risk and capital management - vojvođanska bankabank merged with srpska razvojna banka a.d. beograd...

BOARD OF DIRECTORS Number: 1.0-8895/8 Date: 25.05.2015.

Risk and Capital Management

Basel II Pillar 3 Disclosure

Year 2014

Vojvođanska banka a.d. Novi Sad

Basel II - Pillar 3 Disclosures

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Contents 1. General information .............................................................................................................................4

1.1. Basic information about the Vojvodjanska banka, member of NBG Group ................................. 4

2. Introduction..........................................................................................................................................5

2.1 Pillar 1 ............................................................................................................................................. 5

2.2 Pillar 2 ............................................................................................................................................. 6

2.3 Pillar 3 ............................................................................................................................................. 6

3. Overall risk and capital management...................................................................................................6

3.1 Risk management strategy ............................................................................................................. 6

3.2 Risk management framework ...................................................................................................... 10

3.3 Risk governance structure ............................................................................................................ 11

3.4 Capital management .................................................................................................................... 12

3.5 Risk types ...................................................................................................................................... 13

3.6 Monitoring and reporting ............................................................................................................ 13

4. Capital structure and capital adequacy ratio .................................................................................... 15

4.1 Capital structure and adequacy ................................................................................................... 15

4.2 ICAAP considerations ................................................................................................................... 18

5. Credit risk .......................................................................................................................................... 22

5.1 Introduction.................................................................................................................................. 22

5.2 Credit risk management………………………………………………………………………………………………………….23

5.3 Capital requirement for credit risk ............................................................................................... 24

5.4 Quantitative information on the credit risk ................................................................................. 25

5.4.1 Gross and net credit exposure per exposure classes ........................................................... 25

5.4.2 Credit exposure per geographical areas .............................................................................. 31

5.4.3 Credit exposure per sectors ................................................................................................. 32

5.4.4 Credit exposure according to the remaining time to maturity ............................................ 35

5.4.5 Distribution of exposures per classification categories and exposure classes, as well as

calculated special and needed reserves ........................................................................................ 36

5.5 Large exposures............................................................................................................................ 39

5.6 Impaired facilities and past due exposures .................................................................................. 39

5.7 Credit risk mitigation .................................................................................................................... 42

5.8 Related party and intra-group transactions ................................................................................. 44


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5.9 Equity investments held in banking book .................................................................................... 44

6. Market risk ........................................................................................................................................ 46

6.1 Introduction.................................................................................................................................. 46

6.2 Foreign exchange risk management ............................................................................................ 46

6.3 Market risk management ............................................................................................................. 47

6.4 Capital requirement for market risk............................................................................................. 48

7. Operational risks ............................................................................................................................... 49

7.1 Introduction.................................................................................................................................. 49

7.2 Operational risk management ..................................................................................................... 49

7.3. Capital requirement for operational risk .................................................................................... 51

8. Other types of risk ............................................................................................................................. 52

8.1 Introduction.................................................................................................................................. 52

8.2 Liquidity risk ................................................................................................................................. 52

8.3 Management of interest rate risk in the banking book ............................................................... 54

8.4 Concentration risk ........................................................................................................................ 55

8.5 Counterparty credit risk ............................................................................................................... 55

8.6 Reputational risk .......................................................................................................................... 56

8.7 Other risks .................................................................................................................................... 56

9. Appendix 1-4


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The NBS Basel II guidelines became effective on 31 December 2011 as the common framework for the implementation of Basel II standards for banks incorporated in the Serbia. The Basel II Pillar 3 Disclosure Report has been prepared in accordance with the NBS requirements outlined in the Decision on disclosure of data and information by banks (RS Official Gazette 125/2014).

This Basel II Pillar 3 Disclosure Report contains a description of the Bank’s risk management and capital adequacy practices and processes. The Disclosures in this Report are in addition to or in some cases, serve to clarify the disclosures set out in the Notes to the Financial Statements for the year ended 31 December 2014, presented in accordance with the Financial Accounting Standards (FAS) and International Financial Reporting Standards (IFRS).

1. General information

1.1. Basic information about the Vojvodjanska banka, member of NBG Group

Vojvodjanska banka a.d., Novi Sad (the “Bank”) was established on 1 January 1990 by the transformation of Vojvodjanska bank - Associated Bank, Novi Sad. On 30 December 2001, in accordance with its Articles of Incorporation and the Decision of the Bank’s General Assembly, the Bank merged with Srpska razvojna banka a.d. Beograd and Uzicka banka a.d., Uzice.

In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece became the major owner of the Bank’s share capital, by acquiring an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House, on 12 December 2006. On 25 October 2007, the National Bank of Greece, Athens, conducted the mandatory purchase of the remaining 1,727 shares and became the sole owner of the Bank. On 7 December 2007, Vojvodjanska banka a.d., Novi Sad was excluded from the Belex list on its own request.

The Bank is registered in the Republic of Serbia a closed joint stock company to provide a wide range of banking services associated with payment transfers, credit and deposit activities in the country and abroad, and it operates in accordance with the Republic of Serbia’s Law on Banks.

In accordance with the Decision brought by the Bank’s Assembly on 3 January 2008, Vojvodjanska banka a.d., Novi Sad merged with the National Bank of Greece a.d. Beograd, with the date of merger being 31 December 2007. The aforementioned status change of merger by absorption of the National Bank of Greece a.d., Beograd was inscribed in the registry maintained by the Serbian Business Registers Agency on 14 February 2008 under the number BD 6190/2008 (removal of the business entity – the National Bank of Greece a.d., Beograd as the acquired bank) and the change in equity structure of Vojvodjanska banka a.d., Novi Sad was inscribed (Decision number BD 6210/2008). The National Bank of Greece a.d., Beograd was entirely in the ownership of the National Bank of Greece Athens, Greece. The Bank continued its operations under the name of Vojvodjanska banka a.d., Novi Sad.

The Bank’s Head Office is located in Novi Sad, 7, Trg slobode. As of 31 December 2014, the Bank operated through its Central Office located in Novi Sad, 54 branches and 55 sub-branch offices (31 December 2013 same: 54 branches, 55 sub-branches).

As of 31 December 2014, the Bank had 1,706 employees (31 December 2013: 1,703 employees). The Bank’s registration number is 08074313. Its tax identification number is 101694252.


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2. Introduction

The Basel II based framework, which has been implemented in Serbia by 31 December 2011, provides a more risk sensitive approach to assessment of risk and the calculation of regulatory capital. The new framework intends to strengthen the risk and capital management practices and processes within financial institutions. Given the NBS’s requirements the Bank has accordingly taken steps to comply with these requirements. The NBS’s risk and capital management framework, consistent with the Basel II framework, is built on three pillars:• Pillar 1: Calculation of the regulatory capital, risk weighted assets, capital requirements and capitaladequacy ratio.• Pillar 2: The supervisory review process, including the Internal Capital Adequacy AssessmentProcess.• Pillar 3: Rules for the disclosure of risks management and capital adequacy data and information.

2.1 Pillar 1

Basel II Pillar 1 prescribes the basis for the calculation of the regulatory capital adequacy ratio. Pillar 1 defines the regulatory minimum capital requirements for each bank to cover the credit risk, market risk and operational risk. It also defines the methodology for measurement of these risks and the various elements of qualifying capital.

The capital adequacy ratio is calculated by dividing the regulatory capital base by the total Risk Weighted Assets (RWAs). The resultant ratio is to be maintained above a predetermined and communicated level by NBS. Under Basel II standards, the minimum capital adequacy ratio for banks incorporated in Serbia is set on 12% compared to the Basel Committee’s minimum ratio of 8 per cent. The NBS also requires banks incorporated in Serbia to maintain a capital buffer of 2.5 per cent above the minimum capital adequacy ratio. In the event that the capital adequacy ratio (CAR) is higher for less than 2.5% of prescribed 12% or it would be higher after redistribution of retained profit for less than 2.5% of prescribed 12%, it means that the Bank is restricted to perform redistribution of profit only into elements/items of the Core Capital.

Under the NBS’s Basel II capital adequacy framework, the RWAs are calculated using more sophisticated and risk sensitive methods than under the previous Basel I regulations. The table below summarizes the Pillar 1 risks and the approaches used by the Bank to calculating the RWAs in accordance with the NBS’s Basel II capital adequacy framework.

RISK TYPE APPROACH USED BY THE BANK

Credit risk Standardized Approach

Market Risk Standardized Approach

Operational Risk Basic Indicator Approach


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2.2 Pillar 2

Basel II Pillar 2 deals with the Supervisory Review and Evaluation Process (SREP). It also addresses the Internal Capital Adequacy Assessment Process (ICAAP) to be followed by banks to assess the overall capital requirements to cover all relevant risks (including those uncovered under Pillar 1).

Under the NBS’s rules and Pillar 2 guidelines, each bank is to be individually assessed by the NBS and an individual minimum capital adequacy ratio could be prescribed as higher if the NBS assesses it is necessarily and is in interest of bank.

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the bank is exposed. The Bank has developed an ICAAP process which involves identification and measurement of risks to maintain an appropriate level of internal capital in alignment to the Bank’s overall risk profile and business plan. An ICAAP Policy has been developed to address major components of the Bank’s risk management, including risk types which are not covered under Pillar 1 and they are liquidity risk, credit fx risk, interest rate risk in the banking book, concentration risk, reputational risk and other risks.

In its ICAAP Report 2014 the Bank has, in addition to risks from Pillar 1, calculated internal capital requirements for interest rate risk in the banking book, fx credit risk and for concentration risk.

2.3 Pillar 3

In the NBS’s Basel II framework, the Pillar 3 prescribes how, when, and at what level of data and information should be publicly disclosed about an institution’s risk management, governance and capital adequacy practices. The disclosures comprise detailed qualitative and quantitative information. The purpose of the Pillar 3 disclosure requirements is to complement the first two Pillars and the associated supervisory review process. The disclosures are designed to enable stakeholders and market participants to assess an institution’s risk appetite and risk exposures and to encourage all banks, via market pressures, to move towards more advanced forms of risk management.

In accordance with NBS’s regulation, the Bank ordinarily annually and semi annually disclosed data and information about risk and capital management.

3. Overall risk and capital management

3.1 Risk management strategy

The Bank perceives strong risk management capacities to be the strong foundation in delivering business results to customers, investors and NBG Group. In accordance with this, the Bank endeavors to develop the best international practices of risk management trying to provide the highest level of market discipline.

The primary objectives of the Risk strategy of the Bank are to: • Manage risks inherent in the Bank’s activities in line with the risk appetite of the Bank;


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• Strengthen the Bank’s risk management practices to reflect the industry best practices; and• Align internal capital requirements with risk materiality.

The risk strategy is articulated through the limit structures for individual risks. These limits are based on the Bank’s business plans and guided by regulatory requirements and guidance in this regard. By setting the risk appetite, the Bank links its individual risks to its strategy. The risk limits reflects the level of risk that the Bank is prepared to take in order to achieve its objectives. The Bank reviews and realigns risk appetite as per the evolving business plan of the Bank with changing economic and market scenarios. The Bank will also assess its tolerance for specific risk categories and its strategy to manage these risks. The risk appetite outlines the Bank’s risk exposures and defines its tolerance levels towards accepting or avoiding these risks. Tolerance levels are contained in the limits defined by the Bank for each risk area.

On the basis of the Risk Strategy, the Bank has developed a set of policies referring to individual risks which, inter alia, specify the procedures of identifying, assessing, measuring, monitoring, reporting and controlling risks; the manner of organizing the risk management process in respect of the given risks; as well as roles and responsibilities of the competent organizational units and management bodies with respect to each risk type. The risk mitigation techniques and the manners of ensuring and monitoring risk mitigation efficiency have also been defined in the above-mentioned policies.

Credit risk policies The Credit Policy regarding the Corporate Portfolio aims to provide the Bank’s personnel engaged in loan granting with the fundamental guidelines for the managing (identification, measurement, approval, monitoring and reporting) of the credit risk related to the Corporate Portfolio. The Credit Policy has been designed to meet the organizational requirements and the regulatory frameworks in the best possible way, as well as to allow the Bank to maintain and enhance its leading position in the market in align with adequate credit risk management. The Credit Policy has been approved and can be amended or revised by the Board of Directors and it is subject of periodical revision. This Board ratifies all exceptions from the Credit Policy initially approved by the Chief Credit Officer. All exceptions (and the rationale for each exception) should be recorded and have either an expiry date or a review date.

