Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language
CREDY BANKA A.D., KRAGUJEVAC
Financial Statements For the Year Ended December 31, 2008 and Independent Auditors Report
Translation of the Independent Auditors Report and Financial Statements Issued in the Serbian language
CREDY BANKA A.D., KRAGUJEVAC
CONTENTS
Page
Independent Auditors' Report 1 - 2
Financial Statements:
Income Statement 3
Balance Sheet 4
Statement of Changes in Equity 5
Cash Flow Statement 6
Notes to the Financial Statements 7 - 58
Translation of the Independent Auditors Report Issued in the Serbian language
INDEPENDENT AUDITORS REPORT
To the Management Board and Shareholders of Credy banka A.D., Kragujevac
We have audited the accompanying financial statements (page 3 to 58) of Credy banka A.D., Kragujevac (the Bank), which comprise the balance sheet as of December 31, 2008 and the related income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Law on Accounting and Auditing of the Republic of Serbia and regulations of the National Bank of Serbia governing financial reporting of the banks. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and the Law on Accounting and Auditing of the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
(Continued) Deloitte d.o.o. Makenzijeva 24 11000 Belgrade Serbia
Business Registry Agency, registry number 4290 Raiffeisenbank a.d., Bulevar AVNOJ -a no. 64a Business account no. 265-1040310000266-36 Tax identification number 100048772 Inscribed and paid capital 150.750,06 EUR
2
Translation of the Independent Auditors Report Issued in the Serbian language
INDEPENDENT AUDITORS REPORT
To the Management Board and Shareholders of Credy banka A.D., Kragujevac (Continued)
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of Credy banka A.D., Kragujevac as of December 31, 2008, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with the Law on Accounting and Auditing of the Republic of Serbia, regulations of the National Bank of Serbia governing financial reporting of banks and basis for the preparation and presentation of the financial statements disclosed in the Note 2 to the financial statements.
Emphasis of Matter
Without qualifying our opinion, we draw attention that the Bank is required to maintain certain ratios pertaining to the volume of its activities within the prescribed ratios, i.e., to harmonize the volume and the composition of its risk-weighted placements with the Law on Banks and Other Financial Institutions and with the National Bank of Serbia requirements. As disclosed in Note 27 to the financial statements, as of December 31, 2008, the ratio of the Banks investments in the non financial sector entities and fixed assets amounted to 106.09% and did not comply with the prescribed maximum of 60% of the Banks core capital.
Belgrade, February 28, 2009
Nada Sui Certified Auditor
CREDY BANKA A.D., KRAGUJEVAC
Translation of the Financial Statements Issued in the Serbian language 4 BALANCE SHEET As of December 31, 2008 (Thousands of RSD)
LIABILITIES Transaction deposits 22 1,547,392 1,914,111 Other deposits 23 4,773,840 4,024,348 Borrowings 24 122,493 8,432 Interest, fee and commission payables and change in the value of derivatives 19,691 13,067 Provisions 26 55,334 41,915 Tax liabilities 3,716 2,983 Tax and dividend payables 369 - Deferred tax liabilities 3.11, 12 48,201 35,962 Other liabilities 27 102,823 81,818
Total liabilities 6,673,859 6,122,636
EQUITY 27 Share and other capital 1,709,001 1,708,931 Reserves 404,263 329,932 Accumulated losses (947,775) (331,938)
Total Equity 1,165,489 1,706,925
Total Liabilities and Equity 7,839,348 7,829,561
OFF-BALANCE-SHEET ITEMS 28 8,102,839 7,665,437
The accompanying notes form an integral part of these financial statements. CREDY BANKA A.D., KRAGUJEVAC
Translation of the Financial Statements Issued in the Serbian language 5 STATEMENT OF CHANGES IN EQUITY Year Ended December 31, 2008 (Thousands of RSD) 2008. 2007. SHARE CAPITAL Balance, beginning of year 1,426,550 1,300,090 Newly issued shares - 126,460
Balance, end of year 1,426,550 1,426,550
OTHER CAPITAL Balance, beginning of year 6,260 6,260
Balance, end of year 6,260 6,260
SHARE PREMIUM Share premium arising from new share issuance 276,191 276,191
Balance, end of year 276,191 276,191
TREASURY SHARES Acquisition (70) (70) Sale of treasury shares 70 - Balance, end of year
- (70)
RESERVES FOR POTENTIAL LOSSES Balance, beginning of year 11,878 11,878 Special reserve for potential losses 245,682 310,442 Additional provision for potential losses to be set aside as appropriation of retained earnings (245,682) (310,442)
Balance, end of year 11,878 11,878
OTHER RESERVES Balance, beginning of year 3 3 Balance, end of year
3 3
REVALUATION RESERVES Balance, beginning of year 318,051 33,121 Property and equipment appraisal effect 120,246 311,276 Effects of deferred taxes arising from the appraisal of property and equipment (12,024) (31,128) Transfer to accumulated losses based on the sale of fixed assets (87) - (Negative)/positive effects of remeasurement of available-for sale securities to their fair value (33,804) 4,782
Balance, end of year 392,382 318,051
ACCUMULATED LOSS Balance, beginning of year (331,938) (137,216) Loss for the year (615,924) (194,722) Transfer from revaluation reserves based on effects of sale of fixed assets 87 -
Balance, end of year (947,775) (331,938)
TOTAL EQUITY 1,165,489 1,706,925 The accompanying notes form an integral part of these financial statements. CREDY BANKA A.D., KRAGUJEVAC
Translation of the Financial Statements Issued in the Serbian language 6 CASH FLOW STATEMENT Year Ended December 31, 2008 (Thousands of RSD) 2008. 2007. CASH FLOWS FROM OPERATING ACTIVITIES Cash provided by/(used in) operating activities Interest receipts 698,840 498,528 Fee and commission receipts 393,800 374,229 Receipts from other operating income 158,663 233,736 Interest payments (319,087) (201,608) Fee and commission payments (60,615) (50,758) Payments to, and on behalf of employees (607,154) (494,648) Taxes, contributions and other duties paid (104,220) (99,878) Payments for other operating expenses (279,136) (244,773)
Net cash (used in)/provided by operating activities (118,909) 14,828 prior to changes in placements and deposits
Decrease/(increase) in placements and increase/(decrease) in deposits Decrease in loans and placements to banks and customers 647,010 - Increase in deposits from banks and customers - 1,929,655 Increase in loans and placements to banks and customers - (2,175,462) Increase in securities at fair value through profit or loss, trading placements and short-term securities held to maturity (87,995) (271,499) Decrease in deposits from banks and customers (24,651) -
Net cash provided by/(used in) operating activities before income taxes 415,455 (502,478) Income taxes paid (688) (6,936)
Net cash used in operating activities 414,767 (509,414)
CASH FLOWS FROM INVESTING ACTIVITY Cash provided by/(used in) investing activity Proceeds from long-term investments in securities - 4,325 Cash used for the purchase of intangible assets, fixed assets and investment property, net (32,770) (24,357)
Net cash used in investing activities (32,770) (20,032)
CASH FLOWS FROM FINANCING ACTIVITIES Cash provided by/(used in) financing activities Proceeds from share issue - 402,651 Cash from borrowings 100,637 - Proceeds from the sale of treasury shares 70 - Cash used for subordinated liabilities (972) (971)
Net cash provided by financing activities 99,735 401,680
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 481,732 (127,766) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 847,062 1,003,066 NET FOREIGN EXCHANGE GAINS /(LOSSES) 32,315 (28,238)
CASH AND CASH EQUIVALENTS, END OF YEAR 1,361,109 847,062
The accompanying notes form an integral part of these financial statements. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 7 Translation of the Financial Statements Issued in the Serbian language
1. BANKS ESTABLISHMENT AND OPERATING POLICY
Credy banka A.D. Kragujevac (hereinafter: the Bank) was established as a shareholding company under the name of J ugobanka J ubanka D.D., Kragujevac, pursuant to the J une 27, 1991 Articles of Incorporation of the Bank and J uly 3, 1991 Decision issued by the National Bank of Serbia. It was inscribed in the Register maintained by the Commercial Court in Kragujevac under the registration number Fi. 1378-91 on J uly 9, 1991.
In order to comply with the Law on Banks and Other Financial Institutions, the Bank was entered in the register maintained by the Commercial Court in Kragujevac on J une 20, 1995 pursuant to the Decision numbered Fi. 1355/95.
At the March 30, 2000 Assembly meeting, the Bank enacted the Decision on merger with umadija banka A.D., Kragujevac. The merger was consummated on J anuary 1, 2000 with the balance of assets, equity and liabilities as of December 31, 1999. The Merger and Acquisition Agreement entered by and between the Bank and umadija banka A.D., Kragujevac was signed on March 30, 2000. Based on its Decision number IV/143 634/1 as of April 20, 2000, the National Bank of Yugoslavia gave its consent to the Amendments and Addendums to Articles of Incorporation of J ugobanka J ubanka A.D., Kragujevac which relate to the abovedescribed merger of umadija banka A.D., Kragujevac. Pursuant to the Decision of the Commercial Court in Kragujevac number Fi. 376/2000, the merger with umadija banka A.D., Kragujevac and establishment of the Main Branch umadija banka Kragujevac were registered.
The change in the registered name into Credy banka A.D., Kragujevac was entered into the Court Register maintained by the Commercial Court in Kragujevac on September 3, 2001, pursuant to the Decision number Fi 1116/2001, and as provided in the NBY Decision as of J une 21, 2001, number 1339 and J une 14, 2001 Decision enacted by the Banks Assembly.
At the December 10, 2004 Assembly meeting, the Bank enacted a Decision to accept the merger of Credy banka A.D., Kragujevac with Srpska regionalna banka A.D., Beograd.
The merger was executed on November 1, 2004 with the assets, equity and liabilities as of October 31, 2004.
By its December 24, 2004 Decision register number 5011, the Bank consented to the Decision number 25744 regarding the Proposal of the Decision on Amendments and Addendums to the Articles of Incorporation in order to account for the merger between Credy banka A.D., Kragujevac and Srpska regionalna banka A.D., Beograd.
Pursuant to the December 24, 2004 Decision enacted by the Commercial Court of Kragujevac number Fi 1376/04, the merger between Credy banka A.D., Kragujevac and Srpska regionalna banka A.D., Beograd was registered.
The Bank is registered to perform the deposit, credit and other banking operations in the country and payment transactions abroad, based on the J une 18, 1999 Decision of the National Bank of Yugoslavia registration number 465. Under the Decision of the National Bank of Yugoslavia registration number 4162 as of November 23, 2001, the Bank became authorized to perform payment transactions abroad (the so-called grand authorization).
At December 31, 2008, the Bank comprised of the Central Office located in Kragujevac, Kralja Petra I Street number 13, 5 Main Branches, 12 Branches, 33 Branch Offices, 2 Business Units, 4 Agencies and 39 outlets.
As of December 31, 2008, the Bank had 707 employees (December 31, 2007: 788 employees). The Banks tax identification number is 101458655. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 8 Translation of the Financial Statements Issued in the Serbian language
2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS
2.1. Basis of Preparation and Presentation of the Financial Statements
Pursuant to the Law on Accounting and Auditing (Official Gazette of the Republic of Serbia no. 46 of J une 2, 2006), legal entities and enterprises incorporated in Serbia are required to maintain their books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity with the prevailing legislation and professional rules which include: the Framework for the Preparation and Presentation of Financial Statements (the Framework), International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), as well as the related interpretations representing an integral part of these standards.
Pursuant to its Decision numbered 011-00-738-2003-01 of December 30, 2003, the Republic of Serbia Ministry of Finance determined and issued the Framework and IAS that were applied as of December 31, 2002, and upon which both the previous and the new Law on Accounting and Auditing from 2006 were based.
The amendments to the IAS, as well as the newly-issued IFRS and the related interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC), upon the aforementioned date, were officially adopted pursuant to a Decision enacted by the Ministry of Finance of the Republic of Serbia with reference to the issuance of International Financial Reporting Standards (number 401-00-11/2008- 16) as published in the Official Gazette of the Republic of Serbia number 16 of February 12, 2008.
However, until the preparation date of the accompanying financial statements, not all amendments to Standards and Interpretations had been translated (particularly after the aforesaid Decision of the Ministry). The Interpretations in application for the accounting periods commencing J anuary 1, 2008, which were not officially translated and adopted by the Ministry are disclosed in Note 2.2.
The accounting regulations of the Republic of Serbia depart from IFRS and certain provisions of IAS 39 Financial Instruments: Recognition and Measurement given that in the Interpretation of the Ministry of Finance number 401-00-222/2009-16 dated February 24, 2009, the negative effects and/or the decline in the value of securities available-for-sale (mostly shares), do not represent a permanent impairment in the value but rather a fluctuation arising from extraordinary circumstances that have lead to a drop in prices, and accordingly, the negative effects arising from the decrease in fair value are not treated as impairment losses on securities available-for-sale, and are not transferred to the income statement, but presented within the balance sheet as an equity deductible.
