risk and capital management - vojvođanska bankaand it operates in accordance with the republic of...

Risk and Capital Management

Basel II - Pillar 3 Disclosures

Year 2011

��Vojvođanska banka a.d. Novi Sad

2

Table of Contents Page 1. GENERAL INFORMATION 3

1.1. Basic information about the Vojvodjanska bank Member of NBG Group 3

2. INTRODUCTION 4

2.1 Pillar 1 4

2.2 Pillar 2 4

2.3 Pillar 3 5

3. OVERALL RISK AND CAPITAL MANAGEMENT 5

3.1 Risk management strategy 5

3.2 Risk management framework 6

3.3 Risk governance structure 6

3.4 Capital management 8

3.5 Risk types 8

3.6 Monitoring and reporting 9

4. CAPITAL STRUCTURE AND CAPITAL ADEQUACY RATIO 9

4.1 Capital structure and adequacy 9

4.2 ICAAP considerations 12

5. CREDIT RISK 12

5.1 Introduction 12

5.2 Credit risk management 12

5.3 Capital requirements for credit risk 13

5.4 Quantitative information on credit risk 14

5.4.1 Gross and net credit exposure towards to asset classes 14

5.4.2 Credit exposure by geography 16

5.4.3 Credit exposure by industry 17

5.4.4 Credit exposure by maturity 19

5.4.5 Distribution of exposures according to classification category, by types

of counterparty, as well as calculated specific and needed reserves 20

5.5 Large exposures 20

5.6 Impaired facilities and past due exposures 21

5.7 Credit risk mitigation 25

5.8 Related party and intra-group transactions 26

5.9 Equity investments held in banking book 26

MARKET RISK 28

6.1 Introduction 28

6.2 Foreign exchange risk management 29

6.3 Market risk management 31

6.4 Capital requirements for market risk 31

7. OPERATIONAL RISK 32

7.1 Introduction 32

7.2 Operational risk management 33

7.3 Capital requirements for operational risk 35

8. OTHER TYPES OF RISK 36

8.1 Introduction 36

8.2 Liquidity risk 36

8.3 Interest rate risk in the banking book 39

8.4 Concentration risk 41

8.5 Counterparty credit risk 41

8.6 Reputational risk 41

8.7 Other risks 41

3

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

Disclosures 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 45/2011).

This Basel II Pillar 3 Disclosures 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 financial statements for the year ended 31 December 2011,

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 bank Member of NBG Group

Vojvodjanska banka a.d., Novi Sad (the “Bank”) was established on 1 January 1990 by the transformation

of Vojvodjanska banka - 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 2011, the Bank

operated through its Central Office located in Novi Sad, 60 branches, excluding the inactive braches in

Pristina and Podgorica, 58 sub-branch offices (31 December 2010: 67 branches, 67 sub-branches and 8

counters). As of 31 December 2011, the Bank had 1.786 employees (31 December 2010: 2.238

employees).

The Bank‟s registration number is 08074313. Its tax identification number is 101694252.

4

As of 31 December 2011, the Bank had controlling interest in the following legal entity, which is not

consolidated in the accompanying financial statement: Imos a.d. Šid (51.55% of interest in capital).

2. Introduction

The new 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 risk weighted amounts and capital requirement.

• Pillar 2: the supervisory review process, including the Internal Capital Adequacy Assessment Process.

• Pillar 3: rules for the disclosure of risk management and capital adequacy information.

2.1 Pillar 1

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

2.2 Pillar 2

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 covered under Pillar 1).

5

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, interest rate risk in the banking book, concentration risk, reputational risk and other risks. Given the

current capital resources and position of the Bank, no additional capital is being allocated to these risk

components. However, the responsible functions and governance bodies of the Bank permanently monitor

and report on these risks to the Board of Directors on a quarterly basis.

2.3 Pillar 3

In the NBS‟s Basel II framework, the Pillar 3 prescribes how, when, and at what level 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 2011, the NBS prescribed basic guidelines to cover the detailed disclosure requirements to be followed

by licensed banks in Serbia to be in compliance with Pillar 3 of Basel II.

3 Overall risk and capital management

3.1 Risk management strategy

The Bank perceives strong risk management capabilities to be the foundation in delivering results to

customers, investors and NBG Group. The Bank will continue to endeavor to adopt international best

practices of risk management, superior corporate governance and 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;

• 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 its 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 reflected in the limits defined by the Bank for each risk area.

6

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 organising the risk management process in respect of the given risks; as

well as roles and responsibilities of the competent organisational units and 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.

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 and measurement

and assessment and for managing risks

• Adequate internal organizational structure

• Effective and efficient process of management of all risk

• 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 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.

7

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

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 of Directors for

approval.

• Developing and reviewing risk management policies in accordance with the risk management guidelines

issued by the NBS, NBG Group and international best practices.

• Reviewing operating policy manuals and ensuring that such policy manuals are in accordance with the

risk management policies and appropriately addresses all the key risks embedded in the related processes/

products.

• Acting as the principal coordinator in Basel II implementation as required by the NBS and facilitating

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 approving authorities.

• 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 communicating the

planned/ executed corrective actions to the Risk Management Committee.

8

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.

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

Market risk

Operational risk

Risks in Pillar 2 Liquidity risk

Concentration risk

Interest rate risk in banking book

Reputational risk

Other risks

The details of components of risks and how they are managed are discussed in the following sections of

this document.

9

3.6 Monitoring and reporting

The Risk Management Division provides independent assurance that all types of risk are being measured

and managed in accordance with the policies and guidelines set by the Board of Directors. The RMD

submits a quarterly Risk Review report to the Executive Board, Board Risk Management Committee and

Audit Committee.

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 2011 was above to the minimum regulatory capital requirement of 12%,

and it was on level of 23%. 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; and Regulatory value adjustments.

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; and Amount of Needed reserves for estimated losses on

balance sheet and off-balance items.

10

The Bank‟s capital structure, capital requirements and risk weighted assets at 31 December 2011 was as

follows:

In RSD thousand

No. CAPITAL STRUCTURE 31.12.2011.

