Amounts owed to customersx) 69,774 143,486 134,673 267,739 27,907 643,579Bonds in issuex) 4,715 5,723 12,420 10,628 10,711 44,197Subordinated debt 6,500 – 4,938 1,966 – 13,404Total selected liabilities 94,952 166,374 158,450 289,221 40,756 749,753Current gap 111,429 (29,521) (60,271) (77,996) 67,418 11,059Cumulative gap 111,429 81,908 21,637 (56,359) 11,059 x) Including liabilities at fair value.

In addition, the Group enters into interest rate swaps to manage its interest rate risk exposure.

43.2.2 Foreign Currency Risk

Foreign currency risk is the risk that the value of fi nancial instru-ments in both the trading and banking books will fl uctuate due to changes in foreign exchange rates. The Group manages this risk by establishing and monitoring limits on open positions, also includ-ing delta equivalents of currency options. In addition, the Group monitors special sensitivity limits for foreign currency option con-tracts known as “greeks” sensitivity. Foreign currency risk of all fi nancial instruments is transferred in the Trading Department’s positions which manages these currency positions in accordance with the set currency sensitivity limits. In addition to the moni-toring of limits, the Group uses the VaR concept for measuring the risk arising from open positions from all currency instruments (refer to Note 43.2).

Foreign currency exposures are primarily carried by the Bank and real estate companies within the Group as they generate the bulk of their rental income in EUR. The foreign currency risk of other Group entities is limited. With regard to real estate companies, the Group uses “inherent” hedging where the companies exposed to foreign currency risk as a result of EUR denominated rental in-come are refi nanced by loans denominated in EUR.

43.2.3 Equity Risk

To monitor and manage the equity risk inherent in the trading and banking books, the Group uses the VaR method and sensitivity analysis which is based on the exposure to the risk of change in the price of shares as of the reporting date. With respect to the increased volatility of share prices, the equity risk represents

a signifi cant component of risks despite smaller volumes of share positions.

43.2.4 Commodity Risk

The commodity instruments appear solely in the trading portfolio as supporting instruments for client transactions. These commod-ity derivatives represent sporadic transactions within the Group’s portfolio and are secured on a so called “back to back” basis with a third party.

43.3 Liquidity Risk

Liquidity risk is the risk that the Group will encounter diffi culties in raising funds to satisfy its fi nancial liabilities when they mature or in fi nancing its assets. The Group’s short-term liquidity position is monitored and managed based on expected cash fl ows and adjust-ing the structure of interbank deposits and placements accordingly and / or taking other decisions aimed at adjusting the short term li-quidity position of the Group, for example, by taking a decision to balance the short term liquidity position in individual currencies.

Mid and long term liquidity is monitored and stressed tested on a monthly basis through the Traffi c Light System (“TLS”)3 simula-tion model which takes into account the anticipated possibility of renewal, preliminary repayment or sale of the Group’s individual positions. The results are presented and discussed in the Operat-ing Liquidity Committee (“OLC”) and ALCO which decide on the need to take measures with respect to the liquidity risk exposure.

3 Traffi c Light System

128


(a) Analysis of Financial Assets and Liabilities Based on Remaining MaturitiesThe breakdown of remaining contractual maturities of the Bank’s fi nancial assets and liabilities and contingent liabilities based on undis-counted cash fl ow as at 31 December 2010 and 31 December 2009 was as follows:


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 25,767 – – – – 25,767Loans and advances to fi nancial institutions 134,381 18,439 2,276 3,563 19,585 178,244Loans and advances to customers net of provisions 23,124 18,704 60,206 232,991 280,472 615,498Securities at fair value through profi t or loss 17,854 337 612 4,004 7,721 30,528Positive fair value of derivative transactions 351 838 2,125 6,892 5,816 16,022Securities available-for-sale 376 113 1,201 12,391 9,034 23,115Securities held-to-maturity 1,714 934 30,097 50,441 85,559 168,744Total 203,567 39,365 96,517 310,283 408,187 1,057,918LiabilitiesAmounts owed to fi nancial institutions 16,868 7,342 2,425 8,546 23,559 58,740Amounts owed to customers 454,829 74,897 40,983 77,380 17,704 665,793Financial liabilities at fair value 12,058 – – – – 12,058Negative fair value of derivative transactions 460 658 2,013 6,463 5,079 14,672Bonds in issue 1,035 665 4,350 30,563 18,278 54,891Subordinated debt – 105 2,485 9,872 – 12,462Total 485,250 83,666 52,255 132,825 64,620 818,616Banking book derivativesAssets:Amount received 351 286 1,167 17,666 13,637 33,106Amount due (114) (213) (440) – – (767)Total 237 72 726 17,666 13,637 32,339Banking book derivativesLiabilities:Amount received 59 285 689 – – 1,032Amount due (114) (217) (943) (18 150) (15,100) (34,524)Total (55) 67 (254) (18 150) (15,100) (33,491)Current gap (281,502) (44,161) 44,734 176 974 342,103 238,149Cumulative gap (281,502) (325,663) (280,929) (103 955) 238,149 Contingent liabilities Financial guarantees 253 180 24 24 403 2,557 27,417Irrevocable letters of credit 43 3 4,408 1 370 58,892 64,715Total 296 183 4,432 25 773 61,449 92,132

129



Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 29,371 – – – – 29,371Loans and advances to fi nancial institutions 98,524 10,130 4,216 2,380 13,594 128,844Loans and advances to customers 15,686 25,798 68,068 236,331 289,257 635,139Securities at fair value through profi t or loss 30,354 82 648 4,125 4,631 39,840Positive fair value of derivative transactions 767 781 2,852 8,058 5,217 17,674Securities available-for-sale 2,288 708 6,272 10,262 13,349 32,880Securities and other assets held-to-maturity 575 1,219 24,474 56,308 59,515 142,091Total 177,565 38,719 106,529 317,463 385,562 1,025,838Liabilities Amounts owed to fi nancial institutions 9,892 8,694 8,387 8,421 17,292 52,686Amounts owed to customers 436,727 84,432 48,617 64,311 14,211 648,298Financial liabilities at fair value 8,129 – – – – 8,129Negative fair value of derivative transactions 812 721 2,386 8,783 3,710 16,412Bonds in issue 1,164 507 6,716 20,084 24,706 53,177Subordinated debt 138 101 2,942 12,337 – 15,517Total 456,863 94,454 69,048 113,935 59,919 794,219Banking book derivatives Assets: Amount received 41 257 1,309 19,868 12,606 34,081Amount due (13) (65) (103) (219) (62) (462)Total 27 192 1,206 19,649 12,543 33,618Banking book derivativesLiabilities:Amount received 24 39 169 171 10 414Amount due (108) (167) (1,162) (18,712) (10,630) (30,780)Total (84) (129) (993) (18,541) (10,620) (30,366)Current gap (279,354) (55,672) 37,695 204,636 327,567 234,872Cumulative gap (279,354) (335,026) (297,331) (92,695) 234,872 Contingent liabilities Financial guarantees 112 306 578 30,375 196 31,567Irrevocable letters of credit 1 2 16,512 5,409 51,987 73,910Total 113 307 17,090 35,784 52,183 105,477

130


(b) Analysis of Assets and Liabilities Based on Estimated MaturitiesThe breakdown of estimated maturities of the Group’s assets and liabilities as at 31 December 2010 and 2009 was as follows:


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years Over 5 years

Total

AssetsCash and balances with CNB 215 429 1,932 10,307 12,883 25,767Loans and advances to fi nancial institutions 133,615 18,236 1,936 2,651 18,508 174,947Loans and advances to customers 20,653 19,444 61,983 141,052 197,617 440,750Securities at fair value through profi t or loss 18,131 251 454 3,175 6,063 28,075Positive fair value of derivative transactions 351 838 2,125 6,891 5,816 16,021Securities available-for-sale 514 108 629 10,500 8,279 20,029Securities held-to-maturity 1,400 880 24,978 34,271 67,449 128,977Other assets 4,463 2,415 8,548 12,421 19,216 47,063Total 179,342 42,602 102,585 221,268 335,831 881,628LiabilitiesAmounts owed to fi nancial institutions 12,220 7,302 2,337 7,593 22,760 52,213Amounts owed to customers 42,296 59,092 86,588 202,295 270,802 661,073Financial liabilities at fair value 696 567 3,774 7,021 – 12,058Negative fair value of derivative transactions 460 658 2,013 6,463 5,079 14,673Bonds in issue 998 359 3,069 25,431 16,201 46,058Provisions – – – 2,145 – 2,145Subordinated debt – – 2,210 8,826 – 11,036Other liabilities 10,475 400 351 197 – 11,423Total 67,145 68,378 100,343 259,971 314,842 810,680Current gap 112,197 (25,777) 2,243 (38,703) 20,989 70,948Cumulative gap 112 197 86,420 88,663 49,959 70,948


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 245 490 2,203 11,748 14,685 29,371Loans and advances to fi nancial institutions 97,942 9,955 4,017 1,667 12,926 126,506Loans and advances to customers 14,322 28,377 70,245 140,123 201,406 454,472Securities at fair value through profi t or loss 30,380 – 549 3,514 2,567 37,011Positive fair value of derivative transactions 767 781 2,852 8,059 5,217 17,675Securities available-for-sale 2,359 698 5,566 7,620 12,144 28,388Securities and other assets held-to-maturity 200 1,147 19,993 43,730 46,908 111,977Other assets 5,009 2,995 10,191 12,676 18,852 49,723Total 151,224 44,442 115,615 229,137 314,705 855,124Liabilities Amounts owed to fi nancial institutions 8,061 8,417 8,254 6,902 15,800 47,434Amounts owed to customers 53,264 66,478 93,684 184,778 245,216 643,420Financial liabilities at fair value 140 1,008 3,042 3,330 609 8,129Negative fair value of derivative transactions 812 721 2,386 8,783 3,710 16,412Bonds in issue 1,127 216 5,358 14,600 21,817 43,119Provisions – – – 2,040 – 2,040Subordinated debt – – 2,725 10,679 – 13,404Other liabilities 16,302 459 644 221 – 17,626Total 79,706 77,298 116,093 231,333 287,152 791,583Current gap 71,518 (32,856) (478) (2,197) 27,553 63,540Cumulative gap 71,518 38,662 38,184 35,988 63,540

131


43.4 Operational Risk

In accordance with CNB Regulation 123/2007, the Group defi nes operational risk as the risk of loss arising from the inappropriateness or failure of internal processes, human errors or failures of systems or the risk of loss arising from external events, including loss due to the breach of or failure to fulfi l legal regulations.

With assistance from Erste Group Bank, the Group put in place a standardised categorisation of operational risks. This classifi cation became the basis of the “Book of Risks of Česká spořitelna”, developed in cooperation with the Risk Management and Internal Audit Departments. The Book of Risks is a tool used to achieve unifi cation of risk categorisation in order to ensure consistency of risk monitoring and evaluation.

The Group has cooperated with an external supplier in developing a specialised software application to collect data about operational risk which conforms to the data collection requirements set out in Basel II. The data is not only used with a view to quantifying operational risks and monitoring trends in the development of these risks but also for the purpose of preventing recurrence of operational risks. In addition to monitoring actual occurrence of operational risk, the Group also pays attention to how the operational risk is perceived by management. This expert risk analysis is assessed annually.

A tool of importance in mitigating losses arising from operational risks is the Group’s insurance programme put in place in 2002. This in-surance programme involves insurance of property damage as well as risks arising from banking activities and liability risks. Since 2004, the Group has been a member of the Erste Group insurance programme which enhances the insurance protection specifi cally with regard to damages that may materially impact the income statement.

43.5 Capital Management

As with the ICAAP in accordance with the Basel II Pillar 2 rules (Regulation No. 123/2007 Coll.), the Group adopted to the Erste Group methodology in 2009. The methodology was approved by the Board of Directors of Erste Group Bank in December 2008 to serve as a uniform set of rules for capital management within the Erste Group. The group wide rules concentrate in particular on the following objectives:

Analysis and monitoring of Erste Group risks including issuance of reports; Analysis and monitoring of Erste Group capital adequacy requirements including issuance of reports; and Forecast of a possible development of the Group risk profi le.

Within ICAAP, Erste Group considers the following risks to be completely or partially covered by capital: market risks of the investment portfolio, market risks of the investment portfolio including interest rate, credit and operational risks. Additional risks, e. g. concentration, liquidity, securitisation and macroeconomic risks as well as other risks (reputational and strategic) are already included in the risks covered by capital, or are covered alternatively by other risk mitigating techniques, or are immaterial.

To quantify market and operational risks, the Group uses VaR methodology for a one-year period on the confi dence level of 99.9 percent. In quantifying credit risks, a method of risk weighted assets is used. The overall risk of the Group is the sum of individual risk volumes, i. e. no diversifi cation effect based on a preference of a more conservative approach is applied. The resulting aggregate risk is compared to capital resources determined as the sum of basic and additional capital and the profi t for the current year.

The Erste Group methodology determines a limit for maximum risk exposure of the Group. The limit is based on the amount of capital re-sources and the previous development of the Group’s risk profi le. The Group meets the limit set by the majority shareholder with a suffi cient degree of reserve.

The ICAAP results of the Group are submitted to ALCO on a quarterly basis. ALCO is the authoritative body regarding bank capital man-agement within ICAAP.

Erste Group Bank as well as Česká spořitelna group pay suffi cient attention to ICAAP in order to gradually improve the risk profi le and capital adequacy management system of the Group with a view to future developments and, additionally, in order to progressively use the ICAAP outputs in the decision-making and planning processes pertaining to business activities and fi nancial management in general.

Furthermore, the Bank manages its capital structure as defi ned in Pillar 1 of Basle II in compliance with CNB methodology. During the year the Bank complied with the regulatory capital requirements.

–––

132


Statement of Capital for the Bank’s Capital Adequacy calculation per CNB methodology (Basel II).

CZK mil. 2010 2009

Total capital 56,461 51,113Original capital (Tier 1) 50,424 43,614Of which: Share capital (refer to Note 29) 15,200 15,200Share premium 2 2Reserve funds and retained earnings 38,198 31,503Deductible items from original capital (2,976) (3,091)Additional capital (Tier 2) (refer to Note 27) 11,036 13,404Aggregate amount of all deductible items from original and additional capital (4,999) (5,905)

44. Fair Value of Financial Instruments

44.1. Fair Value of Derivative Instruments

The Group maintains strict control limits on net open derivative positions, i. e. the difference between the fair values of purchase and sale contracts. At any one time the amount subject to credit risk is limited to the positive fair value of derivative fi nancial instruments, which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers. Limits are established refl ecting the risk of fair value fl uctuations arising from market movements. Collateral or other security is not usually obtained for credit risk exposures on the derivative fi nancial instruments, except where the Group requires deposits from counterparties.

All derivatives are stated at fair value on the statement of fi nancial position as at 31 December 2010 and 2009 (refer to Note 11 and 22).

Change of Fair Values of DerivativesDerivative contracts are valued using the marked-to-market methodology (usually exchange traded derivatives with quotations in the mar-ket) or, more often using the marked-to-model methodology. The basic models for determining the fair value of derivatives are as follows:

The present value of future cash fl ows; Stochastic models; Analytical (e. g. Black – Scholes model for option contracts); and Monte Carlo simulation (usually for structured derivatives without explicit valuation function); or

A combination of the above methods.

The models are reviewed and tested prior to their application within the implementation of new products and subsequently reviewed by the Internal Audit department.

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Nominal and Fair Values of Derivative Instruments


Nominal value Fair ValuePositive Negative Positive Negative

Hedging instruments Interest rate swaps 9,756 9,756 723 46Foreign exchange interest rate swaps 1,611 1,612 – 5Hedgin instrument for net investment hedge 2,508 2,509 – 124Total hedging instruments 13,875 13,877 723 175 Trading instrumentsSpot contracts– interest rate 46 46 – –– currency 958 961 – –Option contracts– interest rate 17,571 17,571 176 147– currency 48,573 48,893 573 539– equity 1,039 1,039 96 64– commodity 1,098 1,098 14 14Forward contracts– interest rate 2 2 – –– foreign currency interest rate 37,967 37,913 560 535– commodity 529 529 7 7Swaps– interest rate 493,721 493,721 11,610 11,978– foreign currency interest rate 91,558 90,186 1,943 821– equity 8,916 8,916 97 177– commodity 3,656 3,656 182 177Other derivatives (credit derivatives) 752 752 40 40Total trading instruments 706,387 705,283 15,298 14,499 Total 720,261 719,160 16,021 14,674

134



Nominal value Fair ValuePositive Negative Positive Negative

Hedging instruments Interest rate swaps 11,465 11,465 605 66Foreign exchange interest rate swaps 2,226 2,297 – 71Hedgin instrument for net investment hedge 5,428 4,779 – 219Total hedging instruments 19,119 18,541 605 356Trading instruments Spot contracts – interest rate 28 28 – –– currency 1,447 1,454 – –Option contracts – interest rate 9,140 9,140 71 47– currency 61,064 60,437 1,125 732– equity 807 807 55 46– commodity 1,202 1,202 29 30Forward contracts – interest rate 9,000 9,000 3 47– foreign currency interest rate 38,156 38,103 759 721– commodity 757 755 52 51Swaps – interest rate 534,037 534,037 11,612 12,148– foreign currency interest rate 83,021 81,814 3,226 1,987– equity 4,458 4,458 48 156– commodity 575 575 90 91Futures 1 1 – –Total trading instruments 743,693 741,811 17,070 16,056Total 762 812 760,352 17,675 16,412

44.2 Fair Value of Other Financial Instruments Except for Derivatives

Fair value estimates are made based on relevant market data and information about the fi nancial instruments. Because no readily available market prices exist for a signifi cant portion of the Group’s fi nancial instruments, fair value estimates for these instruments are based on judgements regarding current economic conditions, currency and interest rate characteristics and other factors.

Many of these estimates involve uncertainties and matters of signifi cant judgement and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to market values and, in many cases, may not be realised in the current sale of the fi nancial instrument. Changes in underlying assumptions used to determine fair value could signifi cantly affect the determined fair value.

The following table summarises the carrying values and fair values of those fi nancial assets and liabilities not presented on the statement of fi nancial position at their fair value.

CZK mil.

2010 2009Carrying

valueEstimated fair value

Carrying value

Estimated fair value

Financial assetsLoans and advances to fi nancial institutions 174,947 174,974 126,506 125,724Loans and advances to customers, net of provisions 440,750 446,465 454,479 451,471Securities held-to-maturity 128,977 134,562 111,977 116,112Financial liabilitiesAmounts owed to fi nancial institutions 52,214 52,751 47,434 47,453Amounts owed to customers 661,074 660,485 643,420 643,211Bonds in issue 46,058 49,322 43,119 44,047Subordinated debt 11,036 10,967 13,404 13,121

135


(a) Loans and Advances to Financial InstitutionsThe fair value of loans and advances to fi nancial institutions is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered by Erste Group banks.

(b) Loans and Advances to CustomersLoans and advances to customers are carried net of provisions. The fair value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered by Erste Group banks.

(c) Securities Held-to-MaturityThe fair value of securities held-to-maturity is based on market prices or price quotations obtained from brokers or dealers. If this informa-tion is not available, the fair value is estimated using quoted market values for securities with similar credit risk characteristics, maturity or yield rates or, as and when appropriate, according to the recoverability of the net asset value of these securities.

(d) Amounts Owed to Financial Institutions and CustomersThe estimated fair value of amounts owed to fi nancial institutions and customers with no stated maturity which include no-interest earning deposits, is equal to the amount payable on demand. The fair value of fi xed income deposits and other liabilities with no stated market value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered on the market for deposits with similar maturities. The fair value of products with no contractually stated maturity (such as sight deposits, passbooks, overdraft facilities) is considered equal to their carrying value.

(e) Bonds in IssueThe aggregated fair value is based on quoted market prices. The fair value of securities where no market price is available is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rate adjusted by the Bank’s own credit risk.

(f) Subordinated DebtIssued subordinated debt is traded on the free market of the PSE. Its fair value is based on quoted market price.

44.3 Hierarchy of Determining the Fair Value

The Group uses the following hierarchy for disclosures about measurement of fair value of fi nancial instruments, refl ecting the importance of individual inputs in the process of determining the fair value of fi nancial instruments:

Level 1: Listed (unadjusted) prices on active markets applicable for identical assets or liabilities; Level 2: Other inputs than the listed prices included within Level 1 that are observable for the assets or liabilities in question, either directly (i. e. as prices) or indirectly (i. e. derived from the prices); Level 3: Inputs for the relevant assets or liabilities that are not based on observable market data (i. e. unobservable inputs).

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–

136


The following table shows the classifi cation of fi nancial instruments at fair value in accordance with the above levels which were used to determine the fair value of the fi nancial instruments as of 31 December 2010:

CZK mil. Level 1 Level 2 Level 3 Total

Assets Securities held for trading 11,773 6,715 – 18,488Debt securities 9,958 6,715 – 16,673Equity securities and other variable yield securities 1,815 – – 1,815Securities designated upon initial recognition as at fair value through profi t or loss 5,972 2,561 1,054 9,587Debt securities 5,472 2,561 – 8,033Equity securities and other variable yield securities 500 – 1,054 1,554Positive fair value of derivative transactions 11 16,009 – 16,020Securities available-for-sale 16,887 2,910 231 20,028Debt securities 16,512 2,910 2 19,424Equity securities and other variable yield securities 375 – 229 604Total assets 34,643 28,195 1,285 64,123Liabilities Financial liabilities at fair value 2,846 9,212 – 12,058Customer deposits – 9,212 – 9,212Liabilities arising from issued securities 2,228 – – 2,228Payables arising from short sales – debt securities 591 – – 591Payables arising from short sales – shares 27 – – 27Negative fair value of derivative transactions – 14,674 – 14,674Total liabilities 2,846 23,886 – 26,732



Assets Securities held for trading 10,902 18,742 – 29,644Debt securities 10,835 18,742 – 29,577Equity securities and other variable yield securities 67 – – 67Securities designated upon initial recognition as at fair value through profi t or loss 4,196 2,165 1,006 7,367Debt securities 3,971 2,165 – 6,137Equity securities and other variable yield securities 225 – 1,006 1,230Positive fair value of derivative transactions 14 17,661 – 17,675Securities available-for-sale 24,400 3,830 158 28,388Debt securities 22,108 3,830 – 25,938Equity securities and other variable yield securities 2,292 – 158 2,450Total assets 39,512 42,398 1,164 83,074Liabilities Financial liabilities at fair value 4,020 4,109 – 8,129Customer deposits – 4,109 – 4,109Liabilities arising from issued securities 1,947 – – 1,947Payables arising from short sales – debt securities 2,072 – – 2,072Payables arising from short sales – shares 1 – – 1Negative fair value of derivative transactions 16,412 – – 16,412Total liabilities 20 432 4,109 – 24,541

137


The following tables show the changes in the fair value of fi nancial instruments for 2010 and 2009 the fair value of which is determined using valuation models not based on ascertainable market data (Level 3):CZK mil. At 1

January 2010

Gains / losses from revaluation

Purcha-ses

Sales Transfer to / from Level 3

At 31 December

2010

Unreali-sed

gains / lossesx) in income

statementin equity

Assets Securities designated upon initial recognition as at fair value through profi t or loss 1,006 (13) 61 1,054 (13)Securities available-for-sale 158 3 64 (1) 7 231 -Total assets 1,164 (13) 3 64 (1) 68 1,285 (13)x) included in the income statement from instruments held as at 31 December 2010

Based on the analysis of changes of selected valuation factors affecting the fair value of fi nancial instruments, the Group does not believe the change of input parameters to have a signifi cant impact on the fair value of fi nancial instruments.

CZK mil. At 1 January

2009

Gains / losses from revaluation

Purcha-ses


At 31 December

2009

Unreali-sed

gains / lossesx) in income

statementin equity

Assets Securities designated upon initial recognition as at fair value through profi t or loss 2,451 (158) – 9 (84) (1,212) 1,006 14Securities available-for-sale 313 – 9 – (162) (2) 158 –Total assets 2,764 (158) 9 9 (246) (1,214) 1,164 14x) included in the income statement from instruments held as at 31 December 2009

There were no signifi cant transfers between Level 1 and 2 in 2010 and 2009. Several securities were transferred from level 3 to level 2 in 2009 due to the decreased importance of non-market observable inputs into the valuation models.

45. Contingent Assets and Liabilities

In the normal course of business, the Group becomes party to various fi nancial transactions that are not refl ected on the statement of fi nancial position and are referred to as off-balance sheet fi nancial instruments. The following represent notional amounts of these off-balance sheet fi nancial instruments, unless stated otherwise.

Legal DisputesAt the reporting date the Group was involved in various claims and legal proceedings of a nature considered normal to its business. The Czech legal environment is still evolving, legal disputes are costly and their outcome unpredictable. Many parts of the legislation remain untested and there is uncertainty about the interpretation that courts may apply in a number of areas. The impact of these uncertainties can-not be quantifi ed and will only be known as the specifi c legal disputes in which the Group is named are resolved.

The Group is involved in various claims and legal proceedings of a special nature. The Group also acts as a defendant in a number of legal disputes fi led with the arbitration court. The Group does not disclose the details underlying the disputes as the disclosure may have an impact on the outcome of the disputes and may seriously harm the Group’s interests.

Whilst no assurance can be given with respect to the ultimate outcome of any such claim or litigation, the Group believes that the various asserted claims and litigation in which it is involved will not materially affect its fi nancial position, future operating results or cash fl ows.

138


If, in connection with the litigation, the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made of the obligation, the Group recognises a provision for the litigation (refer to Note 24).

Assets PledgedAssets are pledged as collateral under repurchase agreements with other banks and customers in the amount of CZK 11 351 mil. (2009: CZK 13,235 mil.). Mandatory reserve deposits are also held with the local central bank in accordance with statutory requirements (refer to Note 5). These deposits are not available to fi nance the Group’s day-to-day operations.

The Group has received loans to fi nance investment property for which it has pledged real estate of CZK 8 882 mil. (2009: CZK 9 520 mil.) as collaterals.

Commitments to Extend Credit and Commitments from Guarantees and Letters of CreditGuarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specifi c terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of clients’ authorisations to extend credit in the form of loans, guarantees or letters of credit. The credit risk attached to commitments to extend credit represents a potential loss for the Group. The Group estimates the poten-tial loss on the basis of historical developments of CCFs, PDs and LGDs. CCFs indicate the likelihood of the Bank paying out on a guarantee or having to grant a loan on the basis of an issued commitment to extend credit.

Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. Management of the Group believes that the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments is minimal.

In 2010, the Group recorded provisions for off-balance sheet risks to cover potential losses that may be incurred in connection with these off-balance sheet transactions. At December 2010, the aggregate balance of these provisions was CZK 345 mil. (2009: CZK 269 mil.). Refer to Note 24.

CZK mil. 2010 2009

Amounts owed from guarantees and letters of credit 16,688 17,618Undrawn loan commitments 66,505 75,740

Operating Leases

The following table presents future cash fl ows from operating lease agreements where the Group is a lessee:


Less than 1 year

1 to 5 years

Over 5 years

Total

Future operating lease expenses 1,165 3,840 3,166 8,172


Less than 1 year

1 to 5 years

Over 5 years

Total

Future operating lease expenses 1,228 3,948 3,705 8,881

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46. Segment Reporting

(a) Industry SegmentsFor management purposes, the Group is organised into the following major operating divisions:

Retail banking (accepting deposits from the public, providing loans to retail clients, services related to credit and debit cards); Commercial banking (providing loans to corporate clients and municipalities, issuance of guarantees, opening of letters of credit); Investment banking (securities investments, proprietary trading and trading on behalf of the client with securities, foreign exchange assets, entering into futures and options including foreign currency and interest rate transactions, fi nancial brokerage, regulatory custodi-al services, participation in issuance of stock, asset management, safe keeping and administration of securities or other assets); and Other operations (leasing, management of investment and mutual funds, real estate development and advisory services). These opera-tions are aggregated in one segment “Other activities” as they are less material than the remaining activities.

The allocation of directly attributable revenue and expenses to a segment is based primarily on accounting records. Indirect expenses are attributed through:

Internal pricing in accordance with the amount of services received from supporting departments (human resources, asset manage-ment, part of IT); Allocation of expenses relating to buildings and their equipment based on location; Product costs (ABC) in the case of clear relationships between the cost and the product (part of IT, marketing, risk management, operations, products methodology); Business structure allocations where proportional expenses can be distributed between segments based on the ratio of services provi-ded and cannot be directly attributed to the product (used only for investment banking); and Allocation of business-wide overheads.

2010CZK mil.

Banking Other activities

Elimination Total

Retail Commercial InvestmentRevenue External revenue 32,477 6,826 160 6,776 (1,770) 44,469of that: net interest income 21,274 5,695 1,109 3,600 (1,416) 30,262Income from other segments 841 427 261 395 – 1,924Segment revenue 33,318 7,253 421 7,171 (1,770) 46,393Profi tSegment profi t 12,098 2,392 (582) 2,198 (1,447) 14,659Profi t before tax 14,659Income tax (2,611)Non-controlling interests 4Total profi t 12,052Other informationLosses from impairment of fi nancial assets 6,511 3,096 – – – 9,607Asset acquisition 1,850 27 71 1,765 – 3,713Write-offs and depreciation 1,014 108 39 1,686 – 2,847Impairment losses / (reversal of impairment losses) 17 – – 806 – 823Statement of fi nancial positionAssetsSegment assets 343,893 149,188 319,470 137,364 (69,902) 880,013Investment in associates and joint ventures 84Unallocated assets 1,532Total assets 881,629LiabilitiesSegment liabilities 470,694 85,225 201,736 112,601 (66,677) 803,579Unallocated liabilities 7,103Total liabilities 810,682

Segment income is composed of “Net interest income”, “Net fee and commission income”, “Net trading result”, “Total other operating income” and “Income from the revaluation / sale of securities, derivatives and equity investments” (refer to Note 38).

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–

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–

–

140


The Group monitors segment performance and allocates resources based on the net interest income that the particular segment generates.

2009 restatedCZK mil.

Banking Other activities

Elimination TotalRetail Commercial Investment

Revenue External revenue 33,783 5,592 1,529 3,553 (498) 43,959of that: net interest income 23,342 4,911 1,136 2,543 (1,039) 30,892Income from other segments 875 576 1,042 103 – 2,596Segment revenue 34,658 6,168 2,571 3,656 (498) 46,555Profi t Segment profi t 15,003 884 1,344 (1,438) (33) 15,760Profi t before tax 15,760Income tax (3,324)Non-controlling interests 208Total profi t 12,644Other information Losses from impairment of fi nancial assets 4,846 3,649 – – 8,495Asset acquisition 1,199 17 106 3,051 – 4,373Write-offs and depreciation 953 – 40 1,930 55 2,978Impairment losses / (reversal of impairment losses) 51 – – 1,377 – 1,428Statement of fi nancial position Assets Segment assets 383,741 157,210 268,237 99,021 (55,072) 853,137Investment in associates and joint ventures 211Unallocated assets 1,782Total assets 855,130Liabilities Segment liabilities 500 115 77 511 172,966 72,289 (53,346) 769,535Unallocated liabilities 22,049Total liabilities 791,584

Segment income is composed of “Net interest income”, “Net fee and commission income”, “Net trading result”, “Total other operating income”, “Gains / (Losses) from the revaluation / sale of securities” and “Gains / (Losses) from the revaluation / sale of equity investments” (refer to Note 38).

The Group monitors segment performance and allocates resources based on the net interest income that the particular segment generates.

141


(b) Geographical SegmentsThe Group operates predominantly within the Czech Republic and has no signifi cant cross border operations.

The geographical concentration of assets and liabilities as of 31 December 2010 was as follows:

CZK mil. Czech Republic

EU countries

Other European countries

Other Total

Assets Cash and balances with CNB 22,816 2,154 243 554 25,767Loans and advances to fi nancial institutions 123,908 50,473 13 553 174,947Loans and advances to customers, net of provisions 433,464 5,796 876 614 440,750Securities at fair value through profi t or loss 21,177 5,680 217 1,001 28,075Positive fair value of derivative transactions 5,953 10,032 – 36 16,021Securities available-for-sale 17,036 2,821 62 110 20,029Securities held-to-maturity 113,481 12,442 244 2,810 128,977Other assets 43,952 3,012 39 60 47,063Total assets 781,787 92,410 1,694 5,738 881,629LiabilitiesAmounts owed to fi nancial institutions 22,757 29,374 44 39 52,214Amounts owed to customers 650,144 8,835 1,173 922 661,074Financial liabilities at fair value 12,010 41 2 5 12,058Negative fair value of derivative transactions 4,026 10,603 1 44 14,674Bonds in issue 45,609 425 22 2 46,058Subordinated debt 4,024 7,010 2 – 11,036Other liabilities 12,415 1,136 14 3 13,568Total liabilities 750,985 57,424 1,258 1,015 810,682Net position 30,802 34,986 436 4,723 70,947

“Other assets” includes other assets, property and equipment, intangible fi xed assets, fi xed assets for sale, property investments, assets in construction and investments in associated and joint ventures. The line “Other liabilities” includes other liabilities and provisions.

Information about the geographical structure of revenue from external clients is not available and the costs of obtaining such information would be disproportionate to the value derived.

142



CZK mil. restated

Czech Republic

EU countries


Other Total

Assets Cash and balances with CNB 25,993 2,617 177 584 29,371Loans and advances to fi nancial institutions 91,640 34,228 7 631 126,506Loans and advances to customers, net of provisions 445,307 7,553 931 688 454,479Securities at fair value through profi t or loss 30,336 6,030 – 645 37,011Positive fair value of derivative transactions 5,738 11,891 – 46 17,675Securities available-for-sale 23,968 3,551 243 626 28,388Securities held-to-maturity 89,938 18,076 255 3,708 111,977Other assets 46,599 2,992 56 76 49,723Total assets 759,519 86,938 1,669 7,004 855,130LiabilitiesAmounts owed to fi nancial institutions 21,437 25,822 1 174 47,434Amounts owed to customers 636,082 5,161 1,228 949 643,420Financial liabilities at fair value 8,096 19 13 1 8,129Negative fair value of derivative transactions 3,576 12,725 – 111 16,412Bonds in issue 42,962 142 15 – 43,119Subordinated debt 5,984 7,418 2 – 13,404Other liabilities 19,088 561 16 1 19,666Total liabilities 737,225 51,848 1,275 1,236 791,584Net position 22,294 35,091 394 5,768 63,546

“Other assets” includes other assets, property and equipment, intangible fi xed assets, fi xed assets for sale, property investments, assets in construction and investments in associated and joint ventures. The line “Other liabilities” includes other liabilities and provisions.