In addition, the accompanying financial statements are presented in the format prescribed under the Guidelines on the Prescribed Form and Content of the Financial Statements of Banks and Other Financial Institutions (Official Gazette of the Republic of Serbia no. 74/2008 and 3/2009). Such statements represent the complete set of financial statements as defined under the law, which differ from those defined under the provisions of IAS 1, Presentation of Financial Statements and IAS 7, Cash Flow Statement, and differ in some respects, from the presentation of certain amounts as required under the aforementioned standards. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 9 Translation of the Financial Statements Issued in the Serbian language
2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
2.2. Standards and Interpretations Issued, but not yet in Effect
As of the financial statements issuance date, the following standards, amendments and interpretations were issued by the Board and Committee, but were neither in effect nor officially adopted and translated in the Republic of Serbia for the accounting periods commencing on or after J anuary 1, 2008:
IAS 1 Presentation of Financial Statements (effective for financial periods starting J anuary 1, 2009); IAS 23 (Amended) Borrowing costs (effective for financial periods starting J anuary 1, 2009); IFRS 8 Operating Segments (effective for financial periods starting J anuary 1, 2009); IFRS 3 (Amended) Business Combinations and IAS 27 (Amended) Consolidated and Separate Financial Statements (effective for financial periods starting J uly 1, 2009); Amendments to IFRS 2 Share-Based Payment - Vesting Conditions and Cancellations (effective for financial periods starting J anuary 1, 2009); Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements (effective for financial periods starting J anuary 1, 2009); Amendments to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items (effective for financial periods starting J uly 1, 2009); Amendments to IFRS 1 First-time adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements (effective for financial periods starting J anuary 1, 2009); Improvements to International Financial Reporting Standards 2008 (most changes are effective for financial periods starting J anuary 1, 2009); Improvements to IFRS 1 First-time Adoption of International Financial. Reporting Standards (in effect from J uly 1, 2009); IFRIC 17 Distributions of Non-cash Assets to Owners (in effect from J uly 1, 2009);
Also, as of the financial statements preparation date, the following interpretations were not officially adopted by the Ministry.
IFRIC 13 Customer Loyalty programs (effective for financial periods starting J uly 1, 2008); IFRIC 14 Interpretation on IAS 19 The Limit on a Defined Benefit Assets, Minimum Funding Requirements and their Interaction (effective for the accounting periods starting J anuary 1, 2008); IFRIC 16 Hedges of a Net Investment in a Foreign Operation. (effective for financial periods starting October 1, 2008).
In accordance with the aforementioned, the accompanying financial statements cannot be described as having been prepared in accordance with IFRS and IAS.
In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3 which are in conformity with the accounting, banking and tax regulations prevailing in the Republic of Serbia.
The Banks financial statements are stated in thousands of dinars (RSD). The dinar is the official reporting currency in the Republic of Serbia. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 10 Translation of the Financial Statements Issued in the Serbian language
2. BASIS OF PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
2.3. Comparative Information
In order to conform the presentation of figures to the current reporting period, certain reclassifications have been made to the amounts reported in the financial statements for the year ended December 31, 2007.
2.4. Use of Estimates
The presentation of the financial statements requires from the Banks management to make best estimates and reasonable assumptions that effect: the assets and liabilities amounts, the disclosure of contingent liabilities and receivables as of the date of preparation of the financial statements, as well as the income and expenses arising during the accounting period. These estimations and assumptions are based on information available to us, as of the date of preparation of the financial statements. However, actual results may vary from these estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1. Interest and Commission Income and Expenses
Interest income and interest expense, including penalty interest and other operating income and expenses arising on the interest-bearing assets and/or interest-bearing liabilities, are recorded in the income statement on an accrual basis (accounting basis). Interest income also includes positive effects of hedging financial instruments, mostly based on linking the annuity to the RSD:EUR exchange rate, and is accounted as of the annuitys maturity date, i.e., collection date.
With placements adequately provided for, the Bank suspends the interest accrued, but not collected, until the allowance for impairment is formed.
Receivables and payables for suspended interest are stated within off-balance sheet items.
Fee and commission income and expenses are recognized when incurred as the accrued income is collected simultaneously.
Fees and commissions are mostly earned by rendering services of payment transfers, loan administration, issuance of guarantees and letters of credit, as well as other services. Loan origination fees which cover the expenses incurred thereof, are recognized when collected, while loan administration fees are deferred to the loan repayment period regardless of the time when these are collected and are recorded within interest income.
3.2. Foreign Exchange Translation
Transactions denominated in foreign currencies are translated into dinars at official exchange rates at the date of each transaction.
Assets and liabilities denominated in foreign currencies are translated into dinars by applying the official exchange rates that are prevailing at the balance sheet date.
Net foreign exchange gains or losses arising upon the translation of transactions, and the assets and liabilities denominated in foreign currencies are credited or charged to the income statement.
Commitments and contingent liabilities denominated in foreign currencies are translated into dinars by applying the official exchange rates that are prevailing at the balance sheet date. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 11 Translation of the Financial Statements Issued in the Serbian language
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.3. Property, Equipment and Intangible Assets
At December 31, 2008, equipment and intangible assets are stated at cost less accumulated depreciation/amortization and impairment losses, if any.
Items of property are initially measured at cost. In the subsequent measurement of property (land and buildings), the Bank applies the revaluation model in accordance with IAS 16 Property, Plant and Equipment, whereas the cost model is applied to equipment.
The revalued amount is assessed by a certified appraiser. In the assessment the cost method has been applied. The appraisal is performed on a regular basis, i.e., when the Banks management assesses that the book value of property significantly differs from its market value. The positive revaluation effects are credited to revaluation reserves. The decrease in the value of property is charged to revaluation reserves created in the revaluation of the property at issue. However, the decrease shall be charged to expenses of the period in which the difference is identified, if the revaluation surplus relating to that asset does not suffice.
Upon disposal of property, revaluation reserves arising from the asset sold are transferred to retained earnings from previous years.
Property and other assets, including tangibles acquired in lieu of debt settlement and leased, are classified as investment property. Investment property is stated at cost.
Depreciation and amortization are calculated on a straight-line basis by applying the following, annual rates in order to write off the assets over their estimated useful lives:
Intangible assets 20% Computers 20.0% - 50.0% Buildings 1.1% - 4.0% Motor vehicles 14.3% - 33.3% Investment property 1.3% Furniture and other equipment 7.0% - 50.0% Other 7.0% - 16.5%
The depreciation of property and equipment commences when these assets are placed into use.
3.4. Loans
Loans are stated in the balance sheet at amortized value which comprises the initial amount of approved placement, increased by the accrued interest less repayment of the loan principal and allowance for impairment, based on the assessment of specifically-identified exposures and losses that are inherent in the Banks loan portfolio. The Banks management applies the internally adopted methodology in its evaluation which is disclosed in Note 3.5.
Loans that are disbursed in dinars and index-linked to the RSD:EUR exchange rate or to the officially published coefficients derived from the changes in the retail price growth index, are revalued in accordance with the specific individual loan agreements in question. The effects of such revaluation are included under gains and losses on the valuation of assets and liabilities. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 12 Translation of the Financial Statements Issued in the Serbian language
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.5. Allowances for Impairment and Provisions for Contingent Liabilities
In the assessment of credit risk, the management applies its internal model for risk assessment to the accompaniment of the methodology for the calculation of allowance for impairment of balance sheet assets and provisions for losses on off-balance sheet items. The credit risk assessment takes the following into account: financial positions of debtors from the aspect of profit stability, liquidity gap between items of assets and liabilities, cash flow adequacy as a difference between the net cash flow from debtors operating activities and short-term financial liabilities of debtors and indebtedness expressed as debt to equity ratio, customer regularity in setting its contractual liabilities towards the Bank, i.e. default in settling contractual liabilities and quality of collaterals provided against the Banks receivables (first class, adequate or otherwise rated with respect to its quality).
Pursuant to internal criteria for the credit risk assessment, the Bank rates customers, receivables from customers and legal entities as belonging to performing assets, risk-weighted assets and non- performing assets.
Receivables from entrepreneurs and registered farmers are rates pursuant to their regularity in settling materially significant liabilities towards the Bank within the last 12 months, based on their liquidity and due settlement of their tax dues.
The calculation of the allowance for impairment of receivables from retail customers is performed on individual basis for receivables from debtors owing more than RSD 1,500,000.00 (in case of frequent defaults and deterioration in creditworthiness) and collectively, for all other receivables due from retail customers designated into groups per type of product: loans, credit cards, current accounts and receivables for which legal suits have been filed.
The methodology for the calculation of allowance for impairment of balance sheet assets and provisions for losses on off-balance sheet items closer determines the procedure and criteria for the calculation of allowance for impairment.
For the assessment of credit risk, the internal model is applied with the methodology for the calculation of allowance for impairment of the balance sheet assets and provisions for losses on off-balance sheet items, according to which all the Banks receivables classified pursuant to the provisions of the Decision of the National Bank of Serbia delineating the classification of balance sheet assets and off-balance sheet items, subject to the credit risk assessment.
Loans in dinars, for which hedging is achieved by linking the dinar to EUR exchange rate, are revalued in accordance with the agreement pertinent to each loan. The effect of reconciling with the exchange rate as of the balance sheet date is recorded through income statement.
Special reserve for potential losses is determined in accordance with the relevant NBS Regulations. Loans, other placements, guarantees and off-balance-sheet exposures are classified into categories A, B, V, G and D, in accordance with the evaluation of their collectability and associated risk exposures, which depend upon the number of days the payments are in arrears, financial standing of the counterparty, and the quality of the collateral obtained on the exposures. The estimated amount of special reserve for potential losses is calculated by applying the percentages ranging between: 1% and 2% for placements classified into the A category, between 5% and 10% for the placements classified into the B category, between 20% and 35% for the V category placements, percentage of 40% to 75% for the G category placements and 100% for placements in D category. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 13 Translation of the Financial Statements Issued in the Serbian language
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.5. Allowances for Impairment and Provisions for Contingent Liabilities (Continued)
The difference between the amount of special reserve for potential losses calculated in accordance with the National Bank of Serbia Decision on the Classification of Balance Sheet and Off-Balance Sheet Exposures, and the amount of allowances for impairment and provision for contingent liabilities estimated in accordance with the internally adopted methodology, is presented as special reserve for potential losses within the equity.
Special reserve for potential losses is set aside as appropriation of retained earnings. If current year profit and retained earnings from prior years are not sufficient to cover the estimated amount of special reserve, the difference is recognized as additional required provision and represents the item to be deducted from equity.
3.6. Trading Securities
Trading securities comprise of securities which are held for the purpose of making a profit by trading it in the near term. Trading securities are recorded at cost and, as of the balance sheet date, these securities are remeasured to their fair values. All realized and unrealized gains arising on sale, and any changes in their fair values are charged to expenses/credited to income within Gains /(Losses) on sale of securities.
3.7. Securities Held-to-Maturity
Securities held-to-maturity represent securities for which there is a positive intention and ability to hold to maturity. Securities held-to-maturity consist of bills of exchange held-to-maturity. All securities are initially recorded at cost. As at the balance sheet date, securities held-to-maturity are recorded at amortized cost, using the original effective interest rate, less provisions for impairment, if any.
3.8. Securities Available-for-Sale
Securities for which there is intention to hold them for an indefinite time period that can be sold to meet liquidity needs or due to changes in interest rates, foreign exchange rates or prices of equity, are classified as securities available-for-sale. These securities are comprised of equity instruments issued by banks and other legal entities, as well as other securities available-for-sale.
Following the initial recognition, securities available-for-sale are presented at fair value. The fair value of securities not listed on the stock exchange is based on the currently offered prices on the market. Unrealized gains and losses arising from securities available-for-sale are recorded within revaluation reserves, until such security is sold, collected or in some other way realized, or until the security is permanently impaired. When securities available-for-sale are sold or become impaired, cumulative fair value adjustments recognized within equity are recorded in the income statement.
Equity investments in other legal entities that are not quoted on an active market are excluded from being measures at fair value and are stated at cost, net of allowance for impairment. Gains and losses on the sale of these securities are credited or charged to income statement with Gains/(losses) on sale of securities available-for-sale.
3.9. Cash and Cash Equivalents
For the purposes of the cash flow statement, Cash and cash equivalents include cash, balances on the current accounts held with other banks, gold and assets held on the gyro account. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 14 Translation of the Financial Statements Issued in the Serbian language
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.10. Managed Funds
The Bank manages funds on behalf of, and for the account of third parties, charging fees for these services. These items are not included in the Banks balance sheet.
3.11. Income Taxes
Current Income Taxes
Income tax is payable at the rate of 10% on the tax base reported in the annual corporate income tax return as reduced by any applicable tax credits. The taxable base stated in the income tax return includes the profit shown in the statutory statement of income, as adjusted for differences that are specifically defined under statutory tax rules.
The tax regulations in the Republic of Serbia do not envisage that any tax losses of the current period be used to recover taxes paid within a specific carry back period. However, any current year losses may be used to reduce or eliminate taxes to be paid in future periods, but only for duration of no longer than ten years in succession.
Deferred Income Taxes
Deferred income taxes are provided using the balance sheet liability method, for temporary differences arising between the tax bases of assets and liabilities and their carrying values in the financial statements. The currently-enacted tax rates or the substantively-enacted rates at the balance sheet date are used to determine the deferred income tax amount. Deferred tax liabilities are recognized on all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, and the tax effects of income tax losses and credits are available for carry forward, to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences and the tax loss/credits of the carry forwards can be utilized.