Retail Banking Credit Policy and Small Business Banking Credit Policy sets the policies & risk acceptance criteria, which determine the framework for managing and minimizing the credit risks undertaken by the Retail Banking Products and Segments Division. Its main scope is to enhance, guide and regulate the effective and adequate management of retail and small business credit risk, thus achieving a viable balance between risk and reward. Both policies are orientated to serve three basic objectives: 1. Set the framework for the establishment of the basic credit criteria, instructions and procedures,2. Assures compliance with regulatory and NBG Group policy and3. Establish a common approach for managing Retail Credit risks and Small Business Credit risks.

Trading book policy The trading book Policy is related to market risks. Market risks arise from adverse effects on the financial result and equity on the valuation of balance sheet items and off-balance sheet items of the Bank arising from movements in market prices. Market risks include currency risk, price risk on debt securities and equity securities and commodity risk.


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The Bank has no significant exposure to these risks, where there is a constant striving for their reduction to a minimum. Limits setting for market risks aims to risk managing, i.e. minimize risks that can have a negative impact on the operating results of the Bank.

In addition to the nominal limit for open positions, limits related to the indicators, the Bank has established VaR limits on open positions in major currencies. In the market risk management Department the Bank has established a number of different limits for transactions agreed on market, where internal limits are stricter than all the limits prescribed by the National Bank of Serbia.

The Bank is continuously synchronized its assets and liabilities per currency. Monitoring of currency positions in each currency is done in order to have consistent position with the pre-established limits by currency and the total allowed open position of the Bank.

Trading book policy defines the criteria for the allocation of balance sheet items and off-balance sheet items in the trading book and the banking book as well as a methodology for evaluating the trading book and the banking book.

Liquidity risk Policy

The Liquidity risk Policy defines the basis framework, principles and metrics of liquidity risk management, which the Bank will adhere at any time to successfully satisfy its liquidity needs.

The main objective of liquidity management is to reduce the liquidity risk to a minimum by planning the inflow and outflow of funds and the adoption of appropriate measures to prevent and eliminate the causes of insolvency, or the avoidance of negative effects on the financial result and equity due to the inability of the Bank to meet its financial obligations .

The Bank strives in each moment to minimize liquidity risk. For the purposes of effective liquidity risk management and monitoring the Bank uses many reports on daily cash flows related to future planned activities including cyclical events that may affect the liquidity. The reports are used by the Treasury Division for daily liquidity management.

Except the prescribed reserve requirements, the Bank is establishing its own liquidity reserves with the aim to respond in anytime to unexpected demands and outflows of cash funds. The adequacy of liquidity reserves is monitored on a daily basis.

In order to mitigate liquidity risk, the Bank uses a limit system (internal and external), and a set of internal and external indicators.

In addition to the cash flows , the Bank also considers its liquidity position through liquidity GAP and conducts stress testing their liquidity position at least once every quarter and the results of stress testing are discussed at meetings of the ALCO Committee.

Policy for the management of interest rate risk in the banking book

Interest rate risk is the risk of possible adverse effects on the financial result and capital arising from positions in the banking book due to changes in interest rates.

Policy for the management of interest rate risk in the banking book, the Bank is complied with the accepted level of risk exposure and targeted risk profile, as well as general and specific risk management principles set out in the Bank’s Risk Strategy.

The Bank assumes exposure to interest rate risk in accordance with the legal provisions and internal rules, where there is a constant striving to reduce this risk to a minimum.


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Bank tends to maintain ratios between interest sensitive assets and liabilities within the established limits for specified intervals. Interest rate risk management is carried out for all currencies as well as at the level for particular major currencies.

The basis for measuring interest rate risk exposure is to analyze mismatches in re-establishing the interest rate differential between interest-bearing assets and liabilities. Such mismatches are monitored monthly by the interest sensitive items of the balance and off-balance sheet distributed at certain time by intervals and upon such terms and on the basis of the next date of re-pricing instrument or the maturity date for instruments with fixed interest rates.

The Bank performs stress testing of interest rate GAP through a standardized shock of interest rate exposure to interest rate risk and monitor the effect on the economic value of equity and net interest income (NII).

Country Risk Management Policy

Country risk is the risk that refers to the country of origin of the bank is exposed, the risk of negative effects on the financial result and equity due to the inability of banks to collect claims from individuals for reasons that are political, economic or social conditions in country of origin.

Policy for country risk management set out the key principles that are the basis of all business activities of the Bank, which include exposure to other countries and puts the focus on the Bank's approach to managing country risk arising from transactions with foreign counterparties.

The Bank has established limits on individual countries, by groups of countries, in accordance with rating and limits on certain regions of a country where they belong. The basis for determining the limits for exposure to other countries, make the ratings set forth by reputable agencies.

The Bank monitors daily the exposure to countries by all the aforementioned categories and maintains a level of exposure so that they are within established limits.

Investment risk managment Policy

The bank’s Investment risk is defined by the NBS and involves the investment risk in other legal entities and fixed assets. The Bank's investments in an entity who not belong in the financial sector should not exceed 10% of its capital, whereby under the investment is implied the investment that Bank has acquired the participation or shares of entity that not belong to the financial sector.

Total bank investments in entities outside the financial sector, in fixed assets and investment property must not exceed 60% of its capital, except that this limitation does not apply to the acquisition of shares for resale within six months from the date of acquisition.

In the Investments risk management Policy are determined the key principles related to the Bank's business activities that contributes in increasing the Bank's exposure to investment risk particular in part related to the investment relating to fixed assets. The Bank has established a system of control for all activities that contribute to incensement of investments as well as internal limits to prevent exceeding regulatory Ratios. The Bank calculates and monitors on monthly basis investment ratios to timely control planned investments and timely react in case of internal limits exceeding.


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Operational Risk Management Policy The Operational Risk Management Policy aim is to ensure that the entire Bank’s stakeholders, including the Board of Directors, Executive and Senior Management as well as Staff, manage operational risk within a formalized Framework aligned to business objectives.

Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal and compliance risk, but excludes other risks such as strategic or reputational.

The main purpose of managing operational risk is to increase the awareness of operational risk, while creating the management structure which includes all organizational parts of the Bank and its employees as well as introducting the operational risk management tools.

The Policy gives the management structure for managing operational risk at the Bank level describing the role of every participant.

1. Collection of direct operational lossesThe Bank emphasizes on the collection of direct operational losses, for which the following definitionhas been adopted: ’All direct negative financial impacts on the Bank’s financial statements due to theoccurrence of an operational risk event’. The losses are captured in the ALGO OPVAR application.It is the Bank’s policy that all risk owners (the management of every organizational part of the Bank)report all incidents resulting in direct losses at the time of occurrence even if they are temporarilybooked in transitory and/ or suspense accounts and not yet recognized in the P&L.

2. RCSAThe RCSA methodology is conducted at the Bank level and in order to identify operational risks at theprocess level. The same methodology is used for the introduction of new products, activities,processes and systems, and it also assesses the activities entrusted to the third parties. The RCSAuses also the qualitative approach as well as the assessing of the relevant control environment.

3. KRI (key risk indicators)The purpose of KRIs is to assist in the identification of risk exposures before they crystallize intolosses.

4. Action PlansBy the term ’Action Plan’ we hereby mean all the necessary steps and measures intended to mitigateoperational risks, after the acknowledgement of control inefficiencies or risk escalation.

3.2 Risk management framework

The Bank has established a comprehensive and reliable system of risk management, integrated in all its business activities, which ensures that the Bank’s risk profile is always in line with already established propensity to risks. Risk management system is proportionate to the nature, volume and complexity of the Bank’s operations and/or its risk profile.

The Bank’s risk management system encompasses: • Risk management strategy and policies, as well as procedures for risk identification andmeasurement and assessment and for managing risks• Adequate internal organizational structure• Effective and efficient process of management of all risk


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• Adequate internal controls system• Appropriate information system.

The risk management framework of the Bank encapsulates the spirit of the following key principles for Risk Management as articulated by Basel II standards: • Management oversight and control• Risk culture and ownership• Risk recognition and assessment• Control activities and segregation of duties• Information and communication• Monitoring risk management activities and correcting deficiencies.

3.3 Risk governance structure

The Bank’s Board of Directors has overall responsibility for establishing risk culture and ensuring that an effective risk management framework is in place. The Board of Directors adopts and periodically reviews the Bank’s risk management policies and strategies. The Board Risk Management Committee is responsible to control the Risk Management Division in terms of independence, adequacy and effectiveness, as well as to ensure development and ongoing effectiveness of the Bank’s internal risk management system and its integration into the business decision making process as regards to any type of risk. The Executive Board is responsible for monitoring and implementation of the policies adopted by the Board of Directors.

The key element of risk management philosophy is for the Risk Management Department (‘RMD’) to provide independent monitoring and control of risks while working closely with the business units which ultimately own the risks.

The Risk Governance structure of the Bank is depicted by the following diagram.

Risk Management Committee Audit Committee

Board of Directors

ALCO Credit Committee

Executive Board

Finance

IT Business

Processes

HR

Back office

functions

Legal

Other specialized units

Internal

Audit

RISK MANAGEMENT

Corporate

Credit Risk

Market risk

management

Operational risk

management

Credit risk

models

Business

units

1st line of defence 2nd line of defence 3rd line of defence

Strategic level

Tactical level

Operational level

Basel II

Portfolio and

classificaton

management

Compliance

Marketing

CREDIT RISK

MANAGEMENT

Retail Credit

Initiation

Retail policies,

procedures and

credit portfolio

management


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The RMD plays a pivotal role in monitoring the risks associated with all the activities of the Bank. The principal responsibilities of the Division are: • Determining the Bank’s appetite for risk and submitting the same to the RMC and Board ofDirectors for approval.• Developing and reviewing risk management policies in accordance with the risk managementguidelines issued by the NBS, NBG Group and international best practices.• Reviewing operating policy manuals and ensuring that such policy manuals are in accordance withthe risk management policies and appropriately addresses all the key risks embedded in the relatedprocesses/ products.• Acting as the principal coordinator in Basel II implementation as required by the NBS andfacilitating the performance of key Basel II activities.• Identifying and recommending risk analysis tools and techniques as required under Basel II,guidelines issued by the NBS and NBG Group.• Reviewing the adequacy of the risk limits and providing feed back to the relevant approvingauthorities.• Preparing MIS Reports for review by the RMC and the Board of Directors.• Developing systems and resources to review the key risk exposures of the Bank and communicatingthe planned/ executed corrective actions to the Risk Management Committee.

Within the Bank, Risk Management broadly takes place at the following levels:

Strategic level – It encompasses risk management functions performed by the Board of Directors. These include the adoption of risk and capital strategies and policies, ascertaining the Bank’s risk definitions, profile and appetite, as well as, the risk reward profile.

Tactical level – It encompasses risk management functions performed by Executive Board and Directors of Divisions. These include the approval of risk policies and procedure manuals for managing risks and establishing adequate systems and controls to ensure that the overall risk and reward relation remains within acceptable levels.

Operational (business line) level – It involves management of risks at the point where they are actually created. The relevant activities are performed by individuals who undertake risk on the Bank’s behalf. Risk management at this level is implemented by means of appropriate controls incorporated into the relevant operational procedures and guidelines set by the Executive Board.

3.4 Capital management

The Bank’s policy is to maintain a strong capital base and meet the minimum capital requirements imposed by the regulator (NBS), so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognized and the Bank recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank’s capital management policy seeks to maximize return on risk adjusted capital while satisfying all the regulatory requirements.


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The Bank ensures that the capital adequacy requirements are met and comply with regulatory capital requirements at all times. A prior approval of the NBG Group is obtained by the Bank before submitting a proposal for distribution of profits (i.e. dividend) for shareholders approval.

3.5 Risk types

The Bank is exposed to various types of risk.

Risks in Pillar 1 Credit risk (Counterparty credit risk; Delivery/Settlement risk for free delivery)

Delivery/Settlement risk for unsettled transactions

Market risk

Operational risk

Risks in Pillar 2

Liquidity risk

Residual risk

Credit fx risk

Concentration risk

Risk of possible underestimation of credit risk in the Standardized Approach

Risk of possible underestimation of operational risk in the Basic Indicator Approach

Interest rate risk in banking book

Country risk

Investment risk

Strategic risk

Business risk

Reputational risk

External factor risk

The details of components of risks and how they are managed are presented in the following sections of this document.

3.6 Monitoring and reporting

The Risk Management Division provides that all types of risk are being measured and managed in accordance with the policies and guidelines set by the Board of Directors. The Risk Management Division submits a quarterly report about risk management to responsible management bodies of the Bank.