47. Fiduciary Activities on Behalf of Clients

(a) Assets under AdministrationThe Group provides custody, trustee, investment management and advisory services to third parties which involve the Group making purchase and sale decisions in relation to a wide range of fi nancial instruments. Those assets that are held in a fi duciary capacity are not included in these fi nancial statements.

At 31 December 2010, the Group administered CZK 275,102 mil. (2009: CZK 204,211 mil.) of assets representing security certifi cates and other assets received from customers into its custody for administration and safe keeping split as follows:

CZK mil. 2010 2009

Customer securities in custody 62,047 21,251Customer securities under administration 170,139 170,662Customer securities for safe-keeping 1 33Total customer assets under administration 232,187 191,946Other customer securities under administration 1,532 1,503Assets received for management 14,105 10,762Total 247,824 204,211

In addition to customer assets arising from the provision of investment services (refer to Note 47 (b)), the total balance includes bills of exchange and other securities collateralising loans and other assets that do not relate to the provision of investment services.

The Group also acts as a depositary for several mutual, investment and pension funds, whose assets amounted to CZK 103,647 mil. as at 31 December 2010 (2009: CZK 88,302 mil.).

143


(b) Payables Arising from the Provision of Investment ServicesInvestment services involve receiving and providing instructions related to investment instruments, performing instructions relating to invest-ment instruments to a third party account, proprietary trading with investment instruments, management of customer assets under a contractual arrangement with the client if these assets include an investment instrument, and investment instrument underwriting or placement.

Additional investment services involve administration and custody of investment instruments, issuing loans to the client for the purpose of trading with investment instruments if the issuer of the loan takes part in the transaction, advisory services relating to capital structuring, industrial strategy, investments in investment instruments, provision of advice and services related to mergers and acquisitions, implemen-tation of foreign exchange transactions relating to the provision of investment services, services related to the underwriting of investment instrument issues and rental of safety-deposit boxes.

In connection with the provision of these services, the Group received cash and investment instruments from clients or obtained cash or investment instruments for its clients (“customer assets”) in exchange for these values, which amounted to CZK 232,187 mil. as at 31 De-cember 2010 (2009: CZK 191,946 mil.), including advances received, customer assets were CZK 234,060 mil. (2009: CZK 193,636 mil.).

48. Related Party Transactions

Related parties involve connected entities or parties that have a special relationship to the Group.

Parties are considered to be related if one party has the ability to control the other or exercise signifi cant infl uence over the other in making fi nancial or operational decisions. The Group is controlled by Erste Group Bank over which DIE ERSTE österreichische Spar-Casse Privat-stiftung (Erste Stiftung) exercises signifi cant infl uence. The remaining investment in Erste Group Bank AG is held by minority shareholders and institutional investors via freely traded shares on the stock exchanges in Vienna, Prague and Bucharest.

The parties that have a special relationship to the Group are considered to be members of the Group’s statutory and supervisory bodies and management, legal entities exercising control over the Group (including entities with a qualifi ed interest in these entities and manage-ment of these entities), persons closely related to the members of the Group’s statutory and supervisory bodies, management, and entities exercising control over the Group, legal entities in which any of the parties listed above holds a qualifi ed interest, entities with a qualifi ed interest in the Group and any other legal entity under their control, members of the CNB’s Banking Board, and legal entities which the Group controls.

Pursuant to the defi nitions outlined above, the category of the Group’s related parties principally comprise members of its Board of Directors and Supervisory Board, and other entities, namely Erste Group Bank, its subsidiary and associated undertakings.

144


The Group has the following amounts due from / owing to Erste Group Bank and other related parties as at 31 December 2010 and 2009:

CZK mil. 2010 2009

Erste Group Bank

Members of the Board

of Directors and Super-

visory Board

Other Erste Group Bank

Members of the Board

of Directors and Super-

visory Board

Other

Assets Loans and advances to fi nancial institutions 27,650 – 2,894 19,961 – 2,985Loans and advances to customers – 35 263 – 12 1,529Securities at fair value through profi t or loss – – – – – –Securities available-for-sale 198 – – – – 318Securities held-to-maturity – – 300 – – 699Positive fair value of derivative transactions 6,144 – 105 7,199 – 55Other assets 354 – 96 196 – 62Total assets 34,346 35 3,658 27,356 12 5,648Liabilities Amounts owed to fi nancial institutions 2,617 – 960 8,293 – 1,250Amounts owed to customers – 16 432 – 15 530Negative fair value of derivative transactions 6,889 – 3 8,272 – 7Bonds in issue 181 – – 80 – 80Subordinated debt 6,530 – 299 6,580 – 299Other liabilities 42 – 347 166 – 561Total liabilities 16,259 16 2,041 23,391 15 2,727Off-balance sheet Undrawn loans – – – 299 – 192Issued guarantees 25 – 288 2 – 43Received guarantees – – 11 – – 3Positive nominal value of derivatives 333,311 – 7,017 343,307 – 1,472Negative nominal value of fi nancial derivatives 333,444 – 7,026 343,426 – 1,425Revenues Interest income 866 2 42 548 1 67Fee and commission income 24 – 541 14 – 197Net trading result 359 – 58 3,502 – 65Total other operating income – – 39 (1,106) – 22Total income 1,249 2 680 2,958 1 351Expenses Interest expense 1,245 – 80 308 – 99Fee and commission expense – – 98 29 – 50General administrative expenses 192 – 1,522 87 – 1,393Other operating expenses – – 3 – – 16Total expenses 1,437 – 1,703 424 – 1,558

The column “Other” includes other companies that are included in the Erste Group (sister companies). Information on associates is not material.

(a) Members of the Board of Directors and Supervisory BoardLoans and advances granted to members of the Board of Directors and Supervisory Board amounted to CZK 35 mil. as at 31 December 2010 (2009: CZK 12 mil.).

Members of the Board of Directors and Supervisory Board held no shares of the Bank. Under the Management Stock Option Plan, members of the Board of Directors subscribed 0 shares (2009: 0 shares) of the parent company, Erste Group Bank. Under the Management Stock Op-tion Plan (refer to Note 37 (c)), members of the Board of Directors subscribed 9,000 shares (2009: 9,000 options) for subscription of shares of the parent company, Erste Group Bank.

145


(b) Parties with Special RelationshipA number of banking transactions are entered into with Parties with special relationship in the normal course of business. These principally include loans, deposits and other transactions. These transactions were carried out on an arm’s length basis.

49. Dividends

Management of the Group has proposed that total dividends of CZK 4,560 mil. be declared in respect of the profi t for the year ended 31 De-cember 2010, which represents 30 CZK per both ordinary and priority share (2009: CZK 4,560 mil., that is, CZK 30 per both ordinary and priority share). The declaration of dividends is subject to the approval of the Annual General Meeting. Dividends paid to shareholders are subject to a withholding tax of 15 percent or a percentage set out in the relevant double tax treaty. Dividends paid to shareholders that are tax residents of an EU member country and whose interest in a subsidiary’s share capital is no less than 10 percent and that hold the entity’s shares for at least one year are not subject to a withholding tax.

50. Subsequent Events

In January 2011, the Board of Directors approved a plan to lay off 600 employees in the fi rst quarter of 2011. The Group estimates the total severance pay to amount approximately CZK 110 mil.

As at 25 January 2011, the Bank acquired 100% ownership interest in S Morava leasing, a. s., for the price of CZK 148 mil.

On 5 February 2011 a spin-off of CEE Property Development Portfolio B. V. was registered with the Dutch Commercial Court to create a new entity, CEE Property Development Portfolio 2 B. V. This was done in order to house the existing company CPP Lux S.’ ar. l. and its wholly owned subsidiary in the original entity, while the remainder of the current subsidiaries were transferred to the new structure. The ownership structure of CEE Property Development Portfolio B. V. and CEE Property Development Portfolio 2 B. V. remains unchanged, i. e. the Bank’s participation in the registered equity of both entities amounts to 20%.

Neither of the ownership structure changes would lead to a re-evaluation of the necessity to consolidate both companies.

147

Separate Financial Statementsfor the Year Ended 31 December 2010

Independent Auditor’s Report to the Board of Directors of Česká spořitelna, a. s. 148Separate Statement of Financial Position as at 31 December 2010 149Separate Income Statement for the Year Ended 31 December 2010 150Separate Statement of Comprehensive Income for the Year Ended 31 December 2010 151Separate Statement of Changes in Shareholders’ Capital for the Year Ended 31 December 2010 152Separate Statement of Cash Flows for the Year Ended 31 December 2010 153Notes to the Separate Financial Statements for the Year Ended 31 December 2010 155

Prepared in Accordance with International Financial Reporting Standards as Adopted by the European Union

148

Independent Auditor’s Report to the Board of Directors of Česká spořitelna, a. s.

We have audited the accompanying fi nancial statements of Česká spořitelna, a. s., which comprise the statement of fi nancial position as at 31 December 2010, and the income statement, statement of comprehensive income, statement of changes in shareholders’ equity and cash fl ows statement for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes. For details of Česká spořitelna, a. s., see Note 1 to the fi nancial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these fi nancial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as management determines is necessary to enable the preparation of fi nancial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these fi nancial statements based on our audit. We conducted our audit in accordance with the Act on Auditors and International Standards on Auditing as amended by implementation guidance of the Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The proce-dures selected depend on the auditor’s judgment, including an assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presenta-tion of the fi nancial statements.

We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the fi nancial statements present fairly, in all material respects, the fi nancial position of Česká spořitelna, a. s., as at 31 December 2010, and its fi nancial performance and its cash fl ows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.


Represented by


8 March 2011Prague, Czech Republic


149

Separate Statement of Financial Positionas at 31 December 2010

CZK mil. Note 31 Dec 2010 31 Dec 2009

Assets1. Cash and balances with the Czech National Bank 4 24,559 27,2502. Loans and advances to fi nancial institutions 5 161,984 110,5963. Loans and advances to customers 6 416,854 422,4684. Provisions for losses on loans and advances 7 (18,041) (13,423)

Net loans and advances to customers 398,813 409,0455. Securities at fair value through profi t or loss 25,845 36,404

a) Securities held for trading 8 16,487 29,336b) Securities designated upon initial recognition as at fair value through profi t or loss 9 9,358 7,068

6. Positive fair value of derivative transactions 10 16,300 18,5297. Securities available-for-sale 11 3,757 4,1468. Securities held-to-maturity 12 111,509 98,6839. Equity investments in subsidiary and associate undertakings 13 6,680 7,781

10. Property and equipment 14 14,014 13,32511. Intangible assets 15 2,948 3,09112. Income tax receivable 470 –13. Deferred tax asset 24 304 34814. Other assets 16 5,521 5,795

Total assets 772,704 734,993

Liabilities and shareholders’ equity1. Amounts owed to fi nancial institutions 17 64,299 43,1582. Amounts owed to customers 18 530,101 517,7483. Financial liabilities at fair value 19 12,058 8,1294. Negative fair value of derivative transactions 20 14,557 16,1265. Bonds in issue 21 63,618 62,1576. Provisions for liabilities and other reserves 22 2,091 1,9897. Income tax liability – 1378. Other liabilities 23 9,901 14,5439. Subordinated debt 25 11,036 13,404

Total liabilities 707,661 677,39110. Shareholders’ capital 26, 27 65,043 57,602

Total liabilities and shareholders’ equity 772,704 734,993

The accompanying notes are an integral part of these fi nancial statements.

These fi nancial statements were prepared by the Bank and approved by the Board of Directors on 8 March 2011.

Pavel Kysilka Dušan BaranChairman of the Board and Vice Chairman of the Board of Directors andChief Executive Offi cer 1st Deputy CEO

Independent Auditor’s Report | Separate Statement of Financial Position | Separate Income Statement

150


1. Interest income and similar income 28 35,420 35,4752. Interest expense and similar expense 29 (7,088) (7,546)

Net interest income 28,332 27,9293. Provisions for credit risks 30 (9,480) (7,894)

Net interest income after provisions for credit risks 18,852 20,0354. Fee and commission income 31 14,053 12,8805. Fee and commission expense 32 (2,253) (2,046)

Net fee and commission income 11,800 10,8346. Net trading result 33 2,530 3,3257. Staff costs 34 (7,741) (7,883)8. Other administrative expenses 34 (7,186) (7,483)9. Depreciation and amortisation 34 (2,458) (2,600)

Total general administrative expenses 34 (17,385) (17,966)8. Other operating expenses, net 35 (1,480) (2,466)9. Gain on the sale of equity investments in subsidiary and associated undertakings 36 – 328

Profi t before taxes 14,317 14,09010. Income tax expense 38 (2,446) (2,845)

Profi t for the year attributable to the Bank’s shareholders 11,871 11,245


Separate Income Statementfor the Year Ended 31 December 2010

Separate Statement of Financial Position | Separate Income Statement | Separate Statement of Comprehensive Income

151

Separate Statement of Comprehensive Incomefor the Year Ended 31 December 2010


1. Profi t for the year attributable to the Bank’s shareholders 11,871 11,245Other comprehensive gains and lossesGains and losses on revaluation of fi nancial assets available-for-sale 37 149 241Deferred tax 24, 38 (28) (52)

2. Other comprehensive gains and losses after taxes 121 189Comprehensive income for the year after taxes attributable to the Bank’s shareholders 11,992 11,434

Separate Income Statement | Separate Statement of Comprehensive Income | Separate Statement of Changes in Shareholders’ Capital

152

Separate Statement of Changes in Shareholders’ Capitalfor the Year Ended 31 December 2010

CZK mil. Retained earnings

Revalu-ation of

available for sale

securities

Statutory reserve

fund

Share premium

Share capital

Total equity

At 1 January 2009 43,967 (547) 3,040 12 15,200 61,672Net profi t for the year 11,245 – – – – 11,245Other comprehensive gains and losses after taxes – 189 – – – 189Comprehensive income for the year after taxes 11,245 189 – – – 11,434Dividends (15,504) – – – – (15,504)At 31 December 2009 39,708 (358) 3,040 12 15,200 57,602At 1 January 2010 39,708 (358) 3,040 12 15,200 57,602

Net profi t for the year 11,871 – – – – 11,871Other comprehensive gains and losses after taxes – 121 – – – 121Comprehensive income for the year after taxes 11,871 121 – – – 11,992Dividends (4,560) – – – – (4,560)Unpaid dividends for prior periods 9 – – – – 9At 31 December 2010 47,028 (237) 3,040 12 15,200 65,043


Separate Statement of Comprehensive Income | Separate Statement of Changes in Shareholders’ Capital | Separate Statement of Cash Flows

153

Separate Statement of Cash Flows for the Year Ended 31 December 2010

CZK mil. Note 2010 2009

Profi t before taxes 14,317 14,090Adjustments for non-cash transactionsCreation of provisions for losses on loans and advances 30 9,472 7,892Depreciation and amortisation of assets 34 2,458 2,600Unrealised net profi t on securities at fair value through profi t or loss and liabilities at fair value 176 588Creation / (release) of provisions against equity investments 35 757 2,585Gain on the sale of equity investments 36 – (328)Change in fair values of derivatives 660 (648)Gain on the sale of real estate 35 (46) (163)Accrued interest, amortisation of discount and premium (572) 2,259Other non-cash transactions 390 125Operating profi t before changes in operating assets and liabilities 27,612 29,000

Cash fl ows from operating activities(Increase) / decrease in operating assetsMinimum reserve deposits with the CNB 2,686 (2,415)Loans and advances to fi nancial institutions (51,353) (33,325)Loans and advances to customers 848 (12,535)Securities at fair value through profi t or loss 7,057 16,847Securities available-for-sale 523 4,401Other assets 491 37Increase / (decrease) in operating liabilitiesAmounts owed to fi nancial institutions 18,381 1,308Amounts owed to customers 12,355 (3,821)Financial liabilities at fair value 3,929 433Other liabilities (4,381) 1,419Net cash fl ow from operating activities before income tax 18,148 1,349Income taxes paid (2,886) (2,227)Net cash fl ow from operating activities 15,262 (878)

Cash fl ows from investing activitiesIncrease in securities held-to-maturity (30,771) (16,654)Decrease in securities held-to-maturity 17,987 10,354Income related to equity investments 1,068 405Costs related to equity investments (882) (436)Purchase of tangible and intangible assets (3,216) (2,292)Proceeds from the sale of tangible and intangible assets 238 190Net cash fl ow from investing activities (15,576) (8,432)

Separate Statement of Changes in Shareholders’ Capital | Separate Statement of Cash Flows | Notes to the Separate Financial Statements

154

CZK mil. Note 2010 2009

Cash fl ows from fi nancing activitiesDividends paid (4,560) (15,504)Unpaid dividends for prior periods 9 –Bonds in issue – sale 13,438 11,685Bonds in issue – repurchase (12,240) (1,300)Receipt / (payment) of subordinated debt (2,368) 8,207Net cash fl ow from fi nancing activities (5,721) 3,088Net increase / (decrease) in cash and cash equivalents (6,035) (6,222)Cash and cash equivalents at beginning of year 24,288 30,509Cash and cash equivalents at end of year 39 18,253 24,288

Cash fl ows from interest and dividendsCZK mil. Note 2010 2009

Dividends received 1,547 777Dividends paid (4,560) (15,504)Interest received 33,679 36,103Interest paid (7,574) (6,849)


Separate Statement of Changes in Shareholders’ Capital | Separate Statement of Cash Flows | Notes to the Separate Financial Statements

155

1. Introduction

Česká spořitelna, a. s., (henceforth the “Bank”), having its reg-istered offi ce address at Olbrachtova 1929/62, Prague 4, 140 00, Corporate ID: 45244782, is the legal successor of the Czech State Savings Bank and was founded as a joint stock company in the Czech Republic on 30 December 1991. The Bank is a universal savings bank offering retail, corporate and investment banking services in the Czech Republic.

The Bank’s majority shareholder is EGB Ceps Holding GmbH, which is a 100% subsidiary of EGB Ceps Beteiligungen GmbH, a wholly-owned subsidiary of Erste Group Bank AG (“Erste Group Bank“). The change in ownership structure was adopted as part of the technical optimisation of the Erste Group Bank shareholders’ structure; the optimisation took place in 2009 and was duly ap-proved by the Czech National Bank (“CNB”).

The principal activities of the Bank are as follows: Acceptance of deposits from the general public; Extension of credit; Investing in securities on its own account; Payments and clearing; Issuance of payment facilities, e. g. payment cards, traveller’s cheques; Issuance of guarantees; Opening of letters of credit; Collection services; Proprietary or client-oriented trading with foreign curren-cy assets, forward and option contracts, including foreign currency and interest rate transactions, and transferable securities; Management of clients’ securities on clients’ accounts and provision of advisory services; Participation in the issuance of shares and provision of related services; Safety-keeping and administration of securities or other assets; Rental of safe-deposit boxes; Provision of business advisory services; Issuance of mortgage bonds under special legislation; Financial brokerage; Depositary activities; Foreign exchange services (foreign currency purchases); Provision of banking information; and Maintenance of a separate part of the Securities Centre’s records.

The Bank is subject to the regulatory requirements of the CNB. These regulations include those pertaining to minimum capital ad-equacy requirements, categorisation of exposures and off-balance

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sheet commitments, credit risk connected with clients of the Bank, liquidity, interest rate risk and foreign currency position.

2. Basis of Preparation

These statutory fi nancial statements have been prepared in accord-ance with International Financial Reporting Standards (“IFRS“) and interpretations approved by the International Accounting Standards Board (“IASB”) as adopted by the European Union. The fi nancial statements have been prepared and approved by the Board of Directors of the Bank. In addition, the fi nancial statements are subject to the approval by the General Meeting. All fi gures are in millions of Czech crowns (CZK mil.), unless stated otherwise.

These fi nancial statements have been prepared under the historical cost convention as modifi ed by the remeasurement to fair value of available-for-sale securities, fi nancial assets and liabilities at fair value through profi t or loss and all derivatives. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being hedged. Assets held for sale are measured at fair value less cost to sell if this value is lower than their carrying amount (i. e., cost less accumulated depreciation and cumulative impairment losses).

The presentation of fi nancial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of con-tingent assets and liabilities as at the reporting date and their reported amounts of revenues and expenses during the reporting period (refer to Note 3.1). Actual results may differ from those estimates.

Comparative information has been restated, where necessary, on a basis consistent with the current year presentation.

These fi nancial statements and notes thereto are unconsolidated and do not include the accounts and results of those companies over which the Bank has control or signifi cant infl uence. The policies of accounting for equity investments are disclosed in Note 3.3 (b).

The Bank also prepares consolidated fi nancial statements in ac-cordance with IFRS and interpretations approved by the IASB as adopted by the European Union which present the results of the Bank’s fi nancial group.

3. Signifi cant Accounting Policies

The signifi cant accounting policies adopted in the preparation of the fi nancial statements are set out below:

Notes to the Separate Financial Statementsfor the Year Ended 31 December 2010

Separate Statement of Cash Flows | Notes to the Separate Financial Statements | Report on Relations between Related Parties

156

3.1 Signifi cant Accounting Judgements, Estimates and Assumptions in the Application of Accounting Policies

The Bank’s management decided to use the following critical esti-mates in applying accounting policies:

(a) Impairment of Loans and AdvancesThe Bank regularly assesses its loan portfolio for possible impair-ment based on individual assessments for individually signifi cant loans and collective assessment for individually insignifi cant loans and loans where no impairment was identifi ed based on individual assessment.

As part of this analysis, the Bank further splits all loans into two categories: defaulted (non-performing) loans (according to Ba-sel II criteria) and non-defaulted (performing) loans. In respect of the fi rst category of loans, impairment is identifi ed based on loss making events that can be individually ascertained. All receivables are assessed by the Bank on a monthly basis to determine whether a loss making event or other changes occurred. If a loss event is identifi ed the loan is considered impaired on an individual basis. For these loans the Bank makes an estimate of realised losses on an individual basis for individually signifi cant loans, and on a portfo-lio basis for individually insignifi cant loans based on past experi-ence adjusted for current observations. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assess-ment of impairment.

The Bank also splits performing loans into collectively impaired where an indication of impairment on a portfolio basis exists, and unimpaired. With regard to all loans with objective evidence of impairment on a portfolio basis, the Bank assesses the decrease in the estimated future cash fl ows from the portfolio even though the decrease cannot yet be identifi ed with individual loans. Manage-ment of the Bank uses estimates based on historical experience of losses on loans that have similar risk characteristics. This historical experience is adjusted for the effects of current observations.

The methods and assumptions adopted in estimating amounts and the timing of future cash fl ows are regularly reviewed to reduce differences between the estimated and actual data.

A similar approach is used for off-balance sheet credit exposures namely committed credit lines and guarantees issued.

Provisions for losses on loans and receivables are recorded when there are reasonable doubts over the recoverability of the loan bal-ance. Provisions for losses on loans and advances represent man-agement’s assessment of realised losses in relation to the Bank’s on and off-balance sheet activities.

The level of provisions against impaired receivables is established by comparing the carrying amount of the loan and the present

value of future expected cash fl ows using the effective interest rate (“EIR“). The anticipated loss on the impairment of individu-ally signifi cant exposures is reviewed at least quarterly for each exposure. The provisioning percentage in respect of individually signifi cant loans which are collectively impaired is established on a portfolio basis.

(b) Debt Securities Held-to-MaturityBased upon the model of the development of future cash fl ows and its statement of fi nancial position structure, the Bank invests in securities and categorises a portion of purchased securities in the portfolio. The key criterion driving this decision is the Bank’s ability to hold the security to maturity assuming suffi cient fi nancial coverage throughout the whole term of the investment. The ability to hold such a debt security to maturity is a pre-condition for using the debt security as a banking book interest rate risk management tool. Should the sale of more than an insignifi cant portion of the held-to-maturity debt securities take place before their maturity, pursuant to IAS 39, the Bank would be required to reclassify the held-to-maturity securities into one of the remaining portfolios.

(c) Impairment of SecuritiesOn a quarterly basis, the Bank makes an assessment of the avail-able-for-sale and held-to-maturity portfolios to determine if events occurred indicating that an investment has suffered impairment.

The criteria indicating impairment of a security include, but are not limited to: signifi cant changes with an adverse effect on the investment that have taken place in the market, economic or leg-islative environment, or such changes that are expected to occur in the near future (e. g., absence of an active market), signifi cant fi nancial diffi culties of the issuer or the committed party, or con-tractual breach such as the non-payment of the principal, interest or delayed payments.

For equity securities classifi ed as available-for-sale, a signifi cant or prolonged decline in their fair value below their cost is also objective evidence of impairment. The Bank generally treats “sig-nifi cant” as 30% and “prolonged” as greater than 18 months.

The impairment of held-to-maturity securities is determined as the difference between the present value of newly estimated future cash fl ows calculated using the original EIR and the securities’ carrying amount.

For available-for-sale securities the impairment corresponds to the difference between the fair value and the amortised cost.

(d) Valuation of Traded Financial InstrumentsFor debt and equity securities or other fi nancial instruments traded on the Prague Stock Exchange (“PSE”) and other stock exchanges, fair values are derived from quoted prices. In respect of fi nancial instru-ments which are publicly traded but where the volumes or frequency are small, management assesses the identifi ed market prices on an in-dividual basis to determine if they provide an actual indication of the


157

fair value. In exceptional cases, management uses its own estimates to make adjustments or uses the Bank’s own valuation models.

(e) Valuation of Instruments without Direct QuotationsFinancial instruments without direct quotations in an active market are valued using the mark-to-model technique. Each model is cali-brated for the most recent available market data. While the models are only built on available data, their use is subject to certain as-sumptions and estimates (e. g. for correlations, volatilities, credit risk of the issuer, etc.). Changes in the model’s assumptions may affect the reported fair value of the relevant fi nancial instruments.

The valuation of structured bonds, the yields of which are linked to the underlying assets (asset backed securities) is performed month-ly on the basis of quotations requested from listing agents. With assistance from Erste Group Bank, the Bank analyses the quoted prices by reference to the results of internal valuation models and other facts. Based on this analysis, the Bank can value its bonds at other than the quoted price. Where multiple quotations are avail-able, the Bank uses the lowest quotation.

(f) Legal ProvisionsThe Bank is involved in a number of ongoing legal disputes, the resolution of which may have an adverse fi nancial impact on the Bank. Based upon historical experience and expert reports, the Bank assesses the developments in these cases, and the likelihood and the amount of potential fi nancial losses which are appropri-ately provided for. Nevertheless the actual results may differ from the estimated losses at the reporting date.

(g) Impairment of AssetsThe Bank tests its assets for impairment at least annually to de-termine whether there is any indication that those assets have suf-fered impairment. If any such indication exists, the Bank compares the carrying amount of the assets with their recoverable amount defi ned as the higher of fair value less costs to sell or value in use.

With regard to impaired tangible assets within the scope of IAS 16, the Bank determines the fair value less costs to sell. The fair value is arrived at on the basis of expert appraisals prepared by certifi ed appraisers.

The Bank determines the value in use of intangible assets by esti-mating discounted future cash infl ows and outfl ows to be derived from continuing use of the asset and from its ultimate disposal.

(h) Value of CollateralIn the course of its lending business, the Bank accepts movable and immovable assets and securities pledged as collateral. The Bank also uses various forms of guarantee statements to collateralise its loan re-ceivables. Movable and immovable assets pledged as collateral are carried off-balance sheet and are initially valued on the basis of an expert appraisal (nominal value of collateral) which is reduced, based on the Bank’s experience, to the realisable value using the collateral

discount coeffi cient which is derived from the type of collateral. All coeffi cients are described in the Bank’s internal policy. Guarantees are valued at the nominal value reduced by the collateral coeffi cient which is derived from the guarantor’s solvency. Subsequently, the Bank regularly assesses the realisable value of collateral for impair-ment. This assessment is mostly conducted as part of the regular (at least annual) monitoring of loan receivables. With respect to a large amount of collateral of the same type, the Bank uses portfolio models to determine if the realisable value of the collateral decreased. The Bank takes into account the realisable value of collateral in calculating provisions for loan receivables. Details about the determination of the realisable value of collateral are provided in Note 41.1.

3.2 Changes in Accounting Policies

Applicable accounting policies are used consistently with account-ing policies applied in previous years, while refl ecting the changes in International Financial Reporting Standards adopted during the period.

The Bank has adopted the following standards; however, the use of these standards had no material impact on Bank’s fi nancial state-ments:

IFRIC 17 Distributions of Non-cash Assets to Owners (effective 1 July 2009) Amendments to IFRS 2: Share-based Payments regarding group cash-settled share-based payment transactions (effective 1 January 2010) Revised IFRS 3 Business Combinations (effective 3 June 2009) Amendments to IAS 27 Consolidated and Separate Financial Statements (effective 3 June 2009) Amendments to IAS 39 Financial Instruments: Recognition and Measurement (effective 15 September 2009)

At the date of authorisation of these fi nancial statements, the fol-lowing standards were in issue but not yet effective, which the Bank is planning to adopt from 2011:

Amendments to IAS 24 Related Party Disclosures Amendments to IAS 32 Financial Instruments: Presentation: Classifi cation of Rights Issues IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2010 Improvements to IFRSs

The adoption of these standards is not expected to have a material impact on the Bank’s reporting.

3.3 Summary of Signifi cant Accounting Policies

(a) Loans and Advances, Other Off-balance Sheet Credit Exposures and Provisions for Losses on Loans and AdvancesLoans and advances are initially measured at fair value including any directly attributable transaction costs. After initial recognition loans and advances are measured at amortised cost using the EIR,

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158

less provision for impairment. Amortised cost is calculated by tak-ing into account any discount or premium on acquisition as well as fees and costs that are an integral part of the EIR. All loans and advances are recognised when cash is advanced to borrowers.

In terms of accounting and provisioning, receivables are segmented into individually impaired, collectively impaired and unimpaired loans with no indication of impairment (refer to Note 3.1 (a)).

The amount of impairment loss is charged to the income statement line “Provisions for credit risks”.

Restructuring of doubtful loan receivables refl ects the Bank’s busi-ness decisions. Any receivable whose terms and conditions have been renegotiated because of the debtor’s distress is considered restructured. Renegotiations of loan terms and conditions include payment schedule changes (deferrals and reductions of regular payments, extended maturities), interest rate reductions, penalty interest waivers, or the provision of a new loan specifi cally for the repayment of the doubtful receivable.

Restructuring is only possible on the basis of a new loan agree-ment. Restructured debt initially receives an internal rating of R. Rating improvement is possible six months from the restructuring date at the earliest. Restructured loans continue to be tested for impairment, either individually or on a collective basis. As part of the half-year reviews of restructured receivables, the Bank decides whether to improve the internal rating or to extend the monitoring period by another six months.

Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further re-covery is considered remote. The loan is written off against the related account “Provisions for credit risks” in the income statement. If the reason for provisioning is no longer deemed appropriate, the redun-dant provisioning charge is released into income. The relevant amount and recoveries of loans and advances previously written off are re-fl ected in the income statement through “Provisions for credit risks”.

(b) Debt and Equity SecuritiesSecurities held by the Bank are categorised into portfolios in accord-ance with the Bank’s intent on the acquisition of the securities and pursuant to the Bank’s security investment strategy. In accordance with IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), the Bank categorises its securities into the “Securities at fair value through profi t or loss” portfolio, the “Securities available-for-sale” portfolio or the “Securities held-to-maturity” portfolio. The principal difference among the portfolios relates to the measurement and presentation of the securities in the fi nancial statements.

Securities held by the Bank are initially recorded at their fair val-ues including transaction costs, the only exception being “Securi-ties at fair value through profi t or loss” which are recognised at fair value net of transaction costs. Securities and liabilities arising from securities measured at fair value are recognized using trade

date accounting. Securities purchased and issued measured at am-ortised cost are recognized using settlement date accounting.

Securities at Fair Value through Profi t or LossThe portfolio includes debt and equity securities held for trading, in-cluding short sale liabilities, that is, securities held by the Bank with the intention of reselling them, thereby generating profi ts on price fl uctuations in the short term, and debt and equity securities that were designated, upon initial recognition, as at fair value through profi t or loss. Changes in the fair values of assets held for trading and related interest are recognised in the income statement as “Net trading result”. Changes in the fair values of securities not held for trading are report-ed as “Other operating expenses, net” in the income statement; interest income is presented within “Interest income and similar income”.

Fair Value OptionIn addition to securities held for trading, the portfolio of instru-ments at fair value through profi t or loss includes, upon origination or acquisition, other fi nancial assets and liabilities if such designa-tion reduces the mismatch in reporting fi nancial expenses or in-come, that would otherwise arise from measurement on a different basis or if it is a group of fi nancial assets and liabilities which are typically managed and assessed according to fair value changes and such a management and presentation treatment complies with the investment strategy and / or the assets and liabilities management strategy or the fi nancial assets and liabilities contain an embedded derivative other than those which do not modify signifi cantly their cash fl ows or are inseparable.

Securities Available-for-saleSecurities available-for-sale are securities held by the Bank for an indefi nite period of time that are available-for-sale as liquidity re-quirements arise or market conditions change.

Changes in the fair values of available-for-sale securities are recognised in equity as “Gain or loss from revaluation of avail-able-for-sale securities”, with the exception of their impairment and interest income and foreign exchange differences on debt se-curities. Impairment of securities available-for-sale is accounted for on the same basis as impairment of securities held-to-matu-rity (see below). When realised, the relevant revaluation gains or losses are taken to the income statement as “Other operating expenses, net”. When realised, the relevant revaluation gains or losses are taken to the income statement as “Other operating income / (expenses), net”. Interest income on coupons, amortisa-tion of discounts or premiums, and dividends are included in “In-terest income and similar income”.

Securities Held-to-MaturitySecurities held-to-maturity are fi nancial assets a fi xed maturity that the Bank has the positive intention and ability to hold to maturity.

Securities held-to-maturity are initially measured at fair value, net of transaction costs incurred. Securities held-to-maturity are sub-sequently reported at amortised cost using the EIR method. The


159

amortisation of premiums or discounts and interest income on cou-pons are included in “Interest income and similar income”.

Impairment of Debt and Equity SecuritiesWhen a decline in the fair value of an available-for-sale fi nancial asset has been recognised in other comprehensive income and if there is objective evidence that an available-for-sale security is permanently impaired, the cumulative loss is removed from equity and recognised in the income statement within “Other operating expenses, net”. The amount of the cumulative loss that is removed from equity and recognised in the income statement are the dif-ference between the acquisition cost of the security (plus / (minus) accrued premium, discount and interest, if any, in the case of debt securities) and its current fair value, less any impairment loss on that security previously recognised in the income statement.