Indirect Taxes and Contributions
Indirect taxes and contributions include property taxes and various other taxes and contributions paid, pursuant to effective republic and municipal regulations.
3.12. Employee Benefits
The Bank does not have defined benefit plans or share-based remuneration options and there are no identified liabilities thereof as of December 31, 2008. At the aforementioned date, the Bank made provisions based on the estimated present value of retirement benefits to which employees are entitled upon regular retirement.
Long-term liabilities of the Bank arising from retirement benefits payable to an employee once the conditions prescribed by the Labor Law have been met, stated at December 31, 2008 represent the present value of future payments to employees determined under the following assumptions:
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 15 Translation of the Financial Statements Issued in the Serbian language
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.13. Fair Value
The accompanying financial statements are prepared on a historical cost basis, including adjustments and provisions made to reduce assets to their estimated recoverable amounts.
It is the policy of the Bank to disclose the fair value information on those financial assets and financial liabilities for which published market information is readily and reliably available, and whose fair value is materially different from their recorded amounts. Sufficient market experience, stability and liquidity do not exist for the purchase and sale of loans and other financial assets or liabilities, given that published market information is not readily available. Hence, fair value cannot be reliably determined. In the opinion of the Banks management, amounts expressed in the financial statements reflect the fair value which is most reliable and useful for the needs of the financial reporting in accordance with the Law on Accounting and Auditing of the Republic of Serbia.
3.14. Segment Information
The largest portion of its business operations is performed on the territory of the Republic of Serbia. The concentration of financial assets per separate industries is presented in Notes to the financial statements. The revenues which the Bank realizes through its broker-dealer department are presented within fee and commission income.
4. RISK MANAGEMENT
Managing risks comprises effective supervision, control and active management of credit and non- credit risks comprising liquidity risks, interest rate risk, foreign currency risk and other risks.
The Banks Management Board is responsible for the establishment of a unique system for the risk management and supervision over the system and is under obligation to ensure that the Executive Board closer identifies the risks to which the Bank is exposed as well as to exercise control over the risks in accordance with the adopted policies and procedures.
The Banks Executive Board identifies and measures risks to which the Bank is exposed in its operations and applies the principles of risk management as approved by the Management Board of the Bank. The Board for monitoring the Banks business operations analyzes and adopts the proposals of the Banks policies and procedures in respect of risk management and internal controls submitted to the Management Board for further consideration and adoption. The Board for monitoring and managing risks considers the reports on risks in the Bank and delivers them to the Asset and Liability Management Board. The Investment Board monitors and analyzes the compliance of the Banks business operations, expressed through the positions in the Trading Book, with the prescribed limits determined pursuant to the Decision enacted by the Bank and another Decision issued by the NBS.
The Bank has adopted procedures securing the control and consistent application of all internal Banks procedures with reference to risk management, as well as the procedures for regular reporting to the Banks bodies and to the National Bank of Serbia regarding risk management. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 16 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.1. Credit Risk
Credit risk relates to the risks that customers will not be able to settle its liabilities towards the Bank in full and when due. The Bank is secured against credit risk as follows:
- by calculating and allocating reserves for potential losses and losses contingent on balance sheet assets and off-balance sheet items of the Bank, pursuant to the NBS regulations and enactments of the Bank, - by monitoring the changes in operating ratios and reconciling these ratios with percentages prescribed by the NBS, - by monitoring the Banks exposure to credit risk arising from the impact of dinar exchange fluctuations on the financial position of debtors pursuant to the Banks methodology, - by monitoring the participation of non-performing assets (G, D category) in the total classified assets so that it has a tendency towards the average in the banking sector, - by daily customer monitoring from the aspect of default in collection noticing first signs that a customer may be experiencing certain issues on operations, - by strict adherence to the rules for the activation of collaterals accepted, as prescribed in the operating policies, - by collecting placements so that the percentage of collectability of matured liabilities is not below 90%, - by dispersion of placements per separate industries and customers, while taking care that the Banks exposures to individual clients or groups of related parties is within the limits prescribed by the NBS.
The credit risk management principles are the following:
a) Clearly defined competencies and responsibilities, procedures in the decision-making process in the area of credit and other types of engagements with legal entities and entrepreneurs, and targets and objectives set under the Operating Plan and monitoring the implementation, as in accordance with the credit policy adopted by the Bank,
b) The application of defined criteria for the loan origination with the prescribed rating of customer creditworthiness, monitoring the compliance with the conditions that are to be fulfilled upon loan origination or upon any other engagement, as in accordance with the Banks Operating Policy.
c) Adequate maintenance of credit files in accordance with the NBS Decision on the Procedure and Content of a Credit File.
d) Defined criteria for measuring the risk inherent in placements, pursuant to the Procedure for identifying assessment, diminishing and monitoring credit risk and Methodology for defining criteria for the calculation of special reserve for potential losses, and then a developed system of communication and instructions exchanged between credit departments exposed to risk in direct contact with the customer and Portfolio and Credit Risk Department managing that risk, as well as periodic control and assessment performed by the internal auditor regarding the effectiveness of risk control.
e) Education of employees within the Risk Management Sector and Portfolio and Credit Risk Department, through regular reading of reference books, participations in seminars in the field of risk management, technological innovations of the work process and constant education of employees in the Branch Offices with the object of a more effective application of procedures and guidenaces. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 17 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.1. Credit Risk (Continued)
The process of credit risk management is executed in the Portfolio and Credit Risk Department within the Risk Management Sector. In the aim of easier identification and assessment of credit risk upon the origination of loans and other sorts of engagement, uniformity is to be applied to all organizational parts in respect of compiling documentation and delivering standardized information upon placement approval, which is defined in the credit file content procedure, know- your client procedure and guidance on the unique data processing at the request of legal entities, entrepreneurs and unit of the local self-government for the Banks body in charge.
The compilation of all necessary documentation, writing of standardized information for placement approval and delivering it to the Portfolio and Credit Risk Department is the responsibility of the credit officers that are, jointly with the manager of the organizational part at issue, also responsible for the accuracy of input data and complexity of documentation included in the debtors credit file.
Based on the data obtained from the analysis of debtor creditworthiness and its regularity in liability settlement, the officers working in the Portfolio and Credit Risk Department rates debtors into risk groups:
a) Low risk (pass) with the following characteristics: the customer maintains significant and/or long-lasting connection with the Bank through its business operations or if the customer has been operating for 5 years at least and has a high quality management; if its account has not been frozen within the last year; the customer has adequate experience in the activity it performs; it has a clear and stabile source of debt repayment; has been operating with profit in the last two years; realizes cash flows sufficient to meet its dues; the maturities of its liabilities match or significantly match the maturities of its assets; there are no debts that exceed capital; it offers first-class or adequate collaterals. Debtors with the majority of these characteristics are classified into the A or B category and are treated as low credit risk exposures.
b) Medium exposure (risk-weighted assets) imply the following characteristics: the account of such customer was frozen from time to time for more than 10 days in the last year; the source for debt repayment is not clear or is unreliable; the customer invests an insignificant amount of its own resources into the project; its cash flows are insufficient to cover liabilities; the maturities of its liabilities do not match or significantly mismatch the maturities of its assets; the customer did not operate with profit in any of the last two years; the management fluctuates. Debtors with the majority of such characteristics are classified into V category. Exceptionally, if the engagement is secured by adequate collateral, the receivable can be classified into B category.
c) High risk (non-performing assets) show the following characteristics: there is no visible source of debt repayment; the customer incurs losses that exceed its equity; it has liabilities that are more than 30 days past due, while operating with loss; its account is frozen for more than 90 days in succession, it was founded in the last two years, and there is no cash flow projection; the Bank has doubtful receivables from the customer. Debtors showing these characteristics are classified into the categories G and D. The decision on undertaking new engagements with these debtors may be enacted by the Executive Board if the engagement does not exceed three months, and if the engagement is within the decision-making limitations defined by the Management Board; whereas, the Management Board enacts decisions on engagements longer in duration. Exceptionally, if the engagement is secured by adequate collateral, the decision on the exposure is enacted by the Banks Credit Board. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 18 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.1. Credit Risk (Continued)
A credit officer involved in the origination process must obtain collaterals pursuant to the Banks Business Policy, and in the form of standard information forward it to the Portfolio and Credit Risk Department, whereas the assessment of the collaterals provided by the officer working in Portfolio and Credit Risk Department.
The credit officer is bound to keep track of the customer operations, the customer liability settlement towards the Bank and monitor the updatedness of credit files taking care of its completeness, accuracy and any fluctuations in the value of collaterals (adequate collaterals).
A special procedure regulates the manner of managing credit risk occurring and emerging in the Banks receivables based on loans approved and placements with retail customers.
Credit risk in the Bank is identified based on: customer creditworthiness, customer delinquency in settling its liabilities towards the Bank and quality of collaterals that stand surety for the Banks receivables.
Creditworthiness is the basic condition for obtaining loans and advances from the Bank. Total monthly credit liabilities of a private individual are comprised of a sum of liabilities arising from loans, credit cards (monthly liability from the aggregately approved credit card loan), 5% of entire overdraft facilities per current account, activated sureties provided against loans or agreed-upon finance leases, as well as 50% of amounts of sureties against loans.
The assessment of credit risk with receivables from retail customers is conducted according to the Methodology applied in defining criteria for calculating special reserves for potential losses arising from receivables from retail customers, based on which a degree of risk is determined, as is the amount at risk, i.e. rate category of receivables.
The service engaged in coordinating, monitors the report on the classification of receivables on quarterly basis and cooperates with the Portfolio and Credit Risk Department within the Sector in charge of placements and risk management, with the object of prescribed timely reporting to the National Bank of Serbia.
The coordination service reports to the Asset and Liability Management Board in respect of the total funds engaged in loans and advances to retail sector on daily basis, and based on the Decision made by the Banks Commission for approving loans to retail customers.
Once a month or when necessary, the organizational parts involved in retail operations report to the Board for monitoring and managing risks, as well as to the Asset and Liability Management Board, on the regularity of collections in retail.
4.2. Liquidity Risk
Liquidity risk relates to the adverse effects on the financial results of the Bank contingent on the Banks inability to settle its matured liabilities when due.
For the Bank to insure itself against such risks and avoid the sanctions of the regulatory body, the procedures defining the activities for the implementation of liquidity risk management policy have been adopted and they prescribe the manner of identifying, measuring, mitigating monitoring liquidity risk pursuant to legal requirements. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 19 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.2. Liquidity Risk (Continued)
The Bank is under obligation to reconcile its liquidity ratio with the requirements of the NBS Decision, where the critically low liquidity risk internally set at no less than 1.5 when it is calculated as the average of liquidity ratio for all working days in the month (NBS Decision prescribes the ratio of 1.0). However, it does not have to be below 1.3 for more than three working days in succession (Decision prescribes 0.9), i.e. it amounts to 1.2 at least when calculated for a single day (Decision prescribes 0.8).
For the purpose of identifying and measuring liquidity risk, the Sector in charge of assets provides information for the timely and continued liquidity risk management, as well as for:
- planning the scope of inflows and outflows of dinar and foreign currency assets (daily, monthly), as well as matching between the maturities of the Banks receivables and payables, including the assessment of potential commitments to invest the Banks cash funds,
- daily determining and monitoring of the average balance of dinar and foreign exchange reserve held with the NBS,
- measuring and monitoring the liquidity for each and every currency significant for the Banks entire liquidity through monitoring liquidity and currency matching between receivables and payables denominated in the currency at issue,
- monitoring the compliance of business operations with the limits set in the Bank with respect to liquidity risk management delineated in the said Procedure,
- the analysis and assessment of stability in all dinar and foreign currency transaction deposits and other demand deposits of the Bank, as well as planning and assessment of contingent liabilities arising from dinar and foreign currency time deposits of the Bank,
- keeping track of dinar conversion into foreign currency and vice versa, as well as conversion from one currency into another at customers requests and as the Banks needs,
- monitoring the balance of cash in foreign currency, assessment of the needs for and timely acquisition of cash,
- determining and monitoring the liquidity ratios on daily basis and calculation of the average liquidity ratios for each day in a month.
For the purpose of daily measuring and monitoring the net cash flows on the part of the Banks Management Board, a Board has been established as an operating body in charge, inter alia, of managing net cash flows, measures necessary for establishing and maintaining the adequate level of dinar and foreign currency liquidity. For the needs of measuring daily cash flows, the Sector in charge of assets provides data both from its own scope of work and from services concerned, which are valid for timely management of cash flows, as well as for the needs of the Asset and Liability Management Board.
The Sector in charge of assets undertakes measures for regulating cash flows and reports of results thereof to the Executive Board, Risk Management Board and Placement and Risk Management Department further reporting to the Asset and Liability Management Board of the Bank. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 20 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.2. Liquidity Risk (Continued)
At the Boards meeting, daily reports are discussed, movements in dinar and foreign currency liquidity are analyzed, as well as liquidity gaps dating from the day before or from previous periods, while the inflows and outflows of resources are forecasted for that particular day or for the following days, and based on the data available, for the purpose of timey undertaking the necessary measures and activities for achieving an optimal level of net cash flows, that ensure timely dinar and foreign currency payment transactions, timely discharge of all matured liabilities of the Bank and meeting all the customer demands (corporate and retail customers) for additional sources of finances and other forms of the Banks engagement.