I CAPITAL 10,380,913

1. CORE CAPITAL 18,064,319

Paid-up shares (excluding CPS) 16,337,430

Premium on the issue shares (excluding CPS) 120

Reserves allocated form profit 3,188,768

Portion of retained profit from earlier years 133,295

Losses from earlier years 0

Current year losses (1,172,647)

Intangible investment (367,935)

Regulatory value adjustments – unrealized losses (54,712)

Needed reserve for estimated losses 0

2. SUPPLEMENTARY CAPITAL 1,371,348

Portion of revaluation reserves which refers to fixed assets, securities

and other funds

1,371,348

3. DEDUCTION FROM CORE CAPITAL AND SUPPL.CAPITAL (9,054,754)

3.1. It refers: reduction of core capital (7,683,406)

3.2. It refers: reduction of supplementary capital (1,371,348)

Amount for which is exceeded qualified participation of bank in

entities which are not financial sector entities

(157,442)

Needed reserve for estimated losses on balance sheet and off balance

sheet items; in accordance with article 427. Paragraph 1 of Decision

on capital adequacy by bank

(8,897,312)

4. TOTAL CORE CAPITAL 10,380,913

5. TOTAL SUPPLEMENTARY CAPITAL 0

No. CAPITAL REQUIREMENTS 31.12.2011.

I CAPITAL 10,380,913

1. TOTAL CORE CAPITAL 10,380,913

2. TOTAL SUPPLEMENTARY CAPITAL 0

II CAPITAL REQUIREMENTS 5,415,686

1. Credit risk; counterparty risk; delivery/settlement risk for free delivery 4,376,381

2. Delivery/settlement risk for unsettled transactions 0

3. Market risk 149,954

3.1.1. Price risk in respect of debt securities 27,035

3.1.2. Price risk in respect of equity 0

3.1.3. Foreign exchange risk 122,919

3.1.4. Commodities risk 0

4. Operational risk 889,351

5. COVERAGE OF CAPITAL REQUIREMENTS 5,415,686

III CAPITAL ADEQUACY RATIO 23.00%

11

No. RISK WEIGHTED ASSETS STRUCTURE 31.12.2011.

1. Credit 36,469,842

2. Delivery/Settlement risk 0

3. Market risk 1,249,617

4. Operational risk 7,411,258

TOTAL RWA 45,130,717

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%.

- 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 Core Capital.

- 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 perform

redistribution of profit only into elements/items of the Core Capital.

- The sum of Capital deduction items is subtracted 50% from Core Capital and 50% from

Supplementary Capital. If 50% of total amount of deduction items is greater than the disposable

amount of Supplementary Capital – the difference above the amount of disposable Supplementary

Capital is subtracted form the Core Capital.

- Bank is allowed to treat a part of Needed Reserves as deductable item from the Total Capital,

instead treating same as deductible item from the Core Capital on the following way: until the end

of 2011 – 100% of that amount; until the end of 2012 – 75% of that amount; and until the end of

2013 – 50% of that amount.

- During the last five years to maturity, a discount factor of 20% per year will be applied to

subordinated obligations eligible for inclusion in bank‟s supplementary capital, so in the last year

prior to that date subordinated debt are not included in Supplementary Capital.

- Bank is obliged to exclude hybrid instruments with maturity below 12 months from calculation 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.

12

The table below summarizes the structure of the Bank‟s capital and risk weighted assets as of 31

December 2011 and 2010, as well as the capital adequacy ratio:

In RSD thousand

2011 2010

Regulatory capital Core Capital 18,064,319 19,544,157 Supplementary Capital 1,371,348 1,602,837

Total Tier 1 and Tier 2 capital 19,435.667 21,146,994

Deductible items: Needed reserves for estimated losses (8,897.312) (8,810,015) Exceeded qualified invest. in non-financial entities (157.442) -

Total Capital (1) 10,380,913 12,336,979

Risk weighted assets Balance sheet assets 33,946,693 51,069,329 Off balance sheet items 2,395,336 4,127,418 Non-trading derivatives 127,813 87,232 Operational risk exposure 7,411,258 - Foreign currency risk exposure 1,024,325 1,215,653 Price risk exposure 225,292 254,767

Total RWA (2) 45,130,717 56,754,399

Capital adequacy (1/2 x 100) 23.00% 21.74%

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 implementation is

addressed for 2012) which involves identification and measurement of all material risks 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, interest rate risk in the banking book, concentration risk, reputational risk and

other risks) and capital management approaches.

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.

5.2 Credit risk management

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

Corporate Credit Policy

The Corporate 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

13

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.

Retail Credit Policy

The Retail Credit Policy 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 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 NBG Group policy,

- Establish a common approach for managing Retail Credit risks.

The Retail Policies/Procedures and Credit Portfolio Management Unit of the Credit Risk Department is

responsible for developing and submitting for approval to the Board of Directors, the Retail Credit Policy.

The Unit reports to the Chief Credit Officer and its main task is to evaluate, design and approve the credit

policy that governs the retail banking products. The evaluation and monitoring of the credit risk, of new as

well as existing products, is managed through the application of the Credit Policy. The Retail Credit

Policy 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 requirements for credit risk

To assess its capital adequacy requirements for credit risk in accordance with the NBS capital adequacy

requirements, the Bank adopts the standardized approach. According to the standardized approach, on and

off balance sheet credit exposures are assigned to predefined exposure classes based on type of

counterparty or basic exposure. Main exposure classes are claims on banks, claims on corporate, claims on

retail, mortgage loans, and other assets.

Risk Weighted Assets (RWAs) are calculated based on prescribed credit risk weights by NBS Decision on

Capital Adequacy by bank.

Rating of exposures and risk weighting

For 2011 the Bank did not use the ratings of external rating agencies. The Bank uses rating weights

prescribed by NBS for the purpose of capital adequacy computations.

For claims where the remaining maturity of these claims are more than three months and there is no

available credit rating of the selected rating agency, the Bank has assigned the risk weight of the state in

which the bank-borrower is located, or risk weight of 50%, depending on which is higher risk weight.