If after the impairment loss was recognised in the income state-ment, the fair value of debt securities classifi ed as available-for-sale increases and the fair value increase is verifi able, it is recognised in the income statement within “Other operating expenses, net”; however, the fair value increase may not exceed the amount of the previously recognised impairment loss. The impairment losses on debt securities can be reversed when, following the impairment recognition in expenses, the fair value increases for objective rea-sons as determined by the Bank. The increase in the fair value of equity securities is recognised in equity; previously recognised im-pairment losses are irreversible.

If there is objective evidence that an impairment loss on bonds classifi ed as held-to-maturity securities has been incurred, the amount of the loss is measured as the difference between their am-ortised cost and the present value of estimated future cash fl ows discounted at the bonds’ original EIR. The impairment loss is rec-ognised through a provision in the income statement within “Other operating expenses, net”.

Derecognition of Financial AssetsThe Bank derecognises a fi nancial asset only when the contractual rights to the cash fl ows from the asset expire; or it transfers the rights to receive cash fl ows from the fi nancial asset and substan-tially all the risks and rewards of ownership of the asset or control of the fi nancial asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its continuing involvement in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred fi nancial asset, the Bank continues to recognise the fi nancial asset and also recognises a collateralised borrowing for the proceeds received.

Equity InvestmentsEquity investments in subsidiary and associated undertakings are recorded at acquisition cost including transaction costs less provi-sions for any temporary diminution in value or write-offs for any permanent diminution in value.

An investment in a subsidiary is one in which the Bank holds, di-rectly or indirectly, more than 50 percent of its share capital or in which the Bank can exercise more than 50 percent of the voting rights based on an agreement with another shareholder / owner, or where the Bank can appoint or dismiss a majority of the Board of Directors or Supervisory Board members.

An investment in an associate is one in which the Bank holds, direct-ly or indirectly, 20 percent to 50 percent of its share capital or over which the Bank exercises signifi cant infl uence through representa-tion on the entity’s statutory board, participation in the development of the entity’s policy, signifi cant transactions between the entity and the Bank, replacement of the entity’s management by the Bank, and access to signifi cant technical information of the entity.

At the fi nancial statement date, the Bank assesses equity investments in subsidiary or associated undertakings for impairment. An equity investment is impaired if its carrying amount is greater than its re-coverable amount. The recoverable amount is the higher of an asset’s fair value less selling costs and its value in use determined as the sum of discounted expected cash fl ows. The fair value less selling costs valuation technique is adopted in respect of the Bank’s investments in real estate funds and venture capital funds; the discounted cash fl ows method is used in valuing other investments in the Bank’s subsidiar-ies and associates. For the purpose of determining the fair value of real estate funds, the Bank uses expert appraisals made to support the value of material asset items held by companies in which real estate funds have invested. Accordingly, the fair value of each fund is based on the consolidation of fair value estimates of net assets of companies in which the funds have invested. For the purpose of determining the value in use of equity investments, the Bank considers expected cash fl ows at least for three years. A terminal value is based on the assump-tion of zero cash-fl ow growth in the future. The CAPM model is ap-plied to determine the discount rate used for discounting. Impairment of equity investments in subsidiaries and associates is recognised in “Other operating income / (expenses), net”. Impairment of equity in-vestments in subsidiary or associated undertakings is accounted for through the recognition of provisions.

Dividends from equity investments are recognised in the income statement within “Interest income and similar income” in the pe-riod in which they are declared.

(c) Assets Held for SaleThe category of “assets held for sale” includes non-current assets that are taken out of active use at the date on which criteria for sale are met, that is, the sale is approved by an authorised person, steps to locate a buyer have been initiated, and a draft of a purchase contract and other documentation is being prepared. At the same date, the assets held for sale are measured at the lower of carrying amount and fair value less selling costs. At the same time, depre-ciation on such assets ceases. The fair value less selling costs is determined based on an expert appraisal.

In circumstances where the fair value less selling costs is lower


160

than the carrying amount, the difference is accounted for through the recognition of an extraordinary write-off in the income state-ment line “Other operating expenses, net”. Any subsequent revalu-ation of assets arising from a change in the fair value less selling costs is presented in the same income statement line.

(d) Intangible AssetsIntangible assets include identifi able assets without physical sub-stance which have an estimated useful life exceeding one year. The Bank has determined that, in addition to fulfi lling these criteria, in-tangible fi xed assets must include assets with a cost greater than CZK 60,000. Intangible assets are carried at cost less accumulated amor-tisation and cumulative impairment and are amortised on a straight-line basis through “General administrative expenses – amortisation of intangible assets” over an estimated useful life not exceeding four years. Software acquired, valuable rights and other intangible as-sets are treated as intangible assets. Items with a cost less than CZK 60,000 are recognised in expenses in the income statement as part of “General administrative expenses – other administrative expenses” during the period in which they are acquired. Costs associated with the maintenance of intangible assets (software) are expensed through “General administrative expenses – other administrative expenses” as incurred whilst costs of technical improvements, provided they exceed CZK 40,000 per asset upon completion, are capitalised and increase the acquisition cost of the intangible asset.

(e) Property and EquipmentProperty and equipment includes identifi able tangible assets with physical substance which have an estimated useful life exceeding one year and a cost greater than CZK 13,000. Selected small tangi-bles are also classifi ed in this category. Property and equipment is stated at historical cost less accumulated depreciation and impair-ment provisions and is depreciated when ready for use through the income statement line “General administrative expenses – depre-ciation of property and equipment” on a straight-line basis over their estimated useful lives. Depreciation periods for individual categories of assets are as follows:

Land and buildingsLand Not depreciatedBuildings and structures 20–50 yearsEquipment, fi xtures and fi ttingsElectronic machines and equipment 6–12 yearsTools and other equipment 4–12 yearsEquipment, fi xtures and fi ttings 4–6 yearsSelected low value machines and equipment 2 yearsWorks of art Not depreciated

Leasehold improvements are depreciated over the lease term and based on their classifi cation in the relevant asset category. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost also includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Bank’s accounting policy (refer to Note 3.3 (r)). Deprecia-

tion of these assets, on the same basis as other property assets, com-mences when the assets are ready for their intended use.

The gain and loss arising on the disposal of property and equip-ment is determined based on its carrying value and is recognised in the income statement line “Other operating expenses, net” in the year of disposal.

Property and equipment costing less than CZK 13,000 and techni-cal improvements costing less than CZK 40,000 are charged to the income statement line “General administrative expenses – other administrative expenses” in the period of acquisition.

Repairs and maintenance of property and equipment are charged to the income statement line “General administrative expenses – oth-er administrative expenses” in the year in which the expenditure is incurred. Completed technical improvements exceeding CZK 40,000 for the taxation period are capitalised and increase the ac-quisition cost of tangible assets.

(f) Impairment of Non-fi nancial AssetsWhere the carrying amount of an asset stated at net book value is greater than its estimated recoverable amount, it is written down to its recoverable amount. The recoverable amount is the greater of the following amounts: the market value which can be recovered from the sale of an asset under normal conditions, net of selling costs, and the estimated future economic benefi ts arising from the use of the asset and its disposal at the end of its useful life.

The largest components of the Bank’s assets are periodically tested for impairment. Provisions for impairment losses are recognised in the income statement line “Other operating expenses, net”.

Signifi cant accounting estimates and decisions in the application of accounting policies are disclosed in Note 3.1.

(g) Shareholders’ CapitalThe statutory reserve fund is accumulated in compliance with leg-islation up to 20% of share capital depending on the legal form of the company in the Bank. Use of the statutory reserve fund is limited by legislation and the articles of the Bank. The fund is not available for distribution to shareholders.

Where the Bank purchases shares it issued (“treasury shares”) or obtains rights to purchase treasury shares, the consideration paid including any attributable transaction costs net of income taxes, is shown as a deduction from total shareholders’ equity. In selling treasury shares, the Bank recognises the difference between their selling price and cost as share premium.

Dividends reduce retained earnings in the period in which they are declared by the Annual General Meeting.

(h) Cash and Cash EquivalentsThe Bank considers cash and deposits with the CNB, treasury


161

bills and treasury bonds with a residual maturity of three months or less and nostro and loro accounts with fi nancial institutions to be cash equivalents. For the purposes of determining cash and cash equivalents, the minimum reserve deposit with the CNB is not included as a cash equivalent due to restrictions on its avail-ability.

(i) Financial liabilities at Fair ValueThe Bank classifi es as fi nancial liabilities at fair value liabilities held for trading and liabilities for which it uses the fair value op-tion as set out in IAS 39 (For example some issued securities or deposits with embedded derivatives).

Securities borrowed are not recognised in the fi nancial statements, unless they are sold to third parties, in which case the Bank records an obligation to return them which is recognised at fair value as a trading liability and is presented in the statement of fi nancial po-sition line “Financial liabilities at fair value”. Upon the repurchase of securities, the difference between the carrying amount of the obligation and the contracted purchase price is recognised in “Net trading result” in the income statement.

(j) Bonds in IssueOwn issues of debt securities are recognised in the statement of fi -nancial position within “Bonds in issue”, the only exceptions be-ing subordinated bonds, which are recognised within “Subordinated debt”, and issued debt securities measured at fair value, which are recognised within “Financial liabilities at fair value”. Bonds in issue and subordinated debt are initially measured at issue price plus any direct costs of issue. The issue price is gradually increased to re-fl ect accrued interest expense, determined using the EIR method, in-curred in issued bonds from the issue settlement date to the maturity date. When issued bonds are repurchased, the difference between the agreed price and carrying amount is recognised in the income state-ment within “Net trading result”.

(k) Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of past events and it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the report-ing date, taking into account the risks and uncertainties surround-ing the obligation. Where a provision is measured using the cash fl ows estimated to settle the present obligation, its carrying amount is the present value of those cash fl ows.

When some or all of the economic benefi ts required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

(l) Sale and Repurchase AgreementsWhere debt or equity securities are sold under a concurrent com-mitment to repurchase them at a pre-determined price (“repo trans-actions”), they remain at fair value or amortised cost (refer to Note 3.3 (b)) within the relevant portfolio on the statement of fi nancial position and the consideration received is recorded in “Amounts due to fi nancial institutions” or “Amounts due to customers”. Con-versely, debt or equity securities purchased under a concurrent commitment to resell them (“reverse repo transactions”) are not recognised in the statement of fi nancial position and the considera-tion paid is recorded in “Loans and advances to fi nancial institu-tions” or “Loans and advances to customers”. Interest is accrued over the life of the agreement using the effective interest rate.

(m) DerivativesDerivatives include foreign currency and interest rate swaps, cur-rency forwards, forward rate agreements, foreign currency and interest rate options (both purchased and sold), futures and other derivative fi nancial instruments. The Bank uses various types of derivative instruments in both its trading and hedging activities.

Derivative instruments entered into for trading or hedging purpos-es are recognised at fair value as “Positive fair value of derivative transactions” and “Negative fair value of derivative transactions”. Realised and unrealised gains and losses are recognised in the in-come statement line “Net trading result”.

Certain derivatives embedded in other fi nancial instruments are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with gains and losses reported in the income statement.

Hedging derivatives are defi ned as derivatives that comply with the Bank’s risk management strategy, the hedging relationship is formally documented and the hedge is effective, that is, at incep-tion and throughout the period, changes in the fair value or cash fl ows of the hedged and hedging items are almost fully offset and the results are within a range of 80% to 125%.

If the Bank uses a fair value hedge, the hedged item is remeas-ured at fair value and the gain or loss from the remeasurement (in respect of an interest rate risk exposure hedge) is recognised as an expense or income in “Interest income and similar income” or “Interest expense and similar expense” as appropriate. The same accounts of expense and income that refl ect the gain or loss from remeasuring the hedged item at fair value are also used in account-ing for changes in fair values of hedging derivatives that are at-tributable to the hedged risk. Fair value hedges are used to hedge interest and foreign currency risk exposures. Bonds, issued bond liabilities and granted loans are hedged items while interest rate and foreign currency derivatives serve as hedging instruments.

Certain derivative transactions do not qualify for hedge accounting under the specifi c rules in IAS 39 and are therefore treated as de-


162

rivatives held for trading with fair value gains and losses reported in “Net trading result”.

(n) Accrued InterestAccrued not yet created interest on outstanding loan balances, debt securities, deposit products, bonds in issue and subordinated debt is recognised under accrual accounting and reported within “Other assets” and “Other liabilities”, respectively.

(o) Offsetting of Financial InstrumentsFinancial assets and liabilities are not offset, except when the off-set refl ects the substance of the transaction (i. e., the Bank intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously) and is legally enforceable.

(p) Guarantees and Other Off-balance Sheet Credit Related CommitmentsIn the normal course of business, the Bank enters into credit relat-ed commitments which are recorded in off-balance sheet accounts and primarily include guarantees, loan commitments, undrawn loan facilities and letters of credit. The off-balance sheet loan com-mitments are initially recognised at fair value, which equals the fee charged by the Bank, and are subsequently reported at the higher of the accrued fee or the best estimate of losses incurred during the settlement of off-balance sheet commitments.

If a committed guarantee is provided, the amount paid out is recog-nised within “Loans and advances to customers”.

Provisions are made for estimated losses on these commitments on the same basis as set out in Note 3.1 (a) in respect of on balance sheet loan exposures. For these purposes, off-balance sheet items are treated similarly to on-balance sheet exposures. Once a com-mitted guarantee or credit line is drawn the general provision is reversed and a new impairment provision is created against an on-balance sheet receivable, which is tested for impairment.

Any increase in liabilities from guarantees is presented in the in-come statement within “Provisions for credit risks”. Fees received are recognised on a straight-line basis over the term of the guaran-tee and are presented in the income statement line “Fee and com-mission income”.

(q) Transactions with Securities Undertaken on behalf of ClientsSecurities received by the Bank into custody, administration, management or safe-keeping are typically recorded at market or nominal values if the market value is not available and maintained off-balance sheet. “Other liabilities” include the Bank’s payables to clients arising from cash received to purchase securities or cash to be refunded to the client.

(r) Interest Income and Interest ExpenseInterest income and expense are recognised on an accrual basis, us-ing the EIR method. Outstanding penalties, contractual sanctions

and penalty interest on impaired loans, which are those loans that have overdue interest and / or principal, or for which management of the Bank otherwise believes the contractual interest or principal due may not be received, are only recognised on their collection.

The Bank also recognises interest income on impaired loans. This interest income represents interest income using the EIR in respect of the assets less a provision.

(s) Dividend RevenueDividend revenue from investments is recognised when the share-holder’s right to receive payment has been established.

(t) Fees and CommissionsFees and commissions are recognised on the accrual basis, with the exception of fees that are considered to be an integral part of the EIR.

The EIR includes the fees directly associated with the provision of the loan, such as loan origination fees, loan application processing fees, etc. The Bank’s direct external transaction costs involved in issuing loans are offset against these capitalised fees.

(u) Share-based PaymentsWith a view to increasing the relationship of staff to the Bank, fos-tering loyalty of the Bank’s key employees and attracting new key managers, the Supervisory Board of Erste Group Bank, resolved, based upon authorisation given by the General Meeting of Sharehold-ers dated 8 May 2001, to implement an Employee Erste Bank Stock Ownership Programme (“ESOP”) and a Management Erste Bank Stock Option Programme (“MSOP”) within the Bank. Discounts to the market price to which employees and management are entitled are presented within “General administrative expenses – Other personnel expenses”. Additional details can be found in Note 34 (c).

(v) Customer Loyalty ProgrammesCustomer loyalty programmes consist of the Bonus Programme. Commissions from traders for transactions via payment cards are deferred to the statement of fi nancial position and amortised to the income statement depending on the maturity and fair value of the bonus points allocated to clients. The fair value of bonus points is determined based on the costs actually incurred by the Bank in the Bonus Programme. At the reporting date, the level of deferred income is adjusted to refl ect the current balance of unused points.

In 2009 the Bank modifi ed the accounting treatment of the loyalty programme as follows: It ceased establishing a provision for esti-mated costs to be incurred in the future use of bonus points and ad-justed the recognition of the related revenues as described above.

(w) Operating LeasesWhere the Bank is a lessee, operating lease payments are recog-nised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefi ts from the leased asset are


163

consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

(x) TaxationTax on the profi t or loss for the year consists of the current year tax charge, adjusted for deferred taxation. Current tax comprises the tax payable calculated on the basis of the taxable income for the year, using the tax rate enacted by the reporting date, and any adjustment of the tax payable for previous years.

Deferred tax is provided using the balance sheet liability method on all temporary differences between the carrying amounts for fi nan-cial reporting purposes and the amounts used for taxation purposes. However, this does not apply to temporary differences arising from the initial recognition of an asset / liability other than in a business combination which, at the time of the transaction, does not affect either the accounting or the taxable profi t (tax loss). The principal temporary differences arise from certain non-tax deductible reserves and provisions, tax and accounting depreciation on tangible and in-tangible fi xed assets and revaluation of other assets.

Deferred tax assets are recognised only to the extent that it is prob-able that suffi cient taxable profi t will be available to allow the asset to be recovered.

Deferred tax is calculated on the basis of the tax rates that are ex-pected to apply to the period when the asset is realised or the li-ability is settled. The effect on deferred tax of any changes in tax rates is charged to the income statement, except to the extent that it relates to items previously charged or credited directly to equity.

Current and deferred tax are recognised as an expense or income in the income statement, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination.

(y) Segment ReportingSegment information is based on two segment formats. The primary format represents business segments – retail banking, corporate

banking, investment banking and other operations. The secondary format represents the Bank’s geographical markets – the Czech Re-public, EU countries, other European countries and other regions.

Segment results include revenue and expenses directly attributable to a segment and the relevant portion of revenue and expenses that can be allocated to a segment, whether from external transactions or from transactions with other segments of the Bank. Inter-seg-ment transfer pricing is based on cost plus an appropriate margin, as specifi ed by the Bank’s policy. Unallocated items mainly com-prise administrative expenses.

Segment assets and liabilities comprise those operating assets and liabilities that are directly attributable to the segment or can be al-located to the segment on a reasonable basis. Segment assets are determined after deducting related adjustments that are reported as direct offsets in the Bank’s statement of fi nancial position. Seg-ment assets and liabilities do not include income tax items.

(z) Foreign CurrencyItems included in the fi nancial statements of the Bank are ini-tially measured using the currency of primary economic environ-ment in which the Bank operates (“functional currency”), i. e. in Czech crowns.

Transactions denominated in foreign currencies are initially rec-ognised in the functional currency, using exchange rates appli-cable on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the func-tional currency at the respective exchange rate prevailing at the reporting date. Realised and unrealised gains and losses on for-eign exchange are recognised in the income statement in “Net trading result”, with the exception of foreign exchange rate dif-ferences on equity securities included in the available-for-sale portfolio which are reported as a component of a change in the fair value and foreign exchange rate differences on derivatives entered into with a view to hedging currency risk associated with expected foreign currency cash fl ows from assets or liabilities whose foreign exchange rate differences are not reported in the income statement.

4. Cash and Balances with the Czech National Bank

CZK mil. 2010 2009

Cash (Note 39) 20,404 19,821Nostro accounts with the CNB (Note 39) 491 1,079Minimum reserve deposits with the CNB 3,664 6,350Total 24,559 27,250

Minimum reserve deposits represent mandatory deposits calculated in accordance with CNB regulations and whose withdrawal is restricted. Minimum reserve deposits accrue interest at the CNB’s two week repo rate. The Bank is authorised to make withdrawals of minimum re-serve deposits in an amount that exceeds the actual average level of minimum reserve deposits for the relevant holding period calculated pursuant to the CNB’s regulation. The nostro balances represent balances with the CNB relating to settlement activities and were available for withdrawal at the year end.


164

5. Loans and Advances to Financial Institutions

CZK mil. 2010 2009

Nostro accounts with fi nancial institutions (Note 39) 563 528Loans and advances to fi nancial institutions 114,947 69,219Placements with fi nancial institutions 45,746 39,939Other 728 910Total 161,984 110,596

As at 31 December 2010, the Bank provided certain fi nancial institutions with loans of CZK 111,833 mil. (2009: CZK 63,670 mil.) under reverse repurchase transactions which were collateralised by securities amounting to CZK 110,102 mil. (2009: CZK 62,999 mil.); of that, CZK 436 mil. (2009: CZK 2,010 mil.) was further sold or advanced.

6. Loans and Advances to Customers

(a) Analysis of Loans and Advances to Customers by Type of LoanCZK mil. 2010 2009

Corporate loans 129,569 132,096Mortgage loans (both retail and corporate customers) 176,108 176,251Retail loans 94,744 96,917Public sector loans 16,425 17,197Cumulative change in carrying value due to application of fair value hedging 8 7Total 416,854 422,468

As at 31 December 2010, the Bank provided certain clients with loans of CZK 100 mil. (2009: CZK 345 mil.) under reverse repurchase transactions which were collateralised by securities amounting to CZK 116 mil. (2009: CZK 506 mil.).

(b) Analysis of Loans and Advances to Customers According to Credit Risk Assessment PoliciesAt 31 December 2010 CZK mil.



Total


At 31 December 2009 CZK mil.



Total



165

Individually signifi cant loans represent corporate loans or retail loans where the Banks’s exposure exceeds CZK 5 mil.. Individually im-paired loans are those loans where objective evidence demonstrates that the associated cash fl ow is at risk (loss event). The Bank defi nes the loss event in accordance with Basel II criteria. This classifi cation corresponds to the “R” internal rating (default). Collectively impaired loans are loans that show an indication of impairment on a collective basis, which corresponds to the 7–8 internal ratings. Unimpaired loans are loans with an internal rating of 1–6.

The Bank uses various types of collateral in order to mitigate credit risk exposure. The list of collateral instruments is set out in an internal regulation which also outlines the guidance to be followed in determining the values of individual types of collateral. The Bank establishes the nominal value of collateral based upon a market valuation which is subsequently used as a basis for arriving at the realisable value by applying a discount factor set for each type of collateral. Collateral that is valued at the realisable value is taken into account in provisioning (refer to Note 3.1 (a)). Collateral valuation rules also set out when and how often the valuations of individual collateral instruments are updated.

7. Provisions for Losses on Loans and Advances

(a) Creation and Use of Provisions for Losses on Loans and AdvancesCZK mil. 2010 2009

At 1 January 13,423 8,182Charge for provisions (refer to Note 30) 10,417 8,188Release of provisions (refer to Note 30) (1,108) (405)Net charge / (release) of provisions 9,309 7,783Unwinding of discount (refer to Note 28) (912) (620)Use of provisions for loans written off and assigned (refer to Note 7(c)) (3,737) (1,905)FX differences from provisions in foreign currency (42) (17)At 31 December 18,041 13,423Net change in amount of provisions 4,618 5,241

The use of provisions for loans written off and assigned of CZK 3,737 mil. (2009: CZK 1,905 mil.) has no impact on the Bank’s profi t.

The unwinding of discount represents interest income on impaired loans on the basis of the EIR in respect of the discounted value of loans.

(b) Provisions for Losses on Loans and Advances by CategoryAt 31 December 2010CZK mil.



Total





Total



166

(c) Losses from Impairment by Individual Categories of Financial Assets2010CZK mil.

At1 Jan

Provi-sioning

Write-off of loans


year


Foreign exchange


At31 Dec


Retail loans / loans to householdsOverdraft loans 346 336 (173) (156) (21) – 332 (14)Credit cards 205 251 (152) (74) (19) – 211 6Other loans 3,569 3,485 (1,869) (653) (273) – 4,259 690Mortgage loans 1,248 1,049 (180) (282) (161) – 1,674 426Subtotal 5,368 5,121 (2,374) (1,165) (474) – 6,476 1,108MSExx) Overdraft loans 206 56 (9) (156) (3) – 94 (112)Other loans 1,310 2,038 (236) (254) (68) – 2,790 1,480Mortgage loans 491 442 (39) (105) (53) – 736 245Municipal loans 5 3 – (5) (2) – 1 (4)Subtotal 2,012 2,539 (284) (520) (126) – 3,621 1,609Corporate loans Corporate customers 2,426 1,573 (733) (438) (109) (42) 2,677 251Small and medium sized enterprises (SMEs)xxx) 2,782 1,965 (331) (836) (99) – 3,481 699Corporate mortgage loans 813 1,241 (15) (173) (104) – 1,762 949Municipalities 22 5 – (3) – – 24 2Subtotal 6,043 4,784 (1,079) (1,450) (312) (42) 7,944 1,901Total 13,423 12,444 (3,737) (3,135) (912) (42) 18,041 4,618x) Interest income on individually impaired loans and advances.xx) MSE – individuals businessmen and small companies with annual turnover of less than CZK 30 mil..xxx) SME – small and medium sized enterprises with annual turnover between CZK 30 mil. and CZK 1,000 mil..

2009CZK mil.

At1 Jan

Provi-sioning

Write-off of loans


year


Foreign exchange


At31 Dec


Retail loans / loans to householdsOverdraft loans 313 263 (114) (98) (18) – 346 33Credit cards 188 170 (90) (47) (16) – 205 17Other loans 2,523 2,732 (1,207) (295) (184) – 3,569 1,046Mortgage loans 984 627 (14) (236) (113) – 1,248 264Subtotal 4,008 3,792 (1,425) (676) (331) – 5,368 1,360MSExx)

Overdraft loans 220 95 (46) (60) (3) – 206 (14)Other loans 615 903 (105) (55) (48) – 1,310 695Mortgage loans 291 290 (26) (28) (36) – 491 200Municipal loans 5 5 – (4) (1) – 5 –Subtotal 1,131 1,293 (177) (147) (88) – 2,012 881Corporate loansCorporate customers 787 1,709 26 (2) (77) (17) 2,426 1,639Small and medium sized enterprises (SMEs)xxx) 1,949 1,580 (294) (372) (81) – 2,782 833Corporate mortgage loans 291 589 (35) 11 (43) – 813 522Municipalities 16 8 – (2) – – 22 6Subtotal 3,043 3,886 (303) (365) (201) (17) 6,043 3,000Total 8,182 8,971 (1,905) (1,188) (620) (17) 13,423 5,241x) Interest income on individually impaired loans and advances.xx) MSE – individuals businessmen and small companies with annual turnover of less than CZK 30 mil..xxx) SME – small and medium sized enterprises with annual turnover between CZK 30 mil. and CZK 1,000 mil..


167

8. Securities Held for Trading

CZK mil. 2010 2009

Listed debt securities 16,455 29,329Listed equity securities and other variable yield securities 32 7Total 16,487 29,336

Of the held for trading portfolio, securities of CZK 1,057 mil. (2009: CZK 1,916 mil.) were transferred as collateral for loans received under repurchase transactions.


CZK mil. 2010 2009

Variable yield debt securitiesIssued in CZK 2,607 741Total 2,607 741Fixed income debt securitiesIssued in CZK 13,559 28,548Issued in other currencies 289 40Total 13,848 28,588Total debt securities 16,455 29,329


CZK mil. 2010 2009

Shares and share certifi catesIssued in CZK 32 7Total 32 7


CZK mil. 2010 2009

Debt securities issued by State institutions in the Czech Republic 16,151 28,308Foreign state institutions 289 40Financial institutions in the Czech Republic – 21Other entities in the Czech Republic – 824Other foreign entities 15 136Total 16,455 29,329


CZK mil. 2010 2009

Shares and share certifi cates issued byFinancial institutions in the Czech Republic 2 1Foreign fi nancial institutions 27 4Other entities in the Czech Republic 3 2Total 32 7


168

9. Securities Designated upon Initial Recognition as at Fair Value through Profi t or Loss

CZK mil. 2010 2009

Debt securitiesListed 6,544 4,263Unlisted 1,389 1,761Equity securities and other variable yield securitiesUnlisted 1,425 1,044Total 9,358 7,068

This portfolio includes asset-backed securities (“ABS”) of CZK 1,389 mil. (2009: CZK 1,761 mil.). Given the current economic and fi nan-cial market environment, an increase in the value of these securities was recognised and generated a gain of CZK 131 mil. on the revaluation of the CDO / CLO (2009: profi t of CZK 369 mil.), which is reported in the income statement line “Other net operating expenses, net” (refer to Note 35). Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating interests with controlling or signifi cant infl uence. The fair value of these equity investments is not derived from the market price as these securities are not on an active market. The fair value was determined based on a present value of estimated future cash fl ows.


CZK mil. 2010 2009

Variable yield debt securitiesIssued in CZK 677 –Issued in other currencies 3,137 1,761Total 3,814 1,761Fixed income debt securitiesIssued in CZK 417 397Issued in other currencies 3,702 3,866Total 4,119 4,263Total debt securities 7,933 6,024


CZK mil. 2010 2009

Shares and share certifi catesIssued in CZK 1,365 820Issued in other currencies 60 224Total 1,425 1,044


CZK mil. 2010 2009

Debt securities issued byState institutions in the Czech Republic 957 101Financial institutions in the Czech Republic 1,991 –Foreign fi nancial institutions 4,894 5,748Other foreign entities 91 175Total 7,933 6,024


CZK mil. 2010 2009

Shares and share certifi cates issued byFinancial institutions in the Czech Republic 1,365 820Foreign fi nancial institutions 60 224Total 1,425 1,044


169

10. Positive Fair Value of Derivative Transactions

CZK mil. 2010 2009

DerivativesHedging– Foreign currency – 628– Interest rate 723 605Non-hedging– Foreign currency 3,076 5,123– Interest rate 12,065 11,899– Other 436 274Total 16,300 18,529

As at 31 December 2010, the gain on hedging derivatives was CZK 294 mil. (2009: loss of CZK 10 mil.), the loss due to changes in the fair value of hedged items was CZK 313 mil. (2009: gain of CZK 10 mil.).

11. Securities Available-for-sale

CZK mil. 2010 2009

Debt securitiesListed 3,618 4,074Equity securities and other variable yield securitiesUnlisted 139 72Total 3,757 4,146

Unlisted equity securities and other variable yield securities include equity investments and holdings that are not participating interests with controlling or signifi cant infl uence in the total amount of CZK 80 mil. (2009: CZK 68 mil.).


CZK mil. 2010 2009

Variable yield debt securitiesIssued in CZK 2,092 2,092Issued in other currencies 1,524 1,824Total 3,616 3,916Fixed income debt securitiesIssued in CZK 2 158Total 2 158Total debt securities 3,618 4,074


CZK mil. 2010 2009

Shares and share certifi catesIssued in CZK 71 58Issued in other currencies 68 14Total 139 72


CZK mil. 2010 2009

Debt securities issued byFinancial institutions in the Czech Republic 2,092 2,248Foreign fi nancial institutions 1,526 1,826Total 3,618 4,074


170


CZK mil. 2010 2009

Shares and share certifi cates issued byFinancial institutions in the Czech Republic 58 58Other entities in the Czech Republic 13 –Foreign fi nancial institutions 59 5Other foreign entities 9 9Total 139 72

12. Securities Held-to-maturity

CZK mil. 2010 2009

Debt securitiesListed 111,509 98,683Total 111,509 98,683

The held-to-maturity portfolio includes securities of CZK 22,821 mil. (2009: CZK 19,231 mil.) that were transferred as collateral for loans received under repurchase transactions.


CZK mil. 2010 2009

Variable yield debt securitiesIssued in CZK 3,332 7,454Issued in other currencies 1,677 2,672Total 5,009 10,126Fixed income debt securitiesIssued in CZK 100,657 88,266Issued in other currencies 5,843 291Total 106,500 88,557Total debt securities 111,509 98,683


CZK mil. 2010 2009

Debt securities issued byState institutions in the Czech Republic 88,275 67,003Foreign state institutions 2,106 –Financial institutions in the Czech Republic 6,944 8,341Foreign fi nancial institutions 12,762 21,120Other entities in the Czech Republic 795 1,300Other foreign entities 627 919Total 111,509 98,683


171

13. Equity Investments in Subsidiary and Associate Undertakings

Name of the company Registered offi ce Principal activities

Associate undertakings

CBCB-Czech Banking Credit Bureau, a. s. Prague 4, Na Vítězné pláni 1719/4Provision of information from the client information banking register

Erste Group Shared Services (EGSS), s. r. o. Hodonín, Národní třída 44

Production, trade and provision of services not stipulated in Annexes 1 to 3 to the Trade Licensing Act

ÖCI-Unternehmensbeteiligungs G. m. b. H. Vienna, Graben 21, Austria Provision of management servicesProcurement Services CZ, s. r. o. Prague 4, Želetavská 1449/9 Provision of procurement servicesPrvní certifi kační autorita, a. s. Prague 9, Podvinný mlýn 2178/6 Digital signature certifi cation services

s IT Solutions CZ, s. r. o. Prague 4, Antala Staška 32/1292Provision of software and advisory involving hardware and software

s IT Solutions SK, spol. s r. o. Bratislava, Prievozská 14, Slovakia Provision of softwareSubsidiary undertakingsbrokerjet České spořitelny, a. s. Prague 6, Evropská 2690/17 Investment services

CEE Property Development Portfolio B. V.Naritaweg 165, 1043BW Amsterdam, Netherlands Real estate investment

CS Investment LimitedOgier House, St. Julian’s Avenue, St Peter Port, Guernsey Investments and equity holdings

CS Property Investment Limited Themistokli Dervi, 48, Nicosia, CyprusInvestments in securities, issuance of loans

Czech and Slovak Property Fund B. V.Fred Roeskerstraat 123, 1076EE, Amsterdam, Netherlands Real estate investment

Czech TOP Venture Fund B. V.Postweg 11 6561 Groesbeek, Netherlands Management and fi nancing services

Erste Corporate Finance, a. s. Prague 6, Evropská 2690/17 ConsultancyFactoring České spořitelny, a. s. Prague 4, Budějovická 1518/13B FactoringGRANTIKA České spořitelny, a. s. Brno, Jakubské nám. 127/5 Business consultingInformatika České spořitelny, a. s. Prague 1, Antala Staška 32/1292 Provision of IT services

IT Centrum s. r. o. Prague 1, Vodičkova 710/31Lease of real estate, apartments and non-residential premises

Partner České spořitelny, a. s. Prague 4, Poláčkova 1976/2Independent dealers network management

Penzijní fond České spořitelny, a. s. Prague 4, Poláčkova 1976/2 Pension insuranceRealitní společnost České spořitelny, a. s. Prague 3, Vinohradská 180/1632 Real estate activitiesREICO investiční společnost České spořitelny, a. s. Prague 1, Antala Staška 2027/79 Real estate investments Autoleasing, a. s. Prague 8, Střelničná 8/1680 LeasingStavební spořitelna České spořitelny, a. s. Prague 3, Vinohradská 180/1632 Construction savings bank


172

At 31 December 2010Name of the company

Share capital in CZK mil. / TEUR

Currency Ownership % Voting power in %

Net Carrying amount in

CZK mil.