Measuring and monitoring liquidity per currencies is performed by the Sector in charge of assets with its the Service for dinar and foreign currency deposits and liquidity, which measures and monitors liquidity per separate currencies EUR, USD and CHF, and collectively for all currencies, based on the daily report on the foreign currency ratio supplied through the DEV form. Such monitoring also makes it possible to keep track of proportion between long and short positions, on one side, and the Banks equity, on the other. If measuring and monitoring shows that there are significant departures in certain currencies or aggregately, which leads to a higher liquidity risk, the Sector in charge of assets - Service for dinar and foreign currency deposits and liquidity, reports to the Executive Board, Asset and Liability Management Board, Risk Management Department enacting measures aiming to reconcile foreign currency positions in certain currencies:
- purchase or sale of certain currency, - conversion from one currency into another, - purchase and sale of securities denominated in a certain currency, - decreasing or increasing dinar liabilities indexed to a currency clause.
At the proposal of the Asset and Liability Management Board, the Banks Executive Board determines exact measures for the reconciliation of liquidity risk ratios, i.e. elimination of a critical level of liquidity determined in accordance with the Procedure used to identify, measure and assess liquidity risk.
With the object of maintaining the prescribed liquidity level and diminishing risk of critical level of liquidity, the Bank undertakes the following measures:
- engagement to increase deposits, capital and to obtain other sources of finances, - effective collection of matured receivables, sale of certain type of securities (in dinars or in foreign currency), - the sale of foreign currency surpluses for dinars up to the desired level, which does not jeopardize the Banks foreign currency liquidity, - limitation or complete discontinuance in approving and disbursing loans, - limitation or complete discontinuance in discounting securities, - limitation or complete discontinuance in issuing guarantees and other forms of sureties, - limitation or complete discontinuance in issuing letters of credit and other instruments used in payment transfers, - limitation or complete discontinuance of payments from its gyro account, - use of interbanking loan for liquidity purposes, obtained under most favorable terms, - undertaking other measures aiming to reconcile the inflows and outflows of resources. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 21 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.3. Currency Risk
Currency risk implies risk from negative effects on the Banks financial result and capital due to changes in exchange rates. The Bank is exposed to this risk through the items carried in the banking and trading book.
By means of adopted Procedures, the activities in respect of currency risk management policy implementation are defined and the manner of identifying, measuring, relieving and monitoring risk is prescribed in accordance with the legal requirements, in the aim of eliminating risk from incurring negative effects on the financial results and the Banks capital due to the movements in the foreign exchange, protecting the Bank from these risks and avoiding sanctions that may otherwise be imposed by the regulatory body.
The currency risk ratio is the proportion between the total net open foreign currency position of the Bank and the Banks capital, calculated in accordance with the Decision delineating the capital adequacy in banks. The total open foreign currency position of the Bank represents the absolute value of the total long or total short foreign currency position, whichever is the greater one.
The Bank is under obligation to maintain the balance between its foreign currency assets and its foreign currency liabilities (including the dinar items of assets and liabilities indexed to a currency clause), so that its total net open foreign currency position (including the absolute value of net open position in gold), at the end of each working day, does not exceed 20% of its capital, and in its procedures, the Bank defined a critical level of currency risk as amounting to 18% of the Banks capital.
The hedge against currency risk in the Bank is provided by managing:
- total foreign currency assets and liabilities of the Bank, taking care of their maturity, currency, balance and liquidity matching, - the risk of changes in intercurrency relations, taking care of its maturity, currency, balance and liquidity matching between the Banks assets and liabilities denominated in a certain currency, - risk from the change in the value of local currency, so that the risk from changes is transferred to the ultimate beneficiary in the manner defined by the Banks Operating Policy, and the amount of assets for which there is no hedge against currency risk, needs to be reconciled with the amount of risk-weighted liabilities of the Bank indexed to a currency clause, - the optimum level of foreign currency liquidity ensures long-term solvency in the Bank and timely, effective and high quality payment transactions in foreign currency performed abroad. It makes it possible for the Bank to extend loans and advances to its customers in the form of loans and other forms of foreign currency engagements or make deposits with some other domestic or foreign bank, its foreign currency surplus that remains once all prescribed and other liabilities and reserve requirements have been settled, - the optimal proportion between the repurchase and sale of currency from retail and corporate customers, as well as entrepreneurs, and/or by purchasing or sale of foreign currency or cash on Interbank Market, - when necessary, by converting one into other currency in the aim of unimpeded operations and realizing the best possible financial results, such as reconciliation of foreign currency ratios, i.e. eliminating the critical level of long or short position of the Bank expressed in a certain currency. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 22 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.3. Currency Risk (Continued)
At the proposal of the Asset and Liability Management Board, the Executive Board determines concrete steps to be taken as a hedge against currency risk, i.e. measures to be taken to reconcile the foreign currency risk ratios, by eliminating the critical level of long and short foreign currency positions in certain currency or by increasing the Banks capital by means of increasing profitability or by increasing capital.
The measures for eliminating short foreign currency position of the Bank in a certain currency are as follows:
- the purchase of foreign currency or cash from customer or on Interbank Market in certain currency the conversion of foreign currency assets from one currency into another or from currency into cash and vice versa, - the purchase of securities stated in a foreign currency for dinars decrease in liabilities denominated in dinars indexed to a currency cause.
Measures to eliminate a long position of the Bank in a certain currency are the following:
- the sale of foreign currency or cash to customers or on Interbank Market in a certain currency conversion of foreign currency assets from one currency into another or by converting foreign currency assets in the local currency, and vice versa, - the sale of securities denominated in a foreign currency for dinar amounts decreasing the dinar credit engagement of the Bank with a currency clause where the Bank did not agree on the hedge against the fluctuations in foreign exchange increase in dinar liabilities with a currency clause and the like.
4.4. Interest Rate Risk
Interest rate risk relates to the negative effects on the financial results and capital of the Bank contingent on the movements in interest rates, and the Bank is exposed to such risk based on the items carried in the banking book.
The Bank separately analyzes the exposure to interest rate risk based on the following:
1) Risk inherent in the maturity mismatch (for items with fixed interest rate) and repricing (for items with variable interest rate) for separate items of assets and liabilities, as well as off- balance sheet items of the Bank (repricing risk), 2) basis risk (the risk of the so-called imperfect correlation in the movement in rates of collection and payment arising from different characteristics in respect of maturities, i.e. repricing and 3) the risk of options imbedded in the interest sensitive items of assets and liabilities, as well as in the off-balance sheet items of the Bank (optionality risk). The emergence of this risk is associated with situations such as withdrawal of deposits without defined maturities or early loan repayment.
The Procedure used to identify interest rate risk enables timely and comprehensive identification of interest rates to which the Bank is exposed, as well as the analysis of causes leading to its appearance.
The Bank is exposed to the interest rate risk in case of a maturity gap between its interest bearing assets and liabilities with fixed interest rates, as in the case of mismatch between the dates of recalculation of interest rates applied to assets and liabilities with variable interest rates. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 23 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.4. Interest Rate Risk (Continued)
Interest risk is identified based on the following elements:
- movements in interest rates on the financial market, changes in the interest reference rate of the NBS, as well as the retail price growth interest, -liquidity gap between the balance sheet positions, - proportion between the interest bearing and non-interest bearing assets and liabilities, - participation of positions with variable and fixed interest rates in the interest bearing assets and liabilities, - data included in the balance sheet and income statement and - average weighted interest rate accrued on the assets and liabilities on a certain date.
Information for determining the aforementioned elements is provided by the Sector in charge of assets, Retail Sector, Finance and Accounts Department on the basis of updated book balances including all bookkeeping changes while using adequate databases comprised in the information system.
For measuring interest rates, quantitative methods and ratios for expressing the scope of interest rate risk are used.
Measuring interest rate risk is performed by determining the gap ratio, being the proportion between interest sensitive assets and interest sensitive liabilities.
In order to determine the ratio of interest sensitivity it is necessary to identify interest-bearing positions within assets and liabilities.
Within the interest-bearing assets and liabilities, it is necessary to establish items with fixed, i.e. variable interest rates.
For the items with fixed interest rates, maturities are determined, whereas for the items with variable interest rates, it is the dynamics of movements in interest rates that is being determined.
Disaggregation of interest-bearing assets and liabilities based on the previously determined maturities, makes it possible to determine periodic gaps for individual maturities, as well as to determine cumulative gap.
The interest sensitivity quotient may have the value of 1 when the gap position equals zero and the sensitivity of assets and liabilities is matched. If the quotient has the value above 1, then the gap position is positive, implying faster growth of interest income, as well as the exposure of the Bank to the risk in case of a decrease in interest rates.
If the quotients value is below 1, it is a negative gap position which assumes faster growth of income arising from the movements in interest rates, as well as the exposure of the Bank to the risk in case interest rate marks a growth. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 24 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.4. Interest Rate Risk (Continued)
Based on the outstanding maturities, i.e. recalculation of interest rates, the scenarios for analyzing the impact of projected changes in interest rates relating to interest bearing assets and liabilities, by calculating the net change in the financial results under the assumption of:
- changes in interest rates applied to placements made and deposits received with the same intensity for all time intervals on annual basis, - changes in interest rates applied to placements made and deposits received with different intensity for all time intervals and - changes in interest rates applied to placements made and deposits received with the same intensity for different time intervals.
Interest risk is assessed as acceptable:
- if the average weighted interest rate applied to interest bearing assets is above the average weighted interest rate applied to interest bearing liabilities by 8 percentage points, - if the analysis performed based on the scenario indicates a positive effects on the financial result in case of projected changes in interest rates.
Mitigating risk involves determining measures and rules for the application of those measures relating to the assumption, reduction, diversification, transfer and aversion of risks identified or assessed, which means continued analysis and proposing measures for removing the reasons for the unacceptable level of interest rate risk.
4.5. Investment Risk
The Bank is bound by the legal requirements and secondary legislation acts to provide assumptions indicating successful business operations of the Bank under terms of acceptable risk parameters, so as to achieve its business objectives, including positive financial result and preservation of the Banks equity.
The risk inherent in the Banks investments in other legal entities relates to the following:
a) investments of the Bank in a single entity outside the financial sector b) total investment of the Bank in the entities outside the financial sector and capital expenditures.
The Banks investments in a single person outside the financial sector pursuant to the NBS Decision must not exceed 10% of the total Banks capital. The total Banks investments in entities outside the financial sector and into the Banks fixed assets (capital expenditures) must not exceed 60% of the Banks capital.
The Banks investments in the entities outside the financial sector do not include purchase of shares for the purpose of their resale within 6 months from the share acquisition date.
The Procedure for identifying risks inherent in the Banks investments enable timely and comprehensive identification of risks to which the Bank is exposed, as well as the analysis of reasons leading to its appearance. The Bank is exposed to investing risk and risk from potential fluctuations in the value of investment in other legal entities that are outside the financial sector and capital expenditures. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 25 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.5. Investment Risk (Continued)
Measuring and/or assessment of investment ratios of the Bank is performed on monthly, quarterly and annual basis and when so requested by the Banks Executive Board, by preparing reports based on the Banks bookkeeping data and defined parameters applied in the calculation stipulated in the NBS Decision on risk management, where the critically high level of investments in other legal entities and capital expenditures is considered to be the following:
- 8% for the Banks investments in a single entity outside the financial sector and - 58% for the Banks total investments in the entities outside the financial sector and capital expenditures. The report on the ratio is prepared by the Banks Finance and Accounts Departments and it is delivered to the regulatory body in the manner and following the timeline stipulated in the relevant NBS Decision.
The assessment of fluctuations in the ratio entails the projections of the amount of ratio for a certain time interval, and it is determined by assessing the expected changes:
- amount of capital expenditures, - amount invested in shares and equity investments and - amount of the Banks capital in accordance with the Decision on Capital Adequacy in Banks.
For the purpose of mitigating investment risk, the causes of unacceptable risk are continually examined and the steps for their removal may be the following:
- efforts invested to increase the profitability of the Banks operations based on actually proposed activities, - increase in the Banks capital via recapitalization, distribution of profit into capital, conversion of liabilities into equity and the like. - discontinuance of capital expenditures except for those necessary to maintain the Banks business activities, - sale of shares and equity investments, - sale and disposal of fixed assets and - monitoring the dates for disposal and sale of shares acquired for the purpose of their resale.
4.6. Counterparty Risk
The Banks exposure to a single entity or a group of related entities and risk towards a Banks related party is inherent in the Banks involvement with an entity or a group of related entities and risk towards a Banks related party above the limits prescribed in the NBS Decision.
The Counterparty Risk Management Policy providing for exposures towards a single entity or a group of related entities and risk towards a Banks related party, comprises a set of all activities used to identify, measure, control and monitor this risk, and define clear guidelines for determining the responsibilities of persons in charge of collecting documents relevant for noticing the form of relatedness and in the aim of reconciliation with the defined limits and legal provisions.
Managing counterparty risk in the Bank is performed by the Portfolio and Credit Risk Service established within the Placement and Risk Management Department is performed by observing the following limits: CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 26 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.6. Counterparty Risk (Continued)
- the Banks exposure towards a single entity or a group of related entities must not exceed 20% of the Banks capital and - the Banks exposure towards its related party must not be above 5% of the Banks capital.