For claims where the remaining maturity of these claims are three months or and there is no available

credit rating of the selected rating agency, the Bank has assigned the risk weight of the state in which the

bank-borrower is located, or risk weight of 20%, depending on which is higher risk weight.

14

For Corporate exposures for which there is no available credit rating of the selected rating agency the

Bank has assigned the risk weight of 100%.

Following is the analysis for credit risk as computed for regulatory capital adequacy purposes as at 31

December 2011.

The following table represents risk weighted assets and capital requirements per exposure classes as at 31

December 2011: In RSD thousands

Exposure classes RWA Capital

adequacy ratio

Capital requirements

Governments and central banks 0 12% 0

Territorial autonomies and local government entities 42,458 12% 5,095

Public administrative bodies 4,342 12% 521

International development banks 0 12% 0

International institutions 0 12% 0

Banks 1,209,433 12% 145,132

Corporate 13,128,010 12% 1,575,361

Private individuals 12,980,793 12% 1,557,696

Exposures secured by mortgages 1,992,479 12% 239,097

Maturities 375,963 12% 45,115

High risk exposures 0 12% 0

Exposures to covered bonds 0 12% 0

Exposures to investments in open investment funds 0 12% 0

Other exposures 6,736,364 12% 808,364

Total 36,469,842 4,376,381

5.4 Quantitative information on credit risk

5.4.1 Gross and net credit exposure towards asset classes

Gross exposures in all following tables exclude off-balance sheet items which are not classified in

accordance with the NBS Decision on classification of balance sheet assets and off-balance sheet items,

and for financial derivates, the value of exposure after implementation of credit conversion factor is

represented.

The following table represents gross credit risk exposures prior implementation of credit risk mitigation

techniques, i.e. credit protection by change of risk weight, impairments and provisions, needed reserves

and net exposure as at 31 December 2011:

15

In RSD thousands

Exposure classes

Gross exposures

prior

implementation

of credit

protection by

change of credit

risk weight

Impairments

and

provisions

Needed

reserve

Decrease based

on

implementation

of credit

protection

instruments

Increase

based on

implementation of

credit protection

instruments

Net exposure after

implementation of

credit protection

by change of credit

risk weight

Governments and

central banks 28,537,540 10,746 3 0 0 28,526,791

Territorial autonomies and

local government

entities 42,458 0 0 0 0 42,458

Public

administrative

bodies 6,663 0 228 0 0 6,435

Banks 5,734,270 278,128 5,585 0 0 5,450,557

Corporate 27,981,100 241,930 2,147,449 2,385,142 0 23,206,579

Private individuals 21,047,048 57,654 1,505,778 1,030,050 0 18,453,566

Exposures secured

by mortgages 6,037,402 9,946 319,102 0 0 5,708,354

Maturities 15,377,053 10,160,254 4,841,087 0 0 375,712

Other exposures 17,622,812 4,714,600 78,080 0 3,415,192 16,245,324

Total 122,386,346 15,473,258 8,897,312 3,415,192 3,415,192 98,015,776

The following table represents gross credit risk exposures after implementation of credit risk mitigation

techniques, i.e. credit protection by change of risk weight, impairments and provisions, needed reserves

and net exposure as at 31 December 2011:

In RSD thousands

Exposure classes

Gross exposures

after implementation

of credit protection

by change of credit

risk weight

Impairments

and provisions Needed reserve

Net exposure after

implementation of

credit protection by

change of credit risk

weight

Governments and central banks 28,537,540 10,746 3 28,526,791

Territorial autonomies and local

government entities 42,458 0 0 42,458

Public administrative bodies 6,663 0 228 6,435

Banks 5,734,270 278,128 5,585 5,450,557

Corporate 25,595,958 241,930 2,147,449 23,206,579

Private individuals 20,016,998 57,654 1,505,778 18,453,566

Exposures secured by mortgages

6,037,402 9,946 319,102 5,708,354

Maturities 15,377,053 10,160,254 4,841,087 375,712

Other exposures 21,038,004 4,714,600 78,080 16,245,324

Total 122,386,346 15,473,258 8,897,312 98,015,776

16

5.4.2 Credit exposure by geography

Gross exposure geographic distribution after implementation of credit risk mitigation techniques, per

exposure classes, per materially significant areas as at 31 December 2011 was as follows:

In RSD thousands

Exposure classes Credit risk gross exposure

Governments and central banks 28,537,540

Serbia 28,537,540

Territorial autonomies and local government entities 42,458

Serbia 42,458

Public administrative bodies 6,663

Serbia 6,663

Banks 5,734,270

Serbia 271,373

Central Europe (Balkans and other) 64,503

West European countries 5,398,394

Corporate 25,595,958

Serbia 25,585,503

Central Europe (Balkans and other) 11

West European countries 10,444

Private individuals 20,016,998

Serbia 20,006,835


Exposures secured by mortgages 6,037,402

Serbia 6,037,402

Maturities 15,377,053

Serbia 14,548,389


West European countries 749,411

Other exposures 21,038,004

Serbia 21,038,004

Total 122,386,346

17

5.4.3 Credit exposure by sectors

Gross exposure distribution after implementation of credit risk mitigation techniques, per exposure

classes, per sectors as at 31 December 2011 was as follows:

In RSD thousands



Finance and insurance 21,724,983

Public sector 6,812,557


Public sector 42,458


Public sector 6,663

Banks 5,734,270

Finance and insurance 266,308

Foreign persons 5,462,898

Other clients 5,064



Public companies 2,744,781


Foreign persons 10,455

Other clients 218,866


Entrepreneurs 685,412

Retail 19,303,227


Private households with employed individuals and registered agriculturists 18,196


Entrepreneurs 51,627 Corporate 226,457

Retail 5,757,278




Public companies 9,118

Corporate 7,270,707


Public sector 22,858

Retail 2,612,704



Other clients 4,038,206


Corporate 2,385,202


Retail 1,010,920

Private households with employed individuals and registered agriculturists 181

Other 17,622,752

Total 122,386,346

18

The following table presents gross exposures after implementation of credit risk mitigation techniques

with impairments or provisions per off-balance sheet items per sectors or type of counterparty, per

exposure classes as at 31 December 2011:

In RSD thousands

Exposure classes

Credit risk gross

exposures with

impairments or

provisions Impairments or

provisions Governments and central banks 11,546 10,746

Public sector 11,546 10,746

Territorial autonomies and local government entities 0 0

Public sector 0 0

Public administrative bodies 0 0

Public sector 0 0

Banks 278,594 278,128

Finance and insurance 5,603 5,138

Foreign persons 267,926 267,925

Other clients 5,065 5,065

Corporate 298,022 241,930

Public companies 1 0

Corporate 221,010 165,233


Other clients 66,570 66,256

Private individuals 829,127 57,654

Entrepreneurs 14,904 592

Retail 806,223 50,180


Private households with employed individuals and registered agriculturists 1,003 96

Exposures secured by mortgages 132,195 9,946

Corporate 7,745 2,431

Retail 123,661 6,962

Private households with employed individuals and registered agriculturists 789 553

Maturities 12,669,564 10,160,254

Finance and insurance 49,259 37,452

Public companies 8,769 8,740

Corporate 5,181,095 4,152,934

Entrepreneurs 331,896 273,822

Public sector 22,789 4,162

Retail 2,408,658 1,523,014

Private households with employed individuals and registered agriculturists 20,123 13,891


Other clients 3,819,871 3,393,508

Other exposures 17,624,747 4,714,600

Corporate 1,995 60

Other 17,622,752 4,714,540

Total 31,843,795 15,473,258

19

5.4.4 Credit exposure by remaining maturity

Gross exposure distribution after implementation of credit risk mitigation techniques per remaining

maturity, per exposure classes as at 31 December 2011:

In RSD thousands



Up to 1 month 21,849,486

3 to 12 months 1,025,439

1 to 5 years 5,662,615


Up to 1 month 236

1 to 5 years 42,222


Up to 1 month 3,947

1 to 5 years 2,716

Banks 5,734,270

Up to 1 month 5,453,791

Over 5 years 280,479


Up to 1 month 8,682,428

1 to 3 months 636,539

3 to 12 months 9,385,835

1 to 5 years 5,422,749

Over 5 years 1,468,407


Up to 1 month 834,742

1 to 3 months 467,840

3 to 12 months 2,432,275

1 to 5 years 7,778,165



Up to 1 month 42,886

1 to 3 months 20,120

3 to 12 months 79,696

1 to 5 years 290,507



Up to 1 month 13,778,184

1 to 3 months 5,426

3 to 12 months 62,165

1 to 5 years 454,288



Up to 1 month 6,561,180

1 to 3 months 2,043,347

3 to 12 months 457,974

1 to 5 years 977,248

Over 5 years 10,998,255

Total 122,386,346

20

5.4.5 Distribution of exposures according to classification category, by types of counterparty, as well

as calculated specific and needed reserves

Credit risk exposures per client type and classification category as at 31 December 2011:

In RSD thousands

Client / Classification Category

Gross

exposure

Impairments

and provisions

Special

reserve

Needed

reserve

PUBLIC SECTOR 72,321 4,496 23,416 18,920

A 47,575 0 0 0

B 0 0 0 0

V 1,550 0 233 233

G 19 0 6 6

D 23,177 4,496 23,177 18,681

BANKS 6,549,578 1,227,569 1,230,432 6,668

A 5,317,269 17 0 0

V 2,208 2,203 331 1

D 1,230,101 1,225,349 1,230,101 6,667

CORPORATE 39,484,157 7,640,326 13,455,197 5,833,240

A 6,767,845 1,300 0 0

B 13,880,101 469 112,797 112,488

V 3,780,100 743 528,102 527,362

G 3,122,205 18,188 893,393 885,836

D 11,933,906 7,619,626 11,920,905 4,307,554

ENTREPRENEURS 1,236,319 274,414 571,137 297,749

A 532,574 108 0 0

B 35,382 321 678 463

V 99,985 153 14,910 14,765

G 18,205 2,062 5,396 4,138

D 550,173 271,770 550,153 278,383

RETAIL 28,734,858 1,601,501 4,238,544 2,662,655

A 21,269,429 1,119 0 0

B 1,762,153 16,839 34,259 27,255

V 576,487 19,286 85,004 67,091

G 1,380,812 59,323 412,872 364,431

D 3,745,977 1,504,934 3,706,409 2,203,878

Other 82,977 4,897 82,977 78,080

D 82,977 4,897 82,977 78,080

Total 76,160,210 10,753,203 19,601,703 8,897,312

5.5 Large exposures

In accordance with NBS regulations, the large exposure of the 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 accordance with the

NBS Decision on risk management by banks. The meaning of the related entities is defined in the Law on

Banks. The large exposure of the 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 encompasses also the Bank‟s exposures to a related entity. Also, in accordance

with NBS regulations, indicator of the Bank‟s exposure to a single 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.

21

The large exposures and other exposure limits at 31 December 2011 are presented in the following table:

No Exposure limits Prescribed Realized

1 Bank‟s investments Max 60% 54.44%

2 Exposure to persons related to the Bank Max 20% 19.66%

3 Sum of large exposures of the Bank Max 400% 72.53%

4 Exposure to a single person or a group of

related persons

Max 25% 23.40%

5 Exposure to a person related to the Bank Max 5% 4.59%

6 Bank‟s investment in an individual not in the

financial sector

Max 10% 2.88%

On 31 December 2011, the Bank has large loans (loans that exceed 10% of the Bank‟s capital), granted to

the companies: Eko Srbija a.d. Beograd (14.76% of the Bank‟s capital), JP Srbijagas (14.89% of the

Bank‟s capital), Naftna industrija Srbije a.d. (23.40% of the Bank‟s capital) i NBG Group (19.48% of the

Bank‟s capital).

5.6 Impaired facilities and past due exposures

On quarterly basis, the Bank assesses whether there is objective evidence that a financial asset or a group

of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment

losses are incurred if:

there is objective evidence of impairment as a result of a loss event that occurred after the initial

recognition of the asset and up to the balance sheet date (“a loss event”);

the loss event had an impact on the estimated future cash flows of the financial asset or the group

of financial assets and

a reliable estimate of the loss amount can be made.

Objective evidence that a financial asset or group of assets is impaired includes observable data about the

following loss events:

(i) Significant financial difficulty of the issuer or obligor.

(ii) A breach of contract, such as a default or delinquency in interest or principal

payments.

(iii) The Bank, for economic or legal reasons relating to the borrower‟s financial

difficulty, granting to the borrower a concession that the Bank would not otherwise

consider.

(iv) It is becoming probable that the borrower will enter bankruptcy or other financial

reorganisation.

(v) The disappearance of an active market for that financial asset because of financial

difficulties; or

(vi) Observable data indicating that there is a measurable decrease in the estimated future

cash flows from a group of financial assets since the initial recognition of those

assets, although the decrease cannot yet be identified with the individual financial

assets in the group, including:

i. Adverse changes in the payment status of borrowers in the group, or

ii. National or local economic conditions that correlate with defaults on the

assets in the group.

In addition to the loss events described in the previous section, the following is a more detailed (but non-

exhaustive) list of loss events that may lead to impairment:

22

Loss events for individuals

(i) Legal procedures have been initiated,

(ii) Serious illness or disability that affects his/her ability to work

(iii) Death

(iv) Loss or significant decrease of income (e.g. loss of employment)

(v) Conviction for criminal activities or imprisonment

(vi) Fraud relating to the granting of the loan

(vii) Delinquency over a certain number of days and for amounts above appropriate materiality

threshold,

(viii) The loan has been renegotiated during the last 12 months, such that the Bank, for economic or

legal reasons relating to the borrower‟s financial difficulty, has granted to the borrower a

concession that the Bank would not otherwise consider,

(ix) Other loss events that could affect the ability of the obligor to repay all contractual amounts

when due.

Loss events for legal entities

(i) Legal procedures have been initiated,

(ii) Obligor has initiated bankruptcy procedures or some form of financial reorganization (e.g.

conversion of a loan to shares),

(iii) The obligor has negative net asset position,

(iv) Significant financial difficulty of the issuer or obligor,

(v) Deterioration of the obligor‟s credit rating (either external or internal),

(vi) Loss of significant customer(s),

(vii) Damage of property, plant or equipment, used in the obligor‟s operations or taken as collateral,

(viii) Conviction for criminal activities,

(ix) Fraud relating to the granting of the loan

(x) Delinquency over a certain number of days and for amounts above appropriate materiality

threshold,

(xi) The loan has been renegotiated during the last 12 months, such that the Bank, for economic or

legal reasons relating to the borrower‟s financial difficulty, has granted to the borrower a

concession that the Bank would not otherwise consider,

(xii) Obligor operates in an industry sector with financial difficulties, or in a country whose economy

is in recession,

(xiii) The disappearance of an active market for the loan or other instruments (debt or equity) issued

by the obligor because of financial difficulties,

(xiv) Other loss events that could affect the ability of the obligor to repay all contractual amounts

when due.

The Bank first assesses whether objective evidence of impairment exists individually for loans that are

individually significant. It then assesses collectively for loans that are not individually significant and

loans which are significant but for which there is no objective evidence of impairment under the

individual assessment.

To allow management to determine whether a loss event has occurred on an individual basis, all

significant counterparty relationships are reviewed periodically.

If there is evidence of impairment leading to an impairment loss for an individual counterparty

relationship, then the amount of the loss is determined as the difference between the carrying amount of

the loan(s), including accrued interest, and the present value of expected future cash flows discounted at

the loan‟s original effective interest rate or the effective interest rate established upon reclassification to

23

loans, including cash flows that may result from foreclosure less costs for obtaining and selling the

collateral. The carrying amount of the loans is reduced by the use of an allowance account and the amount

of the loss is recognized in the income statement as a component of the provision for credit losses.

On quarterly basis, all impaired loans are reviewed for changes to the present value of expected future

cash flows discounted at the loan‟s original effective interest rate. Any change to the previously

recognized impairment loss is recognized as a change to the allowance account and recorded in the

income statement as a component of the provision for credit losses.

When it is considered that there is no realistic prospect of recovery and all collateral has been realized or

transferred to the Bank, the loan and any associated allowance is written off. Subsequent recoveries, if

any, are credited to the allowance account and recorded in the income statement.

The process to determine the provision for off-balance sheet positions is similar to the methodology used

for loans. Any loss amounts are recognized as an allowance in the balance sheet within other liabilities

and charged to the income statement as a component of the provision for credit losses.

If in a subsequent period the amount of a previously recognized impairment loss decreases and the

decrease is due to an event occurring after the impairment was recognized, the impairment loss is reversed

by reducing the allowance account accordingly. Such reversal is recognized in profit or loss.

24

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

(a) (Charged)/Credited to the Income StatementIn RSD thousand

2011. 2010

Expenses from indirect write-off of placements and

provisions

Impairment losses on financial assets:

– Interest and fees receivable (50,417) (432,362)

– Loans and advances (1,159,444) (2,076,537)

– Securities and equity investments (2,374) (59,058)

– Other placements and other assets (254,564) (1,204,707)

(1,466,799) (3,772,664)

Provisions for:

– Off-balance sheet items (35,105) (9,062)

– Retirement benefits (56,063) (49,997)

(91,168) (59,059)

Total impairment losses and provisions

(1,557,967) (3,831,723)

Reversal of impairment losses Reversal of impairment losses on

financial assets:

– Interest and fees receivable 48,125 273,549

– Loans and advances 884,717 2,101,265

– Securities and equity investments 4,286 798

– Other placements and other assets 55,644 1,195,794

992,772 3,571,406

Release of provision for:

– Off-balance sheet assets 10,841 27,832

– litigations 11 29.635

- other liabilities 83.213

10,852 140,680

Income from reversal of impairment losses

and release of provisions 1,003,624 3,712,086

Income from collected suspended interest 86,997 56,689

Total 1,090,621 3,768,775

Net impairment (losses)/gains (467,346) (62,948)

25

(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:

In RSD thousand

Interest

and fees

receivable

Loans and

advances

Securities and

equity

investments

Cash, other

placements

and other

assets Provisions Total

Balance as of

31 December 2010 662,052 11,798,873 638,802 1,018,910 493,863 14,612,500

Charge for the year 50,417 1,159,444 2,374 254,564 91,168 1,557,967

Reversal of impairment losses (48,125) (884,717) (4,286) (55,644) (10,852) (1,003,624)

Foreign exchange differences 4,192 (258,838) 2,211 13,407 (239,028)

Fair value adjustments - - - - - -

Payments for lost litigations (10,331) (10,331)

Other movements (43,742) (3,345,065) (116,287) (84,097) (33,382) (3,622.573)

Balance as of

31 December 2011 624,794 8,469,697 522,814 1,147,140 530,466 11,294,911

Other movements in 2011 mostly relate to write off of receivables with the related allowances for

impairment based on decisions of the Bank‟s Board of Directors.

5.7 Credit risk mitigation With the aim to decrease credit risk, the Bank has defined by internal acts (Corporate credit policy, Retail

credit policy and Collaterals procedure) types of acceptable collateral instruments and by instructions

more closely defined receiving, keeping, valuating, monitoring and managing of those securities.

Credit risk mitigation techniques refer to eligible instruments of unfunded and funded credit protection.

Eligible instruments of credit protection which the Bank may use in order to decrease credit risk are:

26

1.Instruments of funded credit protection:

- Collaterals in the form of financial assets,

- Balance netting,

- Standardized agreements on netting,

- Other instruments of funded credit protection.

2. Instruments of unfunded credit protection:

- Guarantees, other forms of guarantee and contraguarantee,

- Credit derivates.

In the year 2011 the Bank did not use on balance and off balance netting as the instrument of credit

protection.

During this period, the Bank has adjusted risk weighted assets for the effects of using collaterals in the

form of financial assets by using the simple method.

Implemented credit risk mitigation techniques as at 31 December 2011 refer to deposits received from

corporate and private individuals in the amount of 3.415.192 RSD thousands:

In RSD thousands

Exposure classes

Gross exposures

prior

implementation of

credit protection

by change of credit

risk weight

Impairments

and provisions Needed reserve

Decrease based

on implementing

credit protection

instruments

Nett exposure

after

implementation

of credit

protection by

change of credit

risk weight

Corporate 27,981,100 241,930 2,147,449 2,385,142 23,206,579

Private individuals 21,047,048 57,654 1,505,778 1,030,050 18,453,566

Total 49,028,148 299,584 3,653,227 3,415,192 41,660,145

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

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.

27

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. Unrealised gains and losses are

recognised directly in equity within the Available-for-sale reserves. When the investment is disposed of or

impaired, the cumulative gain or loss previously recognised in equity is recognised 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.

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 224,149 224,149

Shares of enterprises 311,240 311,240

In foreign currency Other securities 429 429

Balance as of 31.12.2011. 535,818 535,818

28

EQUITY INVESTMENTS (NOT LISTED)

In RSD thousand

In dinars Amount

– subsidiaries -

–associates -

– other companies 196,480

–other banks and financial institutions

Total

35,549

232,029

In foreign currency

– subsidiaries 10,441

– foreign banks and financial institutions 275,457

Total 285,898

Gross equity investments 517,927

Less: Allowance for impairment (464,424)

Balance as of 31.12.2011. 53,503

NET GAIN ON THE SALE OF AVAILABLE FOR SALE SECURITIES

In RSD thousand

Gain on the sale

- VISA INC 70,132

Total 70,132

UNREALIZED LOSS FROM CHANGES OF FAIR VALUE OF LISTED AVAILABLE FOR SALE SECURITIES

In RSD thousand

Unrealized loss (54,712)

Balance as of 31.12.2011. (54,712)

Abovementioned data about unrealized loss 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, profit 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

29

dominantly determined by foreign exchange risk in the banking book. The Bank is also exposed to interest

rate risk on the banking book which is managed separately.

6.2 Foreign exchange risk management

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign

exchange rates. All foreign exchange (FX) risk within the Bank is transferred to Treasury. The Bank seeks

to manage currency risk by continually monitoring exchange rates. The Board of Directors approves

policies and strategies related to the management of FX risk. The Asset Liability Committee („ALCO‟)

supports the Board in managing FX risk by recommending policies, setting limits and guidelines and

monitoring the FX risk of the Bank on a regular basis. The ALCO provides guidance for day-to-day

management of FX risk.

The management of the day-to-day FX position of the Bank is the responsibility of the Treasury Division.

The Treasury Division shall ensure adequate FX liquidity to meet the maturing obligations and growth in

assets while ensuring that all limits and guidelines set by the Board and ALCO are complied with; and

shall implement hedging and other approved strategies for managing the risk. The Risk Management

Division on an ongoing basis 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. 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 sensitivity analysis provides for two scenarios prepared on the basis of the assumed potential

movements in foreign exchange, where all other variables remain constant, and presents potential effects

on the financial result.

Proportionate fluctuations in foreign exchange of +10% (foreign exchange depreciation); and

Proportionate fluctuations in foreign exchange of -10 % (RSD depreciation).

In RSD thousand

Change in

foreign

exchange

Net foreign

exchange

position 2011

Change in

foreign

exchange

Net foreign

exchange

position 2010

Percentage in

foreign exchange : + 10% 360,605 + 10% 265,010

Percentage in

foreign exchange: - 10% (295,041) - 10% (216,826)

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

30

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, which at 31

December 2011, was as follows: In RSD thousand

Other Foreign Currency

ASSETS

EUR USD

Currencies

Currencies

RSD

Total

Cash and cash equivalents 2,441,670 1,641,037 720,836 4,803,543 4,347,021

9,150,564

Revocable deposits and loans 16,875,211 0 0 16,875,211 4,700,000

21,575,211

Claims for interest, fees, changes

in fair value of derivatives and

other receivables

142,625 1,662 13,901 158,188 115,838

274,026

Loans and deposits 28,078,831 625,090 6,515,528 35,219,449 16,027,715

51,247,164

Securities 20,373 0 0 20,373 1,860,229

1,880,602

Participation (equity investments) 1,121 14,731 0 15,852 37,651

53,503

Other placements 159,538 296,130 583 456,251 165,584

621,835

Intangible assets 0 0 0 0 367,935

367,935

Fixed assets and investment

property 0 0 0 0 5,557,391

5,557,391

Other assets 186,575 7,939 11,230 205,744 1,573,244

1,778,988

TOTAL ASSETS 47,905,944 2,586,589 7,262,078 57,754,611 34,752,608

92,507,219

LIABILITIES

Total

Transaction deposits 3,503,281 255,311 105,149 3,863,741 10,688,024

14,551,765

Other deposits 42,966,989 872,367 1,035,282 44,874,638 5,302,851

50,177,489

Borrowings 5,300,025 66,662 7,265 5,373,952 73,866

5,447,818

Liabilities for securities 316 316

316

Liabilities for interest, fees and

the valuation of derivatives 446 446 137,469

137,915

Other liabilities

641,071

6,694

8,272

656,037

1,514,239

2,170,276

TOTAL LIABILITIES

52,412,128

1,201,034

1,155,968

54,769,130

17,716,449

72,485,579

forward and spot position 5,583,404 (1,382,151) (6,097,899) (1,896,646) 1,797,586

Open currency position

31. December 2011. 1,077,220 3,404 8,211 1,088,835 18,833,745

31. December 2010. 1,321,556 (8,977) (9,151) 1,303,428 19,583,705

31

6.3 Market risk management

The main document, based on which the Bank manages the market risks is the Trading Book Policy1,

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. This Policy was updated during 2011. Apart from it, several other Regulations are

applied, in accordance with the risk strategy, the instructions of the NBG Group and the regulations of the

local authorities.

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 the effect

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 models where

appropriate. Value at Risk is a statistical estimate of an upper boundary, within a specified confidence

level, of the potential amount a trading position or portfolio could decrease in value during the time

needed to close out a position. Specifically, it is a measure of potential loss from an event in a normal,

everyday market environment. Bank measures VaR of open position under assuming level of 99%

confidence for movement in relevant foreign exchanges rates.

VaR - Open currency position

VaR average in 2011

(in EUR)

35,036

VaR average in 2010

(in EUR)

35,266

– Operating limits and other practices that maintain exposures within levels consistent with internal

policies, in terms of exposure to individual market risk types, position and loss limits.

– Measurement of vulnerability to loss under stressful market conditions (including the breakdown of key

assumptions) considering those results when establishing and reviewing policies and limits for market

risks.

– Adequate and effective processes and information systems for measuring, monitoring, controlling and

reporting market risk exposures. Relevant IT systems must be sophisticated enough to cover the

complexity of trading activities of Bank. Adequate limits are embedded in these systems. Reports are

provided on a timely basis to the Board of Directors, Executive Board, Senior Management, and all other

appropriate levels.

6.4 Capital requirements 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.

1 Complete title: Policy for classification of individual on balance sheet positions and off balance sheet items between trading and banking book

for capital adequacy calculation purposes, bank units and authorized limits for trading book transactions, valuation of the trading book items,

calculation of the capital adequacy of the bank

32

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 to the

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 to a

general change in the interest rate or the price level in the stock market, calculated on the basis 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 1,024,325 12% 122,919

Price risk (debt

securities)

225,292 12% 27,035

Price risk (equity) 0 12% 0

Commodity risk 0 12% 0

TOTAL: 1,249,617 149,954

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 human error or

failure to follow an existing procedure. Process-related losses are regarded as unintentional.

33

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 intentional technology-

related losses occur, they should be categorized in either the People or External category.

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 compliance with the

Bank‟s standards and policies.

The 2nd

Line of Defense includes the ORMD, which is primarily responsible for developing and

providing the ORM methodologies, tools and guidance to be used at the level of all organizational

units for the management of operational risk. The 2nd

Line of Defense includes also the specific

cooperation between the ORMD and specialized organizational units that are faced with and manage a

wide range of operational risks, which is in accordance with their function. More specifically, the

ORMD cooperates with Legal Affairs Division, Compliance Division, Human Resources Division,

Business Processes and Organization Division and Information Technology Division, with respect to

the issues related to specialized methodologies and tools, including business continuity planning,

disaster recovery planning, anti-money laundering, keeping confidential information, etc.

Furthermore, the tasks of monitoring operational risk as well as assisting in mitigation actions belong

to this line of defense.

The 3rd

Line of Defense is Internal Audit, which is responsible for independently ensuring that the

ORM Framework is effective, appropriate and implemented with integrity.

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

34

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.

35

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.

36

In RSD thousand

Banking

activities for

operational risk

capital

requirement

calculation

EXPOSURE RATIO Capital

requirement

RWA

t-3 t-2 t-1

Total banking

activities subject

to Basic

Indicator

Approach (BIA)

7,012,809 5,732,612 5,041,603 889,351 7,411,258

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 risk that the Bank will encounter difficulty in meeting its financial obligations on

account of a maturity mismatch between assets and liabilities. The Bank‟s 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 a liquidity risk policy in place, 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 day to day

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 by the ALCO are

complied with. RMD monitors the liquidity position and any violations are reported to ALCO and

Executive Board.

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.

37

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, liquid asset ratio) taking into account the

existing regulatory limits.

The Bank has established and maintains adequate liquidity measurement, monitoring and control and

reporting functions, addressing:

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.

Potential sources of volatility in assets and liabilities (including claims and obligations arising

from off-balance sheet business).

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

Bank level.

Creditworthiness and capacity of providers of standby facilities to meet their obligations.

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 the key liquidity ratios which reflect the liquidity position of the Bank:

Liquidity ratio in 2011 and 2010 was as follows:

2011 2010

Average during period 1.84 1.77

Highest 2.67 2.12

Lowest 1.12 1.15

On December, 31 2.45 1.83

The level of liquidity is expressed using the Ratio expressed as 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.

The table below analyses assets and liabilities of the Bank into relevant maturity groupings based on the

remaining period on the balance sheet date to the contractual maturity date. The Bank experience is also

hereby noted, based on which, assets and liabilities of a nominal short term, because of continuous roll-

overs, may have practically a much longer term. The following table presents Maturity Mismatch report as

of 31 December 2011:

38

In RSD thousand

ASSETS till 1 month

1 to 3

month

3 to 12

month

1 to 5

Year

over 5

Year Total

Cash and cash equivalents 9,150,564 0 0 0 0 9,150,564

Revocable deposits and loans 21,575,211 0 0 0 0 21,575,211

Claims for interest, fees,

changes in fair value of

derivatives and other

receivables

274,026 0 0 0 0 274,026

Loans and deposits 3,314,655 4,049,146 12,665,318 17,368,153 13,849,892 51,247,164

Securities 567,293 31,700 1,025,439 256,170 1,880,602

Participation (equity

investments) 53,503 53,503

Other placements 621,835 621,835

Intangibles 0 0 0 0 367,935 367,935


property 0 0 0 0 5,557,391 5,557,391

Other assets 447,367 41,463 395,970 470,763 423,425 1,778,988

Total Assets 35,950,951 4,122,309 14,086,727 18,095,086 20,252,146 92,507,219

LIABILITIES

Transaction deposits 14,551,765 0 0 0 0 14,551,765

Other deposits 17,132,065 8,506,990 23,364,848 706,341 467,245 50,177,489

Borrowings 199,345 0 1,057,337 4,185,636 5,500 5,447,818

Liabilities for securities 316 316

Liabilities for interest, fees

and the valuation of

derivatives

137,915 0 0 0 0 137,915

Other liabilities 956,579 144,386 290,234 172,794 606,283 2,170,276

Liabilities 32,977,669 8,651,376 24,712,419 5,064,771 1,079,344 72,485,579

Capital 20,021,640 20,021,640

Total Liabilities 32,977,669 8,651,376 24,712,419 5,064,771 21,100,984 92,507,219

Maturity gap as at:

– 31. December 2011. 2,973,282 (4,529,067) (10,625,692) 13,030,315 (848,838)

– 31. December 2010. (4,895,534) (1,741,036) (9,469,036) 19,185,940 (3,080,334)

39

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 following table shows Reprising Gap report, i.e. the Bank„s exposure to the interest rate risk as of 31

December 2011. The table includes the Bank„s assets and liabilities at carrying amounts, categorized by

the earlier of contractual re-pricing or maturity dates. Basic assumptions for the measurement of interest

rate risk, the risk exposure, are contained in the fact that they provided technical and system possibility, to

make scheduling of balance sheet items with a fixed interest rate in accordance with their maturity, as well

as schedule of balance sheet positions with a floating interest rate in accordance with the period of their

interest rates reprising.

In RSD thousand

ASSETS

Till 1

month

1 do 3

months

3 do 12

months

over 1

Year

Not

interest

bearing TOTAL

Cash and cash equivalents 3,213,422

0

0

0

5,937,142

9,150,564

Revocable deposits and loans 4,700,000

0

0

0

16,875,211

21,575,211

Claims for interest, fees, changes

in fair value of derivatives and

other receivables

274,026

0

0

0

0

274,026

Loans and deposits 37,328,601

2,895,835

1,110,900

9,911,828

51,247,164

Securities 31,475

31,700

1,025,438

256,170

535,819

1,880,602

Participation (equity

investments) 0

0

0

0

53,503

53,503

Other placements 621,.835

0

0 0

0

621,835

Intangible assets 0

0

0 0

367,935

367,935


property 0

0

0

0

5,557,391

5,557,391

Other assets 0 0 0 0 1,778,988 1,778,988

Total Assets 46,169,359

2,927,535

2,136,338

10,167,998

31,105,989

92,507,219

40

LIABILITIES

Transaction deposits 3,916,896

0

0

0

10,634,869

14,551,765

Other deposits 14,894,744

8,452,652

23,139,491

258,073

3,432,529

50,177,489

Borrowings 199,345

0

1,057,337

4,191,136

5,447,818

Liabilities for securities 0

0

0 0

316

316

Liabilities for interest, fees and

the valuation of derivatives 137,915

0

0

0

0

137,915

Other liabilities 33,638 0 0

0 2,136,638 2,170,276

Liabilities 19,182,538

8,452,652

24,196,828

4,449,209

16,204,352

72,485,579

Capital

20,021,640

20,021,640

Total Liabilities 19,182,538 8,452,652 24,196,828 4,449,209 36,225,992 92,507,219

Net exposure to interest rate risk at:

– 31. December 2011. 26,986,821 (5,525,117) (22,060,490) 5,718,789 (5,120,003)

– 31. December 2010. (15,814,773)

(1,706,424)

(9,192,494)

31,437,332

(4,723,641)

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.

The management of IRRBB 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 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.

In RSD thousand

Change in

percentage

points

Income

statement

sensitivity

2011

Change in

percentage

points

Income

statement

sensitivity

2010

Increase in

percentage points :

+ 1%

56,889

+ 1%

52,485

Decrease in

percentage points :

- 1%

(46,545)

- 1%

(42,942)

41

8.4 Concentration risk

Concentration risk is the current or prospective risk to earnings and capital arising from excessive

exposure places with one counterparty or group of related counterparties whose likelihood of default is

driven by common underlying factors, as economic sector, industry, geographical location, and instrument

type and similar. The Bank monitors and control concentration risk by establishing adequate exposure

limits in a function of credit portfolio diversification. Mitigation of the concentration risk the Bank

conducts through active credit portfolio management with permanent adjustments of established limits.

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.

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 2011, the Bank had open positions on foreign

exchange derivatives (forward and swap contracts) in notional amount of EUR 16.8 billion RSD.

Counterparty credit risk regarding repo transaction exposures with NBS has been 4.7 billion 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 communication strategy

helps the Bank to mitigate reputational risks.

8.7 Other risks

Other risks include business risk, country 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.

risk and capital management - vojvođanska bankaand it operates in accordance with the republic of...

Documents