Associated undertakingsCBCB-Czech Banking Credit Bureau, a. s. 1 CZK 20.00% 20.00% 0.2Erste Group Shared Services (EGSS), s. r. o. 0.2 CZK 40.00% 40.00% 0.1ÖCI-Unternehmensbeteiligungs G. m. b. H. 18 EUR 40.00% 40.00% 0.2Procurement Services CZ, s. r. o. 0.2 CZK 40.00% 40.00% 0.1První certifi kační autorita, a. s. 20 CZK 23.25% 23.25% 8s IT Solutions CZ, s. r. o. 0.2 CZK 40.00% 40.00% 0.2s IT Solutions SK, spol. s r. o. 7 EUR 23.50% 23.50% 69Total associated undertakings 78Subsidiary undertakingsbrokerjet České spořitelny, a. s. 160 CZK 51.00% 51.00% 82CEE Property Development Portfolio B. V. 20 EUR 20.00% 20.00% 4CS Investment Limited 8 EUR 99.99% 100.00% 253CS Property Investment Limited 114 EUR 100.00% 100.00% 3,073Czech and Slovak Property Fund B. V. 30 EUR 10.00% 10.00% 0Czech TOP Venture Fund B. V. 19 EUR 84.25% 84.25% 89Erste Corporate Finance, a. s. 6 CZK 75.00% 75.00% 11Factoring České spořitelny, a. s. 84 CZK 100.00% 100.00% 167GRANTIKA České spořitelny, a. s. 7 CZK 100.00% 100.00% 30Informatika České spořitelny, a. s. 10 CZK 100.00% 100.00% 10IT Centrum s. r. o. 179 CZK 100.00% 100.00% 288Partner České spořitelny, a. s. 2 CZK 100.00% 100.00% 0Penzijní fond České spořitelny, a. s. 350 CZK 100.00% 100.00% 841Realitní společnost České spořitelny, a. s. 30 CZK 100.00% 100.00% 0REICO investiční společnost České spořitelny, a. s. 90 CZK 100.00% 100.00% 0s Autoleasing, a. s. 372 CZK 100.00% 100.00% 676Stavební spořitelna České spořitelny, a. s. 750 CZK 95.00% 95.00% 1,198Total subsidiary undertakings 6,722FX differences hedges relating to equity investments denominated in EUR (120)Total equity investments 6,680

The Bank presents its investments in the real estate funds CEE Property Development Portfolio B. V. and Czech and Slovak Property Fund B. V. as equity investments in subsidiary undertakings. While the Bank holds 20 percent and 10 percent, respectively, of the issued share capital of the funds and does not have a majority of voting rights or Board representation, it has provided signifi cant additional funding to the funds for investment purposes which results in the Bank receiving substantially all of the returns and bearing substantially all of the risks of the investments. The second shareholder of CEE Property Development Portfolio B. V. bears minimal risks and receives minimal returns from its investment in the funds. Following the completion of shareholding changes, the Bank also remains the majority shareholder of Czech and Slovak Property Fund B. V. effectively owning 67 percent of the invested funding.

During the year ended 31 December 2010, the portfolio of equity investments underwent the following changes: In May 2010, Erste Group Shared Services (EGSS), s. r. o., was established as new equity investment with 40% held by the Bank; In June 2010, the Bank was repaid a portion of the share premium of CZK 1,000 mil. provided to Penzijní fond České spořitelny, a. s.; As at 1 July 2010, the merger of s Autoleasing, a. s., and its subsidiary, s Autoúvěr, a. s., became effective. Due to the legal terms of the merger, s Autoúvěr, a. s., was wound up without liquidation and s Autoleasing, a. s., became its sole legal successor; In September 2010, the Bank increased the provision against the investment in Realitní společnost České spořitelny, a. s., to CZK 120 mil., i. e. the full carrying amount of the investment; In October 2010, the share capital of s Autoleasing, a. s., was increased to CZK 500 mil.; capital contribution was CZK 128 mil., share premium to new shares issued was CZK 256 mil.. In December, the Bank created a provision of CZK 390 mil.; In October 2010, the share capital of Factoring České spořitelny, a. s., was increased to CZK 114 mil.; capital contribution was CZK 30 mil., share premium to new shares issued was CZK 80 mil.;

–––

–

–

–


173

In November 2010, the Bank acquired a 100% ownership interest in CPDP IT Centrum s. r. o. In December the company name was changed to IT Centrum s. r. o. and its share capital increased to CZK 179 mil.;

In December 2010, Informations-Technologie Austria CZ, s. r. o., ceased to exist as a result of the merger with sIT Solutions CZ, s. r. o. Accordingly, the carrying amount of sIT Solutions CZ, s. r. o., increased from CZK 92 thousand to CZK 172 thousand; In December 2010, the Bank created a provision against the investment in Partner České spořitelny, a. s., of CZK 2 mil., i. e. the full carrying amount of the investment; In December 2010, the Bank increased the provision against the investment in CEE Property Development Portfolio B. V. to CZK 1,821 mil., i. e. the full acquisition cost of the investment; By way of issuing shares with share premium, the Bank increased its equity investment in CS Property Investment Limited in relati-on to the expansion of its business activities; By way of paying additional share premium on already owned shares, the Bank increased the carrying amount of its equity invest-ment in Czech TOP Venture Fund B. V. in relation to the expansion of its business activities; in September 2010, the Bank increased the provision against the investment in the company to CZK 99 mil.; By way of paying additional share premium on already owned shares, the Bank increased the carrying amount of its equity invest-ment in Czech and Slovak Property Fund B. V. in relation to business activities in May and July 2010; in June 2010, the investment was decreased by way of releasing a portion of the share premium. Following the share premium changes, the provision was adjusted to refl ect the acquisition cost of the investment, i. e. CZK 658 mil..

With a view to managing foreign currency risk exposures associated with the Bank’s investments in foreign subsidiaries and associates CS Investment Limited, CS Property Investment Limited, Czech TOP Venture Fund B. V., CEE Property Development Portfolio B. V., and Czech and Slovak Property Fund B. V. denominated in EUR, the Bank has defi ned these investments as a hedged item within the fair value hedge of these shareholdings. Hedging instruments include foreign currency interest rate swaps. The Bank remeasures these investments at fair value as a result of the foreign currency risk hedge.

CEE Property Development Portfolio B. V., CS Investment Limited, CS Property Investment Limited, Czech and Slovak Property Fund B. V., Czech TOP Venture Fund B. V., s Autoleasing, a. s. and GRANTIKA České spořitelny, a. s. hold investments in other entities with which they form sub-groups (detailed information is provided in the consolidated fi nancial statements).

Creation and charge of provisions against equity investments was as follows:

CZK mil. 2010 2009

At 1 January 2,487 212Creation of provisions 803 2,585Release of provisions (46) –Net charge / (release) of provisions (refer to Note 35) 757 2,585Use of provisions – –FX differences from provisions in foreign currency (24) (310)At 31 December 3,220 2,487

–

–

–

–

–

–

–


174

At 31 December 2009Name of the company

Share capital in CZK mil. / TEUR

Currency Ownership % Voting power in %

Net Carrying amount in

CZK mil.

Associate undertakingsCBCB-Czech Banking Credit Bureau, a. s. 1 CZK 20.00% 20.00% 0.2Informations-Technologie Austria CZ, s. r. o. 0.2 CZK 40.00% 40.00% 0.08ÖCI-Unternehmensbeteiligungs G. m. b. H. 18 EUR 40.00% 40.00% 0.19Procurement Services CZ, s. r. o. 0.2 CZK 40.00% 40.00% 0.08První certifi kační autorita, a. s. 20 CZK 23.25% 23.25% 8s IT Solutions CZ, s. r. o. 0.2 CZK 40.00% 40.00% 0.09s IT Solutions SK, spol. s r. o. 7 EUR 23.50% 23.50% 69Total associated undertakings 78Subsidiary undertakingsbrokerjet České spořitelny, a. s. 160 CZK 51.00% 51.00% 82CEE Property Development Portfolio B. V. 20 EUR 20.00% 20.00% 284CS Investment Limited 8 EUR 99.99% 100.00% 252CS Property Investment Limited 114 EUR 100.00% 100.00% 3,045Czech and Slovak Property Fund B. V. 30 EUR 10.00% 10.00% 0Czech TOP Venture Fund B. V. 19 EUR 84.25% 84.25% 152Erste Corporate Finance, a. s. 6 CZK 75.00% 75.00% 11GRANTIKA České spořitelny, a. s. 7 CZK 100.00% 100.00% 30Factoring České spořitelny, a. s. 84 CZK 100.00% 100.00% 57Informatika České spořitelny, a. s. 10 CZK 100.00% 100.00% 10Partner České spořitelny, a. s. 2 CZK 100.00% 100.00% 2Penzijní fond České spořitelny, a. s. 350 CZK 100.00% 100.00% 1,841Realitní společnost České spořitelny, a. s. 30 CZK 100.00% 100.00% 20REICO investiční společnost České spořitelny, a. s. 90 CZK 100.00% 100.00% 0s Autoleasing, a. s. 372 CZK 100.00% 100.00% 682Stavební spořitelna České spořitelny, a. s. 750 CZK 95.00% 95.00% 1,198Total subsidiary undertakings 7,666FX differences hedges relating to equity investments denominated in EUR 37Total equity investments 7,781


175

14. Property and Equipment

CZK mil. Land and buildings

Equipment, fi xtures and fi ttings

Total

CostAt 1 January 2009 16,597 10,748 27,345Additions 831 717 1,548Disposals (100) (1,755) (1,855)At 31 December 2009 17,328 9,710 27,038Additions 1,220 1,081 2,301Disposals (98) (1,598) (1,696)Transfers (382) (4) (386)At 31 December 2010 18,068 9,189 27,257Accumulated depreciation including impairment and provisionsAt 1 January 2009 (5 718) (8 416) (14 134)Depreciation (refer to Note 34) (566) (788) (1,354)Disposals 95 1,734 1,829Impairment loss (44) (10) (54)At 31 December 2009 (6,233) (7,480) (13,713)Depreciation (refer to Note 34) (642) (763) (1,405)Disposals 306 1,583 1,889Impairment loss (12) (2) (14)At 31 December 2010 (6,581) (6,662) (13,243)Net book valueAt 31 December 2009 11,095 2,230 13,325At 31 December 2010 11,487 2,527 14,014

The balances as at 31 December 2010 shown above include CZK 995 mil. (2009: CZK 1,064 mil.) in property under construction.

The acquisition cost of fully depreciated tangible assets was CZK 5,468 mil. as at 31 December 2010 (2009: CZK 6,221 mil.).


176

15. Intangible Assets

CZK mil. Software Other Total

CostAt 1 January 2009 5,500 6,832 12,332Additions – 332 332Disposals (114) (17) (131)Transfers 277 (277) –At 31 December 2009 5,663 6,870 12,533Additions – 916 916Disposals (146) (65) (211)Transfers 546 (546) –At 31 December 2010 6,063 7,175 13,238Accumulated amortisation including impairment and provisionsAt 1 January 2009 (3,150) (5 588) (8 738)Amortisation (refer to Note 34) (853) (393) (1,246)Disposals 335 208 543Impairment loss (1) – (1)At 31 December 2009 (3,669) (5,773) (9,442)Amortisation (refer to Note 34) (806) (247) (1,053)Disposals 146 65 211Impairment loss – (6) (6)At 31 December 2010 (4,329) (5,961) (10,290)Net book valueAt 31 December 2009 1,994 1,097 3,091At 31 December 2010 1,734 1,214 2,948

Other intangible assets include licenses and know-how. In addition, the item includes CZK 955 mil. in assets under construction as at 31 December 2010 (2009: CZK 703 mil.).

The acquisition cost of fully amortised intangible assets was CZK 6,092 mil. as at 31 December 2010 (2009: CZK 5,185 mil.).

16. Other Assets

CZK mil. 2010 2009

Accrued income 2,706 2,486of which:– interest and fees on loans and advances to fi nancial institutions and customers 10 77– coupons on bonds 2,679 2,401– other 17 8Other tax receivables 229 157Deferred expenses 995 1,047Receivables from securities trading 426 304Various receivables 1,165 1,801Total 5,521 5,795


177

17. Amounts Owed to Financial Institutions

CZK mil. 2010 2009

Loro accounts (refer to Note 39) 4,682 1,922Term deposits 30,481 16,906Loans received 29,136 24,330Total 64,299 43,158

As at 31 December 2010, the Bank received loans from fi nancial institutions of CZK 11,807 mil. (2009: CZK 13,895 mil.) under repurchase transactions, which were collateralised by securities amounting to CZK 11,582 mil. (2009: CZK 13,734 mil.).

18. Amounts Owed to Customers

CZK mil. 2010 2009

Public sector 45,824 46,254– current accounts 44,315 43,811– term deposits 1,509 2,443Corporate clients 112,023 102,841– current accounts 94,017 81,413– term deposits 16,393 20,358– other amounts due to customers 1,613 1,070Resident individuals 372,254 368,653– current accounts 213,111 213,518– term deposits 55,198 61,304– savings deposits 101,164 90,846– other amounts due to customers 2,781 2,985Total 530,101 517,748

“Other amounts due to customers” include in particular amounts owed from cancelled deposits, deposits relating to anonymous savings books and loans received from customers under repurchase transactions.

As at 31 December 2010, the Bank had received loans from customers of CZK 789 mil. (2009: CZK 693 mil.) under repurchase transactions which were collateralised by securities amounting to CZK 779 mil. (2009: CZK 667 mil.).

19. Financial Liabilities at Fair Value

CZK mil. 2010 2009

Customer deposits 9,212 4,109Liabilities arising from issued securities 2,228 1,947Payables arising from short sales – debt securities 591 2,072Payables arising from short sales – shares 27 1Total 12,058 8,129


178

The Bank issued the following bonds which are presented within “Liabilities arising from issued securities at fair value”:


2010CZK mil.

2009CZK mil.

Bonds CZ0003701237 February 2007 April 2011 x) 287 289Bonds CZ0003701278 March 2007 March 2010 xx) – 740Bonds CZ0003701351 September 2007 September 2011 x) 284 285Bonds CZ0003701518 April 2008 May 2011 x) 294 291Bonds CZ0003701690 July 2008 January 2012 x) 229 237Bonds CZ0003701955 May 2009 June 2012 xxx) 61 54Bonds CZ0003701963 May 2009 June 2012 xxx) 51 51Bonds CZ0003702284 February 10 February 14 xxx) 149 –Bonds CZ0003702474 October 10 November 14 xxx) 873 –Total 2,228 1,947x) Bonds bear no interest, the yield of bonds increases on a one-off basis as of the fi nal maturity date.xx) The yield depends on the development of the EUR / PLN spot exchange rate.xxx) Bonds bear no interest, yield is determined as a difference between the rate of issue and the bond value payable at its fi nal maturity date.

The ISIN CZ0003701237, CZ0003701351, CZ0003701518, CZ0003701690, CZ0003701955, CZ0003701963, CZ0003702284 and CZ0003702474 were issued as structured bonds, the yield of which is determined as equal to the difference between the issue rate and “an-other value” in accordance with the issue terms and conditions. The amount of the “another value” will be based on a set of indexes and an equity bucket and will be payable as of the fi nal maturity of the bonds. Similarly, the ISIN CZ0003701278 were issued as structured bonds as a structured bond, the yield of which is derived from the development of the EUR / PLN spot exchange rate. The ISIN CZ0003701278 is traded on the offi cial regulated market of the PSE; other issues are not yet traded.

Change in the fair value of debt securities:

CZK mil. 2010 2009

Change in the fair value of debt securities arising from changes in the issuer’s credit profi leCustomer deposits (1) 24Liabilities arising from issued securities at fair value 8 39Total 7 63Difference between the carrying amount and the contractually agreed nominal value due at maturityCustomer deposits 118 78Liabilities arising from issued securities at fair value (12) (8)Total 106 70

Short sales are short-term trading liabilities which mature between one and three months. Changes in the fair value of these trading liabilities are not analysed since the liabilities are different at each reporting date.

The change in the fair value arising from the changes in the credit profi le of the issuer (the Bank) is determined as equal to the difference between the fair values of the liabilities as at the previous and current reporting dates, net of the effect of the change in fair value due to the change in the risk-free interest rate.

20. Negative Fair Value of Derivative Transactions

CZK mil. 2010 2009

DerivativesHedging– foreign currency 1 –– interest rate 47 66Non-hedging– foreign currency 1,906 3,440– interest rate 12,124 12,246– other 479 374Total 14,557 16,126


179

21. Bonds in Issue


2010CZK mil.

2009CZK mil.

Mortgage bonds CZ0002000524 May 2005 May 2010 4.50% – 3,010Mortgage bonds CZ0002000573 June 2005 June 2010 4.05% – 3,009Mortgage bonds CZ0002000623 October 2005 October 2015 4.75% 7,729 7,778Mortgage bonds CZ0002000755 February 2006 February 2016 4.80% 6,726 6,772Mortgage bonds CZ0002000896 October 2006 October 2011 Floating 1,517 1,129Mortgage bonds CZ0002000904 October 2006 October 2014 3.65% 1,490 1,026Mortgage bonds CZ0002000920 October 2006 April 2011 3.00% 796 796Mortgage bonds CZ0002000995 May 2007 May 2012 5.90% 1,025 1,044Mortgage bonds CZ0002001068 June 2007 October 2015 4.50% 757 759Mortgage bonds CZ0002001084 July 2007 July 2014 Floating 1,569 1,596Mortgage bonds CZ0002001126 August 2007 August 2012 3.70% 1,496 1,504Mortgage bonds CZ0002001134 August 2007 August 2017 Floating 2,999 2,998Mortgage bonds CZ0002001191 October 2007 October 2022 Floating 1,999 1,998Mortgage bonds CZ0002001274 November 2007 November 2014 Floating 965 280Mortgage bonds CZ0002001282 November 2007 November 2017 5.90% 2,048 2,071Mortgage bonds CZ0002001290 November 2007 November 2010 4.00% – 999Mortgage bonds CZ0002001407 December 2007 December 2022 Floating 3,997 3,997Mortgage bonds CZ0002001415 November 2007 November 2023 6.15% 455 460Mortgage bonds CZ0002001423 December 2007 December 2017 5.85% 5,253 5,314Mortgage bonds CZ0002001639 December 2007 December 2012 3.70% 2,514 2,522Mortgage bonds CZ0002001647 December 2007 December 2017 3.90% 808 308Mortgage bonds CZ0002001654 December 2007 December 2022 Floating 1,496 1,401Mortgage bonds CZ0002002132 April 2009 April 2012 3.20% 806 354Mortgage bonds CZ0002002157 November 09 May 11 0.25% 996 133Mortgage bonds CZ0002002165 November 09 November 14 3.55% 471 61Mortgage bonds CZ0002002173 November 09 May 13 3.20% 1,335 193Mortgage bonds CZ0002002215 April 10 October 13 0.25% 1,039 –Bonds CZ0003700767 February 2004 February 2014 Floating 1,252 1,253Bonds CZ0003701047 July 2005 July 2012 3.55% 555 557Bonds CZ0003701054 September 2005 September 2017 x) 235 227Bonds CZ0003701062 October 2005 October 2013 x) 276 267Bonds CZ0003701286 March 2007 March 2012 3.49% 931 820Bonds CZ0003701781 December 2008 December 2010 0.50% – 982Bonds CZ0003701948 April 2009 October 2010 xx) – 489Bonds CZ0003702011 July 2009 January 2014 xxx) 530 512Bonds CZ0003702037 October 09 October 16 xxx) 440 424Bonds CZ0003702078 November 09 November 16 xxx) 488 473Bonds CZ0003702268 December 09 December 12 3.50% 3,625 2,319Bonds CZ0003702359 April 10 April 13 3.00% 1,106 –Bonds CZ0003702367 April 10 April 13 Floating 1,338 –Depository bills of exchange 1,531 1,453Cumulative change in carrying value due to application of fair value hedging 1,025 869Total 63,618 62,157x) Bonds were issued with a combined yield.xx) Bonds bear no interest, yield is determined as the difference between the rate of issue and the bond’s nominal value.xxx) Bonds bear no interest, yield is determined as the difference between the rate of issue and the bond’s value payable at its fi nal maturity date.

Of the aggregate carrying value of the mortgage bonds, CZK 9,925 mil. (2009: CZK 11,676 mil.) was hedged against interest rate risk through interest rate swaps linked to a market fl oating rate. In accordance with applicable accounting policies, these mortgage bonds are remeasured at fair value to the extent of hedged interest rate risk.


180

In 2009, the ISIN CZ0003700767 and CZ0003701047 issues were remeasured at fair value as they were hedged against interest rate risk through interest rate swaps linked to a market fl oating rate. In 2010, the interest rate risk hedges were terminated. Of the aggregate carrying value, CZK 63 mil. (2009: CZK 88 mil.) relate to the terminated hedging relationship.

The ISIN CZ0003701054 and CZ0003701062 issues were placed with a share index option which is recorded separately and is remeasured at fair value.

The ISIN CZ0002001126, CZ0002001613, CZ0002001639, CZ0002001647, CZ0002001654, CZ0002002132, CZ0002002157, CZ0002002165, CZ0002002173 mortgage bond issues and the ISIN CZ0003701781, CZ0003702011, CZ0003702037, CZ0003702078 bond issues are not traded on any regulated market. Other issues of mortgage bonds and bonds are traded on the offi cial free market of the PSE.

22. Provisions for Liabilities and Other Reserves

CZK mil. Provision for legal disputes

relating to credit

transactions

Provision for off-balance

sheet credit risks

Total provisions for

credit risks

Other provisions

Total

At 1 January 2009 1,452 187 1,639 553 2,192Charge for provisions 31 96 127 24 151Release of provisions (6) (12) (18) (20) (38)Net charge / (release) of provisions 25 84 109 4 113Use of provisions (6) – (6) – (6)Reclassifi cation – – – (310) (310)At 31 December 2009 1,471 271 1,742 247 1,989At 1 January 2010 1,471 271 1,742 247 1,989Charge for provisions (refer to Note 30) 45 192 237 118 355Release of provisions (refer to Note 30) (35) (39) (74) (61) (135)Net charge / (release) of provisions 10 153 163 57 220Use of provisions – (77) (77) (41) (118)At 31 December 2010 1,481 347 1,828 263 2,091

Other provisions include the provisions for legal disputes, onerous contracts and other risks.

The provision for the customer loyalty programme settlement established in prior periods was reclassifi ed as deferred income in 2009 (refer to Note 3.3(v)).

Provisions for legal disputes connected to loans granted and off-balance sheet credit exposures are recorded to cover specifi c risks arising from pending legal disputes relating to loan transactions and to cover losses that result from off-balance sheet and other exposures.


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23. Other Liabilities

CZK mil. 2010 2009

Accrued expenses 1,551 2,032of which:– interest on amounts owed to fi nancial institutions and customers 780 1 077– interest on bonds in issue 625 804– other 146 151Deferred income 902 701Payables from the loyalty programme 406 599Various creditors 1,844 1,426Payables from securities trading 484 3,537Payables from payment transactions 1,057 1,747Estimated payables 3,180 4,178Other liabilities 477 323Total 9,901 14,543

Estimated payables largely comprise estimated payables for staff and management bonuses, unbilled supplies and contributions to the De-posit Insurance Fund.

Deferred income principally includes deferred commissions and fees related to amounts due from customers in respect of the EIR.

24. Deferred Tax

Deferred tax is calculated from all temporary differences under the liability method using a principal income tax rate of 19 percent (2009: 19 percent).

Net deferred income tax assets / (liabilities) are as follows:

CZK mil. 2010 2009

Balance at the beginning of the year 348 435Movement for the year – equity (29) (52)Movement for the year – (expense) / income (refer to Note 38) (15) (35)Net balance at the year end – asset / (liability) 304 348

Deferred income tax assets and liabilities are attributable to the following items:

CZK mil. 2010 2009

Deferred tax assetsNon-tax deductible reserves and provisions 420 242Changes in the fair value of securities available-for-sale 55 84Other temporary differences 78 193Total deferred tax asset 553 519Deferred tax liabilitiesAccelerated depreciation for tax purposes (249) (171)Total deferred tax lability (249) (171)Net deferred tax asset (liability) 304 348


182

The impact of deferred tax assets on equity arises from changes in the fair value of securities available-for-sale. The deferred tax (charge) / credit in the income statement consists of the following temporary differences:

CZK mil. 2010 2009

Provisions and reserves 178 (2)Accelerated depreciation for tax purposes (78) (39)Other temporary differences (115) 6Total (refer to Note 38) (15) (35)of which: impact of the change of rate – 14

25. Subordinated Debt

ISIN Date of issue Maturity of the issue

Interest rate Nominal value in CZK mil.

Carrying amount at

31 December 2010

Carrying amount at

31 December 2009

CZ0003701005 16 May 2005 16 May 2015 6M PRIBOR +0.46% 3,000 – 2,724CZ0003701187 2 October 2006 2 October 2016 6M PRIBOR +0.46% 3,000 2,210 2,214CZ0003701906 12 March 2009 12 March 2019 5% p. a. 2,000 1,972 1,966CZ0003701930 23 April 2009 23 April 2019 6M PRIBOR +1.50% 6,500 6,500 6,500CZ0003702342 24 March 2010 24 March 2020 6M PRIBOR +0.40% 1,000 354 –Total 11,036 13,404

ISIN CZ0003701005 and CZ0003701187 issues of subordinated debt were made in certifi cate form and placed on the regulated market of the PSE. If the Bank does not exercise its option for premature repayment of the debt after a lapse of fi ve years, the interest rates attached to each issue shall increase to 6M PRIBOR + margin + 1.40% p. a. In compliance with the terms and conditions of these issues, the margins have been set at 0.46% and 0.45%, respectively. Interest is payable semi-annually in arrears. The debt is unsecured and unconditional.

Issues CZ0003701906 and CZ0003701930 of the Bank’s subordinated debt were made in certifi cate form. The bonds are not placed on a regulated market. The debt is unsecured and unconditional. For issue CZ0003701906, interest income is payable once a year retroac-tively, and for the CZ0003701930 issue twice a year retroactively. Upon its discretion, the Bank is entitled to repay the bonds prematurely on 12 March 2014 (CZ0003701906) and 23 April 2014 (CZ0003701930) at 100% of the bonds’ nominal value together with any unpaid interest to date (if relevant). If the Bank’s bonds are not prematurely repaid, the fi xed interest rate will be increased by 1.50% p. a. for issue CZ0003701906, and interest income will be set as the total of 6M PRIBOR + margin + 1.5% p. a. for issue CZ0003701930.

On 5 May 2005 (issue CZ0003701005), 13 September 2006 (issue CZ0003701187), 6 March 2009 (issue CZ0003701906), 21 April 2009 (issue CZ0003701930) and 18 March 2010 (issue CZ0003702342) the CNB issued certifi cates confi rming that these issues of subordinated debt are compliant with all regulatory requirements and may be included in the additional capital of the Bank for the purposes of calculating the capital adequacy ratio (refer to Note 41.5). The CZ0003701005 issue was prematurely repaid in accordance with the issue terms and conditions as at 16 May 2010.

26. Share Capital

Authorised, issued and fully paid share capital was as follows:2010 2009

Number of shares CZK mil. Number of shares CZK mil.Ordinary shares of CZK 100 each 140,788 787 14,079 140,788 787 14,079Priority shares of CZK 100 each 11,211,213 1,121 11,211,213 1,121Total 152,000,000 15,200 152,000,000 15,200


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Priority shareholders are not entitled to vote at the annual shareholders’ meeting. They have a right to receive dividends each year if the Bank is profi table. The amount of the dividend is proposed by the Board of Directors and subject to approval at the annual shareholders’ meeting. In the case of liquidation, priority shareholders have a right to the assets of the Bank before ordinary shareholders but after other creditors. Priority shareholders have a right to purchase shares offered by the Bank when it increases its share capital in the same proportion as the current holding. Priority registered shares can be issued only to municipalities and local governments in the Czech Republic. The priority registered shares can be transferred to entities other than municipalities and local governments of the Czech Republic only subject to the approval of the Board of Directors.

The Bank manages its capital with the objective of maintaining a strong capital base to support its business activities, focusing on maximum return for shareholders and compliance with all capital regulatory requirements.

The Bank’s capital principally consists of share capital, reserve funds, retained earnings, revaluation gains or losses and additional capital in the form of subordinated debt.

27. Revaluation Gains or Losses

Securities available-for-sale CZK mil.

2010 2009

At 1 JanuaryGain / (loss) on fair value changes (442) (683)Deferred tax (liability) / asset 84 136Total at 1 January (358) (547)Changes during the yearGain / (loss) on fair value changes 149 241Deferred tax (liability) / asset (28) (52)Other comprehensive income statement 121 189At 31 DecemberGain / (loss) on fair value changes (293) (442)Deferred tax (liability) / asset 56 84Total at 31 December (237) (358)

28. Interest Income and Similar Income

CZK mil. 2010 2009

Loans and advances to fi nancial institutions 1,863 2,003Loans and advances to customers 27,140 27,448of which: unwinding of discount (refer to Note 7) 912 620Debt securities 4,792 5,158of which:Securities designated upon initial recognition as at fair value through profi t or loss 228 469Securities available-for-sale 78 261Securities held-to-maturity 4,486 4,428Income from shares and other variable yield securities 1,547 777of which:Securities designated upon initial recognition as at fair value through profi t or loss 87 94Securities available-for-sale 1 1Equity investments 1,459 682Other 78 89Total 35,420 35,475


184

29. Interest Expense and Similar Expense

CZK mil. 2010 2009

Amounts owed to fi nancial institutions 701 701Amounts owed to customers 4,154 4,550of which: remeasured at fair value 116 129Bonds in issue 1,838 1,894of which: remeasured at fair value – 14Subordinated debt 395 401Total 7,088 7,546

30. Provisions for Credit Risks

CZK mil. 2010 2009

Charge for reserves for the year (refer to Note 22) (237) (127)Release of reserves for the year (refer to Note 22) 74 18Net (charge) / release of reserves for the year (163) (109)Charge for provisions for the year (refer to Note 7) (10,417) (8,188)Release of provisions for the year (refer to Note 7) 1,108 405Net (charge) / release of provisions for the year (9,309) (7,783)Net (charge) / release of provisions and reserves for the year (9,472) (7,892)Write-offs of loans not covered by provisions (70) (61)Recoveries 62 59Total (9,480) (7,894)

31. Fee and Commission Income

CZK mil. 2010 2009

Lending activities 4,096 3,583Payment transactions 7,827 7,355Custody, trustee and administration of assets 277 222Securities transactions 672 567Mediation of insurance activities 449 380Mediation of construction savings activities 298 381Foreign exchange transactions 36 37Other fi nancial activities 398 355Total 14,053 12,880

32. Fee and Commission Expense

CZK mil. 2010 2009

Lending activities 931 789Payment transactions 940 807Securities transactions 120 104Mediation of insurance activities – 18Mediation of construction savings activities 118 182Foreign exchange transactions – 1Other fi nancial activities 144 145Total 2,253 2,046


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33. Net Trading Result

CZK mil. 2010 2009

Realised and unrealised gains / (losses) on securities held for trading 380 1,095Derivative instruments 442 (112)Foreign exchange trading 1,623 1,908Other 85 434Total 2,530 3,325

Česká spořitelna manages its fi nancial markets trading in accordance with Erste Group Bank’s business model. The market risk arising from the sales activities of the Financial Markets Division (i. e., transactions with retail and corporate clientele), with the exception of equity risk and transactions for the Bank’s liquidity management purposes (money market), is regularly transferred to Erste Group Bank using back-to-back transactions. Trading gains (i. e. from Erste Group Bank’s market positions) are distributed according to approved rules to the relevant banks within the Group and reported in the “Net trading result”.

The basic principle underlying these rules involves Erste Group Bank absorbing potential losses in individual classes of assets in exchange for the risk premium derived from the VaR indicator. The remaining positive result after deducting expenses (calculated using the Cost In-come Ratio) is reallocated to individual participants in the model based on the results from the sale of assets in individual asset groups.

The net trading result includes the income from the market positions of Erste Group Bank structured as follows:

CZK mil. 2010 2009

Gain from foreign exchange transactions 308 413Gain from fi xed income securities 382 492Gain from commodity derivatives 3 1Total 693 906

34. General Administrative Expenses

(a) Composition of General Administrative ExpensesCZK mil. 2010 2009

Staff costsWages and salaries 5,579 5,713Social security costs 1,753 1,750Other staff costs 409 420Total staff costs 7,741 7,883Other administrative expensesData processing expenses 2,704 3,193Building maintenance and rent 1,840 1,766Costs of business transactions 1,213 1,212Advertising and marketing 764 728Advisory and legal services 191 59Other administrative expenses 474 525Total other administrative expenses 7,186 7,483DepreciationAmortisation of intangible assets (refer to Note 15) 1,053 1,246Depreciation of property and equipment (refer to Note 14) 1,405 1,354Total depreciation and amortisation 2,458 2,600Total 17,385 17,966


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(b) Board of Directors and Supervisory Board RemunerationCZK mil. 2010 2009

Remuneration 70 86Total 70 86

Remuneration to the members of the Board of Directors and Supervisory Board are accounted for as short-term employee benefi ts.

(c) Average Number of Employees and Board MembersCZK mil. 2010 2009

Board of Directors 6 7Supervisory Board 9 9Staff 10,163 10,219

The Employee Stock Ownership Programme (“ESOP”) commences annually in May and allows Bank employees to subscribe for Erste Group Bank shares at a preferential price. In 2010, all employees of the Bank were entitled to subscribe for shares under the ESOP. Each employee was entitled to subscribe for a maximum of 200 Erste Group Bank shares (2009: 200 shares). The price of one share was estab-lished on the basis of the average rate in April 2010 decreased by a 20 percent discount. The 20 percent discount is conditional upon the shares being held for a period of one year. A total of 213 employees (2009: 869) participated in the programme and subscribed for 32,358 shares (2009: 136,035 shares).

The aggregate discount was CZK 3 mil. (2009: CZK 19 mil.).