The Risk Management Service reviews the total Banks exposure towards a single entity or a group of related entities, as well as the total exposure towards the Banks related parties in the manner prescribed in the Decision on Risk Management by Banks and the Law on Banks so that:
- sum of all great exposures must not exceed 400% of the Banks capital, - the total of the Banks exposure to the Banks related party must exceed 20% of the Banks capital.
If the aforesaid exposures attain a level 10% below the prescribed limits observed individually, the Risk Management Service informs the Asset and Liability Management Board, i.e. the Executive Board in the aim of limiting further exposure.
The Risk Management Service informs the Board in charge of monitoring and managing risk, Asset and Liability Management Board in respect of the Banks exposure towards related parties and related parties themselves on quarterly basis. The Asset and Liability Management Board reviews the report, and together with its recommendations forwards the report to the Executive Board and to the Board for monitoring the Banks business operations further delivering the report for the adoption to the Management Board.
4.7. Operational Risk
Operational risk relates to the probability of negative effects on the Banks financial results and capital based on omissions in the work of its employees, inadequate internal procedures and inadequate management of information and other systems, as well as from unforeseen external events.
The Bank identifies events representing sources of operational risk, where the sources of operational risk are considered to be the following categories of events:
- internal frauds, - external frauds, - omissions in relations with employees and in the system, safety at work, - issues with customers, placements, products and in the business practice of the Bank, - damage suffered by the Banks tangibles, - interruptions in the operations and errors in the Banks systems and - transactions, delivery and managing processes in the Banks.
The business lines are the operations based on which the Bank disaggregates its activities and based on which events representing sources of operational risks are monitored. The business lines include: - financing the corporate sector, - trade and sale, - retail operations, - commercial banking, - payments and calculation, - agency services, - services of asset management and - brokerage services rendered to retail customers. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 27 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.7. Operational Risk (Continued)
The Management Board monitors the disaggregation of business activities of the Bank, where the process of classifying the Banks business activities is the subject of internal audit.
Following the identification of potential events which are at the same time the cause of operational risk, the Bank applies itself to the measuring stage. The measurement is performed cyclically through the records and analysis of event database.
For the record-keeping needs, a database is established regarding the following events:
- events that have occurred as a result of operational risk which have led to a loss exceeding (or estimated to be in excess of) RSD 10.000,00 in its gross amount - events that have occurred as a result of operational risk which could have led (but did not lead) to a loss exceeding (or estimated to be in excess of) RSD 10.000,00 in its gross amount
Organizational parts are under obligation to prepare daily reports (e-mails) to the Risk Management Department regarding the events that have occurred and which are included in the database. Such reports are also prepared in the case when there are no events to report. Recording events in databases are also the responsibility of heads of departments, heads of branch offices and their deputies.
The Risk Management Department is responsible for monitoring all events recorded in respect of operational risk and reporting to competent bodies.
Risk management is the process of balancing costs, hedging against risks as opposed to costs of risk exposure. When the cost of hedge and cost of risk exposure are almost equal, the measures taken by the Bank with respect to operational risk management are balanced in an adequate way and thought through.
There are three basic choices available to the Bank with respect to operational risk management:
- to accept risk in cases when the risk exposure is insignificant, and the Bank is more than adequately hedged against these risks (full observance of the measures implied by the Operating Policy, procedures, laws, insurance, acquisition of the necessary equipment and the like), - to distribute risk in certain instances it is cheaper to distribute risk to third parties than its direct hedge (maintenance agreements, supervision), - to avert risk act preventively, i.e. establish in all organizational parts the necessary safety measures so that the event does not happen at all or take such measures that the incident becomes less probable (preventive periodic controls and supervisions, constant education of employees, making plans for introducing new technological solutions) - contingency plans with the object of securing continued operations, in case of serious disruptions in the Banks business operations caused by the situations that are outside the Banks control, prepare the contingency plan which must be adopted by the Banks Management Board. The plan sets the priorities in hedging against risk, profitability, procedures for incidental situations, back-up locations, back-up hardware in a distant location, back-up IT communication system, measures for regular plan verification and revisions aiming to improve the plan, and all in the aim of securing continued bank operations in extraordinary situations. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 28 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.7. Operational Risk (Continued)
The Risk Management Department is under obligation to submit the report to the NBS on the losses that have occurred as a consequence of operational risk, as well as those that could have, but did not occur, exceeding (or estimated to be in excess of) 1% of the Banks capital, as well as measures taken for the purpose of adequate managing increased operational risks no later than five working days from the day the loss occurred.
The Risk Management Department reports to the Board in charge of risk managing and monitoring business activities and the Asset and Liability Management Board on monthly or quarterly basis regarding events that have occurred due to operational risk. The Asset and Liability Managed Board considers the Report and, with its suggestions, forwards it to the Executive Board and the Board in charge of risk managing and monitoring business activities, which is then submitted to the Management Board.
4.8. Country Risk
The risks inherent in the country of origin of the entity to which the Bank is exposed (country risk) are the risks from negative effects on the financial results and the Banks capital due to the Banks inability to collect its receivables from this entity for the reasons of political, economic or social nature of the country of the entitys origin.
Country risk comprises:
- political and economic risk of the country implying the probability of incurring loss due to the Banks inability to collect receivables for reasons of limitations imposed by the enactments of state and other bodies of the country of debtors origin, as well as general and system circumstances in the country, - transfer risk implying the probability of loss being incurred due to the inability to collect receivables stated in the currency that is not the official currency of the debtors country of origin, and due to the limitations to discharging amounts to creditors from other countries denominated in a certain currency, as determined by the enactments of state and other bodies in the debtors country of origin.
The limits of exposures to country risk are individually determined by the Bank, and in case a concentration is identified in certain geographical areas these limits are determined for each individual region.
The first step in setting limits to country risk exposure is to determine the resources available for the loss absorption.
It is necessary to decide how much capital will be provided per each risk category, starting from the A category (the smallest risk), from B to E categories (category with greatest possible risk).
The choice of agencies rating country risk determines which categorizations lists will be regularly assumed and applied internally. The Bank chose to rely on the categorization of Euromoney, Moodys and ICERC. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 29 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.8. Country Risk (Continued)
For the countries with the least assessed risk, the Bank may allocate a proportionally greater section of capital given the small exposure to the country risk inherent in the debtors country of origin.
Risk categorization (Euromoney):
A smallest risk, country is reliable with respect to liability settlement, B very high quality very reliable, C1 dependant on the economic conditions still good quality, C2 special notice able to meet its financial liabilities, D1 susceptible to the changes in economic terms currently able to meet its financial liabilities, D2 currently very likely to default on its financial liabilities dependant on the favorable economic conditions and E high risk highly likely to default on its financial liabilities.
The initial limit to country risk exposures per different countries of debtors origin represents only a generally acceptable limit that is based on the information available to all and is not adjusted to the Banks specific characteristics.
All limits of exposures per countries of origin are considered and adopted by the Banks Management Board.
Individual exposure limits per countries of debtors origin are formally considered at least twice a year and ad hoc, if there are significant changes or development in the entity in question (recapitalization, increase in capital on other grounds).
The limits of country risk exposures are regularly controlled in various manners having in mind the need for constant readiness for contingencies.
The limits of exposures to country risk are individually determined by the Bank, and in case a concentration is identified in certain geographical areas these limits are determined for each individual region.
4.9. Capital Adequacy Management
Establishing the process of internal assessment of capital adequacy based on the set goals and risks management principles, as well as on identifying, measuring, assessment and monitoring risk inherent in the Banks business operations and for the purpose of estimating capital necessary for the risk amortization.
With the object of timely diminishing the risk impact that may give rise to negative effects on the Banks financial results and capital, the minimum of acceptable capital adequacy ratio of 13.5% has been established, so the Bank would harmonize its operations with the legal requirements imposed by the Law on Banks, as well as decisions and guidances of the NBS. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 30 Translation of the Financial Statements Issued in the Serbian language
4. RISK MANAGEMENT (Continued)
4.9. Capital Adequacy Management (Continued)
The capital adequacy ratio, representing the proportion between capital and the sum of assets weighted with credit risk, capital requirements regarding currency risk multiplied by reciprocal value of the capital adequacy ratio and capital requirements arising from other market risks, is under the influence of the following:
- capital conditioned by the financial result, - risk-weighted assets and off-balance sheet items, - total net open foreign currency position and - value of items in the trading book.
With the aim of maintaining capital adequacy ratios at the level of the limit set by the Executive Board, the Finance and Accounting Department determines the level of the Banks capital at quarterly basis.
The calculation of capital accounts for both the financial result at the end of month for which the capital is calculated and the carrying values of other items, except for the outstanding amount of special reserves for potential losses, provided by the Placement Sector.
Capital requirements in respect of credit risk include determining the risk-weighted balance sheet assets and off-balance sheet items the calculation of which is based on the classification of balance-sheet assets and off-balance sheet items comprised in the banking book.
Capital requirements regarding currency risk are determined by the sector in charge of asset management.
Pursuant to Item 17 of the Decisions on Capital Adequacy in Banks and goals determined and principles of risk management, the value of items included in the trading book and their participation in the total Banks operations should be maintained within the agreed limits, so the Bank should not be obligated to calculate and securitize the coverage of capital requirements for price risk arising from securities (debt and equity securities), which are the responsibility of the Investment banking Sector.
In accordance with the legal requirements and secondary legislation acts, the Bank is under obligation to secure the preconditions for successful operations under acceptable risk parameters so as to achieve the set targets and/or positive financial result and maintain the Banks capital and eliminate the possibility of sanctions imposed by a regulatory body due to unidentified other market risks and for failure to comply with the capital requirements for other market risks, as provided under the NBS Decision and the Banks internal procedures and Guidances.
The sector of finance and accounting Department of plan, analysis and reporting determines capital adequacy ratio on quarterly basis and reports to the Placement and Risk Management Sector thereof, and this Sector forwards the information necessary to the Risk Management and Monitoring Board.
The reports on risk are prepared by the operating services within the set timelines and are delivered to the Placement and Risk Management Sector for consideration. The report of Risk Management and Monitoring Board with its suggestions is submitted to the Asset and Liability Management Board which makes adequate decisions. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 31 Translation of the Financial Statements Issued in the Serbian language
5. INTEREST INCOME AND EXPENSE
a) Interest Income Year Ended December 31, 2008 2007 National Bank of Serbia: - repo transactions 176,078 92,630 - obligatory reserve 8,975 7,117 - Deposits 2,417 3,772 Banks and other financial organizations 32,450 43,701 Corporate entities 354,981 273,315 Public sector 191 472 Retail 128,407 115,817 Other customers 1,237 568 Securities 13,440 11,646
718,176 549,038
b) Interest Expenses Year Ended December 31, 2008 2007
National Bank of Serbia 389 194 Banks and other financial organizations 142,885 38,011 Corporate sector 50,928 49,584 Public sector 30,697 27,506 Retail 95,018 62,654 Other customers 15,566 30,807
335,483 208,756
6. FEE AND COMMISSION INCOME AND EXPENSE
a) Fee and Commission Income Year Ended December 31, 2008 2007 Payment transaction fees from: - banks 3,880 4,983 - corporate customers 146,998 123,211 - retail customers 13,794 16,968 Cash payment transactions 9,649 7,940 Loan origination fees 31,673 19,264 Exchange operations 37,730 26,683 Safekeeping charges 1,316 999 ATM charges 6,337 1,298 Fees and commission charged for other banking services 74,010 80,562 Payment card charges 23,801 22,223 Broker-dealer services 6,378 8,824 Other fees and commissions 13,035 15,914 Fees for issued guarantees, letters of credit and other contingent liabilities
25,183
29,366
393,784
358,235 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 32 Translation of the Financial Statements Issued in the Serbian language
6. FEE AND COMMISSION INCOME AND EXPENSE (Continued)
b) Fee and Commission Expense Year Ended December 31, 2008 2007 Fee and commission expense arising from domestic payment transfers
15,123
15,391 Fees and commissions on payment cards 38,219 23,722 Other fees and commissions 7,195 11,712
a) Credited/(charged) to results Year Ended December 31, 2008 2007 Reversal of allowance for impairment of balance sheet assets (Note 8b) 885,756
108,160 Reversal of provisions against off-balance sheet items (Note 26b) 102,724
21,773 Reversal of provisions against retirement benefits (Note 27b) 1,904 - Suspended interest collected 491 - Losses on impairment of placements: - loans and deposits (757,970) (94,352) - interest, fees and commissions (27,094) (7,698) - securities and equity investments (9,812) (10,957) - other placements and assets (263,437) (50,056) - off-balance sheet positions (Note 26b) (120,826) (19,975) Provisions for employee retirement benefits (Note 26b) - (5,443)
(188,264) (58,548) CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 33 Translation of the Financial Statements Issued in the Serbian language
8. NET IMPAIRMENT LOSSES AND PROVISIONS (Continued)
b) Movements on accounts of allowance for impairment of receivables 2008
Loans and Advances Interest , Fees and Commissions Securities and Equity Investments Other Placements and Other Assets Total
Balance, beginning of year 482,353 17,897 63,090 210,171 773,511 Charge for the year (Note 8a) 757,970 27,094 9,812 263,437 1,058,313 Foreign exchange fluctuations 17,474 562 (1) 36,062 54,097 Reversal of provisions (Note 8a) (605,701) (20,097) (18,601) (241,357) (885,756) Write-offs (226) - - (522) (748)
Balance, end of year 651,870 25,456 54,300 267,791 999,417
c) Special reserve for potential losses
In accordance with the regulations of the National Bank of Serbia as of December 31, 2008, a special reserve for potential losses on the Banks aggregate credit risk exposure was as follows:
December 31, December 31, 2008 2007 Special reserve for potential losses determined as per the National Bank of Serbia requirements with respect to: - balance sheet exposures 1,233,260 1,004,555 - off-balance sheet exposures 63,747 92,436 1,297,007 1,096,991 Allowances for impairment and provisions determined in accordance with the internally adopted methodology (IAS 39):
- allowance for impairment of balance sheet items (999,417) (773,511) - provision for losses contingent on off-balance sheet items (41,681)
(23,579) (1,041,098) (797,090) Provisions determined in accordance with the internal methodology exceeding the amount of provision as per the NBS Decision 1,651
22,419 Provisions for potential losses contingent on balance sheet assets and off-balance sheet items 257,560
322,320 Reserve for potential losses formed in prior years (11,878) (11,878) Additional provision for potential losses to be set aside as appropriation of retained earnings
245,682
310,442
In accordance with the National Bank of Serbia Decision on the Classification of Balance Sheet and Off-Balance Sheet Exposures, the difference between the amount of special reserve for potential losses calculated in accordance with the National Bank of Serbia requirements and the amount of allowance for impairment of balance sheet items and provision for losses contingent on off-balance sheet items estimated in accordance with the internally adopted methodology, is presented as reserve for potential losses within equity.