Under the market risk management, the Bank has established a number of internal reports, reports submitted to the NBG Group and the National Bank of Serbia. The Bank generates a daily report on the Foreign currency risk, the VaR, the compliance with the limits on open positions and report on the Bank's exposure to other counterparties, balance of goverment portfolio securities.

Considering liquidity risk the Bank has established a series of reports that are related with daily liquidity risk management activities and that are presented to relevant functions and management


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bodies of the Bank, NBG Group and the National Bank of Serbia. Comprised are reports on liquidity ratio, narrow liquidity ratio, balance of planned cash inflows and outflows, balance of liquid assets and liabilities to other banks, the balance of the securities portfolio and balance of deposits.

Within the Country risk management the Bank has established series of internal reports as they are: a daily report on the Bank's exposure to other countries and usage of limits, the Bank's exposure to country risk by groups of quality rating and exposures presented by region.

In addition to the daily, the Bank prepares monthly reports for ALCO Committee concerning market risk, interest rate risk in the banking book, liquidity risk and country risk, which include analysis of movement of relevant internal and external indicators, liquidity GAP's, interest rates GAP's, the results of stress tests and analysis of limit utilization and investment risk. The Bank is preparing a series of reports and on a monthly or quarterly basis that are included in the reports at NBG Group level.

With respect to the credit risk and portfolio and classification management, the Bank prepares reports related to credit risks and delivers them to the National Bank of Serbia, NBG Group, responsible bodies of the Bank and management of the Bank. Reports which the bank delivers to the National Bank of Serbia are the following: reports on classification of balance sheet assets and off-balance sheet items (KA 1-5), large exposures and exposures towards a group of related parties (VI LI, VI GPL), report on restructured receivables (IRP), reports on the structure and changes in level of nonperforming loans (NPL 1-3) and reports on capital requirements for credit risk, counterparty risk and settlement/delivery risk based on free delivery per exposure class according to the standardized approach. Stipulated reports are delivered on quarterly basis with the exception of the report on the structure and changes in level of nonperforming loans (NPL 1-3) which is delivered on monthly basis. On monthly basis are also delivered to the National bank of Serbia reports BAN001 – Monthly report on loans of clients who have accepted the Bank’s offer and have concluded the Annex of the Contract on housing loan indexed in CHF and BAN002 – Monthly report on amounts of decrease of the principal of loans approved to individual persons, based on implementing the recommendation related to increase of inestimable elements of variable interest rate.

Reports on credit risks are delivered quarterly and annually to responsible management bodies of the Bank and contain data on the quality of the credit portfolio, namely the volume of the portfolio, debtor classification, needed reserve for the estimated losses, structure of the loans per delinquency, largest debtors, large exposure indicators and amounts of credit risk weighted assets with remarks for changes in the last quarter. Also, to responsible management bodies of the Bank the following reports are delivered on monthly basis: Watch list, Branch concentration, Data on corporate portfolio – volume, segmentation, total exposure and maximum delinquency, as well as report on blocked corporate clients.

With respect to the credit risk and portfolio and classification management to the NBG Group the following reports are delivered: Basel II, ICAAP report for credit risks, Bank’s large debtors, large exposures, presentation of data on volume, structure of corporate loans and retail loans per delinquency, client segmentation, type of product and NPL indicators. Internally, to the Finance Division are also delivered reports which are integral components of IFRS reports, US GAAP reports and FinRep report, as well as the report on rescheduled, restructured and refinanced receivables.

The operational risk reporting of the appropriate functions and the Bank’s bodies it is conducted on

the monthly, quarterly and annual basis. The reports contain the operational risk events details, the

actual and potential operational risk events, information about taken measures in managing


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operational risk, the results of testing of the BCP (business continuity plan) and other. Also, the Bank

conducts quarterly reporting towards National bank of Serbia considering calculated capital

requirement for operational risk.

Reports which the Bank prepares (daily, monthly and quarterly) for National Bank of Serbia are submitted to certain forms in accordance with the timetable set by the Regulator.

4. Capital structure and capital adequacy ratio

4.1 Capital structure and adequacy

The Bank’s regulator, the NBS, sets and monitors capital requirements for the Bank. In implementing current capital requirements the NBS requires the Bank to maintain a prescribed ratio of 12% of total regulatory capital to total risk-weighted assets. Banking operations are categorized as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The NBS also requires banks incorporated in Serbia to maintain a buffer of 2.5 per cent above the minimum capital adequacy ratio.

The Bank's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The Bank is required to comply with the provisions of the Decision on Capital Adequacy by Bank (which is based on the Basel II standards) in respect of regulatory capital. The Bank has adopted the standardized approach to credit and market risk and basic indicator approach for operational risk management under the revised framework. The Bank has complied with the capital requirements set by the regulator throughout the year. The capital adequacy ratio of the Bank as at 31 December 2014 was on the level of 17.57%. The Bank further plans to maintain strong capital position.

The Bank’s regulatory capital is analyzed into two tiers:

Core Capital (Tier 1 capital) includes: Paid up shares (excluding preference cumulative shares – PCS), Premium on issued shares; Reserves allocated from profit; and Profit of the Bank; reduced for Losses from earlier years; Current year losses; Intangible investments; Acquired own common and preference shares (excluding PCS) pledged with the Bank; Regulatory value adjustments; and Amount of Needed reserves for estimated losses on balance sheet and off-balance items.

Supplementary Capital (Tier 2 capital) includes: Paid up PCS; Premium on issued PCS; Part of positive revaluation reserves; Hybrid instruments; Subordinated debt; reduced for Own PCS; PCS pledged with the Bank; and Claims covered by hybrid instruments and subordinated debts of the Bank.

Deduction items from Capital in case of the Bank include Amount of which is exceeded qualified participation of the Bank in non-financial entities.

The Bank’s capital structure, capital requirements and risk weighted assets at 31 December 2014 was as follows:


16

In RSD thousands

No. CAPITAL STRUCTURE 31.12.2014.

I CAPITAL 10,619,095

1. CORE CAPITAL 10,623,988 Paid-up shares (excluding CPS) 16,337,430 Premium on the issue shares (excluding CPS) 120 Reserves allocated form profit 122,185 Portion of retained profit from earlier years 2,814,416 Losses from earlier years 0 Current year losses 0 Intangible investment (465,514) Regulatory value adjustments – unrealized losses (9,960) Needed reserve for estimated losses (8,174,689)

2. SUPPLEMENTARY CAPITAL 208,486 Portion of revaluation reserves which refers to fixed assets, securitiesand other funds

208,486

3. DEDUCTION FROM CORE CAPITAL AND SUPPL.CAPITAL (213,379) 3.1. It refers: reduction of core capital (106,690) 3.2. It refers: reduction of supplementary capital (106,689)

Amount for which is exceeded qualified participation of bank in entities which are not financial sector entities

(213,379)

4. TOTAL CORE CAPITAL 10,517,298

5. TOTAL SUPPLEMENTARY CAPITAL 101,797

No. CAPITAL REQUIREMENTS 31.12.2014.

I CAPITAL 10,619,095

1. TOTAL CORE CAPITAL 10,517,298

2. TOTAL SUPPLEMENTARY CAPITAL 101,797

II CAPITAL REQUIREMENTS 7,251,184

1. Credit risk; counterparty risk; delivery/settlement risk for free delivery 6,421,829

2. Delivery/settlement risk for unsettled transactions 0

3. Market risk 29,744 3.1.1. Price risk in respect of debt securities 29,744 3.1.2. Price risk in respect of equity 0 3.1.3. Foreign exchange risk 0 3.1.4. Commodities risk 0

4. Operational risk 799,611

5. COVERAGE OF CAPITAL REQUIREMENTS 7,251,184

III CAPITAL ADEQUACY RATIO 17.57%

No. RISK WEIGHTED ASSETS STRUCTURE 31.12.2014.

1. Credit 53,515,241

2. Delivery/Settlement risk 0

3. Market risk 247,867

4. Operational risk 6,663,425

TOTAL RWA 60,426,533

Under the NBS rules the Bank is obliged to maintain capital structure, capital level and capital adequacy ratio in accordance with following regulatory capital requirements and restrictions:

- Total Capital at least 10 million Euros.- Core Capital at least 50% of Total Capital.- Capital Adequacy Ratio (CAR) minimum 12%.


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- Total amount of hybrid instruments may be maximum 50% of the Core Capital.- Total amount of hybrid instruments excluding convertible instruments in the case of balance

sheet deterioration (except cumulative preference shares) may be maximum 35% of the CoreCapital.

- Subordinated debt included in Supplementary Capital is restricted to 50% of Core Capital.- Bank with CAR higher for less than 2.5% of prescribed 12% or it would be higher after

redistribution of retained profit for less than 2.5% of prescribed 12%, is restricted to performredistribution of profit only into elements/items of the Core Capital.

- The sum of Capital deduction items is subtracted 50% from Core Capital and 50% fromSupplementary Capital. If 50% of total amount of deduction items is greater than thedisposable amount of Supplementary Capital – the difference above the amount ofdisposable Supplementary Capital is subtracted form the Core Capital.

- During the last five years to maturity, a discount factor of 20% per year will be applied tosubordinated obligations eligible for inclusion in bank’s supplementary capital, so in the lastyear prior to that date subordinated debt are not included in Supplementary Capital.

- Bank is obliged to exclude hybrid instruments with maturity below 12 months fromcalculation of Supplementary Capital.

Capital adequacy ratio of the Bank is equal to the ratio of the Bank’s capital and the sum of the credit RWA, capital requirement in relation to market risk multiplied with the reciprocal value of the capital adequacy ratio, and capital requirement in relation to operational risk multiplied with the reciprocal value of the capital adequacy ratio.

The table below summarizes the structure of the Bank’s capital and risk weighted assets as of 31 December 2014 and 2013, as well as the capital adequacy ratio:


18

In thousands RSD

2014 2013

Regulatory capital

Tier 1 capital 10,623,988 12,176,479

Tier 2 capital 208,486 1,260,101

Total Tier 1 and Tier 2 capital 10,832,474 13,436,580

Deductible items:

Shoirtfall amount of the special reserves ( 0) ( 4,137,620)

for potential losses

Exceeded qualified investments in non-financial entities ( 213,379) ( 268,339)

Total capital (1) 10,619,095 9,030,621

Risk weighted assets

Balance sheet assets 49,732,808 44,616,871

Off balance sheet items 3,665,228 3,237,450

Non- trading derivatives 117,205 18,866

Operational risk exposure 6,663,425 6,342,292

Foreign currency risk exposure 0 0

Price risk exposure 247,867 145,000

Total (2) 60,426,533 54,360,479

Capital adequacy (1/2 x 100) 17.57% 16.61%

4.2 ICAAP considerations

The ICAAP incorporates a review and evaluation of risk management and capital relative to the risks to which the Bank is exposed. The Bank has developed its own ICAAP framework which involves identification and measurement of all material risks and calculation of internal capital requirements, to maintain an appropriate level of internal capital in alignment to the Bank’s overall risk profile and business plan. An ICAAP document has been developed in order to primarily meet regulatory requirements, and secondary to complement its ongoing improvement of risk (including risk types which are not covered under Pillar 1 including liquidity risk, fx credit risk, interest rate risk in the banking book, concentration risk, strategic risk, business risk, reputational risk and other risks) and capital management approaches.

One of the key elements of the Basel II standard adopted by National Bank of Serbia is the requirement for an Internal Capital Adequacy Assessment Process (ICAAP) of the Bank. In accordance with the NBS regulation the Bank is obligated to implement the Internal Capital Adequacy Assessment Process, i.e. determine total internal capital requirements in accordance with its risk profile, as well as determine available internal capital and perform its allocation.


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The Bank implements the Internal Capital Adequacy Assessment Process with the purpose to identify all materially significant risks to which the Bank is exposed in its business activities and in that respect to ensure that the Bank at all times has sufficient capital (or in wider terms available financial resources) to cover all these risks. The Bank and NBG Group have developed adequate capabilities that are utilized for internal assessment of capital adequacy which are primarily related to effective and efficient risk and capital management. These capabilities are continuously enhanced and formalized so as to address regulatory requirements but also reap business benefits and support the strategic aspirations of the Bank and NBG Group.

The key objective of ICAAP is to ensure that the Bank has sufficient capital (or in wider terms available financial resources) to cover all materially significant risks to which the Bank is exposed in its business activities. A number of already existing capabilities and activities in the Bank may be, to a greater or lesser extent, considered as components of the ICAAP in its broadest sense. These include: -Overall business strategy and objectives of the Bank-Governance, particularly governance in regard to risk and capital management in the Bank-Business planning and budgeting-Risk Management, including risk identification, measurement, assessment, mitigation, monitoringand control of individual risks-Regulatory capital, available internal capital and the Bank funding management-Performance management-Overall internal control system.