35. Other Operating Expenses, Net

CZK mil. 2010 2009

Release of other reserves (refer to Note 22) 61 20Gain on the sale of real estate 46 163Income from other services 61 62Received compensation for defi cits and damage 45 63Release of provisions against non-credit receivables 26 16Tangible and intangible assets write-up 16 7Other operating income 123 196Total other operating income 378 527Charges for other reserves (refer to Note 22) (118) (25)Contribution to the Deposit Insurance Fund (675) (497)Loss on the sale of real estate (4) (6)Defi cits and damage, fi nes and penalties (87) (121)Charge for provisions against non-credit receivables (29) (40)Impairment of tangible and intangible fi xed assets (36) (62)Other operating charges (185) (35)Other taxes (62) (63)Total other operating expense (1,196) (849)Gains / (losses) on the sale of securities held-to-maturity 114 –Gains / (losses) from the revaluation / sale of securities at fair value through profi t or loss that are not designed for trading (23) 339Gains / (losses) from the sale of securities available-for-sale 4 102(Recognition) / release of provisions for equity investments (refer to Note 13) (757) (2,585)Total other operating income / (expenses), net (1,480) (2,466)

“Gains / (Losses) from the revaluation / sale of securities at fair value through profi t or loss that are not designed for trading” includes the gain from the revaluation of asset-backed securities of CZK 131 mil. (2009: CZK 369 mil.) (refer to Note 9).


187

36. Gains on the Sale of Equity Investments in Subsidiary and Associated Undertakings

“Gains on the sale of equity investments in subsidiary and associated undertakings” for the year ended 31 December 2009 includes gains from the sale of an equity investment in Investiční společnost České spořitelny, a. s., in the amount of CZK 328 mil..

37. Other Comprehensive Income Statement

CZK mil. 2010 2009

Available for sale fi nancial assetsProfi ts / (losses) during the year 149 179Reclassifi cation adjustments to the income statement – 62Total 149 241

38. Income Tax Expense

(a) Income StatementCZK mil. 2010 2009

Current tax expense (2,431) (2,810)Deferred tax income / (expense) (refer to Note 24) (15) (35)Total (2,446) (2,845)

(b) Other Comprehensive Income StatementCZK mil. 2010 2009

Profi ts / (losses) on revaluation of available for sale fi nancial assets (28) (52)Total (28) (52)

The tax on the Bank’s profi t before tax differs from the theoretical amount that would arise using the basic tax rate of the Czech Republic as follows:

CZK mil. 2010 2009

Profi t before tax 14,317 14,090Tax calculated at a tax rate of 19% (2009: 20%) 2,720 2,818Income not subject to tax (752) (540)Expenses not deductible for tax purposes 479 739Tax allowances and credits, including the utilisation of tax losses, tax recoveries and additional taxes for prior periods (1) (186)Other items – 14Income tax expense 2,446 2,845Effective tax rate 17.08% 20.19%

Further information about deferred income tax is presented in Note 24.

39. Cash and Cash Equivalents

Cash and cash equivalents at the end of the year as shown in the statements of cash fl ows are composed of the following balances:

CZK mil. 2010 2009

Cash (refer to Note 4) 20,404 19,821Nostro accounts with the CNB (refer to Note 4) 491 1,079Treasury bills and treasury bonds with maturity of less than three months 1,477 4,782Nostro accounts with fi nancial institutions (refer to Note 5) 563 528Loro accounts with fi nancial institutions (refer to Note 17) (4,682) (1,922)Total cash and cash equivalents 18,253 24,288


188

40. Financial Instruments

The Bank classifi es fi nancial instruments into the trading and banking (investment) portfolios in accordance with Basel II rules as per CNB Regulation No. 123/2007 as amended by Regulation 282/2008 Coll., on the rules of prudent business of banks, savings and lending associ-ates and securities traders (henceforth “Regulation 123/2007”). The Bank uses various risk management techniques for the banking and trading books (refer to Note 41).

The table below shows the comparison between categories of fi nancial assets and liabilities reported according to IFRS 7 and categories of fi nancial assets and liabilities reported according to IAS 39.

The balances of fi nancial instruments in individual categories are as follows:


not intended for trading


-maturity



Available for sale fi nancial

assets



value


fair value through

profi t or loss

Financial assetsCash and balances with CNB 24,559Loans and advances to fi nancial institutions 161,984Loans and advances to customers 398,813Securities held for trading 16,487Securities designated upon initial recognition as at fair value through profi t or loss 9,358Derivative instruments 16,300of which: trading 15,577of which: hedging 723Securities available-for-sale 3,757Securities held-to-maturity 111,509Other assets 4,297Financial liabilitiesAmounts owed to fi nancial institutions 64,299Amounts owed to customers 530,101Financial liabilities at fair value 12,058Derivative instruments 14,557of which: trading 14,509of which: hedging 48Bonds in issue 63,618Other liabilities 4,936Subordinated debt 11,036


189


not intended for trading


-maturity



Available for sale fi nancial

assets



value


fair value through

profi t or loss

Financial assetsCash and balances with CNB 27,250Loans and advances to fi nancial institutions 110,596Loans and advances to customers 409,045Securities held for trading 29,336Securities designated upon initial recognition as at fair value through profi t or loss 7,068Derivative instruments 18,529of which: trading 17,296of which: hedging 1,233Securities available-for-sale 4,146Securities held-to-maturity 98,683Other assets 4,591Financial liabilitiesAmounts owed to fi nancial institutions 43,158Amounts owed to customers 517,748Financial liabilities at fair value 8,129Derivative instruments 16,126of which: trading 16,060of which: hedging 66Bonds in issue 62,157Other liabilities 8,742Subordinated debt 13,404

41. Risk Management

Financial instruments may result in certain risks to the Bank. The most signifi cant risk is credit risk. In addition, the investment port-folio of the Bank is exposed to interest rate risk and liquidity risk. The risks attached to the trading portfolio include market risks, specifi cally foreign exchange, interest rate and equity risks and other risks relating to trading with complex instruments. All trans-actions with fi nancial instruments also carry operational risk.

Risk management in the Bank is performed by a division managed by a member of the Board of Directors exclusively responsible for risk management – the Chief Risk Offi cer. This division, which is completely independent of the business divisions of the Bank, centralises all departments tasked with risk management:

Legal and Compliance; Central Risk Management; Credit Risk Management and Credit Service; Credit Risk Controlling and Credit Portfolio Management; and Security.

Central Risk Management is further divided into Financial Mar-kets Risk Management, Operational Risks and Economic Capital.

Internal management and control systems are reviewed by the in-ternal audit function on an annual basis.

–––––

41.1 Credit Risk

The Bank takes on exposure to credit risk which is the risk that a coun-terparty will be unable to pay amounts owing in full when due.

Credit Risk Management MethodologyIn managing credit risk, the Bank applies a unifi ed methodology which sets out applicable procedures, roles and authorities. The lending policy defi nes a comprehensive policy of the Bank’s credit risk management. It defi nes the basic principles related to identifi ca-tion, measurement, monitoring, controlling and credit risk manage-ment. It contains the basic lending rules including limitations for loan granting and describes individual credit risk management tools, such as rating system, collateral management, limit setting, setting of approval policy, monitoring, provision making policy, reporting, controlling and portfolio management. In addition it defi nes credit risk management organization and discloses the lending process.

Breakdown of the Portfolio for Credit Risk Management PurposesFor the purpose of determining impairment allowances the loans and advances are segmented into non-default (performing) loans where the principal and interest is not past due for more than 90 days or there are no other indications that would suggest that the repayment of the receivable is unlikely (bankruptcy proceedings, forced restructurings, etc.) and default (non-performing) loans.


190

There are two large subportfolios within these receivables, i. e. receivables which are individually signifi cant comprising receiva-bles from corporate entities or receivables where the Bank’s credit exposure is higher than CZK 5 mil. and receivables which are in-dividually insignifi cant. Within these two subportfolios the Bank also monitors fi ve customer portfolios for individually signifi cant receivables and 15 product portfolios for individually insignifi -cant receivables. The Bank monitors risk parameters within these portfolios (PD – probability of default, LGD – loss given default, CCF – credit conversions factors). PD is further monitored at vari-ous internal rating levels.

Receivables with debtor default correspond to individually im-paired receivables (rating R). Receivables without debtor default with internal ratings of 1–6 are considered unimpaired; receivables with internal rating 7–8 are considered collectively impaired.

For credit risk management purposes, the Bank’s loan portfolio is broken down as follows:

Retail receivables are receivables from individuals / hou-seholds and small enterprises with an annual turnover of up to CZK 30 mil. and small municipalities – the so called MSE, receivables from hire-purchase, receivables from loans provi-ded for the purchase of securities and lease receivables. The methods of managing the credit risk of retail receivables are based on statistical models calibrated using historical data. Receivables from corporate counterparties include receivables from small and medium sized enterprises with an annual turnover between CZK 30 to 1,000 mil., the so called SME and receivables from large businesses (with an annual turnover exceeding CZK 1,000 mil.) and public sec-tor receivables. The methods of managing the credit risk of corporate receivables are based on statistical models (namely for the portfolio of receivables from mid-size enterprises), great emphasis is also put on regular individual analysis of individual customers.

With the exception of limited number of borderline cases, the implemented breakdown of the portfolio corresponds to the asset classes defi ned in CNB Regulation No. 123/2007 which im-plements the Basel II rules.

For the purpose of provisioning, monitoring and predicting losses, the Bank differentiates between individually signifi cant and indi-vidually insignifi cant exposures when managing credit risk. The credit risk attached to individually signifi cant exposures is man-aged on an individual basis with the minor use of portfolio mod-els. The Bank aggregates individually insignifi cant exposures into portfolios and manages the risk on a portfolio basis.

–

–

Individually signifi cant loans predominantly include loans from the Bank’s corporate portfolio. These loans are additionally split into the following sub-portfolios:

Large corporate clients with annual turnover exceeding CZK 1,000 mil. (the exposure of which is managed using a unifi ed method within the Erste Group or at the Bank level); Project funding and corporate mortgages; small and medium sized enterprises (turnover from CZK 30 to 1,000 mil.); Municipality loans; and Loans from the Workout Department.

Corporate loans additionally match the corporate class (segment) of assets under Basel II or special funding.

Individually insignifi cant loans, including MSE loans, principally encompass the Bank’s retail loans. These loans are additionally split into 15 product portfolios. The key portfolios include mort-gage retail loans, credit card loans, overdraft loans and consumer loans. The Bank’s retail loans additionally match the “individu-als / households” assets class (segment) under Basel II.

Collection of Key Risk Management InformationIn managing credit risk, the Bank refers not only to its own port-folio information but also the portfolio information of other mem-bers of the Česká spořitelna Group. The Bank additionally uses information obtained from external sources such as the Credit Bu-reau or ratings provided by reputable rating agencies. These data provide a basis for modelling credit risk and as a support during debt recovery, valuation of receivables and calculation of losses.

Internal rating toolsThe internal rating of the Bank refl ects the ability of counterparties to meet their fi nancial liabilities. The degree of the risk is refl ected in the internal rating as a probability of default of the debtor in the following twelve months. This degree of risk complies with the defi nition of new capital requirements set out in CNB Regulation No. 123/2007 (Basel II).

The Group allocates internal ratings to all loan receivables from customers and other fi nancial instruments. In addition to the rating of individuals and households, the Bank uses the 13 degree rating scale of non-default categories and one group for “R” default cus-tomers. The scale for individuals and households is 8 + R.

Individual customer segments (classes) are, under Basel II, subject to various rating instruments and all of them are currently the Erste Group-wide standard:

–

––

––


191

Segment Rating tool

Government (sovereign) and bankingUnifi ed model for the whole Erste Group. The model places great emphasis on independent external ratings combined with other information

Specialized fi nancing Unifi ed model for the whole Group, which is primarily based on projected cash fl owsCorporate customers Rating based on fi nancial information and so called soft factors

MSESimilarly to corporate clients, the solvency of the enterprise owner or the entrepreneur himself is taken into account

Individuals Behavioral and application scoringMunicipal clients Model based on budget analysis

The Bank reviews ratings in respect of all segments on a regular basis. The rating of the banking, corporate and sovereign segments is ana-lyzed at least annually. The Bank has developed “behavioral rating” for retail customers where the Bank updates the rating of a customer based on its activities and its delinquency on a monthly basis.

In addition to the internal ratings outlined above, the Bank allo-cates risk-profi le groups to individual assets arising from the loan arrangement according to CNB Regulation No. 123/2007. In ac-cordance with this Regulation, the Bank maintains fi ve groups of risk profi les, ranging from standard, watch, substandard, doubtful to loss receivables.

The Bank also uses independent external ratings provided by rep-utable rating agencies. Based upon its historical experience, the Bank has determined a transfer bridge between its own internal ratings and external ratings (refer to Note 41.1 (c)).

In compliance with the regulatory requirements arising from Ba-sel II, rating instruments are subject to annual validation by the Credit Risk Controlling and Portfolio Management Department and Internal Audit. In addition, the rating instruments are peri-odically adjusted to refl ect changing economic conditions and the Bank’s plans, based on validations (results consistency testing) and performance testing undertaken by the Credit Risk Controlling and Portfolio Management Department.

Exposure LimitsExposure limits are defi ned as the maximum exposure that the Bank may accept in respect of a client with a given rating and underlying collateral. In setting the system of limits, the Bank strives to protect its revenues and capital from risk concentration. Risk concentration is measured through the amount of the loss of twenty groups (the Value at Risk measured using Creditmetrics metodology with a one-year horizon and a reliablity corresponding to a one-sided 95% quintile of loss distribution), to which the Bank records the highest exposure and several other indicators for which limits have been established. The VaR of twenty groups to which the Bank records the highest exposure decreased from 5.6% to 4.5% in 2010 in comparison to 2009. In ad-dition, the amount of the expected loss decreased from 3.8% to 2.1% based on the portfolio being more diversifi ed between individual cus-tomer groups and industries.

Structure of Approval AuthoritiesThe structure of approval authorities is derived from the principle

of the materiality of the impact of a potential loss from a provided loan on the Bank’s fi nancial performance and the risk profi le of the relevant loan transaction. The highest approval authorities rest with the Credit Committee of the Board of Directors, with the Credit Committee of the Supervisory Board only having an advisory role. Lower approval authorities are categorised taking account of the seniority of the staff of the Credit Risk Management Department and Credit Service Department.

Risk ParametersThe Bank currently uses risk parameters in monitoring portfolio risks, defaulted loans portfolio management, portfolio protection measurement and risk valuation. The active use of the risk param-eters in managing the Bank makes it possible to obtain detailed in-formation about the possible sensitivity of basic portfolio segments to both internal and external changes. The Bank uses its own inter-nal models in determining the PD, LGD and CCF risk parameters. All of the models are developed according to Basel II requirements and were subject to review by the regulator. The monitoring of historical risk parameters and their prediction serve as a basis for quantitative management of portfolio credit risk.

All models are back tested at least annually and validated by the Bank’s specialists who are independent of the Risk Management Department.

Provisions for Loan LossesThe Bank recognises provisions for incurred losses. These losses are determined and recognised in accordance with IAS 39. In de-termining the amount of the loss, the Bank uses adjusted risk pa-rameters estimated as part of the implementation of Basel II rules.

Loan loss provisions are determined for all impaired loans. The provisioning methodology is regularly reviewed and adjusted if necessary.

Management of Credit Risk in the Trading PortfolioThe credit risk inherent in the trading portfolio is managed through the imposition of limits approved for individual counterparties.

CollateralThe Bank defi nes collateral as assets that can be realized in case the primary source of repayment fails. Collateralisation of the Bank’s receivables arising from lending transactions is governed by the following principles: collateral represents the Bank’s pre-


192

vention and protection as a creditor and, in addition to the col-lateralising function itself, is exclusively a secondary source of repayment. The selection of individual collateral instruments and the composition of collateral depend on the Bank’s loan products, requirements and professional assessment by the Bank’s respon-sible employee, always with respect to the possibility of trouble-free realisation of the collateral.

The value of collateral is determined by reference to the market price valuation (nominal value of collateral) based on valid regu-lations. If more market prices of the collateral determined using various valuation techniques are available in a particular business transaction, the lowest market price is used.

If the collateral instrument involves real estate, movable assets, abusiness or its branch, trade marks, an asset declared as a his-torical monument, antiquities, paintings, jewels, manuscripts, etc. the price has to be determined on the basis of an appraisal made by an expert appraiser contracted by the Bank or an inter-nal appraiser for the purpose of evaluating the loan application. The expert appraisal or price estimate must not be older than six months at the date on which the loan contract is entered into. For real estate valuation purposes, a detailed inhouse “Method-ology of Valuation of Real Estate for the Purpose of Advancing of a Loan, Including Mortgage Loans, at Česká spořitelna” is used.

The realisable value of collateral is determined using the collateral coeffi cient according to the Collateral Catalogue. In determining the collateral coeffi cient resp. realizable value of the collateral, it is necessary to assess individual instruments by their specifi c fea-tures, e. g. real estate by the character of its construction, etc. and always following a physical inspection. The expert appraiser / price estimate always has to be reviewed. Other conditions taken into account in determining the realisable value of the collateral are, among others, as follows:

Comprehensive assessment of all available and, for the –

particular case, signifi cant circumstances and background documentation; Insurance and pledge of a receivable arising from the insu-rance proceeds in favour of the Bank; Possibilities of the realisation of collateral at a particular time and place and the amount of the costs of the realisation which, in most cases, needs to be viewed as a sale in distress; and Comparison to market trends.

The Collateral Catalogue also includes requirements for periodic revaluation of collateral. Typically, the collateral value is analysed and updated upon the regular monitoring / credit review of clients. With respect to credit product portfolios with a signifi cant amount of collateral, the Bank uses portfolio models of updating realisable collateral values.

In addition, the Bank regularly monitors the loan to value ratio, mainly in respect of mortgage loans and project fi nancing loans.

Credit risk pricingIn determining risk mark-ups for individual types of counterparties and deals the bank uses monitored values of risk parameters PD, LGD and CCF. In addition, in calculating the mark-ups the bank also takes into consideration changes in the macroeconomic envi-ronment and changes in the credit process in the Bank, which may have an impact on risk level within the credit portfolio.

Stress testingThe Bank regularly undertakes the stress testing of the sensitiv-ity of its portfolio to the deterioration of the credit quality of re-ceivables. In addition to the sensitivity of the portfolio to stress changes in the PD and LGD risk factors, the Bank performs scenario analyses modelling the impact of the adverse devel-opment of the macroeconomic factors (such as changes in the economic growth rate, changes in interest rates and changes in infl ation). The breakdown on credit risk by industries is shown in Note 41.1 (b).

–

–

–


193

(a) Structure of Credit Risk by On-balance Sheet and Off-balance Sheet Items

The Bank is exposed to credit risk arising from the following items:

CZK mil. 2010 2009

Credit risk exposures relating to on-balance sheet itemsCash and balances with CNB 4,156 7,429Loans and advances to fi nancial institutions 161,984 110,596Loans and advances to customers, net of provisions 398,813 409,045a) Retail loans 195,943 199,044– overdraft loans 6,875 6,072– credit cards 5,224 4,530– other loans 68,064 71,904– mortgage loans 115,780 116,538b) Retail loans – businessmen and small companies (MSE) 53,105 53,692– overdraft loans 2,506 2,728– mortgage loans 22,406 21,924– municipal loans 8,393 8,949– other loans 19,800 20,091c) Corporate loans 149,765 156,309– large enterprises 48,662 53,662– small and medium sized enterprises (SMEs) 54,686 54,933– corporate mortgages 33,933 34,919– municipalities 12,484 12,795Positive fair value of derivative transactions 16,300 18,529Financial assets at fair value through profi t and loss– debt securities held for trading 16,455 29,329– debt securities designated upon initial recognition as at fair value through profi t and loss 7,933 6,024Debt securities available-for-sale 3,618 4,074Debt securities held-to-maturity 111,509 98,683Accrued interest included in other assets 2,689 2,478Various receivables and Receivables from securities trading in other assets 1,591 2,105Credit risk exposure relating to off-balance sheet itemsGuarantees and letters of credit 27,417 31,568Undrawn loan commitments 64,715 73,910Total 817,180 793,770

The resulting credit exposure as at 31 December 2010 and 2009 represents a worst case scenario, without taking into account any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the statement of fi nancial position.

As shown above, 69% of the total exposure is derived from loans and advances to fi nancial institutions and customers (2009: 65%); 17% represents investments in debt securities (2009: 17%).

The credit risk exposure also includes accrued interest at a total value of CZK 2,689 mil. (2009: CZK 2,478 mil.).

Collateral securing the above receivables is as follows:

CZK mil. 2010 2009

Loans and advances to fi nancial institutions 124,453 78,391Loans and advances to customers, net of provisions 234,808 230,096a) Retail loans 112,863 117,237b) Retail loans – businessmen and small companies (MSE) 25,897 26,232c) Corporate loans 96,049 86,627Total 359,261 308,487

The value of collateral is the lower of the collateral’s nominal value multiplied by a collateral coeffi cient and the receivable balance. The saleability of collateral is not always certain. For details of the determination of collateral values, refer to Note 3.1 (h).


194

(b) Credit Risk by Individual SectorsSet out below is a summary of loans and advances to customers and fi nancial institutions and debt securities by individual sectors in the distribution of the credit exposure of the Bank:

CZK mil. 2010 2009Financial institutions 241,244 29% 211,244 26%Resident individuals 226,793 27% 227,306 28%Trade 38,322 5% 39,492 5%Energy sector 7,881 1% 11,562 1%State institutions 119,179 14% 104,181 13%Public sector 16,050 2% 16,746 2%Construction industry 20,651 3% 18,441 2%Hotels, public catering services 3,730 0% 3,837 1%Manufacturing industry 51,413 6% 55,055 7%Other 108,367 13% 117,224 15%Total 833,630 100% 805,088 100%

Given the allocation of credit risk of on- and off-balance sheet items presented in Table 41.1 (a), this does not include “Cash and balances with the CNB” and “Various receivables in other assets”. In addition, loans and advances to customers are not decreased by provisions.

The geographical concentration of assets and liabilities is detailed in Note 44 (b).

(c) Assessment of Asset Quality Using Risk Profi leAt 31 December 2010CZK mil.

Investment grade

Standard monitoring

Special monitoring

Non-standard

Total

Equal to the S & P external rating AAA to BB+ BB to B B− to CC C and lowerRetail loans / loans to households− overdraft loans 5,758 718 391 340 7,207− credit cards 4,513 491 272 159 5,435− other loans 57,835 6,485 4,194 3,809 72,323− mortgage loans 104,876 6,771 2,675 3,132 117,454MSE − overdraft loans 2,012 495 24 69 2,600− mortgage loans 17,968 3,657 137 1,380 23,142− municipal loans 7,195 1,167 32 – 8,394− other loans 14,460 4,555 368 3,207 22,590Corporate loans − large enterprises 32,912 11,734 2,072 4,621 51,339− SME 20,993 29,064 3,064 5,046 58,167− corporate mortgages 23,289 5,691 1,417 5,298 35,695− municipalities 9,056 3,346 63 43 12,508Total loans and advances to customers 300,867 74,174 14,709 27,104 416,854Total loans and advances to fi nancial institutions 161,638 346 – – 161,984Securities with external rating − securities held for trading 16,113 – – – 16,113− securities designated upon initial recognition as at fair

value through profi t or loss 7,186 53 1 – 7,240− securities available-for-sale 1,614 242 – – 1,856− securities held-to-maturity 105,538 627 – – 106,165Securities with no external rating − securities held for trading 359 – – 15 374− securities designated upon initial recognition as at fair

value through profi t or loss 1,380 738 – – 2,118− securities available-for-sale 1,899 – – 2 1,901− securities held-to-maturity; Other assets 4,344 1,000 – – 5,344Total securities 138,433 2,660 1 17 141,111Positive fair value of derivative transactions 15,006 1,051 175 68 16,300


195


Investment grade

Standard monitoring

Special monitoring

Non-standard

Total

Equal to the S & P external rating AAA to BB+ BB to B B− to CC C and lowerRetail loans / loans to households− overdraft loans 4,994 672 495 257 6,418− credit cards 3,868 412 255 200 4,735− other loans 61,679 6,066 4,268 3,460 75,473− mortgage loans 106,395 6,027 3,048 2,316 117,786MSE − overdraft loans 2,033 686 31 184 2,934− mortgage loans 18,400 2,764 119 1,132 22,415− municipal loans 7,418 1,472 64 – 8,954− other loans 14,982 4,276 228 1,915 21,401Corporate loans − large enterprises 37,663 12,268 1,470 4,687 56,088− SME 20,873 28,559 4,586 3,697 57,715− corporate mortgages 20,825 10,645 1,457 2,805 35,732− municipalities 9,708 3,021 69 19 12,817Total loans and advances to customers 308,838 76,868 16,090 20,672 422,468Total loans and advances to fi nancial institutions 108,861 1,735 – – 110,596Securities with external rating− securities held for trading 28,771 – – – 28,771− securities designated upon initial recognition as at fair

value through profi t or loss 6,700 22 110 – 6,832− securities available-for-sale 2,144 – – – 2,144− securities held-to-maturity; Other assets 93,674 – – – 93,674Securities with no external rating − securities held for trading 428 137 – – 565− securities designated upon initial recognition as at fair

value through profi t or loss 161 75 – – 236− securities available-for-sale 1,985 15 – 2 2,002− securities held-to-maturity; Other assets 5,009 – – – 5,009Total securities 138,872 249 110 2 139,233Positive fair value of derivative transactions 16,816 1,134 299 280 18,529


196

(d) Loans Past their Due DatesAs at 31 December 2010 and 2009, the Bank reports the following loans which are past their due dates, but not impaired:



30 days

Past due date by 30–60

days


days

Total Valule of Collateral

Retail loans / loans to householdsOverdraft loans 81 61 32 174 –Credit cards 557 55 32 644 –Other loans 3,462 892 432 4,786 523Mortgage loans 581 1,009 433 2,023 1,527Subtotal 4,681 2,017 929 7,627 2,050MSEOverdraft loans 23 15 8 46 5Other loans 497 398 332 1,227 551Mortgage loans 62 202 185 449 361Municipal loans 16 – – 16 7Subtotal 598 615 525 1,738 924Total retail loans 5,279 2,632 1,454 9,365 2,974Corporate loansCorporate customers 419 – – 419 271SME 861 306 89 1,256 866Corporate mortgage loans 35 409 40 484 398Municipalities 10 – – 10 10Total corporate loans 1,325 715 129 2,169 1,545Total 6,604 3,347 1,583 11,534 4,519



30 days


days


days

Total Value of Collateral

Retail loans / loans to householdsOverdraft loans 81 63 36 180 –Credit cards 560 56 24 640 –Other loans 4,060 931 453 5,444 573Mortgage loans 495 1,214 511 2,220 1,804Subtotal 5,196 2,264 1,024 8,484 2,377MSEOverdraft loans 12 23 17 52 4Other loans 482 367 199 1,048 499Mortgage loans 149 253 153 555 469Municipal loans 7 – 6 13 1Subtotal 650 643 375 1,668 973Total retail loans 5,846 2,907 1,399 10,152 3,350Corporate loansCorporate customers 388 19 48 455 243SME 1,652 169 113 1,934 1,247Corporate mortgage loans 35 204 23 262 242Municipalities 32 – – 32 –Total corporate loans 2,107 392 184 2,683 1,732Total 7,953 3,299 1,583 12,835 5,082


197

(e) Restructuring of LoansThe Bank has restructured loans that would otherwise be in default or impaired in the aggregate amount of CZK 8,009 mil. (2009: CZK 5,741 mil.).

CZK mil. 2010 2009

Retail loans / loans to householdsOverdraft loans 39 13Credit cards 28 7Other loans 1,610 1,099Mortgage loans 2,141 1,490Subtotal 3,818 2,609MSEOverdraft loans – –Other loans 164 172Mortgage loans 337 243Municipal loans 17 28Subtotal 518 443Total retail loans 4,336 3,052Corporate loansCorporate customers 1,530 882SME 763 426Corporate mortgage loans 1,359 1,362Municipalities 21 19Total corporate loans 3,673 2,689Total 8,009 5,741

(f) Analysis of Individually Impaired LoansCZK mil. Individually impaired Collateral value

2010 2009 2010 2009Retail loans / loans to householdsOverdraft loans 391 405 – –Credit cards 233 265 – –Other loans 5,480 5,180 526 460Mortgage loans 4,656 4,180 3,009 2,937Subtotal 10,760 10,030 3,535 3,397MSEOverdraft loans 85 202 12 25Other loans 3,356 2,081 1,201 907Mortgage loans 1,471 1,229 844 817Municipal loans – 22 – 7Subtotal 4,912 3,534 2,057 1,756Total retail loans 15,672 13,564 5,592 5,153Corporate loansCorporate customers 4,608 4,687 1,409 1,106SME 4,702 3,697 2,667 2,094Corporate mortgage loans 5,298 2,805 3,993 2,185Municipalities 43 19 31 7Total corporate loans 14,651 11,208 8,100 5,392Total 30,323 24,772 13,692 10,545

The value of collateral is the lower of the collateral’s nominal value multiplied by a collateral coeffi cient and the receivable balance. The saleability of collateral is not always certain. For details of the determination of collateral values, refer to Note 3.1 (h).


198

41.2 Market Risk

The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency, equity and com-modity fi nancial instruments, the value of which changes subject to general and specifi c fi nancial market movements. The Bank is primarily exposed to the market risk arising from open posi-tions in the trading book. However, a signifi cant component of the market risk is also the interest rate risk associated with assets and liabilities included in the investment book.

Trading book transactions in the capital, money, interbank and de-rivative markets can be segmented as follows:

Client quotations and client transactions, execution of client orders; Interbank and derivative market quotations (market making); and Proprietary trading in the interbank, derivative and capital markets.

The Bank trades with the following derivative fi nancial instru-ments through the over-the-counter (OTC) market:

Foreign currency forwards (including non-delivery forwards) and swaps; Foreign currency options; Interest rate swaps; Asset swaps; Forward rate agreements; Cross-currency swaps; Interest rate options such as swaptions, caps and fl oors; Commodity derivatives (for gold, copper, silver, crude oil, oil, rape and zinc); and Credit derivatives.

In the area of exchange-traded derivatives, the Bank trades the fol-lowing instruments:

Bond futures; Equity and equity indices futures; Interest rate futures; Commodity derivatives (gold and crude oil futures); and Options in respect of bond futures.

The Bank also trades, on behalf of its clients, with other less com-mon currency options, such as digital, barrier or windowed op-tions. Certain option contracts or options on various underlying equity baskets or equity indices form part of other fi nancial instru-ments as embedded derivatives.

Derivative fi nancial instruments are also entered into to hedge against interest rate risk inherent in the investment book (interest rate swaps, FRA, swaptions) and to refi nance the mismatch be-tween foreign currency assets and liabilities (FX swaps and cross currency swaps).

–

–

–

–

–––––––

–

–––––

The majority of open positions arising from client transactions in the Bank’s trading book are transferred to the Erste Group Bank portfolio through “back-to-back” transactions. As such, the mar-ket risk arising from the Bank’s OTC transactions is managed within the Erste Group Bank portfolio. The Bank retains in the trading portfolio the money market risk due to liquidity man-agement (money market), equity risk and partially a residual risk from previously closed transactions. This residual risk is hedged dynamically at a macro-level in line with the Bank’s limits set for market risk.

In addition to the calculation of sensitivities to individual risk factors, the Bank uses value at risk methodology (“VaR”) to estimate and manage the market risk of open positions held and to determine the maximum losses expected on these positions. The VaR values are calculated on a confi dence level of 99 per-cent for a period of one trading day. To calculate the values, the KvaR+ system is used along with historical simulations based on the last 520 trading days. Assuming a normal distribution of losses, VaR is also determined for a period of one month, or possibly one year and for higher probability levels (99.9%, 99.98%). The Board of Directors establishes VaR limits for the trading and investment portfolio as the Bank’s maximum ex-posure of the Bank to market risk that may be accepted. For the trading portfolio VaR sub-limits (1 day, 99%) in respect of individual trading desks are established and limits for sensitiv-ity values of the trading portfolio to individual risk factors such as foreign exchange rates, equity prices, interest rates, volatil-ity and other risk parameters of option contracts facilitate the maintenance of the overall market risk profi le. These limits are approved by the Financial Market and Risk Management Com-mittee and are monitored on a daily basis.

The market risk VaR indicator is also calculated for the in-vestment (banking) book using special models for current ac-counts and other liabilities without specifi ed maturity. The VaR (1 month, 99%) of the investment book is reported to the Assets and Liabilities Committee (“ALCO”) on a monthly basis while compliance with the limit is monitored by Risk Management on a daily basis. The acceptable level of risk is based on the assess-ment of the capital available to cover risks based on the Internal Capital Adequacy Assessment Process (“ICAAP”) methodol-ogy. The overall VaR is subsequently allocated to individual sub-portfolios of the investment book, taking into account both the perspective of strategic portfolio management and the ac-counting distribution of securities portfolios.


199


The table below summarizes the VaR values as at 31 December 2010 and 2009 on the confi dence level of 99 percent:

2010CZK mil.

Total market risk

Correlation effect

Interest rate risk

Foreign currency

risk

Equity risk

Commodity risk

Trading book Daily value 20 (7) 22 5 – – Monthly value 94 (33) 103 23 1 – Average of daily values for the year 24 (10) 17 17 – – Average of monthly values for the year 111 (51) 80 80 2 –Banking book Daily value 231 (42) 234 25 14 – Monthly value 1,085 (195) 1,098 117 65 – Average of daily values for the year 370 (13) 365 11 7 – Average of monthly values for the year 1,736 (57) 1,710 50 33 –

2009CZK mil.

Total market risk

Correlation effect

Interest rate risk

Foreign currency

risk

Equity risk

Commodity risk

Trading book Daily value 30 (7) 25 12 – – Monthly value 138 (33) 114 56 1 – Average of daily values for the year 22 (12) 17 17 – – Average of monthly values for the year 101 (60) 80 80 1 –Banking book Daily value 366 4 355 2 5 – Monthly value 1,676 23 1,625 7 21 – Average of daily values for the year 389 (6) 388 4 3 – Average of monthly values for the year 1,783 (29) 1,779 18 15 –

In addition, the Bank uses stress testing or an analysis of impacts of adverse developments in market risk factors on the market value of the trading book and on the parts of the investment book revalued to market values. Scenarios are developed on the basis of historical experi-ence and expert opinions of the Macroeconomic Analyses Department. The stress testing is undertaken on a monthly basis and its results are reported to ALCO. In addition, the Bank monitors fi nancial news, analyzes market movements and prepares for different scenarios with respect to the position of the economy.

41.2.1 Interest Rate Risk

Interest rate risk is the risk that the value of fi nancial instruments will fl uctuate due to changes in market interest rates. The Group manages the interest rate risk of the banking book by monitoring the repricing dates of the Bank’s assets and liabilities and using models which show the potential impact that changes in interest rates may have on the Bank’s net interest income.