Once a relevant Decision has been enacted by the Banks Assembly, the outstanding amount of reserve for potential losses will be allocated from retained earnings. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 34 Translation of the Financial Statements Issued in the Serbian language
9. STAFF COSTS Year Ended December 31, 2008 2007
Net salaries and benefits 356,381 346,033 Taxes and contributions on salaries and benefits 144,125 139,603 Other staff costs 103,861 6,348
604,367 491,984
Other staff costs include retirement benefits of RSD 94,511 thousand paid to 118 employees who have left the Bank on redundancy grounds pursuant to the Collective Bargaining Agreement.
10. OTHER OPERATING EXPENSES Year Ended December 31, 2008 2007
Cost of materials 51,027 47,692 Communications 29,926 29,358 Maintenance of fixed assets 18,992 20,372 Rentals of business premises 62,943 46,029 Marketing and advertising 8,417 10,258 Cost of intellectual services 22,601 19,330 Insurance premiums 12,540 11,170 Securing property 16,936 10,461 Compensations to employees 13,345 12,184 Entertainment 5,345 6,209 Indirect taxes and contributions 104,961 101,367 Write-off of bad debts - 2,948 Donations and sponsorships 13,727 9,120 Broker charges 15,344 8,552 Other costs 24,047 15,155
400,151 350,205 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 35 Translation of the Financial Statements Issued in the Serbian language
11. (LOSSES)/GAINS ON THE VALUATION OF ASSETS AND LIABILITIES, net
Year Ended December 31, 2008 2007 Gains on the valuation of assets and liabilities: - Placements with foreign currency clause 304,622 141,206 - Placements indexed to the retail price index 30,113 37,250 - Securities 23,092 52,011 - Other receivables 4,643 2,744 - Liabilities 8,746 2,679 371,216 235,890 Losses on the valuation of assets and liabilities: - Placements with foreign currency clause (207,057) (121,333) - Securities (214,272) (81,921) - Other receivables (2,436) (2,604) - Liabilities (31,474) (2,871) (455,239) (208,729)
(84,023) 27,161
12. INCOME TAXES
a) Components of income tax Year Ended December 31, 2008 2007
Current income tax (369) - Deferred income tax 4,251 11,780
3,882 11,780
b) Numerical reconciliation between tax expense and the product of the accounting results multiplied by the applicable tax rate Year Ended December 31, 2008 2007
Loss before taxation (619,806) (206,502)
Income tax at the statutory tax rate of 10% (62,720) (22,216) Tax effects of capital gains 739 1,566 Tax effects of expenses not deductible for tax purposes 1,490 3,100 Tax credits for new employees hired on open end basis - (1,566) Tax credits for capital expenditures (369) - Not recognized tax losses 60,659 18,632 Other 4,083 12,264
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 36 Translation of the Financial Statements Issued in the Serbian language
12. INCOME TAXES (Continued)
c) Components of deferred tax assets and liabilities
December 31, 2008 December 31, 2007 Deferred tax assets - credits for capital expenditures
17,654 13,188 Deferred tax liabilities - the difference between depreciation and amortization recognized for tax purposes and accounting purposes (48,201) (35,962)
(30,547) (22,774)
d) Changes in deferred tax assets/(liabilities) Year Ended December 31, 2008 2007 Deferred tax assets Balance, beginning of year 13,188 1,052 Increase based on recognized tax credits for capital expenditures 4,466 13,188 Release based on unrecognized deferred tax assets arising from provisions for retirement benefits - (1,052)
Balance, end of year 17,654 13,188
Deferred tax liabilities Balance, beginning of year (35,962) (4,478) Increase based on deferred tax liabilities - the difference between depreciation and amortization recognized for tax purposes and accounting purposes (215) (356) Increase based on appraisal effects (12,024) (31,128)
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 37 Translation of the Financial Statements Issued in the Serbian language
12. INCOME TAXES (Continued)
e) Unused tax losses (Continued)
Pursuant to Article 32 of the Corporate Income Tax Law, the losses incurred in business, financial and non-business transaction are determined in the tax return except for those giving rise to capital gains and losses determined in accordance with the abovementioned Law, may be used as deductible items in calculating the tax base for the future periods, but for no longer than 10 years.
Due to the uncertainty over the availability of profit in future periods against which tax losses could be utilized, in 2008 the Bank did not recognize deferred tax assets arising from tax losses realized thereof in the current year.
13. CASH AND CASH EQUIVALENTS
December 31, 2008 December 31, 2007 Cash in hand: - in RSD 224,277 208,603 - in foreign currency 180,376 202,462 Gyro account 795,657 219,438 Gold and other precious metals 2 2 Foreign currency accounts with: - National Bank of Serbia 3,590 3,211 - domestic banks 7,791 9,345 - foreign banks 146,519 196,001 Foreign currency cheques in the process of collection 2,922 8,000 1,361,134 847,062 Less: Allowance for impairment (25) -
1,361,109 847,062
Pursuant to the Decision on Obligatory Reserves of Banks with the National Bank of Serbia, the required reserve is to be calculated at the rate of 10% on the dinar deposits (5% of time deposits with over 30-day maturity), to the amount of average daily balance of dinar assets in a single calendar month to its gyro account held with the National Bank of Serbia, 45% to dinar deposits indexed by a currency clause, at the rate of 45% to the portion of dinar basis comprised of dinar liabilities arising from deposits and loans received from abroad up to the level of basis registered in September 2008, at the rate of 0% to the positive difference between the portion of dinar basis comprised of deposits and loans received from foreign creditors in the preceding calendar month and that potion of basis dating from September 2008.
The average interest rate charged to the amount of allocated reserve in dinars during 2008 amounted to 2.50% annually. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 38 Translation of the Financial Statements Issued in the Serbian language
14. REVOCABLE DEPOSITS AND LOANS December 31, 2008 December 31, 2007
Obligatory reserves in foreign currencies 798,748 841,795 Securities acquired in repurchase transactions with the Central Bank 450,000 1,400,000 Liquidity surpluses deposited with the Central Bank 50,000 250,000 Revocable placements with banks in foreign currency 7,672 6,796 1,306,420 2,498,591 Less: Allowance for impairment (20) -
1,306,400 2,498,591
In accordance with the Decision on Obligatory Reserves of Banks with the National Bank of Serbia published in the RS Official Gazette numbers 116/2006, 3/2007, 31/2007, 93/2007, 35/2008, 94/2008, 100/2008, 107/2008, 110/2008 and 112/2008, the required reserve represents the minimum reserve which the Bank calculates at the rate of 45% to the amount of average daily balance of foreign currency funds registered in the previous calendar month:
The National Bank of Serbia prescribed that, exceptionally to the aforementioned, banks calculate the required reserve by applying the following ratios:
- 40% on the portion of foreign currency reserving base comprised of obligations arising from foreign currency savings deposited with banks; - 20% on the portion of foreign currency reserving base comprised of subordinated obligations, up to the level of such base as in September 2008; - 100% on the portion of foreign currency reserving base comprised of foreign currency assets kept by leasing companies on special accounts opened with banks; - 0% on the amount of positive difference between the portion of foreign currency reserve base comprised of foreign currency obligations in respect of foreign deposits and borrowings from the previous calendar month and the same portion of foreign currency base from September 2008, while the ratio of 45% will be applied for calculating foreign currency obligatory reserves on the portion of foreign currency reserve base comprised of foreign currency obligations in respect of foreign deposits and borrowings up to the level of such portion of foreign currency reserve base from September 2008; - 0% - on the amount of positive difference between the portion of foreign currency reserve base comprised of subordinated obligations from the previous calendar month and the same portion of foreign currency reserve base from September 2008.
At December 31, 2008, the value of securities acquired in repurchase transactions with the Central Bank in the amount of RSD 450,000 thousand (December 31, 2006: RSD 1,400,000 thousand) relate to treasury bills purchased from the Central Bank with maturities of up to 14 days and an annual interest ranging from 10% to 17.75%. This transaction is governed by the NBS Agreement on the Sale of Securities with an Obligation to Repurchase. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 39 Translation of the Financial Statements Issued in the Serbian language
15. INTEREST, FEES AND COMMISSIONS RECEIVABLES December 31, 2008 December 31, 2007 Interest receivables: - in RSD 54,561 32,589 - in foreign currency 4,519 2,613 59,080 35,202 Fee and commission receivables: - in RSD 9,577 9,584 - in foreign currency 220 57 9,797 9,641 Receivables based the sale of tangibles received in lieu of debt settlement
1,722
-
Less: Allowance for impairment (25,456) (17,897)
45,143 26,946
16. LOANS AND ADVANCES TO CUSTOMERS
December 31, 2008 December 31, 2007 Short-term loans and advances to customers: - in RSD 60,267 160,267 - in foreign currency 5,550 6,079 65,817 166,346 Short-term loans to retail customers: - in RSD 210,470 173,944
Short-term loans to corporate customers: - in RSD 1,603,342 876,297 - in foreign currency 506,005 290,716 2,109,347 1,167,013 Long-term loans to retail customers: - in RSD 322,877 302,364
Long-term loans to corporate customers: - in RSD 769,396 421,533 - in foreign currency 252,609 313,185 1,022,005 734,718
Loans and advances, gross 3,730,516 2,544,385
Less: Allowance for impairment (Note 8b) (651,870) (482,353)
3,078,646 2,062,032
Dinar and foreign currency short-term loans were approved to legal entities and entrepreneurs for the periods from 3 months to one year at nominal interest rates for dinar placements ranging from 5% to 33.74% annually (effective interest rates ranged from 6.21% to 33.77%) and from 9% to 12% annually for placements in foreign currency (effective interest rates ranged from 10.87% to 16.12%).
Short-term loans with up to 3-month maturity (liquidity loans) were approved at nominal interest rate from 19.22% to 28.44% (effective interest rates ranged between 23.16% and 41.67%). CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 40 Translation of the Financial Statements Issued in the Serbian language
16. LOANS AND ADVANCES TO CUSTOMERS (Continued)
Up to one year loans in dinars were approved to retail customers for the period from 6 months to one year, at annual interest rates ranging from 5% to 30.98% (effective interest rates ranged from 10.22% to 30.99%).
Over one year loans in dinars were approved to legal entities and entrepreneurs at nominal interest rate between 5.5% and 16.5% annually (effective interest rate ranged between 5.5% and 25.26%), and to those in foreign currency, the interest from 9% to 12% was applied (effective interest rate from 10.87% to 14.22%).
Up to one year loans in dinars were approved to retail customers for the period from 1 to 3 days at an annual interest rate from 9.2% to 19.30%.
Over one year loans in dinars were approved to retail customers for the period from 24 to 60 months at an annual interest rate from 5% to 30.98% (effective interest rate ranged from 8.35% to 30.99%).
Loan Concentration
The concentration of total net short-term and long-term loans to customers was as follows:
2008 2007
Trade 846,603 404,438 Retail customers 470,837 423,984 State administration and other public services 11,486 7,369 Agriculture, hunting, fishing and forestry 144,397 20,650 Civil engineering 143,986 179,121 Services, tourism and accommodation industry 139,692 132,717 Banks 5,536 106,079 Mining and energy industry 944,991 604,880 Other 371,118 182,794
3,078,646 2,062,032
17. SECURITIES (excluding treasury shares) December 31, 2008 December 31, 2007 In foreign currency: - Republic of Serbia foreign currency savings bonds 52,911 87,626
In RSD: - Trading securities 63,869 202,905 - Securities available-for-sale 10,256 - - Discounted bills of exchange in dinars 104,474 36,037 178,599 238,942 Other trading securities matured - 11,897 231,510 338,465 Less: Allowance for impairment (Note 8b) (3,125) (11,897)
228,385 326,568 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 41 Translation of the Financial Statements Issued in the Serbian language
At December 31, 2008, bills of exchange in the amount of RSD 104,474 thousand (December 31, 2007: RSD 36,037 thousand) represent receivables maturing within the period from two to four months at a discount rate ranging from 23.37% to 29.20% annually (effective interest rate ranging from 25.33% to 31.27%).