Thus, the ICAAP is a process that leverages and integrates into these elements mainly from the point of view of available internal capital adequacy assessment, taking into account regulatory requirements. In particular, the ICAAP can be perceived as related to the further integration of risk management, capital management and performance management across the Bank, and thus serves the further implementation of the strategic direction of the Bank. This integration represents best international practice and aims at addressing challenges across capital, risk and performance management in a way that optimally addresses the fundamental relationship between capital, risk and performance.

The ICAAP represents process of assessment of all materially significant risks to which the Bank is exposed or could be exposed in its banking activities. In accordance with NBS regulation rules, the Bank has developed ICAAP which contains next phases: -Identification, mapping and assessment of materially significant risks;-Calculation (assessment) of internal capital requirements for individual risks;-Calculation (assessment) of aggregated capital requirements;- Comparison of regulatory and available internal capital; comparison of regulatory and internalcapital requirements for individual risks; comparison of aggregated regulatory and aggregatedinternal capital requirements.

Overall assessment of internal capital adequacy (ICAAP), as one of the base assumptions has the assessment of materiality of risks to which the Bank is exposed to, in order to determine the need for calculation of internal capital requirements for individual risk the Bank has identified as materially significant.

For all risks identified on the level of the Bank during the risk identification phases, the Bank performs materiality assessment. In accordance with ICAAP Policy, materiality assessment of each risk is performed by applying the following methodology, i.e. approaches depending on risk nature,


20

as well as NBS requirement. For all assessed risks recognized as materially significant, the Bank calculates internal capital requirement applying adopted methodology and stress testing.

Short description of methodologies (approaches) for calculating internal capital requirement for individual risks:

Credit risk, counterparty risk and Settlement/Delivery risk for free delivery The Bank applies standardized approach (prescribed by the Decision on Capital Adequacy of Banks); Approach of the method of current exposure and Approach prescribed by the Decision on Capital Adequacy of Banks, respectively.

Market risk (price) The Bank applies standardized approach (prescribed by the Decision on Capital Adequacy of Banks).

Market risk (fx) The Bank applies standardized approach (prescribed by the Decision on Capital Adequacy of Banks).

Settlement/Delivery risk for unsettled transactions The Bank applies Approach prescribed by the Decision on Capital Adequacy of Banks.

Operational risk The Bank applies Basic indicator Approach (prescribed by the Decision on Capital Adequacy of Banks).

Credit FX risk In calculation of internal capital requirement for credit fx risk the Bank applies its own methodology which is based on estimation of part of loan portfolio which is consisted of debtors for which there is a assessment that they have unmatched fx position due to volatility of RSD exchange rate (on annual level) would affect the amount of capital requirement..

Country risk The Bank applies approach of weighting exposure derived from net assets and off balance sheet items towards other countries by applying risk weights which are differed for each group depending on credit rating in which underlined country is classed along with stress testing.

Residual risk The Bank applies approach of measuring volatility of market value of collaterals in form of financial property which are accepted regarding standardized approach used for credit risk mitigation along with stress testing.

Risk of possible underestimation of credit risk in the SA The Bank applies its own methodology based on the assumption of deterioration of credit risk for

exposures classified in past due items class from risk weight 100% in risk weight 150%.

Risk of possible underestimation of operational risk in the BIA The Bank applies scenario defining approach taking into the consideration one or more assumptions which can lead to possible underestimation of operational risk in the BIA.

Liquidity risk The Bank uses its own methodology based on consideration of the ratio of liquidity assets and total liabilities.


21

Interest rate risk in banking book The Bank applies the methodology of standardized interest rate shock.

Investment risk The Bank uses its own methodology based on comparison of the balance of the investments in other related entities and fixed assets with the balance in the previous period.

Credit concentration risk The Bank applies approach of assessing material concentration of individual exposures (according to obligor - title) and material concentration of industrial sectors (according to sector) by using Herfindahl-Hirschman index (HHI) along with stress scenario.

Other risks (business risk, strategic risk, reputational risk and other risks) Within process of calculating internal capital requirements for strategic risk, reputational risk, business risk and external factors risk (which cannot be precisely calculated), the Bank can establishes internal capital requirement (capital buffer for all of these risks) in percentage amount of total capital requirements calculated in accordance with the Decision on Capital Adequacy of Banks. The Bank considers this manner of quantification sufficient and adequate taking into account developed policies and procedures of identification, assessment, monitoring and control of exposure to all of these risks.

Total amount of internal capital requirement of the Bank is calculated as the simple sum of internal capital requirements for every type of risk provided through applied methodologies for calculating internal capital requirements and stress testing results.

This approach is considered as conservative, because the Bank does not take into account the effects of diversification between different types of risk.


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5. Credit risk

5.1 Introduction

Credit risk is the risk of suffering financial loss, should any of the Bank’s customers or market counterparty fail to fulfill their contractual obligations, and arises mainly from the Bank’s placements to corporate and retail customers. These placements arise in the ordinary course of its commercial banking activities and are usually transacted with collateral or other credit risk mitigants.

Short description of credit risk (categories)

Credit risk –the current or future risk on earnings and capital arising from the counterparty’s failure

to meet the terms and obligations deriving from a credit agreement with the Bank or its failure to

otherwise act as agreed. It also includes:

Pre-settlement risk – the current or future risk on earnings and capital arising from acounterparty’s default on off-balance sheet products, where the credit equivalent of the riskundertaken consists of the current replacement cost (market value) of the product plus anestimate of potential future credit exposure as a result of prevailing market prices.

Settlement (Clearing) risk – the current or future risk on earnings and capital arising fromcounterparty’s default on transactions which are in the process of being settled and where theasset sold or cash has been delivered to the counterparty but the purchased asset or cash hasnot been received yet.

Residual risk - the current or future risk on earnings and capital arising when risk estimationand mitigation techniques used (e.g. collaterals, guarantees, netting agreements), prove to beless effective than expected.

Concentration risk – the current or future risk on earnings and capital arising from excessiveexposure to one counterparty or group of related counterparties whose probability of defaultdepends on common factors, e.g. economic sector, industry, geographical location or type offinance.

Country risk: the current or future risk on earnings and capital, caused by events taking place ina particular country which are at least to some extent under the control of the centralgovernment but definitely not under the control of an individual or a private enterprise. Suchevents include deterioration of economic conditions, political and social unrest, nationalizationand expropriation as well as depreciation or devaluation of the currency, thereby disruptingnormal market conditions. This definition includes all forms of cross-border lending in acountry either to the central government, or a bank, as well as to a private enterprise or anindividual. It also includes:

Sovereign risk, where the government of a country is not able to service its own debtbecause it does not have the required amount of foreign exchange or is unwilling to serviceits debt or decides to renegotiate or refinance its debt, or takes any other action which is(contractually) equivalent to default. Country risk assessment is not limited to theassessment of willingness of the state to fulfill its obligations, as there are other factorswhich can also cause losses. In practice, sovereign risk and country risk are highlycorrelated, as the government plays a major role in sovereign and country risk issues.


23

Transfer risk is defined as the inability of private businesses or individuals to fulfill theirobligations (or make payments) due to government actions. One example of transfer risk iswhen the government imposes restrictions on capital movements, which make thetransfer of funds impossible

Convertibility risk, is defined as the inability of private businesses or individuals to fulfilltheir obligations (or perform payments) due to government or central bank actions. Anexample of convertibility risk is when the central bank imposes FX restrictions which maymake it impossible to convert funds from the local into a foreign currency and vice versa asfar as the execution of payments is concerned.

5.2 Credit risk management

The Bank has an established internal process for assessing credit risk through Credit Policies.

Credit Policy for the Corporate Portfolio The Credit Policy for the Corporate portfolio aims at providing the Bank’s personnel with the fundamental policies for the control (identification, measurement, approval, monitoring and reporting) of the credit risk related to the Corporate Portfolio. The Credit Policy has been designed to meet the organizational requirements and the regulatory framework in the best possible way, as well as to allow the Bank to maintain and improve its position in the market.

Credit risk control should always be performed according to the prescribed policies, to be implemented taking into consideration Credit Procedures and all relevant circulars. The Credit Policy is approved and can be amended or revised only by the Board of Directors and is subject to periodical revision. The same body ratifies any exception from the Credit Policy initially approved by the Chief Credit Officer. All exceptions (and their rationale) should be recorded and have either an expiry date or a review date.

Credit Policy for Retail Banking The Credit Policy for the Retail Banking Portfolio sets the policies & risk acceptance criteria, which determine the framework for managing and minimizing the credit risks undertaken by the Retail Banking Division. Its main scope is to enhance, guide and regulate the effective and adequate management of credit risk, thus achieving a viable balance between risk and reward. The Retail Credit Policy is orientated to serve three basic objectives:

- Set the framework for the establishment of the basic credit criteria, policies and procedures,- Assures compliance with Group policy,- Establish a common approach for managing Retail Credit risks.

The Retail Policies/Procedures and Credit Portfolio Management Unit of the Credit Risk Division are responsible for preparing and submitting for approval to the Board of Directors, the Credit Policy for the Retail Banking Portfolio. The Unit reports to the Retail Credit Risk Deputy Director and its main tasks are:

- to prepare and submit revisions of Retail Credit Policy and,- monitor performance of portfolio and submit proposals for credit criteria changes if

necessary


24

The processing of retail credit applications is managed by Retail Credit Initiation Department through application of Retail Credit Policy. The Credit Policy for the Retail Banking Portfolio is subject to an annual review. During the review, all of the approved policy changes that occurred since the last review are incorporated in the Policy Manual. Any deviation from the approved policies requires prior approval from the NBG Group Retail Credit Division.

5.3 Capital requirement for credit risk

The Bank uses the Standardized Approach, defined by the National Bank of Serbia in the Decision on Capital Adequacy of Banks, for calculating the credit risk weighted assets. The Bank’s credit risk weighted assets are the sum of the values of balance sheet assets and off-balance sheet items multiplied by the corresponding credit risk weights. The Bank applies the credit risk mitigation techniques in the manner and under the terms prescribed by the Decision on Capital Adequacy of Banks.

The Bank allocates all the exposures from the banking book, exposures from the trading book for which it has to calculate capital requirement for counterparty risk and other exposures from the trading book into one of the following classes:

1) Exposures to governments and Central Banks;2) Exposures to territorial autonomies and local government entities;3) Exposures to public administrative bodies;4) Exposures to International Development Banks;5) Exposures to international organizations;6) Exposures to banks;7) Exposures to business companies;8) Exposures to private individuals;9) Exposures secured by mortgage on real estate;10) Overdue claims;11) High-risk exposures;12) Exposures arising from covered bonds;13) Exposures arising from holdings in open-ended investment funds;14) Other exposures.

Exposure ratings and risk weights While calculating the credit risk weighted assets in 2014, the Bank used the credit risk weigths defined in the Decision on Capital Adequacy of Banks. The Bank did not use the obligors’ credit risk weights assigned by the selected credit rating agencies, but it rather used credit risk weights of a country based on the credit rating of a country established by the individual Export Credit Agencies applying the methodology of the OECD (credit rating is allocated into one of the eight categories of the lowest export credit insurance premiums).

As for exposures to banks whose remaining time to maturity is longer than three months the Bank allocated to these exposures the credit risk weight of the country in which the bank – obligor has the Head Office or the risk weight of 50% depending on which weight is higher, whereas in the case of exposures to banks whose remaining time to maturity is not longer than three months the Bank allocated the credit risk weight of the country in which the bank – obligor has the Head Office or the risk weight of 20% depending on which weight is higher.


25

As For exposures to corporates, territorial autonomies and local government entities, public administrative bodies, private individuals, overdue claims, exposures secured by mortgages on real estate and other exposures, the credit risk weights defined in the Decision on Capital Adequacy of Banks have been used.

The Bank allocated the credit risk weight of 0% to exposures towards Republic Serbia and National bank of Serbia.

The credit risk analysis per exposure classes calculated for the purpose of the regulatory capital adequacy as of 31st December 2014 is provided hereinafter.