For monitoring and measuring the banking (investment) book interest rate exposures, the Bank uses a simulation model focused on monitor-ing potential impacts of market interest rate movements on the net interest income. Simulations are performed over a period of 36 months. A basic analysis focuses on the sensitivity of the net interest income to one-off changes of market interest rates (rate shock). In addition, the Bank performs probability modelling of its net interest income (stochastic simulation) and the traditional gap analysis.

In order to measure the interest rate risk exposure within the trading portfolio instruments, the Bank uses the ‘PVBP gap’ defi ned as a matrix of sensitivity factors to interest rates by currency for individual portfolios of interest rate products. These factors measure the portfolio mar-ket value sensitivity with a parallel shift of the yield curve of the relevant currency within the predefi ned period to maturity. The system of PVBP limits is set in respect of each interest rate product portfolio by currency.

200

The analyses noted above are undertaken on a monthly basis. The current level of the interest rate exposure is assessed by ALCO on a monthly basis in the context of the overall development of fi nancial markets and the Czech banking sector, as well as the structural changes in the Bank’s statement of fi nancial position.

The following table is based on the exposure of the Bank to interest rates for derivative and non-derivative instruments as of the reporting date and the determined changes which occurred at the beginning of the year and are constant during the reported period for the instruments with a variable interest rate, i. e., the model is based on the assumption that the funds released as a result of the payment or sale of interest rate assets and liabilities will be re-invested in assets and liabilities with the same interest rate sensitivity. As such, the model assumes a fi xed structure of the statement of fi nancial position according to interest rate sensitivity. The table shows impacts on the income statement and equity if the CZK or EUR interest rates sharply increased / decreased by 100 points at the beginning of the respective year and other variable interest rates remained unchanged:

CZK mil. 2010 2009Interest rate


decreaseInterest rate


decreasea) CZK Income statement 1,400 (1,220) 960 (1,180) Shareholders’ capital (35) 35 (15) 15b) EUR Income statement 180 (210) 280 (220) Shareholders’ capital (29) 29 (33) 33

The following tables present the distribution of assets and liabilities according to the interest rate repricing dates. They include signifi cant fi nancial assets and liabilities in CZK, EUR and USD as at 31 December 2010 and 2009. Variable yield assets and liabilities have been reported according to their next rate repricing date. Fixed income assets and liabilities have been reported according to their remaining maturity.


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

Selected assetsCash and balances with the CNB 4,156 – – – – 4,156Loans and advances to fi nancial institutions 123,633 35,686 2,172 2 – 161,493Loans and advances to customers, net of provisions 90,660 71,902 63,679 142,256 29,831 398,328Securities at fair value through profi t or loss 18,495 343 2,697 3,066 346 24,947Securities available-for-sale 2 1,855 1,092 668 – 3,617Securities held-to-maturity 3,076 880 23,079 27,153 57,321 111,509Total selected assets 240,022 110,666 92,719 173,145 87,498 704,050Selected liabilities Amounts owed to fi nancial institutions 16,744 24,633 8,300 12,900 1,200 63,777Amounts owed to customers 61,282 69,374 131,751 272,104 – 534,511Bonds in issuex) 6,711 4,609 10,219 26,829 16,452 64,820Subordinated debt – 354 8,710 1,973 – 11,037Total selected liabilities 84,737 98,970 158,980 313,806 17,652 674,145Current gap 155,285 11,696 (66,261) (140,661) 69,846 29,905Cumulative gap 155,285 166,981 100,720 (39,941) 29,905 x) Including liabilities arising from issued securities at fair value.


201



Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

Selected assetsCash and balances with the CNB 7,429 – – – – 7,429Loans and advances to fi nancial institutions 85,689 24,014 503 – 1 110,207Loans and advances to customers, net of provisions 60,444 105,176 68,734 141,569 32,032 407,955Securities at fair value through profi t or loss 30,214 888 754 3,491 234 35,581Securities available-for-sale 2 2,144 1,248 679 – 4,073Securities held-to-maturity 2,614 6,576 11,980 33,663 43,850 98,684Total selected assets 186,392 138,798 83,219 179,402 76,117 663,928Selected liabilities Amounts owed to fi nancial institutions 14,038 17,702 3,990 5,000 1,000 41,730Amounts owed to customers 69,137 74,190 131,575 242,466 – 517,368Bonds in issuex) 4,715 5,723 15,697 12,503 24,584 63,222Subordinated debt 6,500 – 4,938 1,966 – 13,404Total selected liabilities 94,390 97,615 156,200 261,935 25,584 635,724Current gap 92,002 41,183 (72 981) (82 533) 50,533 28,204Cumulative gap 92,002 133,185 60,204 (22 329) 28,204 x) Including liabilities arising from issued securities at fair value.

In addition, the Bank enters into interest rate swaps to manage its interest rate risk exposure.

41.2.2 Foreign Currency Risk

Foreign currency risk is the risk that the value of fi nancial instruments in both the trading and banking book will fl uctuate due to changes in foreign exchange rates. The Bank manages this risk by establishing and monitoring limits on open positions, also including delta equivalents of currency options. In addition, the Group monitors special sensitivity limits for foreign currency option contracts known as “greeks” sensi-tivity. Foreign currency risk of all fi nancial instruments is transferred in the Trading Department’s positions which manages these currency positions in accordance with the set currency sensitivity limits. In addition to the monitoring of limits, the Bank uses the VaR concept for measuring the risk arising from open positions from all currency instruments (refer to Note 41.2).

41.2.3 Equity Risk

To monitor and manage the equity risk inherent in the trading and banking books, the Bank uses the VaR method and sensitivity analysis which is based on the exposure to the risk of change in the price of shares as of the reporting date. With respect to the increased volatility of share prices, the equity risk represents a signifi cant component of risks despite smaller volumes of share positions.

41.2.4 Commodity Risk

The commodity instruments appear solely in the trading portfolio as supporting instruments for client transactions. These commodity deriv-atives represent sporadic transactions within the Group’s portfolio and are secured on a so called “back to back” basis with a third party.

41.3 Liquidity Risk

Liquidity risk is the risk that the Bank will encounter diffi culties in raising funds to satisfy its fi nancial liabilities when they mature or in fi nancing its assets. The Bank’s short-term liquidity position is monitored and managed based on expected cash fl ows and adjusting the structure of interbank deposits and placements accordingly and / or taking other decisions aimed at adjusting the short term liquidity position of the Bank, for example, by taking a decision to balance the short term liquidity position in individual currencies.

Mid and long term liquidity is monitored and stressed tested on a monthly basis through the Traffi c Light System (“TLS”) simulation model which takes into account the anticipated possibility of renewal, preliminary repayment or sale of the Bank’s individual positions. The results are presented and discussed in the Operating Liquidity Committee (“OLC”) and ALCO which decide on the need to take measures with respect to the liquidity risk exposure.

202

(a) Analysis of Financial Assets and Liabilities Based on Remaining MaturitiesThe breakdown of remaining contractual maturities of the Bank’s fi nancial assets and liabilities and contingent liabilities based on undis-counted cash fl ow as at 31 December 2010 and 2009 was as follows:


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 24,559 – – – – 24,559Loans and advances to fi nancial institutions 122,059 18,439 2,276 3,563 18,940 165,277Loans and advances to customers 22,544 16,628 54,651 205,987 262,163 561,973Securities at fair value through profi t or loss 17,636 336 610 3,978 5,722 28,282Positive fair value of derivative transactions 368 838 2,125 6,891 6,078 16,300Securities available-for-sale – 112 300 3,628 253 4,293Securities and other assets held-to-maturity 1,658 934 26,331 42,512 75,030 146,465Total 188,824 37,287 86,293 266,559 368,186 947,149Liabilities Amounts owed to fi nancial institutions 17,043 7,813 8,897 16,205 21,276 71,234Amounts owed to customers 443,868 9,667 35,385 43,762 290 532,972Financial liabilities at fair value 12,058 – – – – 12,058Negative fair value of derivative transactions 460 658 2,013 6,463 4,963 14,557Bonds in issue 1,035 740 5,131 37,984 30,109 74,999Subordinated debt – 105 2,485 9,872 – 12,462Total 474,464 18,983 53,911 114,286 56,638 718,282Banking book derivativesAssets: Amount received 351 286 1,167 17,666 13,637 33,107Amount due (114) (213) (440) – – (767)Total 237 73 727 17,666 13,637 32,340Banking book derivativesLiabilities: Amount received 59 285 689 – – 1,033Amount due (114) (217) (943) (18,150) (15,100) (34,524)Total (55) 68 (254) (18,150) (15,100) (33,491)Current gap (285,458) 18,445 32,855 151,789 310,085 227,716Cumulative gap (285,458) (267,013) (234,158) (82,369) 227,716 Contingent liabilities Financial guarantees 253 180 24 24,403 2,557 27,417Irrevocable letters of credit 43 3 4,408 1,370 58,892 64,716Total 296 183 4,432 25,773 61,449 92,133


203



Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 27,250 – – – – 27,250Loans and advances to fi nancial institutions 83,969 10,130 4,216 2,380 12,232 112,927Loans and advances to customers 14,942 22,327 59,735 210,657 271,590 579,251Securities at fair value through profi t or loss 30,354 82 634 4,094 4,050 39,214Positive fair value of derivative transactions 772 781 2,852 8,059 6,065 18,529Securities available-for-sale – 6 469 2,193 2,355 5,023Securities and other assets held-to-maturity 520 1,219 20,254 47,567 57,146 126,706Total 157,807 34,545 88,160 274,950 353,438 908,900LiabilitiesAmounts owed to fi nancial institutions 15,251 7,749 4,208 7,007 13,523 47,738Amounts owed to customers 427,666 15,646 45,604 31,269 271 520,456Financial liabilities at fair value 8,129 – – – – 8,129Negative fair value of derivative transactions 750 721 2,386 8,783 3,486 16,126Bonds in issue 1,164 632 10,464 23,652 39,851 75,763Subordinated debt 138 101 2,942 12,337 – 15,518Total 453,098 24,849 65,604 83,048 57,131 683,730Banking book derivativesAssets:Amount received 41 257 1,309 19,868 12,606 34,081Amount due (13) (65) (103) (219) (62) (462)Total 28 192 1,206 19,649 12,544 33,619Banking book derivativesLiabilities:Amount received 24 39 169 171 10 413Amount due (108) (167) (1 162) (18 712) (10 630) (30 779)Total (84) (128) (993) (18 541) (10 620) (30 366)Current gap (295,347) 9,760 22,769 193,010 298,231 228,423Cumulative gap (295,347) (285,587) (262,818) (69,808) 228,423 –Contingent liabilities Financial guarantees 112 306 578 30,375 196 31,567Irrevocable letters of credit 1 2 16,512 5,409 51,987 73,911Total 113 308 17,090 35,784 52,183 105,478

204

(b) Analysis of Assets and Liabilities Based on Estimated MaturitiesThe breakdown of estimated maturities of the Bank’s assets and liabilities as at 31 December 2010 and 2009 was as follows:


Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 205 409 1,842 9,824 12,279 24,559Loans and advances to fi nancial institutions 121,617 18,231 1,912 2,522 17,702 161,984Loans and advances to customers 20,348 17,822 58,448 120,615 181,580 398,813Securities at fair value through profi t or loss 17,913 251 454 3,155 4,072 25,845Positive fair value of derivative transactions 368 838 2,125 6,891 6,078 16,300Securities available-for-sale 139 108 242 3,029 239 3,757Securities and other assets held-to-maturity 1,400 880 21,947 28,461 58,821 111,509Equity investments in subsidiary and associated undertakings – – – – 6,680 6,680Other assets 3,122 104 2,765 304 16,962 23,257Total 165,112 38,643 89,735 174,801 304,413 772,704Liabilities Amounts owed to fi nancial institutions 12,376 7,632 8,651 14,771 20,869 64,299Amounts owed to customers 32,947 23,070 84,364 168,980 220,740 530,101Financial liabilities at fair value 696 567 3,774 7,021 – 12,058Negative fair value of derivative transactions 460 658 2,013 6,463 4,963 14,557Bonds in issue 998 359 3,473 31,307 27,481 63,618Provisions – – – 2,091 – 2,091Subordinated debt – – 2,210 8,826 – 11,036Other liabilities 9,173 400 328 – – 9,901Total 56,650 32,686 104,813 239,459 274,053 707,661Current gap 108,462 5,957 (15,078) (64,658) 30,360 65,043Cumulative gap 108,462 114,419 99,341 34,683 65,043


205



Demand and less

than 1 month

1 to 3 months

3 months to 1 year

1 to 5 years

Over 5 years

Total

AssetsCash and balances with CNB 227 454 2,044 10,900 13,625 27,250Loans and advances to fi nancial institutions 83,616 9,951 4,000 1,577 11,452 110,596Loans and advances to customers 13,859 25,345 63,649 119,841 186,351 409,045Securities at fair value through profi t or loss 30,381 – 537 3,491 1,995 36,404Positive fair value of derivative transactions 772 781 2,852 8,059 6,065 18,529Securities available-for-sale 72 – 406 1,334 2,334 4,146Securities and other assets held-to-maturity 200 1,147 16,380 36,077 44,879 98,683Equity investments in subsidiary and associated undertakings – – – – 7,781 7,781Other assets 3,698 253 1,844 348 16,416 22,559Total 132,825 37,931 91,712 181,627 290,898 734,993Liabilities Amounts owed to fi nancial institutions 13,312 7,548 4,134 5,769 12,395 43,158Amounts owed to customers 45,974 28,478 89,938 146,834 206,524 517,748Financial liabilities at fair value 140 1,008 3,042 3,330 609 8,129Negative fair value of derivative transactions 750 721 2,386 8,783 3,486 16,126Bonds in issue 1,127 216 8,648 16,435 35,731 62,157Provisions – – – 1,989 – 1,989Subordinated debt – – 2,725 10,679 – 13,404Other liabilities 13,624 459 597 – – 14,680Total 74,927 38,430 111,470 193,819 258,745 677,391Current gap 57,898 (499) (19,758) (12,192) 32,153 57,602Cumulative gap 57,898 57,399 37,641 25,449 57,602

41.4 Operational Risk

In accordance with CNB Regulation 123/2007, the Bank defi nes operational risk as the risk of loss arising from the inappropriate-ness or failure of internal processes, human errors or failures of systems or the risk of loss arising from external events, including loss due to the breach of or failure to fulfi l legal regulations.

With assistance from Erste Group Bank, the Bank put in place a standardised categorisation of operational risks. This classifi ca-tion became the basis of the “Book of Risks of Česká spořitelna”, developed in cooperation with the Risk Management and Internal Audit Departments. The Book of Risks is a tool used to achieve unifi cation of risk categorisation in order to ensure consistency of risk monitoring and evaluation.

The Bank has cooperated with an external supplier in developing a specialised software application to collect data about operational risk which conforms to the data collection requirements set out in Basel II. The data is not only used with a view to quantifying op-erational risks and monitoring trends in the development of these risks but also for the purpose of preventing recurrence of opera-tional risks. In addition to monitoring actual occurrence of opera-tional risk, the Bank also pays attention to how the operational risk is perceived by the Bank’s management. This expert risk analysis is assessed annually.

A tool of importance in mitigating losses arising from operational risks is the Bank’s insurance programme put in place in 2002. This insurance programme involves insurance of property damage as well as risks arising from banking activities and liability risks. Since 2004, the Bank has been a member of the Erste Group insurance programme which enhances the insurance protection specifi cally with regard to damages that may materially impact its the income statement.

41.5 Capital Management

As with the ICAAP in accordance with the Basel II Pillar 2 rules (Regulation No. 123/2007 Coll.), the Bank adopted to the Erste Group methodology in 2009. The methodology was approved by the Board of Directors of Erste Group Bank in December 2008 to serve as a uniform set of rules for capital management within the Erste Group. The group wide rules concentrate in particular on the following objectives:

Analysis and monitoring of Erste Group risks including issuance of reports; Analysis and monitoring of Erste Group capital adequacy requirements including issuance of reports; and Forecast of a possible development of the Group risk profi le.

Within ICAAP, Erste Group considers the following risks to be completely or partially covered by capital: market risks of the in-vestment portfolio, market risks of the investment portfolio includ-

–

–

–

206

ing interest rate, credit and operational risks. Additional risks, e. g. concentration, liquidity, securitisation and macroeconomic risks as well as other risks (reputational and strategic) are already included in the risks covered by capital, or are alternatively covered by other risk mitigating techniques, or are immaterial.

To quantify market and operational risks, the Bank uses VaR meth-odology for a one-year period on the confi dence level of 99.9 per-cent. In quantifying credit risks, a method of risk weighted assets is used. The overall risk of the Bank is the sum of individual risk volumes, i. e. no diversifi cation effect based on a preference of a more conservative approach is applied. The resulting aggregate risk is compared to capital resources determined as the sum of ba-sic and additional capital and the profi t for the current year.

The Erste Group methodology determines a limit for maximum risk exposure of the Bank. The limit is based on the amount of capital resources and the previous development of the Bank’s risk profi le. The Bank meets the limit set by the majority shareholder with a suffi cient degree of reserve.

The ICAAP results of the Bank are submitted to ALCO on a quar-terly basis. ALCO is the authoritative body regarding bank capital management within ICAAP.

Erste Group Bank as well as Česká spořitelna group pay suffi cient attention to ICAAP in order to gradually improve the risk profi le and capital adequacy management system of the Bank with a view to fu-ture developments and, additionally, in order to progressively use the ICAAP outputs in the decision-making and planning processes per-taining to business activities and fi nancial management in general.

Furthermore, the Bank manages its capital structure as defi ned in Pil-lar 1 of Basle II in compliance with CNB methodology. During the year the Bank complied with the regulatory capital requirements.

Statement of Capital for the Bank’s Capital Adequacy calculation per CNB methodology (Basel II)

CZK mil. 2010 2009

Total capital 56,461 51,113Original capital (Tier 1) 50,424 43,614of which: Share capital (refer to Note 26) 15,200 15,200 Share premium 2 2 Reserve funds and retained earnings 38,198 31,503 Deductible items from original capital (2,976) (3,091)Additional capital (Tier 2) (refer to Note 25) 11,036 13,404Aggregate amount of all deductible items from original and additional capital (4,999) (5,905)

42. Fair Value of Financial Instruments

42.1 Fair Value of Derivative Instruments

The Bank maintains strict control limits on net open derivative positions, i. e. the difference between the fair values of purchase and sale contracts. At any one time the amount subject to credit risk is limited to the positive fair value of derivative fi nancial instruments, which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers. Limits are established refl ecting the risk of fair value fl uctuations arising from market movements. Collateral or other security is not usually obtained for credit risk exposures on the derivative fi nancial instruments, except where the Bank requires deposits from counterparties.

All derivatives are stated at fair value on the statement of fi nancial position as at 31 December 2010 and 2009 (refer to Note 10 and 20).

Change of fair values of derivativesDerivative contracts are valued using the marked-to-market methodology (usually exchange traded derivatives with quotations in the mar-ket) or, more often using the marked-to-model methodology. The basic models for determining the fair value of derivatives are as follows:

The present value of future cash fl ows; Stochastic models;

Analytical (e. g. Black – Scholes model for option contracts); and Monte Carlo simulation (usually for structured derivatives without explicit valuation function); or

A combination of the above methods.

The models are reviewed and tested prior to their application within implementation of new products and subsequently reviewed by the Internal Audit department.

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207


Nominal and Fair Values of Derivative Instruments


Nominal value Fair valuePositive Negative Positive Negative

Hedging instrumentsInterest rate swaps 9,756 9,756 723 46Foreign exchange interest rate swaps 2,508 2,508 – 1Total hedging instruments 12,264 12,264 723 47Trading instrumentsSpot contracts– interest rate 46 46 – –– currency 958 961 – –Option contracts: – interest rate 18,708 18,708 179 147– currency 48,573 48,893 573 551– equity 1,039 1,039 96 64– commodity 1,098 1,098 14 14Forward contracts: – interest rate 2 2 – –– foreign currency interest rate 37,967 37,913 560 535– equity – – – –– commodity 529 529 7 7Swaps: – interest rate 500,670 500,670 11,886 11,977– foreign currency interest rate 91,426 90,318 1,943 821– equity 8,916 8,916 97 177– commodity 3,656 3,656 182 177Other derivatives 752 752 40 40Total trading instruments 714,340 713,501 15,577 14,510Total 726,604 725,765 16,300 14,557

208


Nominal value Fair valuePositive Negative Positive Negative

Hedging instrumentsInterest rate swaps 11,465 11,465 605 66Foreign exchange interest rate swaps 5,428 4,779 628 –Total hedging instruments 16,893 16,244 1,233 66Trading instrumentsSpot contracts– interest rate 28 28– currency 1,447 1,454Option contracts:– interest rate 9,140 9,140 71 47– currency 61,064 60,437 1,125 732– equity 807 807 55 46– commodity 1,202 1,202 29 30Forward contracts: – interest rate 9,000 9,000 3 47– foreign currency interest rate 38,156 38,103 759 721– equity – – – –– commodity 757 755 52 51Swaps: – interest rate 541,337 541,337 11,825 12,152– foreign currency interest rate 84,714 83,507 3,239 1,987– equity 4,458 4,458 48 156– commodity 575 575 90 91Futures 1 1 – –Total trading instruments 752,686 750,804 17,296 16,060Total 769,579 767,048 18,529 16,126

42.2 Fair Value of Other Financial Instruments Except for Derivatives

Fair value estimates are made based on relevant market data and information about the fi nancial instruments. Because no readily available market prices exist for a signifi cant portion of the Group’s fi nancial instruments, fair value estimates for these instruments are based on judgements regarding current economic conditions, currency and interest rate characteristics and other factors.

Many of these estimates involve uncertainties and matters of signifi cant judgement and cannot be determined with precision. Therefore, the calculated fair value estimates cannot always be substantiated by comparison to market values and, in many cases, may not be realised in the current sale of the fi nancial instrument. Changes in underlying assumptions used to determine fair value could signifi cantly affect the determined fair value.

The following table summarises the carrying values and fair values of those fi nancial assets and liabilities not presented on the statement of fi nancial position at their fair value:CZK mil. 2010 2009

Carrying value


Carrying value


Financial assetsLoans and advances to fi nancial institutions 161,984 162,011 110,596 109,815Loans and advances to customers, net of provisions 398,813 404,361 409,045 407,267Securities held-to-maturity 111,509 116,123 98,683 102,361Financial liabilities Amounts owed to fi nancial institutions 64,299 64,836 43,158 43,177Amounts owed to customers 530,101 529,512 517,748 517,579Bonds in issue 63,618 64,784 62,157 62,892Subordinated debt 11,036 11,069 13,404 13,085


209


(a) Loans and Advances to Financial InstitutionsThe fair value of loans and advances to fi nancial institutions is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered by Erste Group banks.

(b) Loans and Advances to CustomersLoans and advances to customers are carried net of provisions. The fair value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered by Erste Group banks.

(c) Securities and Other Assets Held-to-maturityThe fair value of securities held-to-maturity is based on market prices or price quotations obtained from brokers or dealers. If this informa-tion is not available, the fair value is estimated using quoted market values for securities with similar credit risk characteristics, maturity or yield rates or, as and when appropriate, according to the recoverability of the net asset value of these securities.

(d) Amounts Owed to Financial Institutions and CustomersThe estimated fair value of amounts owed to fi nancial institutions and customers with no stated maturity which include no-interest earning deposits, is equal to the amount payable on demand. The fair value of fi xed income deposits and other liabilities with no stated market value is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rates currently offered on the market for deposits with similar maturities. The fair value of products with no contractually stated maturity (such as sight deposits, passbooks, overdraft facilities) is considered equal to their carrying value.

(e) Bonds in IssueThe aggregated fair value is based on quoted market prices. The fair value of securities where no market price is available is estimated as the present value of discounted future cash fl ows and the applied discount factor is equal to the interest rate adjusted by the Bank’s own credit risk.

(f) Subordinated DebtIssued subordinated debt is traded on the free market of the PSE. Its fair value is based on quoted market price.

42.3 Hierarchy of Determining the Fair Value

The Bank uses the following hierarchy for disclosures about measurement of fair value of fi nancial instruments, refl ecting the importance of individual inputs in the process of determining the fair value of fi nancial instruments:

Level 1: Listed (unadjusted) prices on active markets applicable for identical assets or liabilities; Level 2: Other inputs than the listed prices included within Level 1 that are observable for the assets or liabilities in question, either

directly (i. e. as prices) or indirectly (i. e. derived from the prices); Level 3: Inputs for the relevant assets or liabilities that are not based on observable market data (i. e. unobservable inputs).

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–

210

The following table shows the classifi cation of fi nancial instruments at fair value in accordance with the above levels which were used to determine the fair value of the fi nancial instruments as at 31 December 2010:

CZK mil. Level 1 Level 2 Level 3 TotalAssetsSecurities held for trading 9,772 6,715 – 16,487 Debt securities 9,740 6,715 – 16,455 Equity securities and other variable yield securities 32 – – 32Securities designated upon initial recognition as at fair value through profi t or loss 5,872 2,561 925 9,358 Debt securities 5,372 2,561 – 7,933 Equity securities and other variable yield securities 500 – 925 1,425Positive fair value of derivative transactions 12 16,288 – 16,300Securities available-for-sale 855 2,761 141 3,757 Debt securities 855 2,761 2 3,618 Equity securities and other variable yield securities – 139 139Total assets 16,511 28,325 1,066 45,902Liabilities Financial liabilities at fair value 2,846 9,212 – 12,058 Customer deposits – 9,212 – 9,212 Liabilities arising from issued securities at fair value 2,228 – – 2,228 Payables arising from short sales – debt securities 591 – – 591 Payables arising from short sales – shares 27 – – 27Negative fair value of derivative transactions – 14,557 – 14,557Total liabilities 2,846 23,769 – 26,615



AssetsSecurities held for trading 10,594 18,742 – 29,336 Debt securities 10,587 18,742 – 29,329 Equity securities and other variable yield securities 7 – – 7Securities designated upon initial recognition as at fair value through profi t or loss 4,083 2,165 820 7,068 Debt securities 3,859 2,165 – 6,024 Equity securities and other variable yield securities 224 – 820 1,044Positive fair value of derivative transactions 14 18,515 – 18,529Securities available-for-sale 1,148 2,930 68 4,146 Debt securities 1,144 2,930 – 4,074 Equity securities and other variable yield securities 4 – 68 72Total assets 15,839 42,352 888 59,079Liabilities Financial liabilities at fair value 4,020 4,109 – 8,129 Customer deposits – 4,109 – 4,109 Liabilities arising from issued securities at fair value 1,947 – – 1,947 Payables arising from short sales – debt securities 2,072 – – 2,072 Payables arising from short sales – shares 1 – – 1Negative fair value of derivative transactions 16,126 – – 16,126Total liabilities 20,146 4,109 – 24,255


211


The following tables show the changes in the fair value of fi nancial instruments for 2010 and 2009 the fair value of which is determined using valuation models not based on ascertainable market data (Level 3):CZK mil. Gains / losses from

revaluation Unreali-sed

gains / lossesx)

At 1 January

2010

In income

statement

In equity

Purcha-ses


At 31 December

2010AssetsSecurities designated upon initial recognition as at fair value through profi t or loss 820 44 – – – 61 925 44Securities available-for-sale 68 – 3 64 (1) 7 141 Total assets 888 44 3 64 (1) 68 1,066 x) Included in the income statement from instruments held as at 31 December 2010

Based on the analysis of changes of selected valuation factors affecting the fair value of fi nancial instruments, the Bank does not believe the change of input parameters to have a signifi cant impact on the fair value of fi nancial instruments.

CZK mil. Gains / losses from revaluation Unreali-

sedgains /

lossesx)

At 1 January

2009

In income statement

In equity Purcha-ses


At 31 December

2009AssetsSecurities designated upon initial recognition as at fair value through profi t or loss 2,451 (48) – – (84) (1,499) 820 –Securities available-for-sale 223 – 9 – (162) (2) 68 –Total assets 2 674 (48) 9 – (246) (1,501) 888 –x) Included in the income statement from instruments held as at 31 December 2009.

There were no signifi cant transfers between Level 1 and 2 in 2010 and 2009. Several securities were transferred from Level 3 to Level 2 in 2009 due to the decreased importance of non-market observable inputs into the valuation models.

43. Contingent Assets and Liabilities

In the normal course of business, the Bank becomes party to various fi nancial transactions that are not refl ected on the statement of fi nancial position and are referred to as off-balance sheet fi nancial instruments. The following represent notional amounts of these off-balance sheet fi nancial instruments, unless stated otherwise.

Legal DisputesAt the reporting date the Bank was involved in various claims and legal proceedings of a nature considered normal to its business. The Czech legal environment is still evolving, legal disputes are costly and their outcome unpredictable. Many parts of the legislation remain untested and there is uncertainty about the interpretation that courts may apply in a number of areas. The impact of these uncertainties can-not be quantifi ed and will only be known as the specifi c legal disputes in which the Bank is named are resolved.

The Bank is involved in various claims and legal proceedings of a special nature. The Bank also acts as a defendant in a number of legal disputes fi led with the arbitration court. The Bank does not disclose the details underlying the disputes as the disclosure may have an impact on the outcome of the disputes and may seriously harm the Bank’s interests.

Whilst no assurance can be given with respect to the ultimate outcome of any such claim or litigation, the Bank believes that the various asserted claims and litigation in which it is involved will not materially affect its fi nancial position, future operating results or cash fl ows.

212

If, in connection with the litigation, the Bank has a present obligation (legal or constructive) as a result of a past event and it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made of the obligation, the Bank recognises a provision for the litigation (refer to Note 22).

Assets PledgedAssets are pledged as collateral under repurchase agreements with other banks and customers in the amount of CZK 11,351 mil. (2009: CZK 7,235 mil.). Mandatory reserve deposits are also held with the local central bank in accordance with statutory requirements (refer to Note 4). These deposits are not available to fi nance the Bank’s day-to-day operations.

Commitments to Extend Credit and Commitments from Guarantees and Letters of CreditGuarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a cus-tomer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specifi c terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of clients’ authorisations to extend credit in the form of loans, guarantees or letters of credit. The credit risk attached to commitments to extend credit represents a potential loss for the Bank. The Bank estimates the potential loss on the basis of historical developments of credit conversion factors, probability of default and loss given default. Credit conversion factors indicate the likelihood of the Bank paying out on a guarantee or having to grant a loan on the basis of an issued commitment to extend credit.

Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. Management of the Bank believes that the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments is minimal.

In 2010, the Bank recorded provisions for off-balance sheet risks to cover potential losses that may be incurred in connection with these off-balance sheet transactions. As at 31 December 2010, the aggregate balance of these provisions was CZK 347 mil. (2009: CZK 271 mil.). Refer to Note 22.

CZK mil. 2010 2009

Amounts owed from guarantees and letters of credit 27,417 31,568Undrawn loan commitments 64,715 73,910

Operating LeasesThe following table presents future cash fl ows from operating lease agreements where the Bank is a lessee:


Less than 1 year

1 to 5 years

Over 5 years

Total

Future operating lease expenses 801 2,384 449 3,634


Less than 1 year

1 to 5 years

Over 5 years

Total

Future operating lease expenses 814 2,311 406 3,531


213


44. Segment Reporting

(a) Industry SegmentsFor management purposes, the Bank is organised into the following major operating divisions:

Retail banking (accepting deposits from the public, providing loans to retail clients, services related to credit and debit cards); Commercial banking (providing loans to corporate clients and municipalities, issuance of guarantees, opening of letters of credit); Investment banking (securities investments, proprietary trading and trading on behalf of the client with securities, foreign exchange assets, entering into futures and options including foreign currency and interest rate transactions, fi nancial brokerage, custodian servi-ces, participation in issuance of stock, management, safe-keeping and administration of securities or other assets); and Other activities (e. g. supporting activities of the Bank, administrative expenses, payments, provisioning, equity investments, etc.).

The allocation of directly attributable revenue and expenses to a segment is based primarily on accounting records. Indirect expenses are attributed through:

Internal pricing in accordance with the amount of services received from supporting departments (human resources, asset manage-ment, part of IT); Allocation of expenses relating to buildings and their equipment based on location; Product costs (ABC) in the case of clear relationships between the cost and the product (part of IT, marketing, risk management, operations, products methodology); Business structure allocations where proportional expenses can be distributed between segments based on the ratio of provided acti-vities and cannot be directly attributed to the product (used only for investment banking); and Allocation of corporate overheads.

2010CZK mil.

Banking Otheractivities

Total

Retail Commercial InvestmentRevenueExternal income 32,402 7,253 421 3,082 43,158of which: Net interest income 20,800 5,695 1,109 728 28,332Income from other segments – – – – –Segment revenue 32,402 7,253 421 3,082 43,158Profi tSegment profi t 12,014 2,392 (582) 493 14,317Unallocated costsProfi t before tax 14,317Income tax (2,446)Total profi t 11,871Other informationImpairment losses from fi nancial assets 5,975 3,334 – 757 10,066Asset acquisition 1,802 27 71 1,316 3,216Write-offs and depreciation 976 – 39 1,443 2,458Impairment losses 17 – – 3 20Statement of fi nancial positionAssetsSegment assets 282,614 149,188 319,470 19,900 771,172Unallocated assets 1,532Total assets 772,704LiabilitiesSegment liabilities 413,418 85,225 201,736 179 700,558Unallocated liabilities 7,103Total liabilities 707,661

Segment income is composed of “Net interest income”, “Net fee and commission income”, “Net trading result”, “Total other operating income”, “Income from the revaluation / sale of securities”, and “Gains on the sale of equity investments” (refer to Note 36).

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–

214

2009CZK mil.

Banking Otheractivities

Total

Retail Commercial InvestmentRevenueExternal income 32,180 6,168 2,571 2,528 43,447of which: Net interest income 21,277 4,911 1,136 605 27,929Income from other segments – – – – –Segment revenue 32,180 6,168 2,571 2,528 43,447Profi tSegment profi t 13,240 884 1,344 (1,378) 14,090Unallocated costsProfi t before tax 14,090Income tax (2 845)Total profi t 11,245Other informationImpairment losses from fi nancial assets 4,264 3,519 – 2,585 10,368Asset acquisition 1,148 17 106 1,021 2,292Write-offs and depreciation 914 – 40 1,646 2,600Cancellation of impairment losses 51 – – 3 54Statement of fi nancial positionAssetsSegment assets 282,954 157,210 268,237 24,810 733,211Unallocated assets 1,782Total assets 734,993LiabilitiesSegment liabilities 404,838 77,511 172,966 27 655,342Unallocated liabilities 22,049Total liabilities 677,391

Segment income is composed of “Net interest income”, “Net fee and commission income”, “Net trading result”, “Total other operating income” and “Income from the revaluation / sale of securities, derivatives and equity investments” (refer to Note 36).