18. EQUITY INVESTMENTS (interests)
December 31, 2008 December 31, 2007 Equity investments: - banks and other financial institutions 4,250 13,697 - corporate and other legal entities 48,345 80,314 - Other customers - 2,446 52,595 96,457 Less: Allowance for impairment (Note 8b) (51,175) (51,193)
1,420 45,264
19. OTHER PLACEMENTS
December 31, 2008 December 31, 2007 Short-term placements with banks: - in RSD 111 111 - in foreign currency 555,384 738,239 Long-term placements with banks in dinars 15,092 14,388 Matured other short-term and long-term placements in foreign currency 111,363 95,869 Other placements with the NBS 9,540 - Short-term placements with retail customers in dinars DINA cards 81,085 107,464 Long-term other placements with customers in dinars DINA cards 78,903 51,842 Other placements in foreign currency 15,505 14,896 Other placements in dinars 7,980 - Receivables in dinars for payments made based on sureties and acceptances 92,669 99,015 967,632 1,121,824 Less: Allowance for impairment (Note 8b) (199,299) (168,373)
768,333 953,451
Short-term placements with banks in foreign currency were approved to domestic banks for the period from one to seven days at an annual interest rate ranging from 3.0% to 9.20%. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 42 Translation of the Financial Statements Issued in the Serbian language
20. INTANGIBLE ASSETS, FIXED ASSETS AND INVESTMENT PROPERTY 2008
Land and Buildings
Equipment and Other Assets
Investment Property Construction in Progress and Advances
Total
Intangible Assets Cost Balance, beginning of year 1,113,429 212,402 443 16,674 1,342,948 49,266 Additions 620 21,363 - - 21,983 1,271 Transfers/closing of advances - 9,512 - (9,512) - 508 Disposals and retirements - (18,446) - - (18,446) - Sale (945) (827) (443) - (2,215) - Appraisal effects 182,629 - - - 182,629 - Other - 50 - - 50 -
Balance, end of year 1,295,733
224,054
-
7,162
1,526,949
51,045
Accumulated Depreciation and Amortization
Balance, beginning of year
351,280
133,654
6
-
484,940
36,239 Charge for the year 14,451 27,443 6 - 41,900 6,438 Disposals and retirements - (18,446) - - (18,446) - Sale (471) (806) (12) - (1,289) - Appraisal effects 62,383 - - - 62,383 -
Balance, end of year 427,643
141,845
-
-
569,488
42,677
Net Book Value: - as of December 31, 2008 868,090
82,209
-
7,162
957,461
8,368 - as of December 31, 2007 762,149 78,748 437 16,674 858,008 13,027
At December 31, 2008, for buildings in the net book value of RSD 184,561 thousand, the Bank possesses adequate purchase and sale documentation, i.e., the documentation regarding the legal grounds for their acquisition, but not the respective property titles. The forgoing buildings have not been recorded as the Banks property, given that on the territory where they are located the Cadastres have still not been established. The Banks management has taken all the necessary steps to obtain such documents.
At December 31, 2008, the Bank had no inscribed mortgages or other encumbrances against its property.
21. OTHER ASSETS
December 31, 2008 December 31, 2007
Tangibles acquired in the process of collection 44,491 104,055 Receivables from employees 24,053 34,342 Prepaid expenses 3,446 3,011 Accrued interest 9,015 48,843 Receivables from payment cards 4,163 1,450 Receivables for prepaid income taxes 4,468 3,780 Receivables arising from liabilities paid 8,399 6,682 Deferrals of receivables arising from valuation of loans - revaluation by applying retail price growth index 5,525 - Other receivables 29,429 22,931 Inventories 5,646 5,760 138,635 230,854 Less: Allowance for impairment (72,206) (45,430)
66,429 185,424 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 43 Translation of the Financial Statements Issued in the Serbian language
21. OTHER ASSETS (Continued)
In 2007, the Bank acquired tangibles in the process of collection amounting to RSD 64,443 thousand. In 2008, no additional assets were received in this manner, but some tangibles previously received were sold. In consideration of the departures from market values at which these immovables have been sold or whether it is possible to sell them, the fair value of these assets as of December 31, 2008 and 2007 amounted to RSD 95,458 thousand and RSD 36,665 thousand, respectively.
22. TRANSACTION DEPOSITS December 31, 2008 December 31, 2007 Transaction deposits of retail customers: - in RSD 174,454 186,702 - in foreign currency 46,549 13,563 Transaction deposits of other corporate entities: - in RSD 978,826 1,108,213 - in foreign currency 229,799 304,665 Transaction deposits of the banking sector: - in RSD 88 128,870 - in foreign currency 183 7,463 Transaction deposits of other customers: - in RSD 117,493 163,123 - in foreign currency - 1,512
1,547,392 1,914,111
Transaction deposits are non-interest bearing, except for the arrangements where the interest rate ranges from 2.4% to 13.5% annually.
23. OTHER DEPOSITS December 31, 2008 December 31, 2007 Demand deposits: - in RSD 316,715 338,146 - in foreign currency 707,115 771,962 Short-term deposits: - in RSD 1,578,361 1,570,251 - in foreign currency 2,074,564 1,213,731 Long-term deposits: - in RSD 71,669 99,139 - in foreign currency 25,416 31,119
4,773,840 4,024,348
Demand deposits in dinars mostly relate to the balances on current accounts of corporate entities, state and other institutions. These deposits are non-interest bearing ones, save for the dinar assets of KRT of the local self-government and in the arrangements from 0% up to 16.05% annually.
Demand deposits of corporate entities and state institutions in foreign currency are non-interest bearing ones. Short-term deposits in foreign currency were placed at an interest rate ranging from 2.5% to 6.95% annually. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 44 Translation of the Financial Statements Issued in the Serbian language
23. OTHER DEPOSITS (Continued)
Dinar savings were deposited at an annual interest rate ranging from 3.71% to 15.62%. Foreign currency accounts were deposited at an interest rate from 1.80% to 8.50%.
Short-term deposits of retail customers for the purchase and sale of bonds and shares, deposits placed as condition for obtaining loans and credit cards, as well as the accounts opened for foreign pensions.
Short-term deposits of corporate entities denominated in dinars were deposited at interest rates ranging from 6% to 16.50%, annually, depending on the maturity dates.
Short-term dinar deposits of banks were placed for the period from one to three months at an interest rate ranging annually from 8% to 16.75%. Short-term foreign currency deposits with banks were placed for the period from one to three months at an interest rate ranging annually from 2.5% to 4.5%.
Non-interest bearing deposits of corporate customers are made of deposits for the purchase and sale of bonds, shares and deposits paid upon loan origination.
Long-term deposits of the Bank are mostly non-interest bearing except for a special purpose deposits dating from 2006 amounting to RSD 2,052 thousand placed for the period of three years at an interest rate of 1% annually, which was repaid when it fell due at the beginning of 2009.
Amounts owed to customers (transaction and other deposits) are structured as follows:
24. BORROWINGS December 31, 2008 December 31, 2007
Short-term borrowings from banks in dinars 118,135 - Long-term borrowings in dinars: - NBS 3,886 4,858 - Republic of Serbia 184 184 Other financial liabilities 288 3,390
122,493 8,432
Short-term borrowings from banks in dinars are associated with the loan obtained from a domestic bank, maturing within a year at an interest rate of three-month EURIBOR as increased by the margin of 3.90% annually. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 45 Translation of the Financial Statements Issued in the Serbian language
25. OTHER OPERATING LIABILITIES December 31, 2008 December 31, 2007
Accounts payable 21,027 24,822 Liabilities to other customers for receipts from retail customers 8,693 7,957 Advances received 3,271 2,914 Deferred liabilities for accrued interest: - in RSD 4,824 3,803 - in foreign currency 28,889 10,171 Deferred loan origination fees 16,262 17,848 Other liabilities 19,857 14,303
102,823 81,818
26. PROVISIONS
a) Structure of provisions
December 31, 2008 December 31, 2007
Provisions for off-balance sheet items 41,681 23,579 Provisions for litigations 5,020 5,020 Provisions for employee benefits 8,633 13,316
55,334 41,915
b) Movements in provisions
December 31, 2008 December 31, 2007 Provisions for potential losses on off-balance sheet items Balance, beginning of year 23,579
25,377 Charge for the year (Note 8a) 120,826 19,975 Release (Note 8a) (102,724) (21,773)
Balance, end of year 41,681 23,579
Retirement benefits Balance, beginning of year 13,316 10,517 Charge for the year (Note 8a) - 5,443 Release of provisions (1,904) - Payments (2,779) (2,644)
Balance, end of year 8,633 13,316
Provisions for potential losses on litigations Balance, beginning of year 5,020 5,020
Balance, end of year 5,020 5,020 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 46 Translation of the Financial Statements Issued in the Serbian language
26. PROVISIONS (Continued)
b) Movements in provisions (Continued)
At December 31, 2008, based on the assessment of the Banks management, the total amount sought in litigations filed against the Bank amounted to RSD 6,520 thousand. The Banks management allocated provisions for losses contingent on these legal suits in the amount of RSD 5,020 thousand. The aforementioned amount does not include potential penalties which could be additionally assessed upon the resolution of these litigations. The Companys management does not anticipate losses in the forthcoming period based on other legal suits filed against the Bank.
27. SHARE CAPITAL
The Banks share capital was formed through the initial contributions and common share issues which followed. At December 31, 2008, the Banks share capital comprised of 142,655 common shares with the par value of RSD 10 thousand per share.
Holders of common shares are responsible for the Banks liabilities and are exposed to the risk present in the Banks business operations commensurately with the number of shares in their possession. The shares are transferable to other entities pursuant to the provisions of the Articles of Incorporation. The holders of common shares are also entitled to a dividend.
Capital Adequacy and Ratios Prescribed by the Law on Banks
The Bank is required to maintain the minimum capital adequacy ratio of 12%, as established by the NBS. As of December 31, 2008, the Banks capital adequacy ratio was higher than the prescribed minimum.
The Bank is also required to maintain certain ratios pertaining to the volume of its activities and composition of risk assets in compliance with the Law on Banks and with the NBS requirements. As of December 31, 2008, all ratios were within their prescribed limits, except for the ratio of total Banks investments in the non financial sector entities and in fixed assets which amounted to 106.09% and did not comply with the prescribed ratio of the maximum 60% of the Banks equity. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 47 Translation of the Financial Statements Issued in the Serbian language
28. OFF-BALANCE SHEET ITEMS
December 31, 2008 December 31, 2007 a) Managed funds Short-term placements 22,479 22,739 Long-term placements - 1,301 22,479 24,040 b) Guarantees, other contingent liabilities and commitments Payment guarantees: - in RSD 663,298 618,190 - in foreign currency 22,323 50,090 Performance bonds: - in RSD 134,208 159,710 - in foreign currency 16,369 17,537 Sureties and acceptances: - in RSD 180,697 236,855 Irrevocable commitments: - unused loan facilities 319,457 232,872 - unused overdraft facilities 175,236 160,933 - unused limits on credit cards 166,674 116,275 Not covered foreign currency letters in credit 51,584 13,566 1,729,846 1,606,028 c) Other off-balance sheet items Foreign currency savings bonds 6,263,272 5,991,181 Unsecured loro guarantees 40,455 33,395 Other off-balance sheet items 46,787 10,793 6,350,514 6,035,369
8,102,839 7,665,437
29. RELATED PARTY TRANSACTIONS
At December 31, 2008, the Banks total receivables from the Management and Executive Board members, as well as the receivables due from the Banks employees based on the credit card operations, overdrafts on current accounts and loans, aggregated to RSD 110,803 thousand (December 31, 2007: RSD 102,207 thousand).
The total gross salary paid to the members of the management, i.e., the President and the Executive and Management Board members in 2008, amounted to RSD 10,241 thousand (RSD 7,215 thousand in the net amount) (December 31, 2007: RSD 8,885 thousand, RSD 6,282 thousand in the net amount). CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 48 Translation of the Financial Statements Issued in the Serbian language
30. CREDIT RISK
a) Maximum Exposure to Credit Risk per Balance Sheet Assets and Off-Balance Sheet Items
The following table represents the worst case scenario of credit risk exposures as of December 31, 2008 and 2007 without the effects of collaterals and hedges against credit risk. The exposures to credit risk are presented at their carrying values as of the reporting date.