The overview of capital requirements for cedit risk, counterparty risk and delivery/settlement risk for free delivery per exposure classes as of 31st December 2014 is presented in the following table:

In RSD thousands

Exposure classes Capital requirements

Governments and central banks 0

Territorial autonomies and local government entities

356

Public administrative bodies 25,990

International development banks 0

International institutions 0

Banks 302,050

Corporate

2,853,948

Private individuals 1,859,489

Exposures secured by mortgages 649,454

Maturities 63,592

High risk exposures 0

Exposures to covered bonds 0

Exposures to investments in open investment funds

0

Other exposures 666,950

Total 6,421,829

5.4 Quantitative information on the credit risk

5.4.1 Gross and net credit exposure per exposure classes

The gross exposures presented in all the tables below include balance sheet assets and off-balance sheet items before applying the credit conversion factor, but do not include off-balance sheet items that are not subject to classification according to the NBS Decision on the Classification of Bank


26

Balance Sheet Assets and Off-Balance Sheet Items, while the exposure with respect to financial derivatives is presented by using the current exposure method.

The gross exposures to credit risk before applying the credit risk mitigation techniques, allowances for impairments and provisions, necessary reserves and net exposure as of 31st December 2014 are provided in the following table:

In RSD thousands

Exposure classes Gross exposures

Impairments and

provisions Needed reserve

Net exposure prior to

implementation of credit

protection

Risk weighted

assets

Governments and central banks 24,618,516 1,801 0 24,616,715 0

Territorial autonomies and local government entities 5,949 15 0 5,934 2,967

Public administrative bodies 217,194 611 0 216,583 216,583

International development banks 0 0 0 0 0

International institutions 0 0 0 0 0

Banks 12,397,953 284,015 60,362 12,053,576 2,517,085

Corporate 39,977,152 249,248 1,726,159 38,001,745 23,782,900

Private individuals 23,990,883 226,339 489,068 23,275,476 15,495,745

Exposures secured by mortgages 12,271,814 30,797 455,566 11,785,451 5,412,114

Maturities 16,588,399 10,771,296 5,328,771 488,332 529,929

High risk exposures 0 0 0 0 0

Exposures to covered bonds 0 0 0 0 0

Exposures to investments in open investment funds 0 0 0 0 0

Other exposures 24,930,369 5,142,216 114,763 19,673,389 5,557,918

Total 154,998,229 16,706,338 8,174,689 130,117,201 53,515,241


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The gross exposures to credit risk before applying the credit risk mitigation techniques per credit risk weights and exposure classes, containing exposure classes secured by mortgages on real estate (weight of 35% and 100%) and overdue claims (ranging between the weights of 100% and 150%), as of 31st December 2014, are presented in the following table:

In RSD thousands CREDIT RISK WEIGHTS

Exposure classes Gross

exposures 0% 20% 35% 50% 75% 100% 150%

Governments and central banks 24,618,516 24,618,516 0 0 0 0 0 0

Territorial autonomies and local government entities 5,949 0 0 0 5,949 0 0 0

Public administrative bodies 217,194 0 0 0 0 0 217,194 0

International development banks 0 0 0 0 0 0 0 0

International institutions 0 0 0 0 0 0 0 0

Banks 12,397,953 0 11,833,896 0 151,781 0 357,964 54,312

Corporate 39,977,152 4,889,025 2,692,025 0 0 0 32,396,102 0

Private individuals 23,990,883 314,266 132,250 0 0 23,521,921 22,446 0

Exposures secured by mortgages 12,271,814 20,779 8,341 9,970,982 0 0 2,271,712 0

Maturities 16,588,399 0 0 0 0 0 16,467,903 120,496

High risk exposures 0 0 0 0 0 0 0 0

Exposures to covered bonds 0 0 0 0 0 0 0 0

Exposures to investments in open investment funds 0 0 0 0 0 0 0 0

Other exposures 24,930,369 14,269,249 0 0 0 0 10,661,120 0

Total 154,998,229 44,111,835 14,666,512 9,970,982 157,730 23,521,921 62,394,441 174,808

Amount of deductions from capital 213,380


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The net exposures to credit risk before applying the credit risk mitigation techniques per credit risk weights and exposure classes, containing exposure classes secured by mortgages on real estate (weight of 35% and 100%) and overdue claims (ranging between the weights of 100% and 150%), as of 31st December 2014, are presented in the following table:

In RSD thousands

Exposure classes Net

exposures

CREDIT RISK WEIGHTS

0% 20% 35% 50% 75% 100% 150%

Governments and central banks

24,616,715 24,616,715 0 0 0 0 0 0


5,934 0 0 0 5,934 0 0 0

Public administrative bodies

216,583 0 0 0 0 0 216,583 0

International development banks

0 0 0 0 0 0 0 0

International institutions

0 0 0 0 0 0 0 0

Banks

12,053,576 0 11,814,317 0 151,781 0 34,253 53,225

Corporate

38,001,745 4,872,885 2,689,930 0 0 0 30,438,930 0

Private individuals

23,275,476 313,903 132,105 0 0 22,813,179 16,289 0

Exposures secured by mortgages

11,785,451 20,771 8,240 9,760,501 0 0 1,995,939 0

Maturities

488,332 0 0 0 0 0 404,901 83,431

High risk exposures

0 0 0 0 0 0 0 0

Exposures to covered bonds

0 0 0 0 0 0 0 0


0 0 0 0 0 0 0 0

Other exposures

19,673,389 14,269,249 0 0 0 0 5,404,140 0

Total

130,117,201 44,093,523 14,644,592 9,760,501 157,715 22,813,179 38,511,035 136,656

Amount of deductions from capital 213,380


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The net exposures to credit risk after applying the credit risk mitigation techniques per credit risk weights and exposure classes, containing exposure classes secured by mortgages on real estate (weight of 35% and 100%) and overdue claims (ranging between the weights of 100% and 150%), as of 31st December 2014, are presented in the following table:

In RSD thousands

Exposure classes Net

exposures

CREDIT RISK WEIGHTS

0% 20% 35% 50% 75% 100% 150%

Governments and central banks 28,376,140 28,376,140 0 0 0 0 0 0

Territorial autonomies and local government entities 5,934 0 0 0 5,934 0 0 0

Public administrative bodies 216,583 0 0 0 0 0 216,583 0

International development banks 0 0 0 0 0 0 0 0

International institutions 0 0 0 0 0 0 0 0

Banks 12,053,576 0 11,814,317 0 151,781 0 34,253 53,225

Corporate 30,438,930 0 0 0 0 0 30,438,930 0

Private individuals 22,829,469 0 0 0 0 22,813,180 16,289 0

Exposures secured by mortgages 11,756,439 0 0 9,760,501 0 0 1,995,938 0

Maturities 488,332 0 0 0 0 0 404,901 83,431

High risk exposures 0 0 0 0 0 0 0 0

Exposures to covered bonds 0 0 0 0 0 0 0 0

Exposures to investments in open investment funds 0 0 0 0 0 0 0 0

Other exposures 23,951,798 18,547,658 0 0 0 0 5,404,140 0

Total 130,117,201 46,923,798 11,814,317 9,760,501 157,715 22,813,180 38,511,034 136,656


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The gross exposures to credit risk per exposure classes before applying the credit risk mitigation techniques, as of 31st December 2014 and average exposures per exposure classes during 2014 are displayed in the following table:

In RSD thousands

Exposure classes

Exposures before implementation of

credit protection as at 31.12.2014

Average gross exposure before

implementation of credit protection

Governments and central banks 24,618,516 27,527,964

Territorial autonomies and local government entities 5,949 8,374

Public administrative bodies 217,194 298,741

International development banks 0 0

International institutions 0 0

Banks 12,397,953 8,582,904

Corporate 39,977,152 36,069,071

Private individuals 23,990,883 22,482,895

Exposures secured by mortgages 12,271,814 12,154,631

Maturities 16,588,399 16,139,387

High risk exposures 0 0

Exposures to covered bonds 0 0

Exposures to investments in open investment funds 0 0

Other exposures 24,930,369 22,649,347

Total 154,998,229 145,913,314


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5.4.2 Credit exposure per geographical areas

The geographical distribution of gross exposures before applying the credit risk mitigation techniques, per exposure classes and according to the materially significant areas, as of 31st December 2014, was as follows:

In RSD thousands

Exposure classes Credit risk exposure

Serbia European

Union the rest of

Europe the rest of the

world

Governments and central banks 24,618,516 24,618,516 0 0 0

Territorial autonomies and local government entities 5,949 5,949 0 0 0

Public administrative bodies 217,194 217,194 0 0 0

International development banks 0 0 0 0 0

International institutions 0 0 0 0 0

Banks 12,397,953 357,141 9,241,535 1,022,436 1,776,841

Corporate 39,977,152 39,977,152 0 0 0

Private individuals 23,990,883 23,988,063 2,809 8 3

Exposures secured by mortgages 12,271,814 12,271,814 0 0 0

Maturities 16,588,399 15,666,198 880,913 37,051 4,237

High risk exposures 0 0 0 0 0

Exposures to covered bonds 0 0 0 0 0

Exposures to investments in open investment funds 0 0 0 0 0

Other exposures 24,930,369 24,930,369 0 0 0

Total 154,998,229 142,032,396 10,125,257 1,059,495 1,781,081


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5.4.3 Credit exposure per sectors

The distribution of gross exposures before applying the credit risk mitigation techniques, per exposure classes and sectors, as of 31st December 2014, was as follows:

In RSD thousands

Exposure classes

Credit risk exposure

Fin

ance

an

d in

sura

nce

Pu

blic

co

mp

anie

s

Co

rpo

rate

Entr

epre

neu

rs

Pu

blic

sec

tor

Ret

ail

Pri

vate

ho

use

ho

lds

wit

h

emp

loye

d in

div

idu

als

and

re

gist

ered

agr

icu

ltu

rist

s

Fore

ign

per

son

s

Oth

er c

lien

ts

Oth

er


24,618,516 13,767,875 0 0 0 10,850,641 0 0 0 0 0


5,949 0 0 0 0 5,949 0 0 0 0 0


217,194 0 0 0 0 217,194 0 0 0 0 0

International development banks

0 0 0 0 0 0 0 0 0 0 0

International institutions

0 0 0 0 0 0 0 0 0 0 0

Banks 12,397,953 292,919 0 20,742 0 0 0 0 12,044,111 40,181 0

Corporate 39,977,152 211,747 4,763,894 34,502,804 257,907 0 0 0 0 240,800 0

Private individuals

23,990,883 13,950 557 2,695,612 971,099 0 20,215,313 42,627 2,915 48,810 0

Exposures secured by mortgages

12,271,814 0 0 0 0 0 12,268,945 2,869 0 0 0

Maturities 16,588,399 41,362 10,963 6,608,900 707,220 17,668 3,918,075 22,762 922,266 4,339,183 0

High risk exposures

0 0 0 0 0 0 0 0 0 0 0

Exposures to covered bonds

0 0 0 0 0 0 0 0 0 0 0


0 0 0 0 0 0 0 0 0 0 0

Other exposures

24,930,369 0 0 0 0 0 0 0 0 0 24,930,369

Total 154,998,229 14,327,853 4,775,414 43,828,058 1,936,226 11,091,452 36,402,333 68,258 12,969,292 4,668,974 24,930,369


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The table below indicates gross exposures before applying the credit risk mitigation techniques with respect to which allowances for impairments or provisions were made for off-balance sheet items per sectors or types of counterparties, per exposure classes, as of 31st December 2014.

In RSD thousands

Exposure classes Credit risk exposures with impairments or provisions

Impairments or provisions

Governments and central banks 805,396 1,801

Finance and insurance 22 22

Public companies 0 0

Corporate 0 0

Entrepreneurs 0 0

Public sector 805,374 1,779

Retail 0 0

Private households with employed individuals and registered agriculturists

0 0

Foreign persons 0 0

Other clients 0 0

Territorial autonomies and local government entities 5,814 15



Corporate 0 0

Entrepreneurs 0 0

Public sector 5,814 15

Retail 0 0


0 0

Foreign persons 0 0

Other clients 0 0

Public administrative bodies 216,565 611



Corporate 0 0

Entrepreneurs 0 0

Public sector 216,565 611

Retail 0 0


0 0

Foreign persons 0 0

Other clients 0 0

Banks 293,638 284,015

Finance and insurance 41,517 31,895


Corporate 489 489

Entrepreneurs 0 0

Public sector 0 0

Retail 0 0


0 0

Foreign persons 211,766 211,766

Other clients 39,866 39,865

Corporate 28,763,134 249,248

Finance and insurance 30,792 968

Public companies 4,713,191 18,605

Corporate 23,550,722 132,533

Entrepreneurs 239,229 226


34

Public sector 0 0

Retail 0 0


0 0

Foreign persons 0 0


Private individuals 20,686,772 226,339

Finance and insurance 13,206 901


Corporate 2,040,506 7,495

Entrepreneurs 841,462 2,492

Public sector 0 0

Retail 17,707,748 201,772


40,312 819

Foreign persons 1,523 10


Exposures secured by mortgages 12,233,448 30,797



Corporate 0 0

Entrepreneurs 0 0

Public sector 0 0

Retail 12,230,579 30,797


2,869 0

Foreign persons 0 0

Other clients 0 0

Maturities 16,560,872 10,771,296

Finance and insurance 40,454 26,612

Public companies 10,617 10,617

Corporate 6,598,547 3,716,222

Entrepreneurs 706,424 215,864

Public sector 17,668 16,646

Retail 3,909,442 2,261,400


22,662 17,000

Foreign persons 922,258 834,192

Other clients 4,332,800 3,672,743

Other exposures 9,913,559 5,142,216



Corporate 0 0

Entrepreneurs 0 0

Public sector 0 0

Retail 0 0


0 0

Foreign persons 0 0

Other clients 0 0

Other 9,913,559 5,142,216

Total 89,479,198 16,706,338


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5.4.4 Credit exposure according to the remaining time to maturity

The distribution of gross exposures before applying the credit risk mitigation techniques according to the remaining time to maturity, per exposure classes, as of 31st December 2014, is provided in the following table:

In RSD thousands

Exposure classes Credit risk exposure

Up to 1 month

1 to 3 months

3 to 12 months 1 to 5 years

Over 5 years

Governments and central banks 24,618,516 14,627,862 1,234,888 6,589,285 2,166,481 0

Territorial autonomies and local government entities 5,949 138 0 0 5,811 0

Public administrative bodies 217,194 755 0 216,439 0 0

International development banks 0 0 0 0 0 0

International institutions 0 0 0 0 0 0

Banks 12,397,953 11,646,314 22,180 135,783 38,130 555,546

Corporate 39,977,152 7,487,772 2,557,793 7,609,441 20,109,471 2,212,675

Private individuals 23,990,883 925,712 685,654 3,737,245 11,983,430 6,658,842

Exposures secured by mortgages 12,271,814 0 385 9,822 527,039 11,734,568

Maturities 16,588,399 15,037,045 2,585 116,847 473,742 958,180

High risk exposures 0 0 0 0 0 0

Exposures to covered bonds 0 0 0 0 0 0

Exposures to investments in open investment funds 0 0 0 0 0 0

Other exposures 24,930,369 14,337,083 24,133 294,570 523,889 9,750,694

Total 154,998,229 64,062,681 4,527,618 18,709,432 35,827,993 31,870,505


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5.4.5 Distribution of exposures per classification categories and exposure classes, as well as

calculated special and needed reserves

The exposures to credit risk per exposure classes and classification categories as of 31st December 2014 amounted to:

In RSD thousands

Exposure classes / Classification Category Gross exposure

Impairments and provisions Special reserve Needed reserve


0 0 0 0

A 0 0 0 0

B 0 0 0 0

V 0 0 0 0

G 0 0 0 0

D 0 0 0 0


5,949 15 0 0

A 5,949 15 0 0

B 0 0 0 0

V 0 0 0 0

G 0 0 0 0

D 0 0 0 0


217,194 611 0 0

A 217,194 611 0 0

B 0 0 0 0

V 0 0 0 0

G 0 0 0 0

D 0 0 0 0

Banks 12,260,111 284,015 319,823 60,362

A 11,648,528 24,543 0 0

B 297,417 6 5,948 5,948

V 342 6 51 50

G 0 0 0 0

D 313,824 259,460 313,824 54,364

Corporate 39,892,087 249,248 1,939,225 1,726,159

A 17,792,941 28,298 0 0

B 12,400,480 30,700 216,616 193,452

V 4,786,955 6,999 575,383 568,436

G 4,383,270 8,701 618,785 610,380

D 528,441 174,550 528,441 353,891

Private individuals 23,990,883 226,273 585,181 489,068


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A 19,967,378 61,220 0 0

B 1,779,641 43,799 32,229 25,826

V 1,827,412 49,688 261,735 239,498

G 138,179 12,205 39,398 30,626

D 278,273 59,361 251,819 193,118

Exposures secured by mortgages 12,271,814 30,798 470,602 455,566

A 8,898,717 6,908 0 0

B 1,689,746 9,982 33,795 30,137

V 915,459 10,972 137,319 128,789

G 669,148 2,774 200,744 198,057

D 98,744 162 98,744 98,583

Maturities 16,588,399 10,771,361 16,041,024 5,328,771

A 246 0 0 0

B 0 0 0 0

V 100,957 4,642 15,143 11,490

G 658,929 133,886 197,642 121,875

D 15,828,267 10,632,833 15,828,239 5,195,406

Other exposures 118,957 4,193 118,957 114,763

A 0 0 0 0

B 0 0 0 0

V 0 0 0 0

G 0 0 0 0

D 118,957 4,193 118,957 114,763

Total classified assets 105,345,394 11,566,514 19,474,812 8,174,689

non-classified assets 49,652,835 5,139,824 0 0

Total 154,998,229 16,706,338 19,474,812 8,174,689

For coporate clients the Bank does not use credit risk weight ratings assigned by a credit rating

agency, since these ratings are not available, but it uses credit risk ratings of countries for exposures

to banks, for which credit risk weight is applied by rating based on remaining maturity or the rating

of the country where the bank is based, depending on which is the higher weight.

The Bank uses credit rating - credit assessment established by the country export credit agencies

applying the methodology of the OECD (credit assessments are classified into eight categories of

smallest premium exports), which are listed in the table below.


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Minimum export

insurance premiums

categories

0 1 2 3 4 5 6 7

Credit risk weight 0% 0% 20% 50% 100% 100% 100% 150%

Exposure before and after the use of credit protection for the class of exposures to banks for which the Bank uses a credit rating of agency for export credit is given in the table below. Credit risk weight of 100% applies to shares and equity investments in other banks.

In RSD thousands

The level of credit quality Credit risk

weight

Exposure before using

the credit protection

Exposure after using the credit protection

preferential treatment (for Serbia) 0% 0 0

preferential treatment (for Serbia) 20% 100,382 100,382

preferential treatment (for Serbia) 50% 135,783 135,783

preferential treatment (for Serbia)

(shares) 100% 120,976 120,976

0 20% 11,749,253 11,749,253

0 (shares) 100% 213,352 213,352

1 - - -

2 - - -

3 50% 260 260

3 (shares) 100% 18,118 18,118

4 - - -

5 100% 4,669 4,669

6 100% 848 848

7 150% 54,312 54,312

Total 12,397,953 12,397,953


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5.5 Large exposures

In compliance with the NBS regulation, the large exposure of a bank to a single entity or a group of related entities is the exposure amounting to at least 10% of the bank’s capital, calculated in conformity with the NBS Decision on Risk Management. The meaning of related entities is established in the Law on Banks. The large exposure of a bank to a single entity or a group of related entities must not exceed 25% of the bank’s capital, and the sum of all the bank’s large exposures must not exceed 400% of the bank’s capital. This report also encompasses exposures of the bank to a single related entity. Moreover, in line with the NBS regulation, the indicator of the bank’s exposure to a related entity must not exceed 5% of the bank’s capital and the bank’s total exposure to related entities must not exceed 20% of the bank’s capital.

The large exposures and other exposure limits as of 31st December 2014 are presented in the following table:

No. Exposure limits Prescribed Realized

1 Bank's total investments in non-financial sector entities and in fixed assets of the Bank

Maximum 60% 46.66%

2 Bank’s exposure to related entities Maximum 20% 9.70%

3 Sum of all the bank’s large exposures Maximum 400% 148.79%

4 Bank’s exposure to a single entity or a group of related entities

Maximum 25% 20.34%

5 Bank’s exposure to a single related entity Maximum 5% 4.12%

6 Bank’s investments in a single non-financial sector entity

Maximum 10% 2.17%

As of 31st December 2014 the Bank had large loans exceeding 10% of the Bank’s capital and they were provided to the following business companies and banks: Ušde shoping Centar doo Beograd (20.34% of the Bank’s capital), Citigroup Global Markets DE AG (19.14% of the Bank’s capital), AD Dijamant (18.76% of the Bank’s capital), Unicredit Bank Austria AG (16.98% of the Bank’s capital), Commerzbank AG (16.12% of the Bank’s capital) and Landensbank Hessen (12.88% of the Bank’s capital) .

5.6 Impaired facilities and past due exposures

In accordance with its internal policy, the Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial


40

recognition of the asset (an incurred “loss event“) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulties, defaults or delinquencies in interest or principal payments, probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Due receivables are all receivables that are not paid within due date (based on the principal debt, interest and fees, guarantees, avals and other forms of sureties that have fallen at the expense of the bank, unauthorized overdrafts and other due liabilities of clients). Only due receivables with materially significant amount in delay affect the classification of the borrower.

In accordance with the internal methodology, if there is objective evidence that a financial asset has been impaired, the Bank calculates the difference between the carrying amount and the present value of the future cash flows as discounted at the effective interest rate in accordance with the requirements of IAS 39 “Financial Instruments: Recognition and Measurement”, for the corporate customers which meet the criteria prescribed by the internal methodology, whereas, for all other placements, the allowance for impairment is estimated on portfolio basis. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics and the Bank’s internal grading system by an asset type, industry, delinquency in servicing interest or principal, activity, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of contracted cash flows and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The Bank regularly reviews the methodology and assumptions used for estimating future cash flows in order to reduce any differences between loss estimates and actual loss experience.

The carrying amount of the loan is reduced through the use of an allowance account and the amount of the impairment loss arising from impairment of loans and receivables, as well as other financial assets measured at amortized cost, is recognized in the income statement as impairment losses on financial assets. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is thereafter recognized on the net exposure using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss (unwinding).

Loans together with the associated allowance for impairment are written off when there is no realistic prospect of future recovery and when collateral has been realized or has been transferred to the Bank. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously


41

recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement.

(a) Net (losses/gains) from impairment of financial assets and provisions

31.12.2014 31.12.2013

Net (losses)/gains from indirect write-off of placements and receivables Due from other banks 4 48.623

Loans and advances to customers ( 669,557) 1,107,884

Other placement and assets ( 20,877) ( 30,856)

Total (losses)/gains from indirect write-off of placements and receivables ( 690,430) 1,125,651

Net (losses)/gains from indirect write-off of securities and equity investments

Financial assets held-to-maturity 5,555 ( 6,329)

Securities available for sale ( 10,802) ( 80,604)

Total (losses)/gains from indirect write-off of securities and equity investments ( 5,247) ( 86,933)

Recovery of written-off receivables 1,025 2,633

Total recovery of written-off receivables 1,025 2,633

Total (losses)/gains from impairment of financial assets and off-balance sheet items ( 694,652) 1,041,351


42

(b) Movements in the Allowance for Impairment of Financial Assets and Provisions

Movements in the allowance for impairment of loans and other financial assets and provisions during the year were as follows:

Financial assets held-to-

maturity

Loans and receivables from banks and other

financial institutions

Loans and advances

from retail

Loans and advances

from corporate

Loans and advances

from public sector

Balance as of 1.january ( 63,274) ( 43,391) ( 1,818,698) ( 8,033,306) ( 1,051)

Charges of impairment losses during the year ( 3,563) - ( 465,152) ( 808,902) ( 2,267)

Reversals of impairment losses during the year 9,118 - 43,356 507,371 -

Reversals of impairment losses during the year based on repayments 4 56,037 -

Write-off - - 26,088 245,595 -

Unwind - ( 30,326) -

Foreign exchange differences - ( 2,035) ( 125,876) ( 289,576) -

Balance as of 31.december ( 57,719) ( 45,422) (

2,340,282) ( 8,353,107) ( 3,318)

5.7 Credit risk mitigation

In its internal acts, Corporate Credit Policy, Retail Credit Policy, Small Business Banking Credit Policy and the procedures for collaterals, the Bank defined the types of collaterals and provided instructions for receiving, safekeeping, assessing, monitoring and managing these collaterals.

The credit risk mitigation techniques refer to the eligible unfunded and funded credit protection instruments.

The credit protection instruments are considered as eligible if the conditions for recognizing credit protection, prescribed by the Decision on Capital Adequacy of Banks, have been met.

The eligible credit protection instruments that the Bank may use for reducing credit risk are the following:

1. Funded credit protection instruments, which include:- Collaterals in the form of financial assets,- On-balance sheet netting


43

- Standardized netting agreements,- Other funded credit protection instruments.

2. Unfunded credit protection instruments, which include:- Guarantees, other forms of sureties and counter guarantees- Credit derivatives.

In 2014 the Bank did not use on-balance and off-balance sheet netting as a credit protection instrument. The Bank used the following credit protection instruments:

1. unfunded credit protection instruments (guarantees issued by the Republic of Serbia);2. funded credit protection instruments (in particular: cash and cash equivalents deposited with

the Bank and debt securities of the Republic of Serbia, whose value was calculated byapplying the simple method).

The applied credit risk mitigation techniques as of 31st December 2014 refer to the following classes exposure: private individuals and exposures secured by mortgages and their total value amounts to RSD 8,037,834 thousands.

In RSD thousands

Exposure classes/credit protection type Gross exposures

Impairments and

provisions needed reserves

Credit protection instruments

Guarantees issued by the Republic of

Serbia

Securities

issued by the

Republic of

Serbia

Cash deposit (same

currency of cash deposit

and exposure)

Cash deposit

(different currency of

cash deposit and

exposure)

credit risk weight for credit protection instruments 0% 0% 0% 20%

level of credit quality

0 0

Corporate 39,977,152 249,248 1,726,159 3,757,625 0 1,115,260 2,689,930

Private individuals 23,990,883 226,339 489,068 0 1,800 312,158 132,050

Exposures secured by

mortgages 12,271,814 30,797 455,566 0 0 20,771 8,240

Total 76,239,849 506,384 2,670,793 3,757,625 1,800 1,448,189 2,830,220


44

5.8 Related party and intra-group transactions

Related entities are those entities which are connected to the Bank through significant and/or control shareholding. The Bank in the normal course of its business has entered into business transactions with related entities and entities inside NBG Group (intra-group transactions). The Bank has performed its transactions with related parties under the prevailing market conditions. For the purpose of identification of related parties the Bank strictly follows the guidelines issued by NBS and definitions as per IFRS.

5.9 Equity investments held in banking book

The Bank’s equity investments are classified in the banking book and are subject to credit risk weighting under the capital adequacy framework except participation deductible from capital pursuant to the decision on bank capital adequacy. For regulatory capital calculation purposes, the Bank’s equity investments include available-for-sale investments, qualified, significant and controlling participation (investments) in financial and non-financial entities.

According with the Bank’s accounting policies, the Bank’s management determines the classification of its equity investments at initial recognition. Classification of financial instruments upon initial recognition depends on the purposes for which financial instruments have been obtained and their characteristics.

Subsequent measurement of financial assets depends on their classification.

Securities Available-for-Sale

Securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as “securities available-for-sale”.

Available-for-sale securities include other legal entities’ or equity securities and debt securities. Subsequent to the initial measurement, these securities are measured at fair value. The fair values of securities quoted in active markets are based on current bid prices. Unrealized gains and losses are recognized directly in equity within the Available-for-sale reserves. When the investment is disposed of or impaired, the cumulative gain or loss previously recognized in equity is recognized in the income statement.

Available for sale securities that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate are exempt from fair value valuation. These available-for-sale securities are measured at cost, less any allowance for impairment.

Dividends earned whilst holding available-for-sale financial instruments are recognized in the income statement as dividend income when the right to receive payment is established. Gains and losses arising from the sale of these securities are credited or debited as appropriate, to the income statement, as gains/losses from sale of available-for-sale securities. In addition, impairment losses on securities available-for-sale, which cannot be deemed to be temporary, are recognized in the income statement.


45

Equity investments

Equity investments comprise equity investments in other legal entities, related parties, shares of companies and banks denominated in dinars and foreign currencies.

Equity investments in other legal entities that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate are exempt from fair value valuation. These securities are measured at cost, less any allowance for impairment.

Subsidiary or related party is a legal entity in which the Bank possesses a stake of more than 50 percent, or otherwise holds more than half of voting rights, or the right to manage the financial (business) policy of the subsidiary.

Available for sale securities (listed) In RSD thousand

Book value Fair value In dinars Shares of banks 57,484 57,484 Shares of enterprises 265,239 265,239

In foreign currency Other securities 497 497

Balance as of 31.12.2014. 323,220 323,220

Equity investments (not listed) In RSD thousand

In dinars Amount – subsidiaries 230,010 – other companies 232,979 –other banks and financial institutionsTotal

1,920

464,909

In foreign currency – foreign banks and financial institutions 231,470

Total 231,470

Gross equity investments 696,379 Less: Allowance for impairment (431,482)

Balance as of 31.12.2014. 264,897

Net gain on the sale of available for sale securities

In RSD thousand

Gain on the sale - AD Radijator 128

Total 128


46

Net gain from revaluation reserves based on changes of fair value of listed available for sale

securities

In RSD thousand

Net gain 216,030

Balance as of 31.12.2014. 216,030

Abovementioned data about unrealized gain is related to changes of value of all listed securities available for sale, not only equity investments in banking book.

6. Market risk

6.1 Introduction

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, equity prices, and commodity prices will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

The Bank has adopted a standardized approach for measurement of market risk under the NBS capital adequacy framework. The NBS’s standardized approach capital computation framework requires risk weighted assets to be computed for price risk (debt securities and equities), foreign exchange risk and commodities risk. Hence, from a capital computation perspective the Bank’s market risk measurement is dominantly determined by foreign exchange risk in the banking book.

6.2 Foreign exchange risk management

Foreign exchange risk is the risk of potential arising of negative effects on the Bank’s financial result and capital due to changes in foreign exchange rate. Foreign exchange (FX) risk management within the Bank is under the responsibility of Treasury Division. The Bank strives to continually manage foreign exchange risk by monitoring exchange rate movements and open currency position. The Board of Directors adopts policies and strategies related to the management of FX risk and the Bank’s FX position. The Asset Liability Committee (‘ALCO’) supports the Executive Board in managing FX risk by recommending guidelines on the FX risk.

The Treasury Division shall ensure adequate FX liquidity while ensuring that all limits and guidelines set by the ALCO, Executive Board and Board of Directors are complied with it. Also, mentioned Division implements hedging and other approved strategies for managing the risk. The Risk Management Division on an ongoing basis monitors and reviews the limits set and ensure that the concerned department(s) is complying with all limits set as per this policy.

The management of foreign exchange risk against net exposure limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various foreign exchange scenarios.


47

Standard scenarios that are considered include a 10% plus / minus increase in exchange rates. An analysis of the Bank’s net foreign exchange position and its sensitivity to an increase or decrease in foreign exchange rates (assuming all other variables, primarily profit rates, remain constant) has been presented in to the financial statements.

The Bank uses several scenarios for stress testing of foreign exchange risk at the same time taking into account potential changes in exchange risks Ratio, the impact on profitability and Bank’s capital.

The banking operations in different foreign currencies cause the exposure to fluctuation in foreign currencies exchange rates. The Bank manages foreign currency risk, striving to prevent adverse effects of changes in cross-currency rates and foreign exchange rates comparing to dinar (foreign currency losses) on the Bank‘s financial result, as well as on customers‘ ability to repay loans in foreign currency. For the purposes of protection against the foreign currency risk, the Bank monitors the changes in foreign currency exchange rate on the financial market on daily basis, carries out the policy of low level exposure to the foreign currency risk and contracts the foreign currency clause with its customers, the monitoring results obtained during the simulations of stress test.

The Bank has established and maintains adequate FX risk measurement, monitoring and control functions, including an application to daily monitor the open position of the Bank in foreign currencies.

6.3 Market risk management

The main document, based on which the Bank manages the market risks is the Trading Book Policy, which defines the measurement methodologies, processes and tools, risk limits, reporting and remedial action guidelines and responsibilities, as well as trading book definition, for both accounting and capital adequacy purposes. Apart from it, several other regulations are applied, in accordance with the Bank’s Risk Strategy, the instructions of the NBG Group and the regulations of the NBS.

The Bank has established and maintains adequate market risk measurement, monitoring, and control functions, including: – Market risk measurement processes that capture all material sources of market risk and assess theeffect of market risk factors‘ changed in ways that are consistent with the scope of Bank‘s activities.These measurement systems include Value at Risk (VaR) for the major foreign currencies and modelswhere appropriate. Value at Risk is a statistical estimate of an upper boundary, within a specifiedconfidence level, of the potential amount a trading position or portfolio could decrease in valueduring the time needed to close out a position. Specifically, it is a measure of potential loss from anevent in a normal, everyday market environment.

The Bank measures VaR of open position under assuming level of 99% confidence for movement in relevant foreign exchanges rates.

– Operating limits and other practices that maintain exposures within levels consistent with internalpolicies, in terms of exposure to individual market risk types, position and loss limits.– Measurement of vulnerability to loss under stressful market conditions (including the breakdownof key assumptions) considering those results when establishing and reviewing policies and limits formarket risks.


48

– Adequate and effective processes and information systems for measuring, monitoring, controllingand reporting market risk exposures. Contemporary IT systems have been developed in the Bank,sophisticated enough to cover the part of trading activities of the Bank. Adequate limits areembedded in these systems. Reports are provided on a timely basis to the ALCO Committee,authorized directors of divisions or/and departments, as well as all other relevant stakeholders.

6.4 Capital requirement for market risk

To assess its capital adequacy requirements for market risk in accordance with the NBS capital adequacy requirements the Bank adopts the standardized approach. Foreign exchange risk charge is computed based on 12% of overall net open foreign currency position of the Bank.

Capital requirements against the price risk arises from open positions of the Trading portfolio in debt instruments and equity, as well as in derivatives on debt instruments, stock, interest rates and foreign exchange, are calculated as the sum of the following:

the specific risk, i.e. the risk of change in the price of the relevant financial instrument due tothe impact of issuer-related factors, calculated on the basis of the Standardized Approach,and

the general risk, i.e. the risk of change in the price of the relevant financial instrument due toa general change in the interest rate or the price level in the stock market, calculated on thebasis of the Standardized Approach.

Capital requirement of price risk (debt securities) is calculated under trading book elements that include bonds and FX derivates using maturity method for calculations by taking in consideration of long or short positions in debt securities and long and short positions in swaps and forwards allocated to trading book by different currencies in which are transactions and by residual maturity

The capital requirement for the price risk on debt securities is equal to the sum of capital requirements for specific and general price risk based of those securities, multiplied by 1.5.

In RSD thousand

Exposure RWA Capital adequacy ratio Capital requirements

Foreign currency 0 12% 0 Price risk (debt securities) 247.867 12% 29.744 Price risk (equity) 0 12% 0 Commodity risk 0 12% 0

TOTAL: 247.867 29.744


49

7. Operational risks

7.1 Introduction

The Bank has adopted the definition of the Basel II (BCBS, International Convergence of Capital Measurement and Capital Standards, A Revised Framework, July 2006), whereby “Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Adopted definition includes legal and compliance risk but excludes other risks such as strategic and reputation risk. Operational risk is an inherent part of the Bank’s normal business operations. The Bank has adopted the Basic Indicator Approach for measurement of capital requirements for operational risk under the Basel II and NBS capital computation framework.

This adopted definition of Operational Risk specifies the broad categories of operational risk sources and in particular: Processes – refers to losses that have been incurred due to a deficiency in an existing procedure,

or the absence of procedure documentation. Losses in this category can result from humanerror or failure to follow an existing procedure. Process-related losses are regarded asunintentional. People – refers to losses associated with intentional violation of internal policies by current or

former employees. In some specific cases, this category may include independent contractors,people employed by outsourcers or people who are being considered for employment. Systems – reflects losses that are caused by breakdowns in existing systems or technology.

Losses in this category are considered as unintentional (IT risk fall in this category). If intentionaltechnology-related losses occur, they should be categorized in either the People or Externalcategory. External events – reflects losses occurring as a result of natural or man-made forces, or the

direct result of a third party's action.

7.2 Operational risk management

The Bank’s ORM governance structure is based on the “three lines of defense” model. In particular: The 1st Line of Defense includes all the Bank’s organizational units, each one directly responsible

for controlling and minimizing the operational risk within their business activities in compliancewith the Bank’s standards and policies.

The 2nd Line of Defense includes the ORMD, which is primarily responsible for developing andproviding the ORM methodologies, tools and guidance to be used at the level of allorganizational units for the management of operational risk. The 2nd Line of Defense includesalso the specific cooperation between the ORMD and specialized organizational units that arefaced with and manage a wide range of operational risks, which is in accordance with theirfunction. More specifically, the ORMD cooperates with Legal Affairs Division, ComplianceDivision, Human Resources Division, Business Processes and Organization Division andInformation Technology Division, with respect to the issues related to specialized methodologiesand tools, including business continuity planning, disaster recovery planning, anti-moneylaundering, keeping confidential information, etc. Furthermore, the tasks of monitoringoperational risk as well as assisting in mitigation actions belong to this line of defense.


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The 3rd Line of Defense is Internal Audit, which is responsible for independently ensuring that theORM Framework is effective, appropriate and implemented with integrity.

The organizational structure of the Bank with respect to ORM is shown in the following chart.

BoD and Risk Management CommitteeAudit

Committee

Executive Board

Executive Manager

and Heads of

Divisions

Chief Risk Officer

Operational Risk Management

Department (Operational Risk)Organizational

Unit 1

Correspondent

Organizational

Unit 2

Correspondent

Internal

Audit

Legal Compliance HR

Support or

Specialized org.

Unit 1

Correspondent

Support or

Specialized org.

Unit 2

Correspondent

Business

Process &

Organization

Information

Technology

Specijalized organ. Units

1st Line of Defence 2nd Line of Defence 3rd Line of Defence

ORGANIZATIONAL STRUCTURE OF THE BANK WITH RESPECT TO OPERATIONAL RISK MANAGEMENT

The overall ORM approach consists of the following components: Loss Event Data Collection Risk and Controls Self Assessment (RCSA) Key Risk Indicators (KRIs) Action Plans

The interrelation of these components is schematically shown below.


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Back t

esti

ng

Action Plans

Loss Collection

Basic Components of the ORM Framework

Risk & Control Self-Assessment

Key Risk Indicators (KRIs)

The objective of this approach is to constitute a formalized and transparent structure in which all components are linked logically and reinforce each other in order to implement a dynamic and ongoing ORM process throughout the Bank.

In particular, the Loss Data Collection process includes an objective recording of realized operational risk related losses; the RCSA process includes the identification and assessment of risks as perceived by the respective risk owners, KRIs aim to provide metrics that allow for the proactive and/ or retroactive monitoring of risk trends. All these components in general may give rise to Action Plans for the remediation of identified issues and mitigation of the relevant operational risks. By means of the common risk typology adopted by the Bank, the results of all components are comparable, allowing for the back-testing of the whole process.

The overall approach is aimed to allow an increasingly precise perspective of the evolution of the Bank’s operational risk profile, as well as being a tool for operational improvement by means of the implementation of action plans.

7.3. Capital requirements for operational risk

The Bank adopts the Basic Indicator Approach to evaluate operational risk charge in accordance with the NBS capital adequacy requirements. According to this approach, Bank’s average gross income for three financial years is multiplied by a fixed coefficient alpha of 15% set by the NBS and a multiple of 1/12 is used to arrive at the risk weighted assets that are subject to capital charge.


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In RSD thousand

Banking activities for

operational risk capital

requirement calculation

EXPOSURE RATIO Capital requirement for operational risk as of 31.12.2014.

RWA

as of

31.12.2014. t-3 t-2 t-1

Total banking activities

subject to Basic Indicator

Approach (BIA)

5,336,556 4,843,332 5,812,328 799,611 6,663,425

Note: ‘t’ means current year

8. Other types of risk

8.1 Introduction

Apart from the risks listed in the previous sections, the Bank is also exposed to other types of risks which it identifies and manages as part of its risk management framework. Although these risks do not directly form part of the Tier 1 risks, they are identified, monitored and controlled by the Bank.

8.2 Liquidity risk

Liquidity risk is the possibility of occurrence of adverse effects on financial result and capital of the Bank caused by the Bank’s inability to fulfill its due obligations as a result of: withdrawal of existing sources of financing and /or impossibility of securing new sources of financing (funding liquidity risk), or difficulties in converting assets into liquid funds due to market disturbances (market liquidity risk). The Bank’s active approach to managing liquidity is to ensure, that it will always have sufficient funds to meet its liabilities when due without incurring unacceptable losses or risking damage to the Bank’s reputation.

The Bank has established a liquidity risk policy, which describes the roles and responsibilities of the Board of Directors, Board’s Risk Management Committee, Asset Liability Management Committee (ALCO), Treasury and other concerned departments in management of liquidity. It also stipulates various liquidity ratios to be maintained by the Bank, as well as gap limits under each time bucket of the maturity ladder.

It is the Bank’s policy to keep adequate levels of high quality liquid assets to ensure that funds are available to meet maturing deposits and other liabilities, as and when they fall due. The everyday management of liquidity risk is the responsibility of the Treasury Division, which monitors the sources and maturities of assets and liabilities closely, and ensures that limits stipulated are complied with. Risk management Division monitors the GAP liquidity and any violations are reported to ALCO and Executive Board.


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The Bank‘s framework for managing liquidity risk encompasses:

Operating standards relating to liquidity risk, including appropriate policies, procedures and resources for controlling, limiting and managing liquidity risk.

Maintenance of a stock of liquid assets appropriate for the cash flow profile that can be readily converted into cash without incurring undue capital losses.

Management of access to funding sources and measurement, control and scenario testing of funding requirements.

Management information and other systems that identify, measure, monitor and control liquidity risk.

Contingency plans for handling liquidity disruptions by means of the ability to fund some or all activities in a timely manner and at a reasonable cost.

Liquidity risk limits (e.g. maturity mismatch ratio) taking into account the existing regulatory limits.

The Bank has established and maintains adequate liquidity measurement, monitoring and control and reporting functions, addressing to:

The maturity profile of cash flows under varying scenarios, including scenarios for non-maturing assets and liabilities (e.g. savings, credit cards).

The stock of liquid assets available to the institution and their market values.

The ability of the Bank to execute assets sales in various markets (notably under adverse conditions) and to borrow in markets.

The impact of adverse trends in asset quality on future cash flows and market confidence at the Bank level.

The impact of market disruptions on cash flows and customers.

The type of new deposits being obtained, as well as its source, maturity and price.

The regulatory reporting requirements.

The following are mentioned regulatory liquidity ratios which reflect the liquidity position of the Bank:

Liquidity ratio was as follows:

2014 2013

Average during period 2.02 1.94

Highest 2.50 2.46

Lowest 1.14 1.04

On December, 31 2.09 2.12

The level of liquidity is expressed using the Ratio which represents the liquid sum of the first and second level (cash, assets on accounts with other banks, deposits with the National Bank of Serbia, other receivables in the process of realization, irrevocable credit lines approved to the Bank, quoted financial instruments, percentage of securities issued by Republic of Serbia nominated in RSD with original maturity more that 3 months, other receivables due within a month) and sum of liabilities on demand without determined maturity date and liabilities with fixed maturity up to a month.


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The Bank regularly monitors the maturity compliance of assets and liabilities by specific time intervals for which a defined limits. In its effort that the liquidity risk is observed through the potentially adverse events, the Bank carried out at least quarterly stress testing of the liquidity risk. The results of stress testing are discussed on the ALCO Committee meetings by which occasion are observed adequacy and structure of liquidity reserves inventory.

8.3 Management of interest rate risk in the banking book

Interest rate risk in the banking book is the current or prospective risk to earnings (net interest income) and capital arising from adverse movements in interest rates affecting the banking book position. The Bank has developed Policy for management of interest rate risk in banking book whose main objective is to define process of identifying, measuring, mitigating, monitoring and reporting of interest rate risk. The Bank‘s goal when managing the interest rate risk is to optimize its effect to the changes in interest rate on one hand and the economic value of equity on the other.

The Bank identifies the following types of interest rate risk: Maturity mismatch risk - is a mismatch in the period to maturity of interest-sensitive assets and

liabilities with agreed fixed rate and the period of re-pricing for interest rate sensitive assets andliabilities with a variable rate;

Basis risk – is the risk of imperfect correlation in the movement rate of receipts and payments ina variety of interest sensitive items with otherwise similar characteristics as far as maturity or re-pricing

Optional risk - (risk of emedded options) is a risk of options embedded in the interest sensitiveasset and liability items (products/instruments);

Yield curve risk - which the Bank is exposed due to changes in the yield curve

The Bank at least once per month measures interest rate risk based on re-pricing GEP. Measuring the maturity mismatch risk includes the assets and liabilities of the Bank at carrying amounts, categorized by dates that are before the agreed date of re-pricing or maturity dates. Except the total gap Bank also observe maturity mismatch in significant currencies i.e. EUR, RSD, USD and CHF.

The basic assumptions for the measurement of interest rate risk, or the exposure to the risk, is that the allocation of balance sheet items with a fixed interest rate is performed in accordance with their maturity, as well as the allocation of balance sheet positions with a variable interest rate in line with the period of their re-determination of interest rates. The amounts of not term deposits (demand deposits) are currently distributed in the shortest time interval.

The impact of interest rate risk on equity is measured by calculating the sensitivity of the economic value of the Bank's capital to changes in interest rates. During the 2014th , the indicator of interest rate risk, as measure of the impact on equity (proceeding with the model prepareed on the base of applied recommendations of the Basel Committee on Banking Supervision, which takes into account the principle of net present value of the parallel shift in the yield curve by 200bp), fluctuated below the defined limit.

The management of interest rate risk in the banking book against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered at least


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once per quarter include a 100 basis point (bp) parallel fall or rise in yield curves and stress tested on 200 basis point parallel shift in yield curve.

The Bank measures interest rate risk that arises from the contracts with embedded options related to the repayment of the loan before its maturity or potential withdrawal of term and non term deposits before maturity, and the extent of their influence (on annual basis) to net interest income of the Bank in accordance with the assumed (previously defined) percentage of early repayment of loans and withdrawals deposits.

8.4 Concentration risk

The concentration risk is the current or prospective risk of adverse effects on the financial result and capital of the Bank arising from the excessive exposure to one counterparty or a group of related counterparties whose likelihood of default is driven by common underlying factors, e.g. economic sector, industry, geographical location, collateral type, and the like. The concentration risk refers both to banking and trading book exposures.

In compliance with the Bank’s credit risk policy the Bank manages credit risk and provides compliance with the regulations of the National Bank of Serbia, through the system of internal limits. obligor limit, country credit limit, in compliance with the Country Risk Management Policy, sector limits and sector concentration limits as well as Large Credit Exposure limits (LCE), including limits for related entities of the Bank. The Large Credit Exposure limits (LCE) and limits for related entities of the Bank.

The exposure limits prescribed by the National Bank of Serbia are: - the bank’s exposure to a single entity or a group of related entities must not exceed 25% of

the bank’s capital,- the bank’s exposure to a single related entity must not exceed 5% of the bank’s capital,- the bank’s total exposure to related entities must not exceed 20% of the Bank’s capital and- the sum of all the bank’s large exposures must not exceed 400% of the bank’s capital.

The realized exposure limits as of 31st December 2014 are provided within the Point 5.5 Large exposures.

8.5 Counterparty credit risk

Counterparty credit risk is the possibility of adverse effects on the Bank’s financial result and capital arising from counterpart’s failure to fulfill his part of the deal in a transaction before final settlement of cash flows of the transaction or settlement of monetary liabilities under that transaction. Counterparty credit risk which is derived from trading book and banking book positions formed on trading with foreign exchange derivatives (forward and swap contracts) is fully integrated into the credit risk management system.

Counterparty credit risk is measured and monitored on a daily basis and is submitted in calculation of credit risk weighted assets. In including counterparty risk in risk weighted assets, the Bank applies method of current exposure. The Bank has established limits for each counterparty bank and the regular assessment of the limits is performed in accordance with total allowed exposure to hereto the risk.


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The Bank is constantly reviewing and monitoring its open positions to ensure proper adherence to the limits and defined policies of the Bank. As at 31 December 2014 the Bank had open positions on foreign exchange derivatives (forward and swap contracts) in notional amount of 15,5 billion RSD with current exposure of 99.042 thousands RSD. The Bank has been exposed to counterparty risk in total amount of 222.906 thousands RSD. Its exposure to counterparty credit risk as at 31. December, 2014 the Bank has reduced based on forward transaction because the client placed collateral in the form of deposits in amount of 149 thousands RSD.

8.6 Reputational risk

Reputational risk is the current or prospective risk to earnings and capital arising from adverse perception of the Bank’s image from its customers, counterparties, shareholders, investors or regulators. In terms of reputational risk management in the Bank, this is effectively performed across all activities of the Bank, through the respective internal control system and by developing risk culture through the Bank, as well as through the Compliance Division whose authority and organization is defined by Law on Banks, sub laws, internal acts and procedures. A well developed and coherently implemented environmental communication strategy helps the Bank to mitigate reputational risks.

8.7 Other risks

Other risks include business risk, strategic risk and other risks which are inherent in all business activities and are not easily measurable or quantifiable. The Bank permanently develops proper policies and procedures to mitigate and monitor these risks.

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