215


(b) Geographical SegmentsThe Bank operates predominantly within the Czech Republic and has no signifi cant cross border operations.

The geographical concentration of assets and liabilities as at 31 December 2010 was as follows:


EU countries


Other Total

AssetsCash and balances with CNB 21,608 2,154 243 554 24,559Loans and advances to fi nancial institutions 112,974 48,444 13 553 161,984Loans and advances to customers, net of provisions 391,760 5,611 829 613 398,813Securities at fair value through profi t or loss 20,469 4,874 – 502 25,845Positive fair value of derivative transactions 6,232 10,032 – 36 16,300Securities available-for-sale 2,163 1,524 61 9 3,757Securities held-to-maturity 96,013 12,442 244 2,810 111,509Equity investments in subsidiary and associated undertakings 3,311 3,369 – – 6,680Other assets 22,630 564 6 57 23,257Total assets 677,160 89,014 1,396 5,134 772,704LiabilitiesAmounts owed to fi nancial institutions 40,687 23,530 44 38 64,299Amounts owed to customers 519,444 8,570 1,168 919 530,101Financial liabilities at fair value 12,010 41 2 5 12,058Negative fair value of derivative transactions 4,033 10,478 1 45 14,557Bonds in issue 63,170 425 22 1 63,618Subordinated debt 4,024 7,010 2 – 11,036Other liabilities 11,803 184 1 4 11,992Total liabilities 655,171 50,238 1,240 1,012 707,661Net position 21,989 38,776 156 4,122 65,043

The line “Other assets” includes other assets, property and equipment, intangible fi xed assets. The line “Other liabilities” includes other liabilities and provisions.


216



EU countries


Other Total

AssetsCash and balances with the CNB 24,719 1,770 177 584 27,250Loans and advances to fi nancial institutions 77,502 32,456 7 631 110,596Loans and advances to customers, net of provisions 400,219 7,269 869 688 409,045Securities at fair value through profi t or loss 30,076 5,683 – 645 36,404Positive fair value of derivative transactions 5,963 12,520 – 46 18,529Securities available-for-sale 2,305 1,825 7 9 4,146Securities held-to-maturity 76,644 18,076 255 3,708 98,683Equity investments in subsidiary and associated undertakings 3,941 3,840 – – 7,781Other assets 21,787 691 9 72 22,559Total assets 643,156 84,130 1,324 6,383 734,993Liabilities Amounts owed to fi nancial institutions 22,376 20,607 1 174 43,158Amounts owed to customers 510,510 5,067 1,225 946 517,748Financial liabilities at fair value 8,096 19 13 1 8,129Negative fair value of derivative transactions 3,509 12,506 – 111 16,126Bonds in issue 62,000 142 15 – 62,157Subordinated debt 5,984 7,418 2 – 13,404Other liabilities 16,501 166 1 1 16,669Total liabilities 628,976 45,925 1,257 1,233 677,391Net position 14,180 38,205 67 5,150 57,602

The line “Other assets” includes other assets, property and equipment, intangible fi xed assets. The line “Other liabilities” includes other liabilities and provisions.

45. Fiduciary Activities on Behalf of Clients

(a) Assets under AdministrationThe Bank provides custody, trustee, investment management and advisory services to third parties which involve the Bank making purchase and sale decisions in relation to a wide range of fi nancial instruments. Those assets that are held in a fi duciary capacity are not included in these fi nancial statements.

The Bank administered CZK 275,102 mil. (2009: CZK 226,719 mil.) of assets as at 31 December 2010 representing security certifi cates and other assets received from customers into its custody for administration and safe keeping split as follows:

CZK mil. 2010 2009

Customer securities in custody 62,047 21,251Customer securities under administration 162,785 164,311Customer securities for safe-keeping 1 33Total customer assets under administration 224,833 185,595Other customer securities under administration 1,532 1,504Assets received for management 48,737 39,620Total 275,102 226,719

“Customer securities for safe-keeping” does not include bills of exchange and other securities collateralising loans and other assets that do not relate to the provision of investment services.

The Bank also acts as a depositary for several mutual, investment and pension funds, whose assets amounted to CZK 103,647 mil. as at 31 December 2010 (2009: CZK 88,302 mil.).


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(b) Payables Arising from the Provision of Investment ServicesInvestment services involve receiving and providing instructions related to investment instruments, performing instructions relating to invest-ment instruments to a third party account, proprietary trading with investment instruments, management of customer assets under a contractual arrangement with the client if these assets include an investment instrument, and investment instrument underwriting or placement.

Additional investment services involve administration and custody of investment instruments, issuing loans to the client for the purpose of trading with investment instruments if the issuer of the loan takes part in the transaction, advisory services relating to capital structuring, industrial strategy, investments in investment instruments, provision of advice and services related to mergers and acquisitions, implemen-tation of foreign exchange transactions relating to the provision of investment services, services related to the underwriting of investment instrument issues and rental of safety-deposit boxes.

In connection with the provision of these services, the Bank received cash and investment instruments from clients or obtained cash or investment instruments for its clients (“customer assets”) in exchange for these values, which amounted to CZK 224,833 mil. as at 31 De-cember 2010 (2009: CZK 185,595 mil.). Including advances received, customer assets were CZK 224,913 mil. (2009: CZK 185 666 mil.).

46. Related Party Transactions

Related parties involve connected entities or parties that have a special relationship to the Bank.

Parties are considered to be related if one party has the ability to control the other or exercise signifi cant infl uence over the other in making fi nancial or operational decisions. The Bank is controlled by Erste Group Bank over which Erste Stiftung exercises signifi cant infl uence. The remaining investment in Erste Group Bank is held by minority shareholders and institutional investors via freely traded shares on the stock exchanges in Vienna, Prague and Bucharest.

The parties that have a special relationship to the Bank are considered to be members of the Bank’s statutory and supervisory bodies and management, legal entities exercising control over the Bank (including entities with a qualifi ed interest in these entities and management of these entities), persons closely related to the members of the Bank’s statutory and supervisory bodies, management, and entities exercising control over the Bank, legal entities in which any of the parties listed above holds a qualifi ed interest, entities with a qualifi ed interest in the Bank and any other legal entity under their control, members of the CNB’s Banking Board, and legal entities which the Bank controls.

Pursuant to the defi nitions outlined above, the category of the Bank’s related parties principally comprise its subsidiary and associated undertakings, members of its Board of Directors and Supervisory Board, and other entities, namely Erste Group Bank, its subsidiary and associated undertakings, and subsidiary and associated undertakings owned by the Bank’s subsidiaries.

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The Bank has the following amounts due from / owing to related parties as at 31 December 2010 and 2009:

2010CZK mil.

Parent bank

Subsidiaries Associates Members of the Board

of Directors and

Supervisory Board

Other related parties

AssetsLoans and advances to fi nancial institutions 27,650 – – – 2,883Net receivables from clients – 12,402 – 35 1,876Securities held-to-maturity – – – – 300Positive fair value of derivative transactions 6,144 280 – – 108Other assets 113 142 47 – 38Total assets 33,907 12,824 47 35 5,205LiabilitiesAmounts owed to fi nancial institutions 2,486 25,119 – – 72Amounts owed to customers – 4,411 109 16 327Bonds in issue 211 17,561 – – 68Negative fair value of derivative transactions 6,888 10 – – 3Other liabilities 42 573 92 – 15Subordinated debt 6,500 – – – 299Total liabilities 16,127 47,674 201 16 784Off-balance sheetUndrawn loans – 45 – – –Issued guarantees 25 10,729 – – 288Received guarantees – – – – 11Positive nominal value of derivatives 333,311 6,957 – – 1,674Negative nominal value of fi nancial derivatives 333,444 6,966 – – 1,570IncomeInterest income 480 404 1 2 50Dividends received – 1,437 4 – 3Fee and commission income 24 644 – – 441Net trading result (27) 109 – – 59Other income 4 – 19 – 18Total income 481 2,594 24 2 571ExpensesInterest expense 258 1,048 – – 8Fee and commission expense – 49 – – 40General administrative expenses 191 281 1,285 – 181Other expenses – (236) – – –Total expenses 449 1,142 1 285 – 229


219


2009CZK mil.

Parent bank

Subsidiaries Associates Members of the Board

of Directors and

Supervisory Board

Other related parties

AssetsLoans and advances to fi nancial institutions 19,961 – – – 2,976Loans and advances to customers – 11,424 – 12 1,033Securities held-to-maturity – – – – 699Positive fair value of derivative transactions 7,826 225 – – 55Other assets 196 132 – – 50Total assets 27,983 11,781 – 12 4,813LiabilitiesAmounts owed to fi nancial institutions 8,137 12,225 – – 281Amounts owed to customers – 4,034 67 15 392Bonds in issue 80 19,038 – – 80Negative fair value of derivative transactions 8,053 4 – – 7Other liabilities 166 552 280 – 279Subordinated debt 6,580 – – – 299Total liabilities 23,016 35,853 347 15 1,338Off-balance sheetUndrawn loans 299 235 – – 242Issued guarantees 2 13,949 – – 43Received guarantees – – – – 3Positive nominal value of derivatives 343,307 8,425 – – 1,472Negative nominal value of fi nancial derivatives 343,426 8,424 – – 1,425Income Interest income 548 434 – 1 66Dividends received – 669 – – 9Fee and commission income 15 930 – – 76Net trading result 3,502 170 – – 57Other income – 79 – – 20Total income 4,065 2,282 – 1 228ExpensesInterest expense 301 903 – – 14Fee and commission expense 29 87 – – 3General administrative expenses 86 264 1,205 – 318Other expenses 1,106 – – – –Total expenses 1,522 1,254 1,205 – 335

Subsidiaries include both direct and indirect investments with controlling infl uence, associates include both direct and indirect investments with signifi cant infl uence, other related parties include companies directly or indirectly controlled by Erste Group Bank.

(a) Members of the Board of Directors and Supervisory BoardLoans and advances granted to members of the Board of Directors and Supervisory Board amounted to CZK 35 mil. as at 31 December 2010 (2009: CZK 12 mil.).

Members of the Board of Directors and Supervisory Board held no shares of the Bank. Under the Employee Stock Option Plan (refer to Note 34 (c)) members of the Board of Directors subscribed no shares (2009: 0 shares) of the parent company, Erste Group Bank. Under the Management Stock Option Plan (refer to Note 34 (c)), members of the Board of Directors hold 9,000 options (2009: 9,000 options) for subscription of shares of the parent company, Erste Group Bank.

(b) Parties with Special RelationshipA number of banking transactions are entered into with Parties with special relationship in the normal course of business. These principally include loans, deposits and other transactions. These transactions were carried out on an arm’s length basis.

220

47. Dividends

Management of the Bank has proposed that total dividends of CZK 4,560 mil. be declared in respect of the profi t for the year ended 31 De-cember 2010, which represents 30 CZK per both ordinary and priority share (2009: CZK 4,560 mil., that is, CZK 30 per both ordinary and priority share). The declaration of dividends is subject to the approval of the Annual General Meeting. Dividends paid to shareholders are subject to a withholding tax of 15 percent or a percentage set out in the relevant double tax treaty. Dividends paid to shareholders that are tax residents of an EU member country and whose interest in a subsidiary’s share capital is no less than 10 percent and that hold the entity’s shares for at least one year are not subject to a withholding tax.

48. Subsequent Events

In January 2011, the Board of Directors approved a plan to lay off 600 employees in the fi rst quarter of 2011. The Bank estimates the total severance pay to amount approximately CZK 110 mil..

As at 25 January 2011, the Bank acquired 100% ownership interest in S Morava leasing, a. s., for the price of CZK 148 mil..

On 5 February 2011 a spin-off of CEE Property Development Portfolio B. V. was registered with the Dutch Commercial Court to create a new entity, CEE Property Development Portfolio 2 B. V. This was done in order to house the existing company CPP Lux S.’ ar. l. and its wholly owned subsidiary in the original entity, while the remainder of the current subsidiaries was transferred to the new structure. The ownership structure of CEE Property Development Portfolio B. V. and CEE Property Development Portfolio 2 B. V. remains unchanged, i. e. the Bank’s participation in the registered equity of both entities amounts to 20%.


221

Report on Relations between Related Partiespursuant to Section 66a (9) of Act No. 513/1991 Coll., The Commercial Code for the accounting period from 1 January 2010 to 31 December 2010

Česká spořitelna, a. s., with its registered offi ce at Olbrachtova 1929/62, 140 00 Prague 4, Business registration No.: 45244782, entered in the Commercial Register maintained by the Munici-pal Court in Prague, Section B, Insert 1171 (henceforth “Česká spořitelna”), is part of a business group (holding) in which the following relations between Česká spořitelna and controlling par-ties and between Česká spořitelna and persons controlled by the same controlling parties (henceforth the “related parties”) exist.

This report on relations between the parties hereunder was prepared pursuant to the provision of Section 66a(9) of Act No. 513/1991 Coll., The Commercial Code, as amended, for the accounting period from 1 January 2010 to 31 December 2010 (henceforth the “accounting period”). In this accounting period, Česká spořitelna and the parties hereunder entered into the following contracts and adopted or enacted the following legal acts and other de facto measures. This report pro-vides the fi nancial details of transactions with related parties for the accounting period from 1 January 2010 to 31 December 2010.

A. Chart of Parties whose Relationships are Described

* enterprises listed in Part C. Other related parties, Erste Group Bank

Erste Group Bank

Other related parties*

EGB Ceps Beteiligungen

EGB Ceps Holding

Česká spořitelna

brokerjet ČS CS Property Investment DINESIA

Erste Corporate Finance Factoring ČS GRANTIKA ČS

Informatika ČS ISČS PF1 ISČS PF2

IT Centrum Partner ČS Penzijní fond ČS

Realitní společnost ČS REICO ČS s Autoleasing

Stavební spořitelna ČS

B. Controlling Parties

Erste Group Bank AG, Am Graben 21, Vienna, Austria (“Erste Group Bank”)

EGB Ceps Beteiligungen GmbH, Am Graben 21, Vienna, Austria (“EGB Ceps Beteiligungen”)

EGB Ceps Holding GmbH, Am Graben 21, Vienna, Austria (“EGB Ceps Holding”)

C. Other Related Parties whose Relationships are Described

Other Related Parties, Erste Group Bank

Allgemeine Sparkasse Oberösterreich Bankaktienge-sellschaft, Promenade 11, Linz, Austria

Banca Comerciala Romana S. A., Regina Elisabeta Blvd 5, Bucharest, Romania

Bankhaus Krentschker & Co. Aktiengesellschaft, Am Eisernen Tor 3, Graz, Austria

CT Borská Pole, a. s., Národní 973/41, Prague 1, Czech Republic

CT Brno Heršpická, spol. s r. o., Národní 973/41, Prague 1, Czech Republic

CT Iota, spol. s r. o., Národní 973/41, Prague 1, Czech Republic

CT Rho, spol. s r. o., Národní 973/41, Prague 1, Czech Republic

CTFinance s. r. o., Národní 973/41, Prague 1, Czech Republic

CTP Heršpická, spol. s r. o., Národní 973/41, Prague 1, Czech Republic

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CTPark Bor, spol. s r. o., Národní 973/41, Prague 1, Czech Republic

Dezentrale IT-Infrastruktur Services GmbH, Geiselbergstrasse 21, Vienna, Austria

ecetra Central European e-Finance AG, Neutorgasse 2, Vienna, Austria

ecetra Internet Services AG, Mariahilferstrasse 121B, Vienna, Austria

Epsilon Immorent s. r. o., Národní 973/41, Prague 1, Czech Republic

Erste Bank der österreichischen Sparkassen AG, Am Graben 21, Vienna, Austria

Erste Bank Hungary Nyrt, Hold utca 16, Budapest, Hungary

Erste Group Services GmbH, Am Graben 21, Vienna, Austria

Erste Group Shared Services (EGSS), s. r. o., Národní třída 44, Hodonín, Czech Republic

Erste Securities Polska S. A., ul. Królewska 16, Warsaw, Poland

Erste-Sparinvest Kapitalanlagegesellschaft m. b. H., Habsburgergasse 1, Vienna, Austria

Erste & Steiermärkische bank d. d., Rijeka,Jadranski trg 3, Rijeka, Croatia

Factoring Slovenskej sporiteľni, a. s., Tomášikova 48, Bratislava, Slovakia

Grand Hotel Marienbad s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Brno Retail, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent ČR, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Development s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Financeprojekt s. r. o., Národní 973/41, Prague 1, Czech Republic

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–

Immorent Hrádek, a. s., Národní 41/973, Prague 1, Czech Republic

Immorent Cheb s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Chomutov, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Inprox Budweis s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Investment XVII, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Investment XX, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Investment XXV, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Jilská s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Kladno, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Leasfi nance s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Orange s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Orange Ostrava s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Ostrava I s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Plzeň s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent PTC, s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent TMIS s. r. o., Národní 973/41, Prague 1, Czech Republic

Immorent Vega, s. r. o., Národní 973/41, Prague 1, Czech Republic

Inprox Frýdek-Místek s. r. o., Národní 973/41, Prague 1, Czech Republic

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Separate Financial Statement | Report on Relations between Related Parties | Česká spořitelna Financial Group

223

Investiční společnost České spořitelny, a. s., Evropská 2690/17, Prague 6, Czech Republic

Jablonecká realitní a. s., Národní 973/41, Prague 1, Czech Republic

Lambda Immorent s. r. o., Národní 973/41, Prague 1, Czech Republic

Logcap ČR s. r. o., Národní 973/41, Prague 1, Czech Republic

Malá Štěpánská 17 s. r. o., Národní 973/41, Prague 1, Czech Republic

Mocero reality s. r. o., Národní 973/41, Prague 1, Czech Republic

ÖCI-Unternehmensbeteiligungs-gesellschaft m. b. H., Am Graben 21, Vienna, Austria

OM Objektmanagement GmbH, Schwarzenbergplatz 2, Vienna, Austria

Omega Immorent s. r. o., Národní 973/41, Prague 1, Czech Republic

Procurement Services CZ, s. r. o., Želetavská 1449/9, Prague 4, Czech Republic

Procurement Services GmbH, Brehmstrasse 12, Vienna, Austria

Proxima Immorent, s. r. o., Národní 973/41, Prague 1, Czech Republic

Public Company Erste Bank, Proreznaja 6, Kiev, Ukraine

Retail Kopřivnice spol. s r. o., Národní 973/41, Prague 1, Czech Republic

Retail Příbram spol. s r. o., Národní 973/41, Prague 1, Czech Republic

s IT Solutions AT Spardat GmbH, Geiselbergstrasse 21–25, Vienna, Austria

s IT Solutions CZ, s. r. o., Antala Staška 32/1292, Prague 4, Czech Republic

s IT Solutions Holding GmbH, Geiselbergstrasse 21–25, Vienna, Austria

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s IT Solutions SK, spol. s r. o., Prievozská 14, Bratislava, Slovakia

S Morava leasing, a. s., Horní náměstí 264/18, Znojmo, Czech Republic

Senior Park a. s., Na Strži 1702/65, Prague 4, Czech Republic

Slovenská sporiteľňa, a. s., Tomášikova 48, Bratislava, Slovakia

Theta Immorent s. r. o., Národní 973/41, Prague 1, Czech Republic

Waldviertler Sparkasse von 1842 AG, Hauptplatz 22, 3830 Waidhofen a. d. Thaya, Austria

Weinviertler Sparkasse AG, Hauptplatz 10, Hollabrunn, Austria

Zeta Immorent s. r. o., Národní 973/41, Prague 1, Czech Republic

Other Related Parties, Česká spořitelna Group

brokerjet České spořitelny, a. s., Evropská 2690/17, Prague 6, Czech Republic (“brokerjet ČS”)

CS Property Investment Limited, Diomidous Street 2024, Nikósia, Cyprus (“CS Property Investment”)

DINESIA, a. s., Střelničná 8, Prague 8, Czech Republic (“DINESIA”)

Erste Corporate Finance, a. s., Evropská 2690/17, Prague 6, Czech Republic (“Erste Corporate Finance”)

Factoring České spořitelny, a. s., Budějovická 1518/13B, Prague 4, Czech Republic (“Factoring ČS”)

GRANTIKA České spořitelny, a. s., Jakubské nám. 127/5, Brno, Czech Republic (“GRANTIKA ČS”)

Informatika České spořitelny, a. s., Antala Staška 32/1292, Prague 4, Czech Republic (“Informatika ČS”)

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224

Investiční společnost České spořitelny, a. s., PF1 – otevřený podílový fond, Evropská 2690/17, Prague 6, Czech Republic (“ISČS PF1”)

Investiční společnost České spořitelny, a. s., PF2 – otevřený podílový fond, Evropská 2690/17, Prague 6, Czech Republic (“ISČS PF2”)

IT Centrum s. r. o., Vodičkova 710/31, Prague 1, Czech Republic (“IT Centrum”)

Partner České spořitelny, a. s., Poláčkova 1976/2, Prague 4, Czech Republic (“Partner ČS”)

Penzijní fond České spořitelny, a. s., Poláčkova 1976/2, Prague 4, Czech Republic (“Penzijní fond ČS”)

Realitní společnost České spořitelny, a. s., Vinohradská 180/1632, Prague 3, Czech Republic (“Realitní společnost ČS”)

REICO investiční společnost České spořitelny, a. s., Antala Staška 2027/79, Prague 4, Czech Republic (“REICO ČS”)

s Autoleasing, a. s., Střelničná 8, Prague 8, Czech Republic (“s Autoleasing”)

Stavební spořitelna České spořitelny, a. s., Vinohradská 180/1632, Prague 3, Czech Republic (“Stavební spořitelna ČS”)

D. Transactions with Related Parties

Česká spořitelna identifi ed relationships with the related parties listed in sections B and C and compiled them into the following categories.

Related Party Transactions Recorded on the Asset Side of Česká spořitelna’s Statement of Financial Position

Loans and Advances to Financial InstitutionsWithin approved general limits (see page 227), Česká spořitelna provided related parties – fi nancial institutions with funds on the basis of contracts for, inter alia, the provision of loans, term depos-its, current account administration and overdraft facilities under standard market conditions in an aggregate amount of CZK 30,533 million. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Loans and Advances to CustomersWithin approved general limits (see page 227), Česká spořitelna pro-vided related parties – non-fi nancial institutions with funds on the

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basis of contracts for, inter alia, the provision of loans and overdraft facilities under standard market conditions in an aggregate amount of CZK 8,727 million. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Securities Held to MaturityČeská spořitelna holds held-to-maturity bonds and similar securi-ties issued by related parties, which were purchased under standard market conditions in an aggregate amount of CZK 300 million. Česká spořitelna incurred no detriment as a result of these transac-tions in the current accounting period.

Positive Fair Value of Financial Derivative TransactionsČeská spořitelna entered into contracts for hedging or trading fi nan-cial derivatives with related parties under standard market condi-tions, the positive fair value of which was CZK 6,328 million at the end of the accounting period. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Other AssetsOther assets includes other trade receivables of Česká spořitelna from related parties recorded on the asset side of Česká spořitelna’s statement of fi nancial position in an aggregate amount of CZK 341 million. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Related Party Transactions Recorded on the Liability Side of Česká spořitelna’s Statement of Financial Position

Amounts Owed to Financial InstitutionsIn the accounting period, Česká spořitelna provided related par-ties – fi nancial institutions with monetary services associated, inter alia, with the administration of current and term accounts, received loans and loro accounts based on contracts for the opening and administration of accounts under standard market conditions in an aggregate amount of CZK 27,677 million at the end of the account-ing period. Česká spořitelna incurred no detriment as a result of the performance of these contracts in the current accounting period.

Amounts Owed to ClientsIn the accounting period, Česká spořitelna provided related par-ties – non-fi nancial institutions with monetary services associated, inter alia, with the administration of current and term accounts, received loans and credit balances on overdraft facilities based on contracts for the opening and administration of accounts un-der standard market conditions in an aggregate amount of CZK 4,527 million at the end of the accounting period. Česká spořitelna incurred no detriment as a result of the performance of these con-tracts in the current accounting period.

Bonds Issued by Česká spořitelnaRelated parties hold bonds and similar securities issued by Česká spořitelna, which were purchased under standard market conditions


225

in an aggregate amount of CZK 17,840 million. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Negative Fair Value of Financial Derivative TransactionsČeská spořitelna entered into contracts for hedging or trading fi nan-cial derivatives under standard market conditions with related par-ties, the negative fair value of which was CZK 6,901 million at the end of the accounting period. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Subordinate DebtRelated parties hold subordinate bonds issued by Česká spořitelna, which were purchased under standard market conditions in an ag-gregate amount of CZK 6,799 million. Česká spořitelna incurred no detriment as a result of these transactions in the current ac-counting period.

Other LiabilitiesOther liabilities includes other trade payables of Česká spořitelna from related parties recorded on the liability side of Česká spořitelna’s statement of fi nancial position in an aggregate amount of CZK 719 million. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Related Party Transactions Impacting Česká spořitelna’s Income Statement

Interest IncomeIn the accounting period, Česká spořitelna generated total interest income of CZK 2,164 million, including dividends, from trans-actions with related parties enacted under standard market condi-tions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Interest ExpenseIn the accounting period, Česká spořitelna incurred total interest expense of CZK 1,314 million from transactions with related par-ties enacted under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Fee and Commission IncomeIn the accounting period, Česká spořitelna received fee and com-mission income primarily comprising fees and commissions for asset management, depository services and the sale of subsidiaries’ products in an aggregate amount of CZK 1,101 million as a part of transactions with related parties enacted under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Fee and Commission ExpenseIn the accounting period, Česká spořitelna incurred fee and com-mission expense primarily comprising transaction fees in an ag-gregate amount of CZK 89 million as a part of transactions with

related parties enacted under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Net Trading ResultIn the accounting period, Česká spořitelna incurred a net profi t of CZK 34 million from securities transactions, foreign currency transactions and similar transactions with related parties, including income and expense from changes in the fair value of non-hedg-ing derivatives, enacted under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

General Administrative ExpensesIn the accounting period, Česká spořitelna incurred CZK 1,937 mil-lion in general administrative expenses in respect of related parties, in particular for the purchase of goods, material, insurance, adviso-ry, professional, consulting or maintenance services under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Other Income / ExpenseIn the accounting period, Česká spořitelna reported a positive balance of other income and expense in an aggregate amount of CZK 109 mil-lion as part of other transactions with related parties, in particular the provision of outsourcing services and client centre services, and as part of profi t and loss from the sale and revaluation of securities valued at fair market value and available-for-sale securities, all executed under standard market conditions. Česká spořitelna incurred no detriment as a result of these transactions in the current accounting period.

Other Banking and Trade Relationships with Related Parties

General LimitsČeská spořitelna has instituted approved general limits for related-party transactions; these apply to current and term deposits, loans, repurchase transactions, own securities, letters of credit and provid-ed and received guarantees in an aggregate amount of CZK 101,945 million. Under these limits, the total exposure to related parties was CZK 46,353 million. Česká spořitelna incurred no detriment as a re-sult of these transactions in the current accounting period.

Provided and Received GuaranteesČeská spořitelna provided related parties with guarantees based on contracts for the provision of guarantees under standard mar-ket conditions. Provided guarantees totalled CZK 11,041 million. Česká spořitelna received related-party guarantees based on con-tracts for the acceptance of bank guarantees under standard mar-ket conditions in an aggregate amount of CZK 11 million. Česká spořitelna incurred no detriment as a result of the performance of these contracts in the current accounting period.

Fixed-term ContractsIn the accounting period, Česká spořitelna entered into fi xed-term


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contracts with related parties under standard market conditions. The nominal value of receivables and payables arising from fi xed-term contracts was CZK 337,118 million and CZK 337,156 mil-lion, respectively, at the 2010 year-end. Česká spořitelna incurred no detriment as a result of these transactions in the current ac-counting period.

Equity Transactions with Related PartiesIn the accounting period, Česká spořitelna, as a market maker, purchased and sold shares of related parties under standard mar-ket conditions with an aggregate turnover of CZK 6,986 million. Česká spořitelna incurred no detriment as a result of these transac-tions in the current accounting period.

Paid DividendsBased on a General Meeting decision of 23 April 2010, Česká spořitelna paid dividends totalling CZK 4,560 million to related parties in the accounting period. Česká spořitelna incurred no det-riment as a result of the execution of this decision.

E. Non-banking Related-party Transactions

In previous accounting periods, Česká spořitelna entered into con-tracts with related parties listed in Sections B and C pertaining to non-banking relations, the fi nancial details of which for the account-ing period are presented in Section D. In the accounting period, Česká spořitelna entered into new contracts with related parties list-ed in Sections B and C pertaining to non-banking relationships, the fi nancial details of which for the accounting period are included in Section D. The list below includes signifi cant non-banking contracts concluded with related parties in the accounting period. Non-ma-terial contractual relations under which Česká spořitelna received or provided non-banking performance with related parties, whose fi nancial details are also included in Section D and which resulted in no detriment to Česká spořitelna, are not included in this report.

Contract name Contract party Performance description DetrimentDeed of foundation of the limited liability company Erste Group Shared Services (EGSS), s. r. o.

Erste Group Services GmbHCapital contribution into the share capital of the newly established Erste Group Shared Services (EGSS), s. r. o.

None incurred

Contract on the underwriting of shares

Factoring České spořitelny, a. s.

Underwriting of 20 pcs of shares at CZK 1,500,000 for the issue price of CZK 5,500,000 per share upon the share capital increase of Factoring České spořitelny, a. s. None incurred

Contract on the underwriting of shares s Autoleasing, a. s.

Underwriting of 128 pcs of shares at CZK 1,000,000 for the issue price of CZK 3,000,000 per share upon the share capital increase of s Autoleasing, a. s. None incurred

Contract on the offset of receivables IT Centrum s. r. o.

Offset of a receivable portion arising from the contract for the cession of a receivable and a receivable arising from a commitment to increase the contribution upon the share capital increase None incurred

Addendum to the contract on the provision of outsourcing services

Informatika České spořitelny, a. s. Provision of outsourcing services None incurred

Addenda to the contract on the provision of outsourcing services

Investiční společnost České spořitelny, a. s. Provision of outsourcing services None incurred

Addenda to the contract on the provision of outsourcing services s Autoleasing, a. s. Provision of outsourcing services None incurredAddenda to the contract on the provision of outsourcing services

Stavební spořitelna České spořitelny, a. s. Provision of outsourcing services None incurred

Contract on the provision of servicesProcurement Services CZ, s. r. o. Fees for provided services None incurred

Agreement on the termination of the contract on the lease of non-residential premises

Informatika České spořitelny, a. s.

Lease of real estate, termination of the contractual relationship None incurred

Contract on the lease of non-residential premises

Informatika České spořitelny, a. s. Lease of real estate, new agreement None incurred

Contract on the lease of non-residential premises s Autoleasing, a. s. Lease of real estate, new agreement None incurredFramework agreement on the consideration distribution Slovenská sporiteľňa, a. s.

Distribution of consideration for advisory services None incurred

Contract on the provision of advisory services

GRANTIKA České spořitelny, a. s. Provision of advisory services None incurred

Contract on the processing of non-domestic payments

Erste Group Shared Services (EGSS), s. r. o.

Processing of manual payments within the non-domestic payment system None incurred


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Contract name Contract party Performance description Detriment

Contract on subsidies managementGRANTIKA České spořitelny, a. s. Contract on advisory on subsidy granting None incurred

Co-operation agreementStavební spořitelna České spořitelny, a. s.

Contract on the co-operation in the fi eld of debt recovery None incurred

Contracts on the provision of services Erste Group Bank AGAdvisory services, development and support of projects, line activities None incurred

Contract on the SIEBEL CRM terms of use s IT Solutions CZ, s. r. o.

Administration and management of the Klient (CRM) application databases None incurred

Contract on the lease of non-residential premises

Procurement Services CZ, s. r. o. Leasing of non-residential premises None incurred

Contracts on the lease of non-residential premises s IT Solutions CZ, s. r. o. Leasing of non-residential premises None incurredContract on the use of the Calypso system Erste Group Bank AG

Services relating to the use of the Calypso system None incurred

Addendum to the service contracts IT Solutions AT Spardat GmbH

Maintenance services relating to CORE SAP None incurred

Addendum to the service contracts IT Solutions AT Spardat GmbH

MAINTENANCE services relating to the SAP system None incurred

Contracts for works IT Solutions AT Spardat GmbH Various maintenance services None incurred

Contracts for work S IT Solutions CZ, s. r. o. Various maintenance services None incurred

Contract for workBanca Comerciala Romana S. A.

Provision of services within the Public Private Partnership project None incurred

Addendum to the Framework agreement

Realitní společnost České spořitelny, a. s.

Sale of selected immovable and movable assets, management of unused non-residential premises None incurred

Framework advisory agreement Erste Corporate Finance, a. s. Provision of fi nancial advisory services None incurred

Erste Group Bank Employee Stock Ownership Program “ESOP” Erste Group Bank AG

Settlement of a 20% discount on share subscriptions by employees utilising the option to subscribe for Erste Group Bank AG shares None incurred

F. Other Legal Acts

In the accounting period, Česká spořitelna neither adopted nor en-acted any other legal acts to the benefi t or upon the initiative of related parties.

G. Other de facto Measures

Within Erste Group Bank, Česká spořitelna takes part in group projects whose common aim is to fully exploit the business poten-tial of central European markets in all segments as well as econo-mies of scale and cost synergies, concentration of support activities within the group and performance measurement transparency and comparability. Projects cover information technology (Data Centre Transition, Corona, REM FX – upgrade), risk management (Group Risk Management – Risk Development Project, Application Fraud System; Master Scale – analytical phase, Security Monitoring) and service activity (Group Operation / Processing – SSP Pilot). Česká spořitelna incurred no detriment as a result of its involvement in the foregoing projects.

H. Conclusion

It is clear from our review of the legal relationships between Česká spořitelna and related parties that Česká spořitelna incurred no det-riment as a result of contracts, other legal acts or other measures executed, effected or adopted by Česká spořitelna in the account-ing period from 1 January 2010 to 31 December 2010 to the benefi t or upon the initiative of individual related parties.

Dušan BaranBoard of Directors Vice Chairman andFirst Deputy Director

Jiří Škorvaga Board of Directors Member andDeputy Director


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Česká spořitelna Financial GroupFigures (non-audited) are Stated under International Financial Reporting Standards (IFRS), Unless Otherwise Indicated

Stavební spořitelna České spořitelny, a. s.Stavební spořitelna České spořitelny, a. s., with its registered offi ce at Vinohradská 180, Prague 3, was incorporated on 22 June 1994. Its principal business is the provision of fi nancial services pursu-ant to Act No. 96/1993 Coll. Česká spořitelna, a. s., owns a 95% shareholding; Bausparkasse der österreichischen Sparkassen AG owns the remaining 5%. Stavební spořitelna ČS offers its clients construction savings with state support and a statutory entitlement to construction savings loans.

Amid the diffi cult social and economic circumstances of 2010, Stavební spořitelna ČS rigorously applied the “customer fi rst” principle in everything it did in accordance with its mission state-ment of “We’re a Lending Institution that Finances Better Housing for Everyone”, i. e. by introducing new client services, reducing or eliminating certain fees, and offering a number of benefi ts for new deposit and loan transactions. Many of these represented unique offerings on the construction savings market. This proved to be the right strategy, as Stavební spořitelna ČS managed to address all the social and economic challenges facing the construction savings market while retaining the trust of its clients.

At the 2010 year end, Stavební spořitelna ČS recorded a sta-ble number of loan accounts, i. e. more than 198 thousand, in a year-to-year comparison, having lent its clients CZK 45.1 bil-lion to help them have better housing. Stavební spořitelna ČS

applied the principle of equitable lending throughout the year in compliance with the aims of the European Com-mission’s recommendations for prudent bank lending practices.

In terms of newly concluded deposit transactions, Stavební spořitelna ČS is proud to have reported year-on-year growth of 3% to CZK 97.5 billion. The number of newly concluded construction savings contracts increased by 12% and the Buřinka database re-corded more than 163 thousand new construction savings accounts. In terms of volume-based parameters, the results of 2010 also saw growth in the Buřinka database; the target amount increased 13% year-on-year to CZK 3.3 billion and the balance sheet total rose by more than 2% to CZK 103.0 billion.

With profi t of CZK 1.3 billion, Stavební spořitelna ČS contin-ues to be a leader on the construction savings market. This achievement is all the more impressive given the diffi cult socio-economic situation of 2010 that did not favour construction savings banks’ clients.

In 2010, the Portus Praha civic association once again nominated Buřinka for the prestigious Via Bona prize for the longstanding “Akce cihla” partnership and its employees’ engagement in vol-unteer activities.

Correspondence address: Vinohradská 180, 130 11 Prague 3Free info-line: +420 800 207 207Telephone: +420 224 309 111

Website: www.burinka.czE-mail: [email protected]

Stavební spořitelna České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 750 750 750 750 750Total assets (CZK billion) 103.0 100.8 98.2 96.2 90.8Loans and advances to clients (CZK billion) 45.1 45.5 42.8 33.4 24.2Client deposits (CZK billion) 97.5 95.0 93.2 89.8 83.8Net profi t (CZK million) 1,264 1,509 1,465 1,105 938Number of clients (million) 1.2 1.1 1.2 1.1 1.2Average headcount 212 215 209 206 215

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Penzijní fond České spořitelny, a. s.Penzijní fond České spořitelny, a. s., was founded on 24 August 1994. Its registered offi ce is located at Poláčkova 1976/2, Prague 4. Česká spořitelna is its sole shareholder. The Company’s princi-pal business is the provision of supplementary pension insurance schemes pursuant to Act No. 42/1994 Coll. on supplementary state-contributory pension insurance as amended by Act No. 170/1999 Coll. and Act No. 36/2004 Coll.

Penzijní fond České spořitelny increased its client base by 74 thousand in 2010 for a year end total of nearly 908 thou-sand clients. It reported growth in funds held in client personal accounts to more than CZK 35.2 billion, an 8% increase year-on-year. Based on the number of clients and volume of funds under management, Penzijní fond České spořitelny is the second largest pension fund on the Czech market for supplementary pension in-surance.

Penzijní fond České spořitelny reported a net profi t of CZK 807 million for 2010, a 76% increase year-on-year. In an envi-ronment characterised by low interest rates, this favourable result was achieved thanks to slowly recovering fi nancial markets. The

return for distribution to the fund’s clients outpaced 2010 infl a-tion. Another important factor behind these good results was the volume of fi nancial assets under management, which increased by CZK 2.7 billion in 2010.

The business performance of Penzijní fond České spořitelny was notably driven by the further development of co-operation with employers. As part of its corporate programme, Penzijní fond České spořitelny entered into business arrangements with almost 11,000 employers. This business dynamic was supported by continued expansion of the sales network, which covers all branches of Česká spořitelna and its external sales network in-cluding Partner České spořitelny and the insurance company Kooperativa.

In fi nancial asset management, Penzijní fond České spořitelny fol-lowed its strategic objective of achieving the best possible return on clients’ assets while keeping fi nancial risk low. Funds were principally invested in Czech (largely government) bonds that car-ry a low risk of default, government treasury bills, term deposits and, to a lesser degree, equities and participation certifi cates.

Correspondence address: Poláčkova 1976/2, 140 21 Prague 4Telephone: +420 800 207 207

Website: www.pfcs.czE-mail: [email protected]

Penzijní fond České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 350 350 350 100 100Total assets (CZK billion) 37,6 35.5 30.6 25.2 20.3Capital funds (CZK billion) 35,2 32.4 29.7 24.4 19.2Net profi t (CZK million) 807 459 127 776 531Number of participants (thousand) 908 833 750 634 550Average headcount 57 56 54 53 52

Report on Relations between Related Parties | Česká spořitelna Financial Group | Independent Auditor’s Report

230

s Autoleasing, a. s.The leasing company s Autoleasing, a. s., founded on 6 October 2003, is wholly owned by Česká spořitelna. Its registered offi ce is located at Střelničná 8 in Prague 8. The Company carried out a merger by amal-gamation with subsidiary s Autoúvěr, a. s., in 2010 and now has total share capital of CZK 500 million. Its principal business is providing fi nance leases for a wide range of passenger and utility vehicles and providing consumer loans for vehicles to individuals – non-entrepre-neurs, individuals – entrepreneurs and corporate entities.

In 2010, s Autoleasing reported a net profi t of CZK 19 mil-lion. In the course of the year, the Company completed fi nancing transactions at an aggregate initial debt value of CZK 2,595 mil-lion. The company s Autoleasing creates provisions to cover all known risks arising from its lease and loan contract portfolio. Material facts that may favourably impact s Autoleasing meeting its future business targets include closer co-operation with the parent bank.

Correspondence address: Střelničná 8/1680, 180 00 Prague 8Telephone: +420 225 105 111

Website: www.sautoleasing.cz

s Autoleasing, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 500 372 372 100 100Total assets (CZK billion) 8.7 6.1 8.7 8.6 6.4Volume of new transactions (CZK billion) 2.6 1.1 4.3 5.5 5.2Net profi t / (loss) (CZK million) 19 (135) (23) (90) (13)Number of new contracts 13,833x) 1,316 4,383 6,488 6,017Number of own points of sale 1 1 1 1 1Average headcount 108 58 98 – –x) Number of new contracts was infl uenced by merger with s Autoúvěr

Factoring České spořitelny, a. s.Factoring České spořitelny, a. s., founded in November 1995, is wholly owned by Česká spořitelna. The Company’s registered of-fi ce is at Budějovická 1518/13B, Prague 4. A sole shareholder de-cision increased the Company’s share capital in October 2010 by a nominal value of CZK 30 million to a total of CZK 114 million. Company equity was also increased by CZK 80 million through an issue of shares at premium.

The Company’s focus is on domestic, export and import factoring, the fi nancing of purchases of selected types of current assets and the provision and tracking of information on corporate solvency and debt management for a corporate clientele operating in a wide range of industries.

In 2010, factoring companies operating in the Czech Republic, in-cluding Factoring ČS, saw a slight increase in the sale of assigned receivables, though this did not reach pre-economic crisis levels.

Nonetheless, Factoring ČS held on to its leading position on the Czech factoring market, bolstering its fi rst place rank-ing with a 27% market share. However, the economic crisis im-pacted a number of the Company’s clients, in some cases leading to defaults and company closures due to insolvency or bankruptcy. Consequently, Factoring ČS was forced to step up its provisioning, though not in as great a volume as in 2009. As a result, the Com-pany posted a slight net loss for the year.

Factoring ČS continued to work on deepening and improving its co-operation with the parent bank in the areas of business and risk management, increasing the attention paid to the managed receiva-bles portfolio and introducing new processes to enhance service quality. The Company further focused on systematising and im-proving the process of collecting delinquent receivables and en-hancing collection procedures, particularly given the economic crisis and consequent deterioration in payment discipline.

Correspondence address: Budějovická 1518/3B, 140 00 Prague 4Telephone: +420 956 770 711

Website: www.factoringcs.cz

Factoring České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 114 84 84 84 84Equity (CZK million) 155 47 137 138 136Total assets (CZK billion) 3.1 2.9 6.7 7.0 7.1Net profi t / (loss) (CZK million), CAS (2) -90 19 30 21Contracted amounts (CZK billion) 31.2 26.3 33.1 29.3 27.3Average headcount 39 40 31 36 33


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brokerjet České spořitelny, a. s.The company brokerjet České spořitelny, a. s., was established by Česká spořitelna on 17 September 2003 as a subsidiary (51% share-holding) and by the fi rm ecetra Central European e-Finance AG (49% shareholding). A subsidiary of Erste Group Bank, ecetra Central Euro-pean e-Finance AG is one of Austria’s most important internet securi-ties traders. The shareholder structure provides brokerjet ČS with a unique combination of a strong foundation and background, an exten-sive sales network (as a member of Česká spořitelna Financial Group) and top-quality technologies plus the years of experience brought by ecetra Central European e-Finance. The Company’s registered offi ce is at Evropská 2690/17, Prague 6.

In 2010, the capital markets lost much of their previous vigour. What this meant for brokerjet ČS was a slight increase in net interest income thanks to the increased volume of drawn loans. Transaction volume held steady, though the number of these transactions dropped consid-erably, meaning reduced net fee income. The total number of cli-

ents increased by 1,400 to almost 18 thousand. The Company realised signifi cant cost savings and managed to increase profi t to CZK 18 million.

In 2010, brokerjet ČS opened up the possibility for its clients to trade on the markets in Warsaw, Budapest, Zagreb and Ljubljana, co-operated with the company ecetra in implementing a new busi-ness platform for active investors and, no less importantly, entered into a Client Acquisition Co-operation Agreement with Slovenská sporiteľňa.

In 2011 brokerjet ČS intends to launch a new business platform for active traders and maximise its operations in Slovakia. It also plans to broaden the range of client services to include investment plan consul-tation with a personal broker. These activities, together with closer ties to the ČS Premier network, will enable the Company to increase both the number of its active clients and its income.

Correspondence address: Evropská 2690/17, 160 00 Prague 6Telephone: +420 224 995 777

Website: www.brokerjet.czE-mail: [email protected]

brokerjet České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 160 160 160 160 160Subordinated debt (CZK million) 60 60 60 60 60Total assets (CZK million) 2,585 2,370 2,039 3,023 2,420Volume of managed assets (CZK million) 9,147 7,970 5,776 8,828 6,998Net profi t (CZK million) 18 5 37 52 41Average headcount 18 20 23 23 19

REICO investiční společnost České spořitelny, a. s.REICO investiční společnost České spořitelny, a. s., established on 13 June 2006, has always been a wholly-owned subsidiary of Česká spořitelna. The Company’s registered offi ce is located at Antala Staška 2027/79, Prague 4, 140 00.

REICO has completed its fourth year of managing a special real estate investment fund of ČS nemovitostní fond. At 31 December 2010, the equity of ČS nemovitostní fond increased by CZK 0.6 billion year-on-year to nearly CZK 1.8 billion. In 2010, REICO investiční společnost began to manage a special fund for qualifi ed investors – the V. I. G. ND, closed investment fund, which was granted a license in August 2010.

Commercial real estate prices stabilised in 2010; this was ac-companied by a slight recovery in investor demand. Banks made lending more accessible again, accelerating the development and purchasing of commercial real estate. Several signifi cant invest-ment transactions were concluded on the Czech real estate market, including the ČS nemovitostní fond acquisition of the building

that formerly housed the Melantrich publishing house on Prague’s Wenceslas Square. This brought the total number of properties in the Fund to seven commercial buildings, of which six are in the Czech Republic and one in Slovakia.

ČS nemovitostní fond realised a 3.41% return for 2010 due in large part to income from rental properties and real estate price stabi-lization. From a fi nancial perspective, the ČS nemovitostní fond portfolio is healthy; most properties have an occupancy rate above 95%, which assures stable rental income. The Fund collected more than CZK 120 million in rent in 2010. The current values of the buildings in the portfolio are stable and have signifi cant long-term growth potential.

The 2010 economic indicators refl ect the very slow recovery on the real estate and investment products markets, as a result of which REICO investiční společnost managed a lower than expected volume of funds and generated a loss of CZK 18 mil-lion for 2010.


232

Correspondence address: Antala Staška 2027/79, 140 00, Prague 4Telephone: +420 221 516 500

Website: www.reicofunds.czE-mail: [email protected]

REICO investiční společnost České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 90 90 90 80 30Equity (CZK million) 34 59 71 51 29Total assets (CZK million) 45 71 89 62 29Net loss (CZK million) (18) (12) (29) (28) (2)Volume of managed assets (CZK billion) 1.7 1.2 1.6 1.2 0.0Average headcount 9 10 10 7 3

GRANTIKA České spořitelny, a. s.GRANTIKA České spořitelny, a. s., was formerly Raven EU Adviso-ry, of which Česká spořitelna became the majority owner in 2007 and sole owner in 2008. The Company’s restructuring culminated with a name change to GRANTIKA České spořitelny in April 2009.

GRANTIKA ČS is a leading advisory fi rm – operating across the Czech Republic – whose focus is on comprehensive advi-sory services relating to European Union structured funds. The Company has a network of offi ces in Prague, Zlín, Plzeň, Hradec Králové and Ostrava and offers its services in Slovakia through the subsidiary EuroDotácie, s. r. o., GRANTIKA ČS has implemented and certifi ed a quality management system pursuant to ISO 9001:2001 and ISO 10006:2004 norms.

The Company offers comprehensive services in the area of EU and

Czech subsidy policies for clients of all legal forms. The service portfolio includes the preparation of applications for operational and other subsidy programmes, project implementation and man-agement advisory services (including tender procedures) and ensur-ing subsequent monitoring and technical support for public admin-istration institutions in implementing operational programmes.

Since its inception, the Company has completed more than 3,500 projects for roughly 2,800 clients entailing the preparation of applications for EU Structural Funds subsidies and provision of related advisory services.

In 2011, the Company will focus on gaining additional market share (principally in the area of EU funding) and will implement a major change with the introduction of fi nancial services.

Correspondence address: Jakubské náměstí 2, 602 00 BrnoTelephone: +420 542 210 148

Website: www.grantikacs.comE-mail: [email protected]

GRANTIKA České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 7 7 7 7 7Net profi t or loss (CZK million) 0 (2) 3 (15) 8Income from principal activities (CZK million) 47 42 62 25 37Added value (CZK million) 32 30 46 9 25Average headcount 39 40 50 46 34

Realitní společnost České spořitelny, a. s.Realitní společnost České spořitelny, a. s., with its registered offi ce at Vinohradská 180/1632, Prague 3, was incorporated on 4 December 2002. Česká spořitelna is its sole shareholder.

The Company is primarily engaged in real estate activities, i. e. brok-ering the sale and lease of residential and commercial properties and providing related advisory services in order to complement and expand the comprehensive real estate service offering of Česká spořitelna Fi-nancial Group and advice on the sale and lease of real estate owned by Česká spořitelna. The Company sold its 5% equity participation in the

Croatian real estate company Erste Nekretnine d. o. o. in March 2010 to the company Erste & Steiermarkische Bank d. d.

At the 2010 year-end, Realitní společnost ČS had a presence in 33 towns across the Czech Republic through its branch network.

In the course of 2010, the Company executed 1,375 real estate transactions (including franchises) with a total value of CZK 3.2 billion, which confi rmed its dominant position among real estate agencies, including development companies that sell their own real


233

Correspondence address: Vinohradská 180/1632, 130 00 Prague 3Telephone: +420 272 189 701; +420 800 227 227

Website: www.rscs.czE-mail: [email protected]

estate. Company operations were affected by the recession in 2010 and its impact on the real estate market. The total number of real estate transactions throughout the Company’s sales network decreased 10% year-on-year, even though transaction volume increased. For 2010, Realitní společnost ČS generated revenues from real estate activity of CZK 29 million in total and incurred a net loss of CZK 28 million.

In 2010, Realitní společnost ČS successfully carried out a restruc-turing of its portfolio of developer projects, upgraded its real estate brokerage business model, including a training system for brokers, and prepared a new franchise network concept. The Company made signifi cant personnel and administrative cost savings.

Realitní společnost České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 30 30 30 20 4Total assets (CZK million) 16 18 54 140 95Income from real estate activities (CZK million) 29 23 30 75 48Net profi t or loss (CZK million) (28) (42) (110) 0 5Average headcount 15 24 24 23 22

Erste Corporate Finance, a. s.Erste Corporate Finance, a. s., with its registered offi ce at Evropská 2690/17, Prague 6, was established on 19 July 1995. Erste Cor-porate Finance is a joint venture between two members of Erste Group Bank, Česká spořitelna and Slovenská sporiteľňa. Česká spořitelna holds 75% of the Company’s share capital. Erste Cor-porate Finance provides its clients in the Czech Republic with expert investment banking and fi nancial advisory serv-ices, primarily in mergers and acquisitions, privatisation, MBO, valuations of companies or their parts, economic advice, due dili-gence, restructuring and investment opportunity analysis.

In the Czech Republic, Erste Corporate Finance ranks among the elite advisory companies and holds a leading market po-sition. In 2010, the co-operation between individual investment banking and fi nancial advisory practices, among them Erste Cor-

porate Finance, continued in the central and eastern European re-gion. The aim of this step is to improve the quality of services provided in the Czech Republic and across the region.

In 2010, the market gradually recovered from the worldwide fi nan-cial crisis, which was refl ected in the number of acquired projects, the majority of which should be completed in 2011. Nonetheless, Erste Corporate Finance managed to execute a number of transac-tions in 2010, including advisory services for the company Lafarge as part of one of the largest transactions in the central and eastern European region.

Erste Corporate Finance generated a net profi t of CZK 0.4 million in 2010 under Czech Accounting Standards. Income from advisory services amounted to CZK 58 million.

Correspondence address: Evropská 2690/17, 160 00, Prague 6Telephone: +420 224 995 166

Website: www.erste-cf.comE-mail: [email protected]

Erste Corporate Finance, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 6 6 6 6 6Equity (CZK million, CAS) 62 61 58 50 50Net profi t (CZK million, CAS) 0 3 8 0 13Average headcount 13 15 19 21 17


234

Informatika České spořitelny, a. s.Informatika České spořitelny, a. s., was established on 11 Decem-ber 1997 by Česká spořitelna as a wholly-owned subsidiary with the aim of providing Česká spořitelna and / or other ČS Financial Group subsidiaries with auxiliary banking services. The Company provides technical servicing and procurement of goods for sale in the IT area for Česká spořitelna and other ČS Financial Group members.

In 2010, Informatika České spořitelny provided warranty and post-warranty servicing of IT equipment owned by members of

the Financial Group, the installation and servicing of ATMs for Česká spořitelna, the technical servicing of IT for the ČS Financial Group, and support for traders who use POS and FlexiPad termi-nals. The Company also engaged in commercial activity involving hardware for the ČS Financial Group and provided the necessary technical support through its hardware specialists in the implemen-tation of Česká spořitelna’s development projects. The Company offers any additional capacity to customers outside of the ČS Fi-nancial Group. Informatika ČS is an authorised HP business and service partner and has ISO 9001:2008 certifi cation.

Correspondence address: Antala Staška 32/1292, Prague 4Telephone: +420 220 874 625

Website: www.informatikacs.czE-mail: [email protected]

Partner České spořitelny, a. s.Partner České spořitelny, a. s., with its registered offi ce at Poláčkova 1976/21, Prague 4, commenced operations on 1 July 2009. The Com-pany is a wholly-owned subsidiary of Česká spořitelna. Partner ČS primarily engages in the management of external sales of products and services of the Česká spořitelna Financial Group via a network of exclusive external fi nancial intermediaries.

Partner ČS has increased the number of Česká spořitelna distribu-tion channels, contacts clients selected by the Bank and contributes to enhancing the overall comfort of client services. It also attracts new clients to the fi nancial group.

In 2010, Partner České spořitelny began to focus on passive prod-ucts for selected clients. It made its greatest contribution to the Fi-nancial Group’s business results in the area of housing, brokering more than CZK 1.3 billion in loans, primarily construction savings loans. In 2010, the Company emphasized quality, which is favour-ably refl ected in the loan portfolio of external agents because it reported results for 2010 that are comparable to those of the Česká spořitelna branch network.

Correspondence address: Poláčkova 1976/2, 140 21 Prague 4Telephone: +420 261 073 291

Website: www.partnercsas.czE-mail: [email protected]

Informatika České spořitelny, a. s. 2010 2009 2008 2007 2006Share capital (CZK million) 10 10 10 10 10Total assets (CZK million) 106 121 82 86 95Net profi t (CZK million) 15 12 7 9 16Sales (CZK million) 254 247 239 253 279Average headcount 88 90 90 92 93

Partner České spořitelny, a. s. 2010 2009Share capital (CZK million) 2 2Total assets (CZK million) 24 64Net loss (CZK million) (6) (3)Sales (CZK million) 91 88Average headcount 16 16


235

Independent Auditor’s Reportto the Shareholders of Česká spořitelna, a. s.

I. We have audited the consolidated fi nancial statements of Česká spořitelna, a. s., (“the Company”) as at 31 December 2010 presented in the annual report of the Company on pages 63–145, on which we have issued an audit report, dated 8 March 2011, which is presented on page 62. We have also audited the separate fi nancial statements of Česká spořitelna, a. s., (“the Company”) as at 31 December 2010 presented in the annual report of the Company on pages 149–220, on which we have issued an audit report, dated 8 March 2011, which is presented on page 148 (both referred to further as “fi nancial statements”).

II. We have also audited the consistency of the annual report with the fi nancial statements described above. The management of Česká spořitelna, a. s., is responsible for the accuracy of the annual report. Our responsibility is to express, based on our audit, an opinion on the consistency of the annual report with the fi nancial statements.

We conducted our audit in accordance with International Standards on Auditing and the related implementation guidance issued by the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the information presented in the annual report that describes the facts refl ected in the fi nancial statements is consistent, in all material respects, with the fi nancial statements. We have checked that the accounting information presented in the annual report is consistent with that contained in the audited fi nancial statements as at 31 December 2010. Our work as auditors was confi ned to checking the annual report with the aforementioned scope and did not include a review of any information other than that drawn from the audited accounting records of the Company. We believe that our audit provides a reasonable basis for our opinion.

Based on our audit, the accounting information presented in the annual report is consistent, in all material respects, with the fi nancial state-ments described above.

III. In addition, we have reviewed the accuracy of the information contained in the report on related parties of Česká spořitelna, a. s., for the year ended 31 December 2010 presented in the annual report of the Company on pages 221–227. The management of Česká spořitelna, a. s., is responsible for the preparation and accuracy of the report on related parties. Our responsibility is to issue a report based on our review.

We conducted our review in accordance with the applicable International Standard on Review Engagements and the related Czech standard No. 56 issued by the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the review to obtain moderate assurance as to whether the report on related parties is free from material misstatement. The review is limited primarily to enquir-ies of company personnel, to analytical procedures applied to fi nancial data and to examining, on a test basis, the accuracy of information, and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the report on related parties of Česká spořitelna, a. s., for the year ended 31 December 2010 is materially misstated.


Represented by


22 April 2011Prague, Czech Republic


236

Česká spořitelna Selected Consolidated Financial Performance Figuresin 1st Quarter 2011 According to International Financial Reporting Standards (Unaudited)

CZK mil. 31. March2010

31. March2009

Interest income and similar income 9,781 9,737Interest expense and similar expense (2,366) (2,341)Net interest income 7,415 7,396Provisions for credit risks (1,950) (2,705)Net interest income after provisions for credit risks 5,465 4,691Fee and commission income 3,706 3,411Fee and commission expense (687) (541)Net fee and commission income 3,019 2,870Net trading income 935 1,225Staff costs (2,155) (2,000)Other administrative expenses (1,957) (2,171)Depreciation and amortization (613) −652Total general administrative expenses (4,725) (4,823)Other operating expenses, net 30 (85Profi t before taxes 4,724 3,878Income tax expense (915) (730)Profi t after taxes 3,809 3,148Profi t for the year

attributable to owners of the parent 3,803 3,151attributable to non-controlling interest 6 (3)

Total Assets 935,631 891,396Loans and advances to customers 466,749 466,789Amounts owed to customers 701,519 685,494Shareholders‘ equity attributable to owners of the parent bank 74,486 66,391Notice: In 2010, Česká spořitelna changed its accounting policy for valuation of real estate investments held through real estate funds in its consolidated fi nancial statements from the fair value valuation model to the cost valuation model as used by Erste Group Bank. Thus, comparables for Q1 2010 have been adjusted in accordance with this new accounting policy. Comparables for other years have not been adjusted.

Česká spořitelna Financial Group | Independent Auditor’s Report |

237

Proceedings of the Ordinary General Meeting of 20 April 2011

At the Ordinary General Meeting of Česká spořitelna held on 20 April 2011 in Prague, the shareholders approved, inter alia, the Board of Directors Report on the Bank’s Performance and Financial Position in 2010. The attending shareholders were also presented with the reports of the Supervisory Board and the Audit Committee for 2010 and approved the standalone an-nual fi nancial statements, consolidated fi nancial statements and profi t allocation proposal. Funds for distribution totalled CZK 47 028 million; CZK 4 560 million was allocated for the payment of dividends of CZK 30 per share. The balance of retained earn-ings from previous years is CZK 42 468 million. The General Meeting appointed the company Ernst & Young Audit, s. r. o., to perform the audit of the standalone and consolidated fi nancial statements of Česká spořitelna for 2011.

At the Ordinary General Meeting, the shareholders also approved a change in the form of ČS shares, which are to be converted from bearer to registered shares, and a corresponding change in the Articles of Association in response to an amendment of Act No. 137/2006 Coll. on public contracts. Pursuant to the amendment, a basic qualifi cation criterion for a joint-stock company to take part in a public contract tender is that it can only have issued reg-istered shares. The General Meeting further amended the company Articles, inter alia, to stipulate that a) the Audit Committee shall submit its report to the General Meeting and b) the General Meet-ing shall approve the Audit Committee members’ compensation.

The General Meeting re-appointed Heinz Kessler and Bernhard Spalt as members of the Česká spořitelna Supervisory Board.


238

Index

AATM 2, 3, 5, 21–22, 25–26, 32, 51, 56, 234Audit Committee 12–13, 36, 53–54, 57, 60, 237Auditor 53–54, 56, 60, 62, 148, 235

BBalance sheet total 17, 228Basel II 18, 40, 43, 72, 89, 113, 115–117, 131–132, 156, 188, 190–191, 205–206Benefi ts programme 4, 22Board of Directors 5–6, 8–9, 36, 39–42, 44, 46–49, 52–56, 60, 71, 106, 110, 114, 124, 144, 155, 186, 189, 205, 218–219, 237Bonds issued 18–19, 29, 81, 161, 224–225brokerjet České spořitelny 84, 116, 171–172, 174, 223, 231BUSINESS 24 4, 7, 16, 32

CCapital adequacy 4, 18, 20, 44–45, 70, 132, 205–206Clever savings 17, 23 Client deposits (amounts owed to customers) 7, 17–18, 22–23, 38, 63, 100, 104, 108, 113–114, 126–130, 134, 141–142, 144, 149, 153, 177, 184, 188–189, 200–205, 208, 215–216, 218–219, 228, 236Code 47–49, 52–55

Construction savings 16–17, 21, 23, 82, 84, 88, 91–92, 109, 115, 118, 120–123, 171, 174, 228, 234Consumer loans 19, 21, 35, 45, 190, 230Cool Card 4Corporate account 4Corporate clientele 26, 28, 109, 185, 230Corporate clients 3–4, 8, 17, 28–30, 37, 40, 42, 100, 115–116, 139, 177, 190–191, 213Cost / income ratio 16, 38, 109, 185 CS Real Estate Investment Fund 5, 23Czech Finance Ministry 52Czech National Bank (CNB) 9, 14, 16, 19, 30, 42, 52, 55, 60, 70, 78, 149, 155, 163

DDeposit Insurance Fund 104, 111, 181, 186Developer centre 27, 38Dividends 44, 46, 54, 66, 69, 71, 77, 80, 82, 106, 145, 152, 154, 159, 162, 218–220, 226, 237

EEquity investments 13, 22, 53, 86, 88, 93, 95, 111–112, 139–140, 149, 150, 153, 155, 159, 168–169, 171–174, 183, 186–187, 204–205, 213–216Erste Corporate Finance 8, 87, 171–172, 174, 223, 227, 233

Erste Group Bank 3, 5, 10–13, 15, 24–25, 29–30, 35–36, 38, 41, 43, 46–48, 55, 70, 73–74, 82, 109–110, 131, 135, 143–144, 155, 157, 162, 185–186, 189, 205–206, 209, 217, 219, 221, 227, 231, 233Erste Private Banking 24, 38European Investment Bank (EIB) 4, 28

FFactoring České spořitelny 9, 84, 86, 116, 126, 171–172, 174, 222–223, 226, 238Faktura 24 28, 51Fee and commission income 15–16, 38, 64, 109, 144, 150, 184, 218–219, 225, 236Financial Markets 17, 22, 30, 38, 41–42, 56, 124, 168, 198, 229

GGeneral Meeting 3, 46–49, 53–56, 60, 70, 80, 82, 145, 155, 160, 162, 220, 226, 237Giro accounts 21–23, 35GRANTIKA České spořitelny 8, 29, 86, 171–174, 223, 226–227, 232Guarantee Fund 26, 47

IIdeal mortgage 4, 18, 20, 22Income Tax 63–64, 83, 104–105, 112, 139–140, 149–150, 153, 181, 187, 213–214, 236

Informatika České spořitelny 86, 171–172, 174, 223, 226, 234Information technologies (IT) 16, 37, 38, 70, 227International Financial Re-porting Standards (IFRS) 15, 40, 57, 60, 70, 76, 155, 157, 228, 236Internet savings 4, 23Investiční společnost České spořitelny 16–17, 23, 31, 42, 86–87, 187, 223–224, 226ISCS High Yield Bonds 22ISCS Top Stocks 23

LLiquidity ratio 43Loans and advances to clients 18–19, 40, 228Loans and advances to fi nancial institutions 19, 40, 63, 68, 88, 99, 108, 113–114, 119–121, 126–130, 134–135, 141–142, 144, 149, 153, 164, 176, 183, 188–189, 193–195, 200–205, 208–209, 215, 216, 218, 219Loans to individuals – households 18–19, 21, 91–92, 115–116, 120–123, 166, 190, 194–197

MMortgage bonds 18, 70, 102–103, 155, 179–180Mortgage loans 18–20, 27–29, 33, 42, 88, 91–92, 117–118, 120–123, 164, 166, 192–197Mutual funds 22, 29, 31, 38, 139


239


NNet interest income 15–16, 38, 42, 64, 125, 139–140, 150, 199, 213–214, 231, 236Net interest margin 16Net profi t 15, 17, 38, 48, 66, 108, 152–153, 225, 228–234Non-interest income 16

OOmbudsman 34, 50Operating expenses 7, 15–17, 37–38, 64, 70, 77–79, 97, 111, 144, 150, 158–160, 186, 236Operating income 15–16, 18, 38, 77, 111, 139–140, 144, 158–159, 186Operating profi t 7, 15, 48, 68, 153

PPartner České spořitelny 86, 171–174, 224, 234Penzijní fond České spořitelny 3, 17, 23, 25, 35, 84, 86–87, 111, 171–172, 174, 224, 229PLATBA 24 32Prague Stock Exchange 47, 73, 156Premier 3, 7, 22, 24Private Account 4, 7, 20–22, 25, 27Private clientele 20Public sector 4, 14, 17, 19, 115, 190

RRating 4, 35, 39–40, 76, 89, 115–116, 120–121, 158, 165, 189, 191, 194–195

Realitní společnost České spořitelny 87, 171–172, 174, 224, 227, 232–233REICO investiční společnost ČS 5, 23, 27, 84, 171–172, 174, 224, 231–232Reserves and provisions 82, 105, 163, 181Risks 36–37, 39–44, 50, 64, 77–78, 86, 103, 108, 114, 116, 124, 127, 131, 138, 150, 155, 159, 161, 164, 172, 180, 184, 189, 191, 198., 201, 205–206, 212, 236ROA 15ROE 15, 38

Ss Autoleasing 84, 86, 116, 126, 171–174, 176, 224, 226, 230Securities 19, 23, 63, 68, 73, 77, 81, 92–93, 95–96, 107–109, 113–114, 120–121, 126–130, 134–137, 141–142, 144, 149, 153–156, 158, 161–162, 167, 170, 183–184, 188–189, 194–195, 200–205, 208–211, 215–216, 218–219, 224Service quality 34, 37, 56SERVIS 24 4, 7, 16, 24, 28, 32, 34–35Shareholders’ capital 63, 66–67, 126, 149, 152, 160, 200SME 4, 37, 91–92, 115, 120–123, 166, 190, 194, 197Stavební spořitelna České spořitelny 19–21, 23, 35, 42, 84, 171–172, 174, 224, 226–228

Strategy 15, 22, 30, 34, 37, 39, 42, 48, 50–51, 56Supervisory Board 10–13, 36, 40, 46, 48–49, 52–55, 60, 110, 144, 186, 218–219, 237Supplementary pension insurance 16–17, 23, 100, 229

TTOP Energy 28, 51TOP Podnik II 28Total assets 19–20, 23, 63, 75, 86, 136–137, 139, 141–142, 144, 149, 210–211, 213–216, 218–219, 228–234, 236

241

Česká spořitelna, a. s.Olbrachtova 1929/62, 140 00 Prague 4, Czech RepublicIČ: 45244782Telephone: +420 956 711 111Telex: 121010 SPDB C,

121624 SPDB C,121605 SPDB C

Swift: GIBA CZ PXInformation line: 800 207 207E-mail: [email protected]: www.csas.cz

Annual Report 2010

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