December 31, 2008 December 31, 2007 Maximum exposures arising from balance sheet assets Revocable deposits and loans 7,671 6,796 Receivables arising from interest, fees and commissions, fair value adjustments of derivatives and other receivables 70,587 43,671 Loans and advances to customers 3,730,516 2,544,385 Securities (excluding treasury shares) 114,730 250,840 Equity investments (interests) 52,596 96,457 Other placements 943,000 1,107,434 Other assets 65,861 112,458 4,984,961 4,162,041
Maximum exposure per off-balance sheet items 1,729,846 1,606,028
Total exposure 6,714,807 5,768,069 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 49 Translation of the Financial Statements Issued in the Serbian language
30. CREDIT RISK (Continued)
b) Loans and Placements
The following table presents the structure of loans and placements of the Bank at December 31, 2008 and 2007 pursuant to the placement quality. The table accounts for balance sheet and off-balance sheet exposures of the Bank.
Receivables not Matured (Group Allowance for Impairment)
Receivables Past Due (Group Allowance for Impairment)
Provided For (Individual Allowance for Impairment)
Total Gross
Group Allowances for Impairment Individual Allowance for Impairment
Group Allowance for Impairment of Receivables not Matured Group Allowance for Impairment of Receivables Past Due Total Allowance for Impairment
Total Net December 31, 2008 Consumer 14,486 15,496 2,535 32,517 62 905 2,535 3,502 29,015 Housing 3,799 8,682 - 12,481 16 131 - 147 12,334 Cash and other 159,527 137,979 - 297,506 686 3,314 - 4,000 293,506 Agriculture 4,557 223 - 4,780 20 5 - 25 4,755 Cards 301,393 25,209 - 326,602 1,714 1,745 - 3,459 323,143 Overdrafts per current accounts 221,717
99,619
9,356
330,692
1,249
13,423
9,356
24,028
306,664 Total 705,479 287,208 11,891 1,004,578 3,747 19,523 11,891 35,161 969,417 SME and largecorporate entities 131,449
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 50 Translation of the Financial Statements Issued in the Serbian language
30. CREDIT RISK (Continued)
b) Loans and Placements (Continued)
Receivables not Matured (Group Allowance for Impairment)
Receivables Past Due (Group Allowance for Impairment)
Provided For (Individual Allowance for Impairment)
Group Allowances for Impairment
Total Gross Group Allowance for Impairment of Receivables not Matured Group Allowance for Impairment of Receivables Past Due Individual Allowance for Impairment Total Allowance for Impairment
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 51 Translation of the Financial Statements Issued in the Serbian language
30. CREDIT RISK (Continued)
c) Credit Risk Assessment of Receivables that are neither Past Due nor Impaired Acceptable Risk Special Notice Substandard
Total gross
Consumer 14,486 - - 14,486 Housing 3,799 - - 3,799 Cash and other 159,527 - - 159,527 Agriculture 4,557 - - 4,557 Cards 301,393 - - 301,393 Overdrafts per current accounts 221,717 - - 221,717 Total 705,479 - - 705,479 SME and large corporate entities 124,284 7,165 - 131,449 Entrepreneurs 46,608 - - 46,608 Total 170,892 7,165 - 178,057 Receivables frombanks 621,961 - - 621,961 Total 792,853 7,165 - 800,018
Total, December 31, 2008 1,498,332
7,165
-
1,505,497
Total, December 31, 2007 -
-
-
-
In 2007, the Bank applied the methodology based on individual assessment of risk exposures for corporate entities that are more than 90 days in default. For receivables from retail customers with more than 90 days in default, the allowance for impairment was estimated collectively, with the exception of receivables subject to litigations that are adjusted in full.
d) Credit Risk Assessment of Receivables that are Past Due but not Impaired
Up to 30 days From 30 to 60 days From 60 to 90 days From 90 to 180 days From 180 to 365 days From 1 to 5 Years Over 5 Years Total December 31, 2008 Consumer 13,745 1,503 132 79 37 - - 15,496 Housing 8,682 - - - - - - 8,682 Cash and other 111,057 20,396 4,181 1,878 467 - - 137,979 Agriculture 223 - - - - - - 223 Cards 14,608 5,313 2,484 2,339 465 - - 25,209 Overdrafts per current accounts 90,031 2,695 1,667 2,719 2,507 - - 99,619 Total 238,346 29,907 8,464 7,015 3,476 - - 287,208 SME and large corporate entities 101,834
Up to 30 days From 30 to 60 days From 60 to 90 days From 90 to 180 days From 180 to 365 days From 1 to 5 Years Over 5 Years Total December 31, 2007 Consumer - - - - - - - - Housing - - - 306 1,491 - - 1,797 Cash and other - - - 1,745 907 - - 2,652 Agriculture - - - - - - - - Cards - - - - - - - - Overdrafts per current accounts - - - 294 13,117 - - 13,411 Total - - - 2,345 15,515 - - 17,860 SME and large corporate entities -
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 52 Translation of the Financial Statements Issued in the Serbian language
30. CREDIT RISK (Continued)
e) Concentrations per Industries
All financial assets are placed on the territory of the Republic of Serbia.
Revocable Deposits and Loans
Interest Receivables Extended Letters and Deposits
Securities
Equity Investment
Other Placements
Other Assets
Total Agriculture, hunting, fishing and forestry -
Undrawn Credit Facilities Guaranties Not Covered Letters of Credit Sureties Total December 31, 2008 Up to one year 620,359 98,512 51,584 27,127 797,582 From1 to 5 years 41,008 737,686 - 153,570 932,264
661,367
836,198
51,584
180,697
1,729,846 December 31, 2007 Up to one year 497,589 636,240 13,566 90,822 1,238,217 From1 to 5 years 12,491 209,287 - 146,033 367,811
510,080
845,527
13,566
236,855
1,606,028 CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 53 Translation of the Financial Statements Issued in the Serbian language
31. LIQUIDITY RISK
The maturities of assets and liabilities, pursuant to their outstanding maturities, as of December 31, 2008 were as follows:
Up to 1 Month From 1 to 3 Months From 3 to 12 Months From 1 to 5 Years Over 5 Years
Total ASSETS Cash and cash equivalents 1,357,519 - - - 3,590 1,361,109 Revocable deposits and loans 1,306,400 - - - - 1,306,400 Receivables arising frominterest, fee and commission, trade, fair value adjustments of derivatives and other receivables 45,143
- December 31, 2008 (324,340) (826,283) 648,670 511,882 (9,929) - - December 31, 2007 414,479 (655,633) 429,954 461,498 (650,298) -
The Banks liquidity, as its ability to discharge its liabilities when due, depends on the balance sheet structure of the Bank, as well as the matching between inflows and outflows of assets. The structure of assets and liabilities as of December 31, 2008 according to their maturities indicates the existence of a liquidity gap in the period up to one month and from 1 to 3 months. The primary weakness of the aforementioned mismatch is inherent in the fact that short-term sources of assets were placed for a longer time period. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 54 Translation of the Financial Statements Issued in the Serbian language
32. MATURITIES OF FINANCIAL LIABILITIES (undiscounted cash flows)
Up to 1 Month From 1 to 3 Months From 3 to12 Months From 1 to 5 Years Over 5 Years Total LIABILITIES December 31, 2008 Transaction deposits 1,583,982 - - - - 1,583,982 Other deposits 2,714,204 1,570,143 808,476 14,123 17 5,106,963 Borrowings 20,642 40,669 60,926 3,145 - 125,382 Interest, fee and commission payables and change in the value of derivatives
Up to 1 Month From 1 to 3 Months From 3 to12 Months From 1 to 5 Years Over 5 Years Total LIABILITIES December 31, 2007 Transaction deposits 1,947,267 - - - - 1,947,267 Other deposits 2,584,987 1,095,950 538,351 21,726 1,404 4,242,418 Borrowings - - 995 3,965 3,575 8,535 Interest, fee and commission payables and change in the value of derivatives
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 55 Translation of the Financial Statements Issued in the Serbian language
33. INTEREST RATE RISK
The Decision issued with reference to interest rates, established the framework for determining interest rates on placements and liabilities in 2008. The Bank strives to ensure the preservation of the real value of sources and placements.
An Asset and Liability Management Board was established within the Bank which is in charge of interest rate risk management.
Up to One Month
From 1 to 3 Months
From 3 to12 Months
From 1 to 5 Years
Over 5 Years Non- Interest Bearing Assets/ Liabilities
Total ASSETS Cash and cash equivalents 795,657 - - - 3,590 561,862 1,361,109 Revocable deposits and loans 507,652 - - - - 798,748 1,306,400 Receivables arising frominterest, fee and commission, trade, fair value adjustments of derivatives and other receivables 45,143
Net interest rate exposure: - December 31, 2008 (501,702) (813,740) 656,317 518,029 226,261 (85,165) - - December 31, 2007 (41,125) (636,407) 431,141 429,376 143,586 (326,571) - CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 56 Translation of the Financial Statements Issued in the Serbian language
34. CURRENCY RISK
The following table shows the net foreign currency position of the Banks assets and liabilities as of December 31, 2008:
USD
EUR
Other Currencies
Total Foreign Currency
Local Currency
Total
Cash and cash equivalents 18,762 218,889 103,525 341,176 1,019,933 1,361,109 Revocable deposits and loans 194,990 611,410 - 806,400 500,000 1,306,400 Receivables arising frominterest, fee and commission, trade, fair value adjustments of derivatives and other receivables 683
957,461 Deferred tax assets - - - - 17,654 17,654 Other assets 88 9,270 132 9,490 56,939 66,429 Total assets
323,685
2,826,315
170,458
3,320,458
4,518,890
7,839,348
LIABILITIES Transaction deposits 15,967
252,192
8,372
276,531
1,270,861
1,547,392 Other deposits 286,809 2,394,690 212,342 2,893,841 1,879,999 4,773,840 Borrowings 195 118,198 - 118,393 4,100 122,493 Interest, fee and commission payables and change in the value of derivatives 61
Net currency exposure: - December 31, 2008 14,944 26,331 (53,532) (12,257) 12,257 - - December 31, 2007 28,662 1,081,071 14,274 1,124,007 (1,124,007) -
At December 31, 2008, loans and other placements in dinars hedged by indexing dinar exchange rate to foreign currencies, amounted to RSD 890,338 thousand and were presented within foreign currency exposure. The liabilities with currency clause of RSD 213,845 thousand are also included within the foreign currency exposure. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 57 Translation of the Financial Statements Issued in the Serbian language
34. CURRENCY RISK (Continued)
Total Foreign Currency Changes in Exchange Rates 10% Changes in Exchange Rates -10%* Sensitivity analysis (currency risk) Cash and cash equivalents 341,176 34,118 (34,118) Revocable deposits and loans 806,400 80,640 (80,640) Receivables arising from interest, fee and commission, trade, fair value adjustments of derivatives and other receivables 11,153
1,115
(875) Loans and deposits to customers 1,508,198 150,820 (75,323) Securities (excluding treasury shares) 52,911 5,291 (5,291) Other placements 591,130 59,113 (57,137) Other assets 9,490 949 (567)
TOTAL ASSETS 3,320,458
332,046
(253,951)
Transaction deposits 276,531 27,653 (27,653) Other deposits 2,893,841 289,383 (289,383) Borrowings 118,393 11,839 (11,839) Interest, fee and commission payables and change in the value of derivatives 306
31
(31) Other liabilities 43,644 4,364 (4,364)
TOTAL LIABILITIES 3,332,715
333,270
(333,270)
December 31, 2008 (12,257) (1,224) 79,319 December 31, 2007 1,124,007 (112,401) (17,122)
* The Bank has placements with contractual currency clause and according to the contractual terms, the repayment of these loans cannot be below the exchange rate as of the release date.
35. IMPACT OF THE FINANCIAL CRISIS ON THE BANKS BUSINESS OPERATIONS
The Banks operations are under the influence of the financial crisis and deterioration of economic conditions. In 2009, further decline in the market conditions is anticipated as in the first months of 2009, economic activities in the country have grown weaker and liquidity has decreased, making it more difficult for the Bank to collect its receivables. With regards to the current crisis on the global market and its ever growing impact on the Serbian market, the adverse effects on the Banks business operations is to be expected.
Owing to the application of internal procedure and policies applied in managing assets and liabilities, as well as risks, despite the impact of financial crisis in the IV quarter of the previous year, the Bank did not register significant deterioration in business operations from the aspect of all risks (liquidity, credit, interest and currency risks) except for the negative effects of withdrawing foreign currency savings deposits of private individuals in the first half of the month of October. Decrease in savings deposits of private individuals and their amount increased towards the end of year.
The Asset and Liability Management Board monitors and considers liquidity risk, delinquencies in customer liability settlement and currency risk on daily basis. CREDY BANKA A.D., KRAGUJEVAC
NOTES TO THE FINANCIAL STATEMENTS December 31, 2008 All amounts are expressed in thousands of RSD, unless otherwise stated. 58 Translation of the Financial Statements Issued in the Serbian language
35. IMPACT OF THE FINANCIAL CRISIS ON THE BANKS BUSINESS OPERATIONS (Continued)
The main problem of the Bank is insufficient capital in the last decade. In the conditions of financial crisis which will peak in 2009, with negative trends in all aspects of operations, the solution is the increase in capital which would help the Bank survive on the market and provide grounds for further development. Increase in capital would help maintain adequate level of liquidity, proper securitization of credit portfolio which means forming reserves to be one step ahead of deteriorating ambient in which the Banks customers operate, as well as capital adequacy above the prescribed level.
36. EXCHANGE RATES
The official exchange rates for major currencies used in the translation of balance sheet components denominated in foreign currencies as of December 31, 2008 and 2007, were as follows: